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 June 30, 2011

or

[    ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For transition period from             to            

Commission File Number    0-51331

 

 

BANKFINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Charter)

 

 

 

Maryland   75-3199276
(State or Other Jurisdiction of Incorporation)   (I.R.S. Employer Identification No.)
15W060 North Frontage Road, Burr Ridge, Illinois   60527
(Address of Principal Executive Offices)   (Zip Code)

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

Not Applicable

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

 

 

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

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

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

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

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

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date. 21,072,966 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of August 2, 2011.


BANKFINANCIAL CORPORATION

Form 10-Q Quarterly Report

Table of Contents

 

PART I   
         Page
Number
 

Item 1.

  Financial Statements      1   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      61   

Item 4.

  Controls and Procedures      63   
PART II   

Item 1.

  Legal Proceedings      64   

Item 1A.

  Risk Factors      64   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      64   

Item 3.

  Defaults Upon Senior Securities      64   

Item 4.

  [Removed and Reserved]      64   

Item 5.

  Other Information      64   

Item 6.

  Exhibits      64   

Signatures

     65   


PART I

ITEM 1.  FINANCIAL STATEMENTS

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share and per share data)

 

             June 30,        
2011
      December 31,    
2010
     (Unaudited)    

ASSETS

        

Cash and due from other financial institutions

     $ 14,049       $ 18,097  

Interest-bearing deposits in other financial institutions

       100,433         202,713  
    

 

 

     

 

 

 

Cash and cash equivalents

       114,482         220,810  

Securities, at fair value

       95,546         120,747  

Loans held-for-sale

       -         2,716  

Loans receivable, net of allowance for loan losses: June 30, 2011, $22,963 and December 31, 2010, $22,180

       1,291,399         1,050,766  

Other real estate owned and other real estate owned in process

       27,032         14,622  

Stock in Federal Home Loan Bank, at cost

       16,346         15,598  

Premises and equipment, net

       38,745         32,495  

Accrued interest receivable

       5,929         5,390  

Goodwill

       22,566         22,566  

Core deposit intangible

       4,508         2,700  

Bank owned life insurance

       20,901         20,581  

FDIC prepaid expense

       5,003         4,845  

Income tax receivable

       1,862         1,749  

Deferred taxes, net

       13,232         9,333  

Other assets

       5,337         5,737  
    

 

 

     

 

 

 

Total assets

     $ 1,662,888       $ 1,530,655  
    

 

 

     

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Liabilities:

        

Deposits

       1,378,331         1,235,377  

Borrowings

       12,595         23,749  

Advance payments by borrowers taxes and insurance

       10,284         7,325  

Accrued interest payable and other liabilities

       11,300         10,919  
    

 

 

     

 

 

 

Total liabilities

       1,412,510         1,277,370  

Commitments and contingent liabilities

        

Stockholders’ equity:

        

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

                

Common Stock, $0.01 par value, 100,000,000 shares authorized; 21,072,966 shares issued at June 30, 2011 and December 31, 2010

       211         211  

Additional paid-in capital

       194,144         194,186  

Retained earnings

       68,577         71,278  

Unearned Employee Stock Ownership Plan shares

       (13,705 )       (14,190 )

Accumulated other comprehensive income

       1,151         1,800  
    

 

 

     

 

 

 

Total stockholders’ equity

       250,378         253,285  
    

 

 

     

 

 

 

Total liabilities and stockholders’ equity

     $     1,662,888       $     1,530,655  
    

 

 

     

 

 

 

See accompanying notes to consolidated financial statements.

 

1


BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data) - (Unaudited)

 

             Three months ended         
June 30,
          Six months ended         
June 30,
     2011   2010   2011   2010

Interest and dividend income

                

Loans, including fees

     $ 18,155       $ 15,419       $ 32,565       $ 31,476  

Securities

       768         910         1,590         1,918  

Other

       77         122         193         202  
    

 

 

     

 

 

     

 

 

     

 

 

 

Total interest income

       19,000         16,451         34,348         33,596  

Interest expense

                

Deposits

       1,849         3,434         3,749         7,063  

Borrowings

       61         243         157         543  
    

 

 

     

 

 

     

 

 

     

 

 

 

Total interest expense

       1,910         3,677         3,906         7,606  
    

 

 

     

 

 

     

 

 

     

 

 

 

Net interest income

       17,090         12,774         30,442         25,990  

Provision for loan losses

       3,175         2,665         5,599         3,516  
    

 

 

     

 

 

     

 

 

     

 

 

 

Net interest income after provision for loan losses

       13,915         10,109         24,843         22,474  

Noninterest income

                

Deposit service charges and fees

       691         792         1,303         1,565  

Other fee income

       413         500         795         934  

Insurance commissions and annuities income

       155         179         324         314  

Gain on sale of loans, net

       39         68         58         115  

Gain on sale of securities, net

       -         31         -         31  

Loss on disposition of premises and equipment, net

       (10 )       (17 )       (20 )       (17 )

Loan servicing fees

       137         154         269         324  

Amortization and impairment of servicing assets

       (51 )       (78 )       (105 )       (321 )

Earnings on bank owned life insurance

       162         92         320         171  

Trust income

       216         12         292         24  

Other

       127         79         214         127  
    

 

 

     

 

 

     

 

 

     

 

 

 

Total noninterest income

       1,879         1,812         3,450         3,267  

Noninterest expense

                

Compensation and benefits

       7,120         6,552         13,720         13,763  

Office occupancy and equipment

       1,736         1,609         3,604         3,410  

Advertising and public relations

       260         303         497         519  

Information technology

       1,091         961         2,039         1,882  

Supplies, telephone, and postage

       439         406         814         767  

Amortization of intangibles

       470         399         852         804  

Nonperforming asset management

       1,279         355         1,734         622  

Loss (gain) on sale of other real estate owned

       (57 )       107         (109 )       107  

Operations of other real estate owned

       912         393         1,417         527  

FDIC insurance premiums

       186         532         753         1,087  

Acquisition expenses

       240         -         1,771         -  

Other

       947         753         1,786         1,560  
    

 

 

     

 

 

     

 

 

     

 

 

 

Total noninterest expense

       14,623         12,370         28,878         25,048  
    

 

 

     

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

       1,171         (449 )       (585 )       693  

Income tax expense (benefit)

       145         (161 )       (834 )       265  
    

 

 

     

 

 

     

 

 

     

 

 

 

Net Income (loss)

     $ 1,026       $ (288 )     $ 249       $ 428  
    

 

 

     

 

 

     

 

 

     

 

 

 

Basic income (loss) per common share

     $ 0.05       $ (0.01 )     $ 0.01       $ 0.02  
    

 

 

     

 

 

     

 

 

     

 

 

 

Diluted income (loss) per common share

     $ 0.05       $ (0.01 )     $ 0.01       $ 0.02  
    

 

 

     

 

 

     

 

 

     

 

 

 

Weighted average common shares outstanding

       19,713,952         19,737,315         19,701,904         19,778,294  

Diluted weighted average common shares outstanding

       19,715,480         19,737,315         19,703,600         19,791,890  

See accompanying notes to consolidated financial statements.

 

2


BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data) - (Unaudited)

 

     Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Unearned
Employee
Stock
Ownership
Plan
Shares
  Accumulated
Other
Comprehen-
sive Income
(Loss)
  Total   Compre-
hensive
Income
(Loss)

Balance at January 1, 2010

     $ 214       $ 195,177       $ 81,531       $ (15,169 )     $ 1,850       $ 263,603      

Comprehensive income:

                            

Net income

       -         -         428         -         -         428       $ 428  

Change in other comprehensive income, net of tax effects

       -         -         -         -         14         14         14  
                            

 

 

 

Total comprehensive income

                             $ 442  
                            

 

 

 

Purchase and retirement of common stock (356,411 shares)

       (3 )       (3,121 )       -         -         -         (3,124 )    

Nonvested stock awards-Stock-based compensation expense

       -         1,071         -         -         -         1,071      

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

       -         -         (2,998 )       -         -         (2,998 )    

ESOP shares earned

       -         (82 )       -         485         -         403      
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Balance at June 30, 2010

     $ 211       $ 193,045       $ 78,961       $ (14,684 )     $ 1,864       $ 259,397      
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Balance at January 1, 2011

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

Comprehensive income:

                            

Net income

       -         -         249         -         -         249       $ 249  

Change in other comprehensive income, net of tax effects

       -         -         -         -         (649 )       (649 )       (649 )
                            

 

 

 

Total comprehensive loss

                             $     (400
                            

 

 

 

Nonvested stock awards-Stock-based compensation expense

       -         32         -         -         -         32      

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

       -         -         (2,950 )       -         -         (2,950 )    

ESOP shares earned

       -         (74 )       -         485         -         411      
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Balance at June 30, 2011

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

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

See accompanying notes to consolidated financial statements.

 

3


BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

Six months ended June 30, 2011 and 2010

(In thousands) - (Unaudited)

 

             2011                   2010        

Cash flows from operating activities

        

Net income

     $ 249       $ 428  

Adjustments to reconcile to net income to net cash from operating activities

        

Provision for loan losses

       5,599         3,516  

ESOP shares earned

       411         403  

Stock-based compensation expense

       32         1,071  

Depreciation and amortization

       2,216         2,237  

Amortization of premiums and discounts on securities and loans

       (1,123 )       (1 )

Amortization of core deposit intangible

       852         800  

Amortization and impairment of servicing assets

       105         321  

Net change in net deferred loan origination costs

       340         181  

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

       (109 )       108  

Net gain on sale of loans

       (58 )       (115 )

Net gain on sale of securities

       -         (31 )

Net loss disposition of premises and equipment

       20         17  

Loans originated for sale

       (4,880 )       (5,854 )

Proceeds from sale of loans

       7,654         5,757  

Net change in:

        

Deferred income tax

       (839 )       (183 )

Accrued interest receivable

       (184 )       263  

Earnings on bank owned life insurance

       (320 )       (171 )

Other assets

       1,421         (581 )

Accrued interest payable and other liabilities

       (462 )       (1,406 )
    

 

 

     

 

 

 

Net cash from operating activities

           10,924         6,760  

Cash flows from investing activities

        

Securities

        

Proceeds from maturities

       11,802         31  

Proceeds from principal repayments

       22,616         680  

Proceeds from sales of securities

       9,677         -  

Purchases of securities

       (9,786 )       16,785  

Loans receivable

        

Principal payments on loans receivable

       339,813         356,273  

Purchases of loans

       (151,354 )       (798 )

Originated for investment

       (322,517 )       (267,744 )

Proceeds of redemption of Federal Reserve Bank stock

       155         -  

Proceeds from sale of other real estate owned

       2,300         1,496  

Purchases of premises and equipment, net

       (413 )       (563 )

Cash acquired in acquisition

       61,619         -  
    

 

 

     

 

 

 

Net cash from (used) investing activities

       (36,088 )           106,160  

(Continued)

 

4


BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

Six months ended June 30, 2011 and 2010

(In thousands) - (Unaudited)

 

             2011                   2010        

Cash flows from financing activities

        

Net change in deposits

       (69,985 )       19,864  

Net change in borrowings

       (11,154 )       (15,218 )

Net change in advance payments by borrowers for taxes and insurance

       2,925         (358 )

Repurchase and retirement of common stock

               (3,124 )

Cash dividends paid on common stock

       (2,950 )       (2,998 )
    

 

 

     

 

 

 

Net cash from financing activities

       (81,164 )       (1,834 )
    

 

 

     

 

 

 

Net change in cash and cash equivalents

       (106,328 )       111,086  

Beginning cash and cash equivalents

       220,810         108,198  
    

 

 

     

 

 

 

Ending cash and cash equivalents

     $     114,482       $     219,284  
    

 

 

     

 

 

 

Supplemental disclosures of cash flow information:

        

Interest paid

     $ 3,758       $ 7,848  

Income taxes paid

       3         300  

Income taxes refunded

               2,529  

Loans transferred to real estate owned

       7,869         5,218  

Supplemental disclosures of noncash investing activities - Acquisition:

        

Noncash assets acquired:

        

Securities

     $ 10,177       $ -  

Loans receivable

       119,239         -  

Other real estate owned

       7,210         -  

Stock in Federal Home Loan Bank and Federal Reserve Bank

       903         -  

Premises and equipment, net

       7,401         -  

Accrued interest receivable

       355         -  

Core deposit intangible

       2,660         -  

FDIC prepaid expense

       774         -  

Income tax receivable

       774         -  

Deferred taxes, net

       2,662         -  

Other assets

       42         -  
    

 

 

     

 

 

 

Total noncash items acquired

       152,197         -  

Liabilities assumed:

        

Deposits

       212,939         -  

Advance payments by borrowers taxes and insurance

       34         -  

Accrued interest payable and other liabilities

       843         -  
    

 

 

     

 

 

 

Total liabilities assumed

       213,816         -  
    

 

 

     

 

 

 

Cash and cash equivalents acquired

     $ 61,619       $ -  
    

 

 

     

 

 

 

See accompanying notes to consolidated financial statements.

 

5


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1 – Condensed Summary of Significant Accounting Policies

Basis of Presentation:    BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois (the “Company”), is the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”). As used in this Quarterly Report on Form 10-Q, the words “Company,” “we” and “our” are intended to refer to the Company, the Bank, and the Bank’s subsidiaries, with respect to information presented for the three- and six-month periods ended June 30, 2011 and other periods referenced herein.

Principles of Consolidation:    The interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three- and six-month periods ended June 30, 2011, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2011.

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.

Nature of Business:    The Company’s revenues, operating income, and assets are primarily from the banking industry. All of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment for financial reporting purposes. A significant majority of our loan customers are located in the greater Chicago metropolitan area; commercial lessees are located throughout the United States. The loan portfolio is concentrated in loans that are primarily secured by diversified types of real estate collateral.

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.

Interest-bearing Deposits in Other Financial Institutions:    Interest-bearing deposits in other financial institutions maturing in less than 90 days are carried at cost.

Cash Flows:    Cash and cash equivalents include cash, deposits with other financial institutions maturing in less than 90 days, and daily federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, borrowings, and advance payments by borrowers for taxes and insurance.

Securities:    Debt securities are classified as available-for-sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available-for-sale. Securities classified as available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold. Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In determining if losses are other-than-temporary, management considers: (1) the length of time and extent that fair value has been less than cost or adjusted cost, as applicable, (2) the financial condition and near term prospects of the issuer, and (3) whether the Company has the intent to sell the debt security or it is more likely than not that the Company will be required to sell the debt security before the anticipated recovery.

 

 

 

6


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 1 – Condensed Summary of Significant Accounting Policies (continued)

 

Federal Home Loan Bank Stock:    The Bank is a member of the Federal Home Loan Bank system. Members are required to own a certain amount of stock based on their level of borrowings and other factors, and may invest in additional amounts. Federal Home Loan Bank of Chicago (“FHLBC”) stock is carried at cost and classified as a restricted security. Accounting guidance for FHLBC stock provides that, for impairment testing purposes, the value of long term investments such as our FHLBC common stock is based on the “ultimate recoverability” of the par value of the security without regard to temporary declines in value. Both cash and stock dividends are reported as income.

Loans Held-for-Sale:    Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair market value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held-for-sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the fair value of the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans and Loan Income:    Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of the allowance for loan losses, premiums and discounts on loans purchased, and net deferred loan costs. Interest income on loans is recognized in income over the term of the loan based on the amount of principal outstanding.

Premiums and discounts associated with loans purchased are amortized over the contractual term of the loan using the level-yield method.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the contractual loan term, adjusted for prepayments. Interest income is discontinued at the time a loan is 90 days past due or when we do not expect to receive full payment of interest or principal. Past due status is based on the contractual terms of the loan.

All interest accrued but not received for loans that have been placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual status. Once a loan is placed on non-accrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. The Company may have loans classified as 90 days or more past due and still accruing. Generally, the Company does 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 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.

Allowance for Loan Losses:    The Company establishes provisions for loan losses, which are charged to the Company’s results of operations to maintain the allowance for loan losses to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, the Company considers past and current loss experience, trends in nonaccrual loans, 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 the estimates as more information becomes available or events change.

 

 

 

7


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 1 – Condensed Summary of Significant Accounting Policies (continued)

 

The Company provides for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable incurred credit losses. The Company reviews the loan portfolio on an ongoing basis and makes provisions for loan losses on a quarterly basis to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists of two components:

 

 

specific allowances established for any impaired residential owner or non-owner occupied mortgage, multi-family mortgage, nonresidential real estate, construction and land, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of the loan; and

 

 

general allowances for loan losses for each loan class based on historical loan loss experience; and adjustments to historical loss experience (general allowances), maintained to cover uncertainties that affect our estimate of probable incurred credit losses for each loan class. If the remaining unamortized discount related to a specific pool of purchased performing loans exceeds the estimated credit losses associated with these loans, no general valuation allowance is recorded against the loans.

The adjustments to historical loss experience are based on our evaluation of several factors, including levels of, and trends in, past due and classified loans; levels of, and trends in, charge-offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience, ability, and depth of lending management and other relevant staff; and national and local economic trends and conditions.

The Company evaluates the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses than would be the case without the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology generally results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

The following summarizes the applicable factors evaluated with respect to the general allowance for loan losses for each loan class:

One-to-Four Family Residential Mortgage Loans.    The U.S. Index of Leading Economic Indicators is the national economic factor utilized for residential loans; however, because the Company deems local economic factors more relevant to this loan class, the national economic factor accounts for only a 10% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is assigned a 20% weighting, except for non-owner-occupied loans which are assigned a 50% weighting due to their greater reliance on low-income family tenancies. The Company’s historical loss ratio for residential loans is computed using a rolling twelve-quarter average and is assigned a 70% weighting, except for non-owner-occupied loans which are assigned a 40% weighting.

Multi-family Mortgage Loans.    The U.S. Index of Leading Economic Indicators is the national economic factor utilized for multi-family mortgage loans; however, because the Company deems local economic factors more relevant to this class, the national economic factor accounts for only a 10% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is assigned a 30% weighting. The Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is assigned a 60% weighting.

Wholesale Commercial Loans.    This loan class presently consists of multi-family loans originated outside of the Chicago metropolitan area; however, the collateral for some loans may be located in an area contiguous to the Chicago metropolitan area. The U.S. Index of Leading Economic Indicators is the national economic factor utilized for wholesale commercial loans. Because the Company deems national economic factors more relevant to this class, the national economic factor accounts for a 50% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is only assigned a

 

 

8


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 1 – Condensed Summary of Significant Accounting Policies (continued)

 

10% weighting given the predominant geographic distribution of this loan class outside the Chicago metropolitan area. Because the loans in this class are also among the least seasoned in the Company’s overall loan portfolio, the Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is assigned a 40% weighting.

Non-Residential Real Estate Loans.    The U.S. Index of Leading Economic Indicators is the national economic factor utilized for non-residential real estate loans; however, because the Company deems local economic factors more relevant to this class, the national economic factor accounts for only a 10% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is assigned a 25% weighting due to the diversity of the collateral types within this class. The Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is assigned a 65% weighting.

Construction, Development and Land Loans.    The U.S. Index of Leading Economic Indicators is the national economic factor utilized for construction, development and land loans; however, because the Company deems local economic factors more relevant to this class, the national economic factor accounts for only a 10% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is assigned a 25% weighting. The Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is assigned a 65% weighting.

Commercial Loans.    The U.S. Index of Leading Economic Indicators is the national economic factor utilized for commercial loans; however, because the Company deems local economic factors more relevant to this class, the national economic factor accounts for only a 10% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is assigned a 30% weighting for general secured and unsecured loans and 10% for health-care related loans (due to the government-guaranteed status of the underlying eligible collateral). The Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is thus assigned a weighting between of 60% and 80% depending on the nature of the collateral, if any.

Commercial Leases.    This loan class consists of commercial leases originated outside of the Chicago metropolitan area. The U.S. Index of Leading Economic Indicators is the national economic factor utilized for national commercial leases. Because the Company deems national economic factors more relevant to this class, the national economic factor accounts for between 25% to 75% of the weighting, depending on the credit quality of the lessee; investment grade lessees merit a lower weighting due to their typically globally-based operations compared to a below-investment grade domestic lessee, for which the condition of the U.S. national economy has a considerably greater impact. The Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is assigned a weighting equal to the reciprocal of the national economic factor weighting assigned.

Consumer Loans.    The U.S. Index of Leading Economic Indicators is the national economic factor utilized for consumer real estate loans; however, because the Company deems local economic factors more relevant to this class, the national economic factor accounts for only a 10% weighting. A composite index of the Chicago Purchasing Managers index and the regional unemployment rate comprises the local economic factor and is assigned a 20% weighting. The Company’s historical loss ratio for this class of loans is computed using a rolling twelve-quarter average and is assigned a 70% weighting. Loans secured by deposit accounts held by the Company do not have a material allowance due to the absence of credit risk presented by the collateralization status of this sub-class of consumer loans.

Reclassifications:    Certain reclassifications have been made in the prior year’s financial statements to conform 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, 2010, and all amendments thereto, as supplemented by quarterly and other reports filed with the Securities and Exchange Commission.

 

 

 

9


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 2 – Earnings (loss) per share

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

 

             Three months ended         
June 30,
          Six months ended         
June 30,
     2011   2010   2011   2010

Net income (loss) available to common shareholders

     $ 1,026       $ (288 )     $ 249       $ 428  
    

 

 

     

 

 

     

 

 

     

 

 

 

Average common shares outstanding

       21,072,966         21,301,212         21,072,966         21,358,476  

Less:

                

Unearned ESOP shares

       (1,350,347 )       (1,457,047 )       (1,362,395 )       (1,472,447 )

Unvested restricted stock shares

       (8,667 )       (106,850 )       (8,667 )       (107,735 )
    

 

 

     

 

 

     

 

 

     

 

 

 

Weighted average common shares outstanding

       19,713,952         19,737,315         19,701,904         19,778,294  
    

 

 

     

 

 

     

 

 

     

 

 

 

Basic earnings (loss) per common share

     $ 0.05       $ (0.01 )     $ 0.01       $ 0.02  
    

 

 

     

 

 

     

 

 

     

 

 

 

Weighted average common shares outstanding

       19,713,952         19,737,315         19,701,904         19,778,294  

Net effect of dilutive stock options and unvested restricted stock

       1,528                 1,696         13,596  
    

 

 

     

 

 

     

 

 

     

 

 

 

Weighted average diluted common shares outstanding

       19,715,480         19,737,315         19,703,600         19,791,890  
    

 

 

     

 

 

     

 

 

     

 

 

 

Diluted earnings (loss) per common share

     $ 0.05       $ (0.01 )     $ 0.01       $ 0.02  
    

 

 

     

 

 

     

 

 

     

 

 

 

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

       2,202,553         2,320,803         2,202,553         2,320,803  

Weighted average exercise price of anti-dilutive stock options

     $ 16.48       $ 16.51       $ 16.48       $ 16.51  

 

 

 

10


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 3 – Securities

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

 

       Amortized  
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value

June 30, 2011

                  

Certificates of deposit

     $ 22,208        $ -        $ -       $ 22,208  

Municipal securities

       675          -          -         675  

Equity mutual fund

       500          13          -         513  

Mortgage-backed securities - residential

       36,997          1,247          (64 )       38,180  

Collateralized mortgage obligations - residential

       33,257          683          (21 )       33,919  

SBA-guaranteed loan participation certificates

       50          1          -         51  
    

 

 

      

 

 

      

 

 

     

 

 

 
     $ 93,687        $ 1,944        $ (85 )     $ 95,546  
    

 

 

      

 

 

      

 

 

     

 

 

 

December 31, 2010

                  

Certificates of deposit

     $ 27,766        $ -        $ -       $ 27,766  

Municipal securities

       675          34          -         709  

Mortgage-backed securities - residential

       41,034          1,427          (26 )       42,435  

Collateralized mortgage obligations - residential

       48,262          1,477          (7 )       49,732  

SBA-guaranteed loan participation certificates

       103          2          -         105  
    

 

 

      

 

 

      

 

 

     

 

 

 
     $   117,840        $   2,940        $     (33     $   120,747  
    

 

 

      

 

 

      

 

 

     

 

 

 

Mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities and agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the U.S. government has affirmed its commitment to support. All securities reflected in the preceding table were classified as available-for-sale at June 30, 2011 and December 31, 2010.

The amortized cost and fair values of securities at June 30, 2011 by contractual maturity are shown below. Securities not due at a single maturity date are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2011
         Amortized    
Cost
       Fair Value    

Within one year

     $ 22,368        $ 22,368  

One to five years

       515          515  
    

 

 

      

 

 

 
       22,883          22,883  

Equity mutual fund

       500          513  

Mortgage-backed securities - residential

       36,997          38,180  

Collateralized mortgage obligations - residential

       33,257          33,919  

SBA-guaranteed loan participation certificates

       50          51  
    

 

 

      

 

 

 

Total

     $     93,687        $     95,546  
    

 

 

      

 

 

 

 

 

 

11


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 3 – Securities (continued)

 

Securities with unrealized losses at June 30, 2011 and December 31, 2010 not recognized in income are as follows:

 

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

June 30, 2011

                             

Mortgage-backed securities – residential

     $ 4,858        $ 64        $ -        $ -        $ 4,858        $ 64  

Collateralized mortgage obligations – residential

       2,943          21          -          -          2,943          21  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 7,801        $ 85        $ -        $ -        $ 7,801        $ 85  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

December 31, 2010

                             

Mortgage-backed securities – residential

     $ 7,546        $ 26        $ -        $ -        $ 7,546        $ 26  

Collateralized mortgage obligations – residential

       5,102          7          -          -          5,102          7  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $     12,648        $         33        $         -        $         -        $     12,648        $         33  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

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

Certain residential mortgage-backed securities and residential collateralized mortgage obligations that the Company holds in its investment portfolio remained in an unrealized loss position at June 30, 2011, but the declines in fair value were not considered significant under the Company’s impairment testing methodology.

Note 4 – Loans Receivable

Loans receivable are as follows:

 

         June 30,           December 31,    
     2011   2010

One-to-four family residential real estate loans

     $ 291,135       $ 256,300  

Multi-family mortgage loans

       447,162         296,916  

Nonresidential real estate loans

       328,100         281,987  

Construction and land loans

       24,339         18,398  

Commercial loans

       73,622         64,679  

Commercial leases

       145,858         151,107  

Consumer loans

       3,109         2,182  
    

 

 

     

 

 

 

Total loans

       1,313,325         1,071,569  

Net deferred loan origination costs

       1,037         1,377  

Allowance for loan losses

       (22,963 )       (22,180 )
    

 

 

     

 

 

 

Loans, net

     $     1,291,399       $     1,050,766  
    

 

 

     

 

 

 

 

 

12


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Allowance for Losses on Loans and Leases

The following table presents the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method as of June 30, 2011:

 

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

One-to-four family residential real estate loans

     $     1,482        $ 3,554        $ 5,036        $ 5,439        $ 2,757        $ 282,939        $ 291,135  

Multi-family mortgage loans

       2,547          4,041          6,588          13,251          1,778          432,133          447,162  

Nonresidential real estate loans

       2,162          4,377          6,539          14,097          4,256          309,747          328,100  

Construction and land loans

       315          565          880          504          9,391          14,444          24,339  

Commercial loans

       2,045          1,160          3,205          3,886          1,294          68,442          73,622  

Commercial leases

       72          624          696          72          -          145,786          145,858  

Consumer loans

       -          19          19          -          -          3,109          3,109  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 8,623        $     14,340        $     22,963        $     37,249        $     19,476        $   1,256,600          1,313,325  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Net deferred loan origination costs

                                     1,037  

Allowance for loan losses

                                     (22,963 )
                                  

 

 

 

Loans, net

                                   $   1,291,399  
                                  

 

 

 

 

 

 

13


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method as of December 31, 2010:

 

     Allowance for loan losses    Loan Balances
     Individually
evaluated for
impairment
   Collectively
evaluated  for
impairment
   Total    Individually
evaluated for
impairment
   Collectively
evaluated  for
impairment
   Total

One-to-four family residential real estate loans

     $ 686        $ 2,870        $ 3,556        $ 4,022        $ 252,278        $ 256,300  

Multi-family mortgage loans

       3,231          3,801          7,032          13,971          282,945          296,916  

Nonresidential real estate loans

       1,637          4,077          5,714          12,722          269,265          281,987  

Construction and land loans

       1,855          606          2,461          6,138          12,260          18,398  

Commercial loans

       1,931          948          2,879          3,766          60,913          64,679  

Commercial leases

       72          446          518          72          151,035          151,107  

Consumer loans

       —            20          20          —            2,182          2,182  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $         9,412        $     12,768        $     22,180        $     40,691        $   1,030,878          1,071,569  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

Net deferred loan origination costs

                                1,377  

Allowance for loan losses

                                (22,180 )
                             

 

 

 

Loans, net

                              $   1,050,766  
                             

 

 

 

 

 

 

14


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Activity in the allowance for loan losses is as follows:

 

         Three months ended    
June 30,
      Six months ended    
June 30,
     2011   2010   2011   2010

Beginning balance

     $ 22,504       $ 17,516       $ 22,180       $ 18,622  

Loans charged off

                

One-to-four family residential real estate loans

       (415 )       (340 )       (2,043 )       (1,602 )

Multi-family mortgage loans

       (542 )       (290 )       (779 )       (468 )

Nonresidential real estate loans

       -         (406 )       -         (408 )

Construction and land loans

       (1,771 )       -         (2,149 )       (525 )

Commercial loans

       (42 )       (199 )       (42 )       (199 )

Commercial leases

       -         -         -         -  

Consumer loans

       (1 )       (6 )       (17 )       (13 )
    

 

 

     

 

 

     

 

 

     

 

 

 
       (2,771 )       (1,241 )       (5,030 )       (3,215 )

Recoveries:

                

One-to-four family residential real estate loans

       5         7         7         8  

Multi-family mortgage loans

       32         2         121         2  

Nonresidential real estate loans

       5         20         63         36  

Construction and land loans

       -         -         -         -  

Commercial loans

       13         -         23         -  

Commercial leases

       -         -         -         -  

Consumer loans

       -         -         -         -  
    

 

 

     

 

 

     

 

 

     

 

 

 

Recoveries

       55         29         214         46  
    

 

 

     

 

 

     

 

 

     

 

 

 

Net charge-off

       (2,716 )       (1,212 )       (4,816 )       (3,169 )

Provision for loan losses

       3,175         2,665         5,599         3,516  
    

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance

     $   22,963       $   18,969       $   22,963       $   18,969  
    

 

 

     

 

 

     

 

 

     

 

 

 

Impaired Loans

The Company considers a loan to be impaired when it does not expect to receive full payment of interest or principal. The Company evaluates a loan for impairment, for placement on non-accrual status and for classification as a Troubled Debt Restructuring (“TDR”) at the same point in time. When the Company identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operations or liquidation of the collateral. In such cases, the Company measures the impairment using the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If the net realizable value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), the Company recognizes the amount of the impairment by establishing a specific valuation reserve allowance estimate or by a charge-off to the allowance if it can be confirmed that the amount of the impairment is uncollectable.

 

 

 

15


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Non-owner occupied one-to-four family residential real estate loans and certain related owner-occupied residential real estate loans, multi-family real estate loans, nonresidential real estate loans, construction, development and land loans, commercial loans, and commercial leases are individually evaluated for impairment. One-to-four family owner-occupied residential real estate loans in the process of transfer to Other Real Estate Owned (“OREO”) may be individually evaluated based on updated appraisals. Large groups of smaller balance homogeneous loans, such as one-to-four-family residential real estate loans and consumer loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Impaired loans are summarized as follows:

 

         June 30,    
2011
       December 31,    
2010

Period end impaired loans with allocated allowance for loan losses

     $ 25,029        $ 31,057  

Period end impaired loans with no allocated allowance for loan losses

       12,220          9,634  

Period end troubled debt restructured loans not individually evaluated

       9,024          2,975  
    

 

 

      

 

 

 

Total impaired loans

     $     46,273        $     43,666  
    

 

 

      

 

 

 

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

 

 

 

16


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

The following table presents loans individually evaluated for impairment by class loans:

 

 

 

17


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

   

 

   

 

   

 

    For the three months
ended June 30, 2011
    For the six months ended
June 30, 2011
 
    Unpaid
 Principal 
Balance
    Recorded
 Investment 
     Allowance 
for Loan
Losses
Allocated
    Average
 Investment 
in

Impaired
Loans
    Interest
Income
 Recognized 
    Average
 Investment 
in

Impaired
Loans
    Interest
Income
 Recognized 
 

June 30, 2011

             

With no related allowance recorded:

             

One-to-four family residential real estate loans

  $ -      $ -      $ -      $ 66      $ 2      $ 74      $ 2   

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

    992        1,098        -        1,118        59        1,109        75   

Multi-family mortgage loans

    5,700        5,981        -        3,843        40        4,180        62   

Nonresidential real estate loans

    4,975        5,095        -        4,169        51        4,703        76   

Construction loans

    -        -        -        250        -        143        -   

Land loans

    -        -        -        152        -        76        -   

Commercial loans – secured

    553        613        -        343        -        405        -   

Commercial loans - other

    -        -        -        97        5        83        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    12,220        12,787        -        10,038        157        10,773        223   

With an allowance recorded:

             

One-to-four family residential real estate loans

  $ 657      $ 713      $ 93      $ 335      $ -      $ 597      $ -   

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

    3,790        3,957        1,389        2,815        6        2,936        6   

Multi-family mortgage loans

    3,146        3,307        1,078        5,815        -        4,968        -   

Wholesale commercial lending

    4,405        4,676        1,469        4,405        -        4,405        -   

Nonresidential real estate loans

    9,122        9,358        2,162        8,773        -        8,529        71   

Construction loans

    121        137        121        3,024        -        2,585        -   

Land loans

    383        504        194        2,663        -        1,928        -   

Commercial loans – secured

    3,175        3,467        1,918        3,054        2        3,074        2   

Commercial loans – unsecured

    158        208        127        158        -        158        -   

Non-rated commercial leases

    72        77        72        72          72     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    25,029        26,404        8,623        31,114        8        29,252        79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   37,249      $     39,191      $     8,623      $     41,152      $         165      $     40,025      $             302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

18


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

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

December 31, 2010

              

With no related allowance recorded:

              

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

   $ 1,244       $ 1,321       $ -       $ 3,028       $ 69   

Multi-family mortgage loans

     3,554         3,723         -         8,264         142   

Wholesale commercial lending

     -         -         -         1,780         -   

Nonresidential real estate loans

     3,949         4,008         -         4,481         221   

Construction loans

     333         357         -         1,108         55   

Land loans

     -         -         -         772         -   

Commercial loans – secured

     457         478         -         347         10   

Commercial loans - other

     97         117         -         83         7   

Non-rated commercial leases

     -         -         -         20         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     9,634         10,004         -         19,883         504   

With an allowance recorded:

              

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

   $ 2,778       $ 2,888       $ 686       $ 2,075       $ 31   

Multi-family mortgage loans

     6,012         6,362         1,709         4,058         97   

Wholesale commercial lending

     4,405         4,589         1,522         881         71   

Nonresidential real estate loans

     8,773         8,837         1,637         6,255         416   

Construction loans

     2,940         3,244         730         2,447         -   

Land loans

     2,865         3,339         1,125         2,676         -   

Commercial loans – secured

     3,054         3,265         1,804         3,783         28   

Commercial loans – unsecured

     158         202         127         82         -   

Non-rated commercial leases

     72         77         72         29         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     31,057         32,803         9,412         22,286         647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   40,691       $   42,807       $   9,412       $   42,169       $   1,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

19


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Purchased Impaired Loans

As a result of its acquisition of Downers Grove National Bank (see Note 8 – Acquisitions), the Company holds purchased loans for which there was evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected as of the date of the acquisition. The carrying amount of these purchased impaired loans is as follows:

 

         June 30, 2011      

One-to-four family residential real estate loans

   $ 2,201   

Multi-family mortgage loans

     1,398   

Nonresidential real estate loans

     3,369   

Construction loans

     3,431   

Land loans

     4,328   

Commercial loans – secured and unsecured

     1,029   
  

 

 

 

Outstanding balance

   $ 15,756   
  

 

 

 

Carrying amount, net of allowance

   $ 15,756   
  

 

 

 

 

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

 

 

  

Balance at January 1, 2011

   $ -   

New loans purchased

     4,108   

Accretion of income

     388   
  

 

 

 

Balance at June 30, 2011

   $     3,720   
  

 

 

 

There is no allowance for loan losses related to purchased impaired loans due to their having been marked to market at the date of acquisition.

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

 

         June 30, 2011      

Contractually required payments receivable of loans purchased:

  

One-to-four family residential real estate loans

   $ 4,135   

Multi-family mortgage loans

     3,456   

Nonresidential real estate loans

     5,515   

Construction loans

     4,856   

Land loans

     7,153   

Commercial loans

     7,156   

Consumer

     44   
  

 

 

 
   $ 32,315   
  

 

 

 

Cash flows expected to be collected at acquisition, subject to adjustment with final purchase price adjustment

   $ 19,944   

Fair value of purchased impaired loans at acquisition

   $ 15,836   

 

 

 

 

20


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Nonaccrual loans

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

 

      Nonaccrual  
loans
    Recorded
  Investment  
    Loans Past
  Due Over 90  
Days, still
accruing
 

June 30, 2011

     

One-to-four family residential real estate loans

  $ 7,485      $ 7,917      $ -   

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

    5,178        4,621        448   

Multi-family mortgage loans

    7,955        8,410        739   

Wholesale commercial lending

    4,405        4,676        -   

Nonresidential real estate loans

    12,393        12,763        -   

Construction loans

    121        137        -   

Land loans

    383        504        -   

Commercial loans – secured

    3,632        3,959        -   

Commercial loans – unsecured

    158        208        -   

Commercial loans – other

    96        119        -   

Non-rated commercial leases

    72        77        -   

Consumer loans

    -        -        -   
 

 

 

   

 

 

   

 

 

 
  $ 41,878      $ 43,391      $ 1,187   
 

 

 

   

 

 

   

 

 

 
    Nonaccrual
loans
    Recorded
Investment
    Loans Past
Due Over 90
Days, still
accruing
 

December 31, 2010

     

One-to-four family residential real estate loans

  $ 5,748      $ 6,115      $ 47   

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

    4,311        4,513        496   

Multi-family mortgage loans

    8,823        9,327        275   

Wholesale commercial lending

    4,405        4,589        -   

Nonresidential real estate loans

    12,428        12,575        -   

Construction loans

    3,274        3,601        -   

Land loans

    2,865        3,339        -   

Commercial loans – secured

    3,511        3,743        -   

Commercial loans – unsecured

    158        202        -   

Commercial loans – other

    97        118        -   

Non-rated commercial leases

    72        77        -   

Consumer loans

    3        3        -   
 

 

 

   

 

 

   

 

 

 
  $ 45,695      $ 48,202      $ 818   
 

 

 

   

 

 

   

 

 

 

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.

 

 

 

 

21


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

The Company’s reserve for uncollected loan interest was $2.6 million at June 30, 2011 and $2.7 million at December 31, 2010. 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 310-10-50-14(A), FASB ASC 310-10-50-15(b), FASB ASC 310-10-50-15(d), FASB ASC 310-10-50-15(e) and FASB ASC 310-10-50-16, 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 310-10-50-15(b) and FASB ASC 310-10-50-17, as applicable.

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

 

 

 

 

22


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Past Due Loans

The following table presents the aging of the recorded investment in past due loans as June 30, 2011 by class of loans, excluding purchased impaired loans:

 

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

Past Due
        Total Past    
Due
        Loans Not    
Past Due
    Total  

One-to-four family residential real estate loans

  $ 980      $ 1,211      $ 7,218      $ 9,409      $ 196,201      $ 205,610   

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

    1,730        481        4,577        6,788        77,026        83,814   

Multi-family mortgage loans

    2,315        7,886        8,861        19,062        357,652        376,714   

Wholesale commercial lending

    -        -        4,676        4,676        62,926        67,602   

Nonresidential real estate loans

    7,493        2,358        12,111        21,962        300,838        322,800   

Construction loans

    831        -        137        968        1,821        2,789   

Land loans

    2,540        660        504        3,704        10,193        13,897   

Commercial loans:

           

Secured

    1,003        371        3,959        5,333        28,752        34,085   

Unsecured

    418        39        208        665        9,799        10,464   

Municipal loans

    -        -        -        -        7,007        7,007   

Warehouse lines

    1,230        -        -        1,230        4,887        6,117   

Health care

    -        -        -        -        6,518        6,518   

Other

    -        -        117        117        9,009        9,126   

Commercial leases:

           

Investment rated commercial leases

    353        836        -        1,189        90,779        91,968   

Below investment grade

    -        -        -          4,051        4,051   

Non-rated

    393        1,004        77        1,474        42,102        43,576   

Lease pools

    -        -        -        -        7,702        7,702   

Consumer loans

    6        16        -        22        2,757        2,779   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19,292  (1)    $ 14,862  (1)    $ 42,445      $ 76,599      $ 1,220,020      $       1,296,619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)  48% of the combined 30-89 days past due loans have matured and are in the in the process of analysis and renewal.

 

 

 

 

23


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

The following table presents the aging of the recorded investment in past due purchased impaired loans at June 30, 2011 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 - non-owner occupied

  $ -      $ -      $ 456      $ 456      $ 2,300      $ 2,756   

Multi-family mortgage loans

    -        -        1,779        1,779        -        1,779   

Nonresidential real estate loans

    -        214        75        289        3,967        4,256   

Construction loans

    1,278        -        2,720        3,998        -        3,998   

Land loans

    2,402        -        2,991        5,393        -        5,393   

Commercial loans - secured

    -        -        848        848        446        1,294   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,680 (1)    $ 214      $ 8,869      $ 12,763      $ 6,713      $       19,476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)  100% of these loans have matured and are in the in the process of analysis and renewal.

 

 

 

 

24


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

The following table presents the aging of the recorded investment in past due loans as December 31, 2010 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

     $ 1,202       $ 202       $ 5,890        $ 7,294        $ 172,438        $ 179,732  

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

       3,335         449         5,019          8,803          68,127          76,930  

Multi-family mortgage loans

       7,174         4,304         9,588          21,066          202,481          223,547  

Wholesale commercial lending

       1,231         -         4,589          5,820          67,712          73,532  

Nonresidential real estate loans

       9,270         16,061         3,944          29,275          251,139          280,414  

Construction loans

       1,267         1,284         3,601          6,152          3,321          9,473  

Land loans

       -         -         3,339          3,339          6,422          9,761  

Commercial loans:

                           

Secured

       929         700         3,712          5,341          18,370          23,711  

Unsecured

       551         178         202          931          6,558          7,489  

Municipal loans

       -         -         -          -          4,629          4,629  

Warehouse lines

       -         -         -          -          12,320          12,320  

Health care

       -         -         -          -          8,089          8,089  

Other

       7,060         -         118          7,178          1,922          9,100  

Commercial leases:

                           

Investment rated commercial leases

       2,039         2,312         -          4,351          83,506          87,857  

Below investment grade

       3         -         -          3          3,725          3,728  

Non-rated

       3,382         434         76          3,892          47,199          51,091  

Lease pools

       -         -         -          -          9,791          9,791  

Consumer loans

       3         -         4          7          2,186          2,193  
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $         37,446 (1)     $         25,924 (1)     $         40,082        $         103,452        $         969,935        $     1,073,387  
    

 

 

     

 

 

     

 

 

      

 

 

      

 

 

      

 

 

 

(1)  41% of the combined 30-89 days past due loans have matured and are in the in the process of analysis and renewal.

 

 

 

25


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 4 – Loans Receivable (continued)

 

Troubled Debt Restructurings

The Company evaluates loan extensions or modifications in accordance with FASB ASC 310-40 with respect to the classification of the loan as a troubled debt restructuring (“TDR”). In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below-market interest rate, principal forgiveness, payment forbearance or 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.

The Company had $11.9 million of TDRs at June 30, 2011, compared to $6.5 million at December 31, 2010, with $1.4 million in specific valuation allowances allocated to those loans at June 30, 2011, and $658,000 in specific valuation reserves allocated at December 31, 2010. The Company had no outstanding commitments to borrowers whose loans are classified as TDRs.

Credit Quality Indicators

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

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

Special Mention.    Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard.    Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.    Loans classified as Doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

 

 

 

26


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 4 – Loans Receivable (continued)

 

As of June 30, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

             Pass                Watch List        Special
      Mention      
     Substandard          Doubtful                Total        

One-to-four family residential real estate loans

       $ 198,925          $ -          $ -          $ 6,241          $ -          $ 205,166  

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

       67,649          5,171          2,122          11,027          -          85,969  

Multi-family mortgage loans

       344,239          17,188          4,038          10,232          -          375,697  

Wholesale commercial lending

       65,805          1,351          -          4,309          -          71,465  

Nonresidential real estate loans

       254,688          32,013          23,944          17,455          -          328,100  

Construction loans

       1,895          507          237          3,551          -          6,190  

Land loans

       8,776          3,430          1,102          4,592          249          18,149  

Commercial loans:

                             

Secured

       25,019          4,501          164          4,878          98          34,660  

Unsecured

       9,070          563          87          603          58          10,381  

Municipal loans

       6,925          -          -          -          -          6,925  

Warehouse lines

       6,079          -          -          -          -          6,079  

Health care

       5,953          415          143          -          -          6,511  

Other

       8,970          -          -          96          -          9,066  

Commercial leases:

                           -       

Investment rated commercial leases

       90,895          36          -          -          -          90,931  

Below investment grade

       3,648          376          -          -          -          4,024  

Non-rated

       43,004          161          -          -          72          43,237  

Lease pools

       7,666          -          -          -          -          7,666  

Consumer loans

       3,109          -          -          -          -          3,109  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 1,152,315        $ 65,712        $     31,837        $ 62,984        $     477        $ 1,313,325  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

The Company assigned loans attributable to the acquisition of Downers Grove National Bank to risk classification categories on a provisional basis, including the assignment of the purchased impaired loans resulting from the transaction to the Substandard credit risk classification category. The Company will continue to evaluate purchase accounting during the measurement period.

 

 

 

27


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 4 – Loans Receivable (continued)

 

As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

             Pass                Watch List        Special
      Mention      
     Substandard          Doubtful                Total        

One-to-four family residential real estate loans

       $ 174,349          $ -          $ -          $ 5,097          $ -          $ 179,446  

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

       65,071          6,400          776          4,607          -          76,854  

Multi-family mortgage loans

       197,427          12,348          4,642          9,501          -          223,918  

Wholesale commercial lending

       67,304          1,361          -          4,333          -          72,998  

Nonresidential real estate loans

       225,528          24,997          18,756          12,706          -          281,987  

Construction loans

       4,576          -          1,252          3,274          -          9,102  

Land loans

       3,057          3,196          181          2,613          249          9,296  

Commercial loans:

                           -       

Secured

       17,504          2,186          174          3,401          98          23,363  

Unsecured

       6,647          595          16          99          58          7,415  

Municipal loans

       4,540          -          -          -          -          4,540  

Warehouse lines

       12,274          -          -          -          -          12,274  

Health care

       7,851          71          149          -          -          8,071  

Other

       8,629          290          -          97          -          9,016  

Commercial leases:

                           -       

Investment rated commercial leases

       87,119          -          -          -          -          87,119  

Below investment grade

       3,148          542          -          -          -          3,690  

Non-rated

       49,959          569          -          -          72          50,600  

Lease pools

       9,698          -          -          -          -          9,698  

Consumer loans

       2,182          -          -          -          -          2,182  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 946,863        $   52,555        $   25,946        $ 45,728          $         477        $ 1,071,569  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

 

28


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 5 – Deposits

Deposits are as follows:

 

             June 30,        
2011
     December 31,  
2010

Noninterest-bearing demand deposits

     $ 138,805        $ 112,549  

Savings deposits

       143,880          98,894  

Money market accounts

       354,897          341,048  

Interest-bearing NOW accounts

       323,997          302,812  

Certificates of deposit

       416,752          380,074  
    

 

 

      

 

 

 
     $     1,378,331        $     1,235,377  
    

 

 

      

 

 

 

Note 6 – Fair Values

US GAAP establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

   

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

 

   

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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The fair values of marketable equity securities available-for-sale are generally determined by quoted prices, in active markets, for each specific security (Level 1 measurement inputs). 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 measurement inputs). The fair values of debt securities available-for-sale 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 measurement inputs).

The fair values of loans held for sale are generally determined by quoted prices in active markets that are accessible at the measurement date for similar, unrestricted assets (Level 2 measurement inputs).

Impaired loans are evaluated and valued at the time the loan is identified as impaired or placed into OREO, at the lower of cost or fair value. Fair value is measured based on the value of future expected cash flows and the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

 

 

29


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 6 – Fair Values (continued)

 

Real estate properties acquired in collection of a loan are initially recorded at fair value less cost to sell at acquisition, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in noninterest expense as operations of OREO. Fair value is generally based on third party appraisals and internal estimates and is therefore considered a Level 3 valuation.

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 and is therefore considered a Level 2 valuation.

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  
       Amortized  
Cost
      Fair Value       Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
  Observable  
Inputs

(Level 2)
     Significant
  Unobservable  
Inputs

(Level 3)
 

June 30, 2011

              

Securities:

              

Certificates of deposit

   $ 22,208       $ 22,208       $ -       $ 22,208       $ -   

Municipal securities

     675         675         -         675         -   

Equity mutual fund

     500         513         513         -         -   

Mortgage-backed securities residential

     36,997         38,180         -         38,180         -   

Collateralized mortgage obligations – residential

     33,257         33,919         -         33,919         -   

SBA-guaranteed loan participation certificates

     50         51         -         51         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 93,687       $ 95,546       $     513       $ 95,033       $ -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

              

Securities:

              

Certificates of deposit

   $ 27,766       $ 27,766       $ -       $ 27,766       $ -   

Municipal securities

     675         709         -         709         -   

Mortgage-backed securities residential

     41,034         42,435         -         42,435         -   

Collateralized mortgage obligations – residential

     48,262         49,732         -         49,732         -   

SBA-guaranteed loan participation certificates

     103         105         -         105         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 117,840       $ 120,747       $ -       $ 120,747       $ -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

30


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 6 – Fair Values (continued)

 

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

 

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

Assets
(Level 1)
    Significant
  Observable  
Inputs

(Level 2)
    Significant
  Unobservable  
Inputs

(Level 3)
 

June 30, 2011

       

Impaired loans

       

One-to-four family residential real estate loans

  $ 657      $ -      $ -      $ 657   

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

    3,790        -        -        3,790   

Multi-family mortgage loans

    7,551        -        -        7,551   

Nonresidential real estate loans

    9,122        -        -        9,122   

Construction and land loans

    504        -        -        504   

Commercial loans

    3,333        -        -        3,333   

Commercial leases

    72        -        -        72   
 

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans

  $ 25,029      $ -      $ -      $ 25,029   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned:

       

One-to-four family residential real estate

  $ 5,986      $ -      $ -      $ 5,986   

Multi-family mortgage

    3,987        -        -        3,987   

Nonresidential real estate

    9,902        -        -        9,902   

Land

    7,157        -        -        7,157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned

  $ 27,032      $ -      $ -      $ 27,032   
 

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2010

       

Impaired loans

       

One-to-four family residential real estate loans

  $ 2,778      $ -      $ -      $ 2,778   

Multi-family mortgage loans

    10,417        -        -        10,417   

Nonresidential real estate loans

    8,773        -        -        8,773   

Construction and land loans

    5,805        -        -        5,805   

Commercial loans

    3,212        -        -        3,212   

Commercial leases

    72        -        -        72   
 

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans

  $ 31,057      $ -      $ -      $ 31,057   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned:

       

One-to-four family residential real estate

  $ 3,015      $ -      $ -      $ 3,015   

Multi-family mortgage

    2,486        -        -        2,486   

Nonresidential real estate

    7,376        -        -        7,376   

Land

    1,745        -        -        1,745   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned

  $     14,622      $ -      $ -      $ 14,622   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

31


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 6 – Fair Values (continued)

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $46.3 million, with a valuation allowance of $8.6 million at June 30, 2011, compared to a carrying amount of $43.7 million and a valuation allowance of $9.4 million at December 31, 2010, resulting in a decrease in the provision for loan losses of $789,000 for the six months ended June 30, 2011.

OREO and OREO in process, which are carried at lower of cost or fair value less costs to sell, had a carrying value of $27.0 million at June 30, 2011, which included write downs of $478,000 for the six months ended June 30, 2011, compared to $14.6 million at December 31, 2010, which included write downs of $2.4 million for the year ended December 31, 2010.

Mortgage servicing rights, which are carried at lower of cost or fair value, had a carrying amount of $1.3 million at June 30, 2011, of which $965,000 related to fixed rate loans and $334,000 related to adjustable rate loans. A pre-tax recovery of $233,000 on our mortgage servicing rights portfolio was included in net income for the three months ended June 30, 2010, compared to no charge or recovery recorded for the same period in 2011.

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

 

     June 30, 2011     December 31, 2010  
       Carrying  
Amount
    Estimated
  Fair Value  
      Carrying  
Amount
    Estimated
  Fair Value  
 

Financial assets

        

Cash and cash equivalents

   $ 114,482      $ 114,482      $ 220,810      $ 220,810   

Securities

     95,546        95,546        120,747        120,747   

Loans held-for-sale

     -        -        2,716        2,716   

Loans receivable, net of allowance for loan losses

     1,291,399        1,298,760        1,050,766        1,065,404   

FHLBC stock

     16,346        N/A        15,598        N/A   

Accrued interest receivable

     5,929        5,929        5,390        5,390   

Mortgage servicing rights

     1,299        1,573        1,349        1,612   

Financial liabilities

        

Non-interest-bearing demand deposits

   $ (138,805   $ (138,805   $ (112,549   $ (112,549

Savings deposits

         (143,880         (143,880     (98,894     (98,894

NOW and money market accounts

     (678,894     (678,894         (643,860         (643,860

Certificates of deposit

     (416,752     (418,252     (380,074     (384,103

Borrowings

     (12,595     (12,727     (23,749     (23,995

Accrued interest payable

     (294     (294     (146     (146

N/A = Not Applicable

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. Any specific loan losses established for impaired loans are deducted from the loan balance. The estimated fair values of loans held-for-sale are based on quoted market prices.

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

 

 

 

 

32


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 6 – Fair Values (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 non-interest-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 because market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.

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

Note 7 - Other Comprehensive Income (Loss)

Other comprehensive income (loss) components were as follows:

 

     Three months ended
June  30,
    Six months ended
June  30,
 
           2011                 2010                 2011                 2010        
     (Dollars in thousands)  

Unrealized holding gains (losses) on securities, net of tax

   $ (88   $ (82   $ (649   $ 33   

Net gain on sale of securities recognized, net of tax

     -        19        -        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in other comprehensive income, net of tax

   $ (88   $ (101   $ (649   $ 14   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

33


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 8 – Acquisitions

The Company completed its acquisition of DG Bancorp, Inc. and its subsidiary Downers Grove National Bank, on March 18, 2011 and results for Downers Grove National Bank have been included in the Company’s operations from that date. The Company accounted for the acquisition using the acquisition method. The Company recorded merger and acquisition expenses of $1.5 million for this transaction. The acquisition method also requires an acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date.

The Company expects its acquisition of Downers Grove National Bank to result in several benefits, including increased earnings and higher returns on stockholders’ equity, more effective deployment of its excess capital, improved utilization of existing organizational capacities, expanded geographic coverage of the Company’s market territory, increased deposit market share and improved convenience for its existing customers due to the addition of two new full-service branch offices.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition:

 

       March 18, 2011  

Assets acquired and liabilities assumed:

    

Cash and due from other financial institutions

     $ 1,040  

Interest-bearing deposits in other financial institutions

       60,579  
    

 

 

 

Cash and cash equivalents

       61,619  

Securities

       10,177  

Loans receivable

       119,239  

Other real estate owned

       7,210  

Stock in Federal Home Loan Bank and Federal Reserve Bank

       903  

Premises and equipment, net

       7,401  

Accrued interest receivable

       355  

Core deposit intangible

       2,660  

FDIC prepaid expense

       774  

Income tax receivable

       774  

Deferred taxes, net

       2,662  

Other assets

       42  
    

 

 

 

Total assets acquired

     $ 213,816  
    

 

 

 

Deposits

     $ 212,939  

Advance payments by borrowers taxes and insurance

       34  

Accrued interest payable and other liabilities

       843  
    

 

 

 

Total liabilities assumed

     $ 213,816  
    

 

 

 

The Company is still in the process of determining the acquisition date fair value of assets acquired and liabilities assumed in the Downers Grove National Bank acquisition, and the amounts disclosed above are considered provisional amounts. During the measurement period, the Company will retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new facts and information that existed at the acquisition date. The measurement period will end when the Company receives all of the information it is seeking about such facts and circumstances and the measurement period will not exceed one year from the acquisition date. Preliminary estimates of goodwill or bargain purchase gain were considered immaterial and thus were not recorded during the quarter ended June 30, 2011. Subsequent adjustments to the provisional amounts may be material.

 

 

 

34


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 8 – Acquisitions (continued)

 

As noted above, the loans acquired in the Downers Grove National Bank transaction had a fair value of $119.2 million. Included in this amount were $15.8 million of purchased loans with evidence of deterioration of credit quality since origination and for which it was probable, at the time of the acquisition, that the Company would be unable to collect all contractually required payments receivable. The Company’s evaluation of purchased loans with evidence of credit quality deterioration as of the acquisition date resulted in the recording of a nonaccretable difference of $9.2 million, which is defined as the loan’s contractually required payments receivable in excess of the amount of the cash flows that are expected to be collected. The Company considered factors such as payment history, collateral values and accrual status in determining whether there was evidence of deterioration of a purchased loan’s credit quality at the acquisition date. As of June 30, 2011, the carrying amount of purchased loans with evidence of loan deterioration at the acquisition date was $15.8 million, and the remaining nonaccretable difference was $9.2 million. The foregoing data represents the Company’s provisional estimates as the Company continues to evaluate purchase accounting during the measurement period.

The following table summarizes the unaudited pro forma financial results of operations as if the Company acquired DG Bancorp, Inc. on January 1, 2010:

 

         Three Months Ended    
June 30,
        Six Months Ended    
June 30,
 
           2011                  2010                 2011                 2010        

Net interest income (1)

   $ 17,090       $ 14,850      $ 31,795      $ 30,039   

Net income loss(1)

     1,026         (2,486     (1,316     (3,581

Basic earnings (loss) per common share

   $ 0.05       $ (0.13   $ (0.07   $ (0.18

Diluted earnings (loss) per common share

     0.05         (0.13     (0.07     (0.18

(1)  Results for DG Bancorp, Inc. include net income or loss from operations for the respective periods

The Company completed an acquisition of a portfolio of $152 million of performing Chicago area multi-family loans on March 11, 2011. The multi-family loans in this portfolio were originated by Citibank, N.A. and its predecessor by merger, Citibank, F.S.B. At the time of the acquisition, the portfolio consisted of 466 loans with an average loan balance of $327,000. The loans were purchased at a discount that will be accreted into income on a level-yield basis over the remaining life of the loans. The Company conducted extensive due diligence on this transaction, resulting in the recognition of $398,000 in transaction related expenses in 2011. The Company expects its acquisition of this loan portfolio to result in several benefits, including increased earnings and higher returns on stockholders’ equity, more effective deployment of its excess liquidity and capital, improved utilization of existing organizational capacities and new opportunities to develop further business relationships with the borrowers of these loans.

Note 9 – Recent Accounting Pronouncements

FASB ASU 2010-20, “Receivable (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” — ASU 2010-20 requires new and enhanced disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The new and enhanced disclosure requirements focus on such areas as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and modifications. The ASU requires an entity to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. See Note 4 to these Consolidated Financial Statements for the required disclosures at June 30, 2011.

 

 

 

35


BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

Note 9 – Recent Accounting Pronouncements (continued)

 

FASB ASU 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations” — ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 affects any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2010. See Note 8 – Acquisitions.

Note 10 – Newly Issued But Not Yet Effective Accounting Pronouncements

FASB ASU 2010-28, “Intangibles – Goodwill and Other (Topic 350), When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” — ASU 2010-28 affects all entities that have recognized a goodwill asset and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. ASU 2010-28 modifies Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, this guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The guidance is effective for a public entity’s first annual period that ends on or after December 15, 2010. Adoption of ASU 2010-28 is not expected to have a material impact on our consolidated financial statements.

FASB ASU 2011-2 Troubled Debt Restructurings.    In April 2011, the FASB amended existing guidance and clarified when creditors such as banks should classify loan modifications as troubled debt restructurings. Banks will now need to consider all available evidence when evaluating whether a loan modification is a troubled debt restructuring. This new guidance could result in more loan modifications being classified as troubled debt restructurings, which could affect the allowance for loan losses and increase disclosures. This new guidance for identifying and disclosing troubled debt restructurings is effective for interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to troubled debt restructurings occurring after the beginning of the year. The Company is evaluating the impact that the new guidance may have on its financial condition, results of operations and liquidity.

 

 

36


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, including this Item 2, contains, and other periodic and special reports and press releases 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. We intend such 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. Forward-looking statements are based on certain assumptions or describe our future plans, strategies and expectations, and are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, and actual results may differ from those predicted. Factors that could have a material adverse effect on operations and could affect management’s outlook or our future prospects include, but are not limited to: higher than expected overhead, infrastructure and compliance costs, changes in market interest rates, changes in the yield curve, balance sheet shrinkage or less than anticipated balance sheet growth, lack of demand for loan products, illiquidity and changes in financial markets, including the market for mortgage backed securities and other debt obligations, declining or weak demand for real estate and real estate valuations, increasing or high unemployment levels, deposit flows, pricing, underwriting and other forms of competition, adverse federal or state legislative or regulatory developments, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, adverse economic conditions 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, the quality or composition of our loan or investment portfolios, demand for financial services and multi-family, commercial and residential real estate loans in our market areas, the possible short-term dilutive effect of potential acquisitions or de novo branches, if any, changes in accounting principles, policies and guidelines, increased costs of federal deposit insurance, and future adverse developments concerning the Federal Home Loan Bank of Chicago. These risks and uncertainties 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 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, 2010, and all amendments thereto, as filed with the Securities and Exchange Commission. There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

Overview

During the second quarter of 2011, the recovery of the national economy appeared to stagnate, as did the local economy’s participation in the recovery. The principal challenges in the local economy continue to be persistent unemployment and declining real estate values in the Chicago metropolitan area, with certain geographic sub-markets considerably more adversely affected than others. Pricing and underwriting for multi-family and commercial real estate loans came under modest pressure during the second quarter; nevertheless, the Company’s multi-family loan portfolio increased and the non-residential real estate loan portfolio remained essentially constant. Pricing for commercial leases stabilized and the Company experienced modestly increased demand due to improved lessee capital investment activity and portfolio risk exposure management actions by certain market participants. The Company experienced slightly decreased demand for commercial loans due to fluctuations in line usage.

 

 

 

37


Demand for traditional adjustable-rate residential mortgage loans remained low due to an overwhelming market preference for fixed-rate residential mortgage loans given low market interest rates and the Company’s underwriting standards.

Excluding the impact of the purchased impaired loans and OREO acquired in the acquisition of Downers Grove National Bank, the Company’s overall loan portfolio quality improved modestly in the second quarter of 2011. The performing loan portfolios acquired in the Downers Grove National Bank transaction and in the Company’s first quarter purchase of a portfolio of Chicago area multi-family loans from Citibank continued to perform well. The Company continues to experience isolated borrower defaults (particularly in the residential loan category) and certain borrowers seem reluctant or unable to permanently cure chronically past due payment habits; however, the Company is also experiencing a greater volume of fully-reinstated loans and scheduled recoveries to current payment status. The Company experienced increasing purchaser interest in its classified asset collateral and OREO inventory; the quantity of OREO under contract for sale on an orderly liquidation basis nearly tripled in the second quarter. The Company continues to believe that unemployment, consumer spending, borrower and investor perceptions of residential and commercial real estate valuations and the pace of judicial proceedings will be the primary factors affecting loan portfolio quality and classified asset resolutions in 2011.

The Company’s general loan loss reserve requirement increased due to the mild degradation in national and local economic factors, an increase in loss ratios for non-owner occupied single family loans, and the differential between the estimated loan losses and the remaining purchase discount for the Downers Grove National Bank performing loan portfolio. Specific loan loss reserves increased due primarily to the receipt of updated appraisals on existing non-performing loans. The Company’s underwriting standards remain consistent with its historical standards, although the Company’s credit analyses continue to incorporate somewhat more conservative assumptions with respect to effective rents, expenses and occupancy levels given the current economic environment.

Deposits declined in the second quarter of 2011 due principally to the Company’s reduced competitive posture with respect to certificate of deposit accounts. Pricing conditions for local deposits, whether low-balance core deposits, certificates of deposits or high-balance, high-yield transaction accounts, remained favorable during the first half of the year due to very low market yields and continued weak industry-wide loan demand. There are emerging signs that a few competitors may seek to gain market share in high-yield transaction accounts, but there currently does not appear to be any sustained effort by any competitors to do so. In addition, many competitors are still evaluating their deposit product configurations in the context of the Dodd-Frank Act and its related regulations; we expect we will adjust our deposit product offerings to explore such competitive advantages as may emerge in this new regulatory and competitive environment.

The Company’s net interest spread and net interest margin increased in the second quarter of 2011 due to the combined effects of material increases in the loan portfolio and a decline in the cost of funds. Given the quantity and volatility of the variables affecting our net interest margin and net interest spread, the Company is unable to confidently predict what its net interest margin and net interest spread will be for the remainder of 2011; however, the Company expects its recent acquisitions to continue to make immediate positive contributions to its net interest spread and net interest margin.

Non-interest income increased modestly in second quarter of 2011 due to a slight increase in deposit-related fee income and the favorable impact of the Downers Grove National Bank Trust Department fee income. At present, the Company does not expect to record either a material amount of bargain purchase gain or a material amount of goodwill from the Downers Grove National Bank transaction. We continue to evaluate the expansion of non-interest income sources, particularly related to insurance and trust services, to offset any potential future adverse derivative impact from the Dodd-Frank Act.

Non-interest expense increased in the second quarter of 2011 due principally to the Downers Grove National Bank transitional staffing and conversion expenses and non-performing assets management expenses relating to real estate tax expense accruals and final disposition write-downs relating to OREO. We concluded the Downers Grove National Bank systems conversion in June, 2011, and as expected, the residual transition staffing expenses fully abated immediately after the end of the second quarter. We will resume our review of certain departments and operations for net operating contributions and further operating efficiencies throughout the remainder of 2011.

 

 

 

38


Selected Financial Data

The following tables summarize the major components of the changes in our balance sheet at June 30, 2011 and December 31, 2010, and in our statement of operations for the three and six month periods ended June 30, 2011 and June 30, 2010.

 

             June 30,        
2011
       December 31,  
2010
             Change          
     (Dollars in thousands)  

Selected Financial Condition Data:

        

Total assets

   $ 1,662,888       $ 1,530,655       $ 132,233   

Cash and cash equivalents

     114,482         220,810         (106,328

Securities

     95,546         120,747         (25,201

Loans receivable, net

     1,291,399         1,050,766         240,633   

Deposits

     1,378,331         1,235,377         142,954   

Borrowings

     12,595         23,749         (11,154

Stockholders’ equity

     250,378         253,285         (2,907

 

           Three months ended June 30,          Six months ended June 30,
     2011    2010       Change           2011           2010            Change    
     (Dollars in thousands)

Selected Operating Data:

                          

Interest income

     $ 19,000        $ 16,451       $ 2,549       $ 34,348       $ 33,596        $ 752  

Interest expense

       1,910          3,677         (1,767 )       3,906         7,606          (3,700 )
    

 

 

      

 

 

     

 

 

     

 

 

     

 

 

      

 

 

 

Net interest income

       17,090          12,774         4,316         30,442         25,990          4,452  

Provision for loan losses

       3,175          2,665         510         5,599         3,516          2,083  
    

 

 

      

 

 

     

 

 

     

 

 

     

 

 

      

 

 

 

Net interest income after provision for loan losses

       13,915          10,109         3,806         24,843         22,474          2,369  

Noninterest income

       1,879          1,812         67         3,450         3,267          183  

Noninterest expense

       14,623          12,370         2,253         28,878         25,048          3,830  
    

 

 

      

 

 

     

 

 

     

 

 

     

 

 

      

 

 

 

Income (loss) before income taxes

       1,171          (449 )       1,620         (585 )       693          (1,278 )

Income tax expense (benefit)

       145          (161 )       306         (834 )       265          (1,099 )
    

 

 

      

 

 

     

 

 

     

 

 

     

 

 

      

 

 

 

Net income (loss)

     $ 1,026        $ (288 )     $ 1,314       $ 249       $ 428        $ (179 )
    

 

 

      

 

 

     

 

 

     

 

 

     

 

 

      

 

 

 

 

     Three Months  Ended
June 30,
    Six Months Ended
June 30,
 
         2011             2010             2011             2010      

Performance Ratios:

        

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

     0.24     (0.07 )%      0.03     0.05

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

     1.66        (0.44     0.20        0.32   

Net interest rate spread (1) (2)

     4.27        3.30        3.99        3.39   

Net interest margin (1) (3)

     4.38        3.53        4.11        3.63   

Average equity to average assets

     14.65        16.78        15.49        16.86   

Efficiency ratio (4)

     77.09        84.81        85.21        85.61   

Noninterest expense to average total assets (1)

     3.47        3.14        3.59        3.20   

Average interest-earning assets to average interest-bearing liabilities

     122.55        122.10        122.67        122.33   

 

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

 

 

 

39


Selected Financial Data (continued)

 

     At June 30,
2011
    At December 31,
2010
 

Selected Financial Ratios and Other Data:

    

Asset Quality Ratios:

    

Nonperforming assets to total assets

     5.32     3.94

Nonperforming assets to total assets (excluding purchased impaired loans and purchased OREO)

     3.71       

Nonaccrual loans to total loans

     4.67        4.26   

Nonaccrual loans to total loans (excluding purchased impaired loans)

     3.19          

Allowance for loan losses to nonperforming loans

     37.43        48.54   

Allowance for loan losses to nonperforming loans (excluding purchased impaired loans)

     54.83          

Allowance for loan losses to total loans

     1.75        2.07   

Capital Ratios:

    

Equity to total assets at end of period

     16.57        16.55   

Tier 1 leverage ratio (Bank only)

     11.28        12.48   

Other Data:

    

Number of full service offices

     20        18   

Employees (full-time equivalent basis)

     373        328   

Comparison of Financial Condition at June 30, 2011 and December 31, 2010

Total assets increased $132.2 million, or 8.6%, to $1.663 billion at June 30, 2011, from $1.531 billion at December 31, 2010, primarily due to our acquisition of Downers Grove National Bank.

Net loans receivable increased $240.6 million, or 22.9%, to $1.291 billion at June 30, 2011, from $1.051 billion at December 31, 2010. The increase was due in substantial part to our purchase of a portfolio of performing Chicago area multi-family mortgage loans from Citibank and our acquisition of Downers Grove National Bank, each of which closed in March 2011. The increase in net loans receivable reflected net increases of $34.8 million in one-to-four family residential mortgage loans, $150.2 million in multi-family mortgage loans, $46.1 million in nonresidential real estate loans, $5.9 million in construction and land loans, $8.9 million in commercial loans and $927,000 in consumer loans.

One-to-four family residential mortgage loans increased $34.8 million, or 13.6%, to $291.1 million at June 30, 2011, from $256.3 million at December 31, 2010, due primarily to the $47.4 million in one-to-four family residential mortgage loans that were acquired from the Downers Grove National Bank. Multi-family mortgage loans increased $150.2 million, or 50.6%, to $447.2 million at June 30, 2011, from $296.9 million at December 31, 2010, due primarily to the $152.1 million in multi-family mortgage loans that were acquired from Citibank. Nonresidential real estate loans increased $46.1 million, or 16.4%, to $328.1 million at June 30, 2011, from $282.0 million at December 31, 2010, due primarily to the $44.2 million in nonresidential real estate loans that were acquired from Downers Grove National Bank. Construction and land loans increased $5.9 million, or 32.3%, to $24.3 million at June 30, 2011, from $18.4 million at December 31, 2010, due primarily to the $16.8 million in construction and land loans that were acquired from Downers Grove National Bank. Commercial loans increased by $8.9 million, or 13.8%, to $73.6 million at June 30, 2011, from $64.7 million at December 31, 2010, due primarily to the $10.9 million in commercial loans that were acquired from Downers Grove National Bank. Commercial leases decreased $5.2 million, or 3.5%, to $145.9 million at June 30, 2011, from $151.1 million at December 31, 2010, due to lease payments’ slightly outpacing originations. Consumer loans increased $927,000, or 42.5%.

Securities decreased by $25.2 million, or 20.9%, to $95.5 million at June 30, 2011, from $120.7 million at December 31, 2010, due primarily to the receipt of principal repayments in the amount of $18.6 million in our residential collateralized mortgage obligation portfolio.

 

 

 

40


We owned $16.3 million of common stock of the Federal Home Loan Bank of Chicago (“FHLBC”) at June 30, 2011, compared to $15.6 million at December 31, 2010. The increase was due to the $748,000 in FHLBC stock acquired from to the Downers Grove National Bank.

Cash and cash equivalents decreased $106.3 million, or 48.2%, to $114.5 million at June 30, 2011, from $220.8 million at December 31, 2010, primarily due to the $149.4 million in cash consideration that we paid to purchase the Citibank multi-family loan portfolio, offset by $61.6 of cash and cash equivalents acquired from Downers Grove National Bank.

Deposits increased $143.0 million, or 11.6%, to $1.378 billion at June 30, 2011, from $1.235 billion at December 31, 2010. The increase in deposits was primarily due to the deposits acquired in the acquisition of Downers Grove National Bank. At the closing of the acquisition in March of 2011, Downers Grove National Bank had $36.1 million in noninterest-bearing demand deposit accounts, $39.3 million in savings accounts, $17.3 million in money market accounts, $31.7 million in interest-bearing NOW accounts, and $86.1 million of certificates of deposits.

Noninterest-bearing demand deposits increased $26.3 million, or 23.3% to $138.8 million at June 30, 2011, from $112.5 million at December 31, 2010. Savings accounts increased $45.0 million, or 45.5%, to $143.9 million at June 30, 2011, from $98.9 million at December 31, 2010. Money market accounts increased $13.8 million, or 4.1%, to $354.9 million at June 30, 2011, from $341.0 million at December 31, 2010. Interest-bearing NOW accounts increased $21.2 million, or 7.0%, to $324.0 million at June 30, 2011, from $302.8 million at December 31, 2010. Total core deposits (savings, money market, noninterest-bearing demand and interest-bearing NOW accounts) increased as a percentage of total deposits, representing 69.8% of total deposits at June 30, 2011, compared to 69.2% of total deposits at December 31, 2010.

Certificates of deposit increased $36.7 million, or 9.7%, to $416.8 million at June 30, 2011, from $380.1 million at December 31, 2010. The $86.1 million increase in certificate of deposit accounts resulting from the acquisition of Downers Grove National Bank was offset by a $40.7 million decrease in the balances of certificate of deposits accounts held as of December 31, 2010 due to the Company’s reduced competitive pricing position in anticipation of additional excess liquidity resulting from the Downers Grove National Bank acquisition. Of the $40.7 million decrease in certificate of deposit accounts, $5.0 million were wholesale certificates of deposit accounts.

Borrowings decreased $11.2 million, or 47.0%, to $12.6 million at June 30, 2011, from $23.7 million at December 31, 2010, due to our continued reductions of outstanding FHLBC advances.

Total stockholders’ equity was $250.4 million at June 30, 2011, compared to $253.3 million at December 31, 2010. The decrease in total stockholders’ equity was primarily due to the combined impact of our declaration and payment of cash dividends totaling $3.0 million, and a $649,000 decrease in accumulated other comprehensive income during that period, which was partially offset by net income of $249,000. The unallocated shares of common stock that our ESOP owns were reflected as a $13.7 million reduction to stockholders’ equity at June 30, 2011, compared to a $14.2 million reduction to stockholders’ equity at December 31, 2010.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

Net Income (Loss).  We had net income of $1.0 million for the three months ended June 30, 2011, compared to a net loss of $288,000 for the three months ended June 30, 2010. Our earnings per share of common stock for the three months ended June 30, 2011 were $0.05 per basic and fully diluted share, respectively, compared to a loss of $0.01 per basic and fully diluted share, respectively, for the three-month period ending June 30, 2010.

Net Interest Income.  Net interest income increased by $4.3 million, or 33.8%, to $17.1 million for the three months ended June 30, 2011, from $12.8 million for the three months ended June 30, 2010. The increase reflected a $2.5 million increase in interest income and a $1.8 million decrease in interest expense. Our net interest rate spread increased by 97 basis points to 4.27% for the three months ended June 30, 2011, from 3.30% for the same period in 2010. Our net interest margin increased by 85 basis points to 4.38% for the three months ended June 30, 2011, from 3.53% for the same period in 2010.

 

 

 

41


Interest income increased $2.5 million, or 15.5%, to $19.0 million for the three months ended June 30, 2011, from $16.5 million for the three months ended June 30, 2010. The increase in interest income was primarily attributable to an increase in average interest-earning assets and the impact of a higher average yield on interest-earning assets. The average yield on interest-earning assets increased 33 basis points to 4.87% for the three months ended June 30, 2011, compared to 4.54% for the same period in 2010. Total average interest-earning assets increased $111.4 million, or 7.7%, to $1.564 billion for the three months ended June 30, 2011, from $1.453 billion for the same period in 2010. The increase in average interest-earning assets was due in substantial part to a $180.3 million, or 15.6%, increase in average loans receivable, and a net increase of $24.6 million, or 28.0%, in the average balance of securities, partially offset by a net decrease of $94.5 million, or 48.4%, in the average balance of interest-bearing deposits.

Interest income from loans, the most significant portion of interest income, increased $2.7 million, or 17.7%, to $18.2 million for the three months ended June 30, 2011, from $15.4 million for the same period in 2010. The increase in interest income from loans resulted primarily from an increase in average loans receivable to $1.334 billion for the three months ended June 30, 2011, from $1.154 billion for the same period in 2010, and a 10 basis point increase in the average yield on loans to 5.46% for the three months ended June 30, 2011, from 5.36% for the same period in 2010.

Interest income from securities decreased by $142,000, or 15.6%, to $768,000 for the three months ended June 30, 2011, from $910,000 for the same period in 2010. The decrease in interest income from securities was primarily due to a 142 basis point decrease in the average yield on securities to 2.73% for the three months ended June 30, 2011, from 4.15% for the same period in 2010. The decrease in the average yield of securities was partially offset by an increase of $24.6 million, or 28.0%, in the average outstanding balance of securities to $112.6 million for the three months ended June 30, 2011, from $88.0 million for the same period in 2010.

Interest income on interest-bearing deposits in other financial institutions decreased by $49,000, or 40.2%, to $73,000 for the three months ended June 30, 2011, from $122,000 for the same period in 2010. The decrease in interest income from interest-bearing deposits was primarily due to a decrease of $94.5 million, or 48.4%, in the average outstanding balance of interest-bearing deposits in other financial institutions to $100.8 million for the three months ended June 30, 2011, from $195.3 million for the same period in 2010, which partially offset by a four basis point increase in the average yield on interest-bearing deposits to 0.29% for the three months ended June 30, 2011 from 0.25% for the same period in 2010.

The FHLBC paid a dividend of $4,000 on its common stock in the second quarter of 2011; no dividend was paid in the second quarter of 2010.

Interest expense decreased $1.8 million, or 48.1%, to $1.9 million for the three months ended June 30, 2011, from $3.7 million for the three months ended June 30, 2010. The decrease in interest expense was due to a decrease in the weighted average interest rates that we paid on deposit accounts and on borrowings, partially offset by an increase in the balance of our average interest-bearing liabilities. The cost of our average interest-bearing liabilities decreased by 64 basis points to 0.60% for the three months ended June 30, 2011, from 1.24% for the same period in 2010. Our average interest-bearing liabilities increased $86.5 million, to $1.276 billion for the three months ended June 30, 2011, from $1.190 billion for the same period in 2010.

Interest expense on deposits decreased $1.6 million, or 46.2%, to $1.8 million for the three months ended June 30, 2011, from $3.4 million for the three months ended June 30, 2010. The decrease in interest expense on deposits reflected a 61 basis point decrease in the average rate paid on interest-bearing deposits to 0.59% for the three months ended June 30, 2011, from 1.20% for same period in 2010. The decrease in the average rate paid on interest-bearing deposits was partially offset by a $116.0 million, or 10.1%, increase in average interest-bearing deposits to $1.263 billion for the three months ended June 30, 2011, from $1.147 billion for the same period in 2010.

Interest expense on money market accounts decreased $562,000, or 57.5%, to $415,000 for the three months ended June 30, 2011, from $977,000 for the three months ended June 30, 2010. The decrease in interest expense on money market accounts reflected a 66 basis point decrease in the interest rate paid on these deposits to 0.47% for the three months ended June 30, 2011, from 1.13% for the same period in 2010, partially offset by a $5.9 million, or 1.7%, increase in the average balance of money market accounts to $354.0 million for the three months ended June 30,

 

 

42


2011, from $348.2 million for the same period in 2010.

Interest expense on interest-bearing NOW account deposits decreased $298,000, or 66.8%, to $148,000 for the three months ended June 30, 2011, from $446,000 for the three months ended June 30, 2010. The decrease in interest expense on interest-bearing NOW accounts reflected a 43 basis point decrease in the interest rates paid on interest-bearing NOW account deposits to 0.18% for the three months ended June 30, 2011, from 0.61% for the same period in 2010, partially offset by a increase of $36.9 million, or 12.6%, in the average balance of interest-bearing NOW account deposits to $329.5 million for the three months ended June 30, 2011, from $292.6 million for the same period in 2010.

Interest expense on certificates of deposit decreased $664,000, or 35.2%, to $1.2 million for the three months ended June 30, 2011, from $1.9 million for the three months ended June 30, 2010. The decrease in interest expense on certificates of deposit was due to a 73 basis point decrease in the interest rates paid on certificates of deposit to 1.13% for the three months ended June 30, 2011, from 1.86% for the same period in 2010, partially offset by a increase of $27.9 million, or 6.9%, in the average balance of certificates of deposit to $434.9 million for the three months ended June 30, 2011, from $407.0 million for the same period in 2010.

Interest expense on borrowings decreased $182,000, or 74.9%, to $61,000 for the three months ended June 30, 2011, from $243,000 for the same period in 2010. The decrease in interest expense on borrowings was due to a $29.5 million, or 68.6%, decrease of our average borrowings to $13.5 million for the three months ended June 30, 2011, from $43.0 million for the same period in 2010, and a 46 basis point decrease in interest rates paid on borrowings to 1.81% for the three months ended June 30, 2011, from 2.27% for the same period in 2010.

 

 

 

43


Average Balance Sheets

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

 

     For the three months ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield/Rate
(1)
    Average
Outstanding
Balance
    Interest      Yield/Rate
(1)
 
     (Dollars in thousands)  

Interest-earning Assets:

              

Loans

   $ 1,334,239      $ 18,155         5.46   $ 1,153,960      $ 15,419         5.36

Securities

     112,636        768         2.73        88,017        910         4.15   

Stock in FHLB

     16,562        4         0.10        15,598        -         -   

Other

     100,807        73         0.29        195,260        122         0.25   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,564,244        19,000         4.87        1,452,835        16,451         4.54   
    

 

 

        

 

 

    

Noninterest-earning assets

     119,169             121,178        
  

 

 

        

 

 

      

Total assets

   $ 1,683,413           $ 1,574,013        
  

 

 

        

 

 

      

Interest-bearing Liabilities:

              

Savings deposits

   $ 144,519        62         0.17      $ 99,151        123         0.50   

Money market accounts

     354,030        415         0.47        348,153        977         1.13   

Interest-bearing NOW accounts

     329,482        148         0.18        292,589        446         0.61   

Certificates of deposit

     434,852        1,224         1.13        406,976        1,888         1.86   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

     1,262,883        1,849         0.59        1,146,869        3,434         1.20   

Borrowings

     13,507        61         1.81        42,978        243         2.27   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,276,390        1,910         0.60        1,189,847        3,677         1.24   
    

 

 

        

 

 

    

Noninterest-bearing deposits

     141,185             102,997        

Noninterest-bearing liabilities

     19,238             17,126        
  

 

 

        

 

 

      

Total liabilities

     1,436,813             1,309,970        

Equity

     246,600             264,043        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 1,683,413           $ 1,574,013        
  

 

 

        

 

 

      

Net interest income

     $ 17,090           $ 12,774      
    

 

 

        

 

 

    

Net interest rate spread (2)

          4.27          3.30

Net interest-earning assets (3)

   $ 287,854           $ 262,988        
  

 

 

        

 

 

      

Net interest margin (4)

          4.38          3.53

Ratio of interest-earning assets to interest-bearing liabilities

     122.55          122.10     

 

 

  (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.

 

 

 

44


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

Based on our evaluation of the above factors, we recorded a provision for loan losses of $3.2 million for the three months ended June 30, 2011, compared to a provision for loan losses of $2.7 million for the three months ended June 30, 2010. Of the $3.2 million total provision for loan losses, the general valuation allowance increased by $1.2 million and the remaining $2.0 million represents net charge-off activity and specific valuation allowances.

The general valuation allowance increased $1.2 million primarily due to a mild deterioration in national and local economic factors, an initial allowance for the Downers Grove National Bank performing loan portfolio and an increase in the historical loss ratio for non-owner-occupied one-to-four family loans. In general, all other historical loss ratios were stable.

Net charge-offs of $2.7 million were offset by a decrease of $735,000 of specific valuation allowances allocated to impaired loans. The $735,000 decrease in specific valuation allowances allocated to impaired loans reflected an increase of $1.6 million from updated collateral valuations on real estate collateral, net of $2.3 million of charge offs related to properties transferred to OREO in the second quarter of 2011. Of the total charge-offs, $1.3 million related to the final disposition of a single non-owner-occupied single family residential property and $793,000 related to a TDR commenced in the first quarter of 2011 involving multiple loans to certain borrowers and a partnership in which they are members that are secured by non-owner-occupied single-family residential rental properties. The remaining amounts involved a variety of smaller impaired loans for which final resolution was reached in the second quarter of 2011.

Nonperforming Loans and Assets

The Company reviews loans on a regular basis, and generally places loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At June 30, 2011, we had several loans to a single borrower totaling $592,000 in this category. The borrower is in compliance with an informal forbearance agreement that was put into place pending the borrower’s anticipated final resolution of other matters affecting the borrower’s cash flows.

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 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

 

 

45


valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.

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

As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income-producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as-is”, “as-stabilized” or “as-improved” basis is most likely to produce the highest net realizable value. If we determine that the “as-stabilized” or “as-improved” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of June 30, 2011, substantially all impaired real estate loan collateral and OREO are 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 5.0% deduction to determine the expected costs to sell, as costs for real estate taxes and repairs are expensed when incurred.

 

 

 

46


Nonperforming Assets Summary

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

 

     June 30,
2011
     March 31,
2011
     Change  
     (Dollars in thousands)  

Nonaccrual loans

        

One-to-four family residential real estate loans

   $ 7,485       $ 6,366       $ 1,119   

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

     5,178         4,283         895   

Multi-family mortgage loans

     7,955         8,758         (803

Wholesale commercial lending

     4,405         4,405           

Nonresidential real estate loans

     12,393         12,830         (437

Construction loans

     121         3,274         (3,153

Land loans

     383         2,057         (1,674

Commercial loans – secured

     3,632         3,511         121   

Commercial loans – unsecured

     158         158           

Commercial loans – other

     96         96           

Non-rated commercial leases

     72         72           

Consumer loans

                       
  

 

 

    

 

 

    

 

 

 

Nonaccrual loans

     41,878         45,810         (3,932

Other real estate owned and in process

        

One-to-four family residential real estate

     5,659         3,053         2,606   

Multi-family mortgage

     3,987         2,794         1,193   

Nonresidential real estate loans

     6,896         7,150         (254

Land

     3,218         2,174         1,044   
  

 

 

    

 

 

    

 

 

 

Other real estate owned and in process – excluding purchased OREO

     19,760         15,171         4,589   

Purchased other real estate owned

     7,272         7,542         (270
  

 

 

    

 

 

    

 

 

 

Other real estate owned and in process

     27,032         22,713         4,319   
  

 

 

    

 

 

    

 

 

 

Nonperforming assets

   $ 68,910       $ 68,523       $ 387   
  

 

 

    

 

 

    

 

 

 

Loans on Nonaccrual Status

At June 30, 2011, nonaccrual loans decreased on a net basis due to a number of resolved loans and transfers of loans to OREO status. At June 30, 2011, the Company’s nonperforming loans consisted of 123 borrower relationships, with an average loan of $340,000 per borrower. Therefore, there are no specific concentrations of credit risk such that a majority of loans involves only a few borrower relationships. Our two largest nonperforming borrower relationships represent approximately 24% of total nonperforming loans. These loans are briefly described as follows:

 

   

We have a $5.8 million nonperforming loan that is secured by a retail shopping center located in our primary Chicago metropolitan market. As of June 30, 2011, this loan was on nonaccrual status and had a $781,000 specific valuation allowance that was based on an updated “as improved” third party appraisal. The shopping center is 92% occupied by businesses that are affiliated with investors in the entity that owns the shopping center. The loan is further secured by additional collateral pledged by the investors, and is supported by the personal guarantees of the investors. The business operations of the existing tenants of the shopping center, together with the supplementary personal resources of the guarantors, were not

 

 

47


 

sufficient to comply with the planned payment schedule of principal and interest. Accordingly, pursuant to applicable regulatory guidance, future renewals of the loan will remain classified as a TDR, and the loan will remain on nonaccrual status until the borrower’s business operations demonstrate the capability to sustain at least six months of debt service on a fully amortizing basis.

 

   

We have a $4.4 million nonperforming loan that is secured by a 242-unit multi-family residential building located outside of our primary Chicago metropolitan area market. This loan is included in the Wholesale Commercial Lending loan class for allowance purposes. As of June 30, 2011, this loan was on nonaccrual status and had a $1.5 million specific valuation allowance that was based on an updated “as improved” third-party appraisal and a recently-approved budget for capital expenditures for the property.

Other Real Estate Owned and In Process

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

 

     Balance at
  March  31,  
2011
       Additions        Acquired
other real
estate owned
activity, net
    Write-downs           Sale             Balance at  
June 30,
2011
 
     (Dollars in thousands)  

One-to-four family residential

   $ 3,210       $ 3,132       $ 170      $ (45   $ (481   $ 5,986   

Multi-family mortgage

     2,794         1,532         -        -        (339     3,987   

Nonresidential real estate

     9,117         -         1,039        (254     -        9,902   

Land

     7,592         1,044         (1,479     -        -        7,157   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned and in process

   $ 22,713       $ 5,708       $ (270   $ (299   $ (820   $ 27,032   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

OREO and OREO in process increased $4.3 million in the second quarter. The most significant additions to OREO is as follows:

 

 

We had a $4.4 million credit exposure to a single borrower secured by a completed single-family residence that the borrower constructed for the purposes of sale, a parcel of vacant land, and the borrower’s personal residence. All of the real estate collateral is located in our primary Chicago metropolitan market. In July, 2011, we sold the completed single-family residence in an arms-length orderly liquidation for $2.0 million, representing 90% of the listing price. The commissions, sale prorations and closing expenses for the sale totaled $176,000. OREO in process at June 30, 2011 included the single family residence at a fair value of $1.8 million and the parcel of vacant land at a fair value of $540,000. At June 30, 2100, we charged off $1.3 million on this credit exposure, of which $900,000 had been reserved in prior periods, to reflect the final disposition of the completed single family residence and to reduce the fair value of the parcel of vacant land to $540,000.

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

 

 

48


Troubled Debt Restructurings

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

 

        June 30,    
2011
        March 31,    
2011
          Change        
    (dollars in thousands)  

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

  $ 3,449      $ 4,200      $ (751

Multi-family mortgage

    2,791        1,667        1,124   

Nonresidential real estate

    2,784        1,693        1,091   
 

 

 

   

 

 

   

 

 

 

Troubled debt restructured loans – accrual loans

    9,024        7,560        1,464   

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

    793               793   

Multi-family mortgage

    10        11        (1

Nonresidential real estate

    2,026        3,137        (1,111

Commercial loans – secured

    73               73   
 

 

 

   

 

 

   

 

 

 

Troubled debt restructured loans – nonaccrual loans

    2,902        3,148        (246
 

 

 

   

 

 

   

 

 

 

Total troubled debt restructured loans

  $ 11,926      $ 10,708      $ 1,218   
 

 

 

   

 

 

   

 

 

 

TDR loans increased $1.2 million during the second quarter of 2011. Total loans classified as TDRs were 0.91% of total loans at June 30, 2011, and 0.81% of total loans at March 31, 2011.

During the second quarter of 2011, we worked to finalize a restructuring of $5.7 million in loans that we made to two family-related borrowers and a partnership in which they are members. The loans are secured by non-owner occupied one-to-four family rental properties located in our primary Chicago metropolitan market. At March 31, 2011, we classified the loans as a TDR and recorded a $1.2 million charge-off against the original credit exposure based on the terms of a restructuring that we proposed to the borrowers after the partnership filed a Chapter 11 bankruptcy case early in the second quarter of 2011. The proposed restructuring involved a division of assets between the individual borrowers and a segregation of the new total loan amount into a conforming “A” fully amortizing note for $3.4 million and a “B” fully amortizing note for an original balance of $800,000. A cash collateral order was entered in the bankruptcy case requiring the borrowers to pay us rental income from the properties in an amount sufficient to service the proposed “A” and “B” notes, and to continue to fund real estate tax escrows that had previously been established for the loans. At June 30, 2011, all of the loan and escrow payments that were required by the cash collateral order were current. Nonetheless, we elected to charge-off the $793,000 attributable to the proposed “B” note at June 30, 2011 because we received indications that the borrowers believed that they would be unable to finalize the restructuring on the originally proposed terms. We are currently working with the borrowers to determine whether a restructuring of the loans can be accomplished on mutually acceptable terms, or whether an orderly liquidation of the properties conducted with their cooperation should be pursued.

Of the $11.9 million in loans that were classified as TDRs at June 30, 2011, 76% were on accrual status and continued to perform according to the terms of the applicable loan agreements. Of the $10.7 million in loans that were classified as TDRs at March 31, 2011, 71% remained on accrual status as of that date.

 

 

49


The following table summarizes noninterest income for three-month periods ended June 30, 2011 and 2010:

 

    Three months ended
June  30,
       
           2011                   2010                 Change       
    (Dollars in thousands)  

Noninterest income:

     

Deposit service charges and fees

  $ 691      $ 792      $ (101

Other fee income

    413        500        (87

Insurance commissions and annuities income

    155        179        (24

Gain on sale of loans, net

    39        68        (29

Gain on sale of securities

    -        31        (31

Loss on disposition of premises and equipment, net

    (10     (17     7   

Loan servicing fees

    137        154        (17

Amortization and impairment of servicing assets

    (51     (78     27   

Earnings on bank owned life insurance

    162        92        70   

Trust income

    216        12        204   

Other

    127        79        48   
 

 

 

   

 

 

   

 

 

 

Total noninterest income

  $ 1,879      $ 1,812      $ 67   
 

 

 

   

 

 

   

 

 

 

Noninterest Income. Noninterest income increased $67,000, or 3.7%, to $1.9 million for the three months ended June 30, 2011, from $1.8 million for the same period in 2010. Deposit service charges and fees decreased $101,000, or 12.8%, to $691,000 for the three months ended June 30, 2011, from $792,000 for the same period in 2010. Other fee income decreased $87,000, or 17.4%, to $413,000 for the three months ended June 30, 2011, compared to $500,000 for the same period in 2010. Income from insurance commissions and annuities decreased $24,000, or 13.4%, to $155,000 for the three months ended June 30, 2011, from $179,000 for the same period in 2010. Gains on sales of loans were $39,000 for the three months ended June 30, 2011, compared to $68,000 for the same period in 2010, due to a decrease in the volume of loan sales. Loan servicing income decreased $17,000, or 11.0%, to $137,000 for the three months ended June 30, 2011, from $154,000 for the same period in 2010. In the second quarter 2010, we recorded a recovery of our mortgage servicing rights portfolio of $233,000 due to the combined effects of market interest rates and their concomitant effect on prepayment speeds during the quarter compared to no reserve for the same period in 2011. Earnings on bank-owned life insurance were $162,000 for the three months ended June 30, 2011, compared to $92,000 for the same period in 2010. Trust department income increased $204,000 to $216,000 for the three months ended June 30, 2011, compared to $12,000 for the same period in 2010, due to the acquisition of Downers Grove National Bank on March 18, 2011. Other income increased $48,000 to $127,000 for the three months ended June 30, 2011, from $79,000 for the same period in 2010.

 

 

50


The following table summarizes noninterest expense for the three-month periods ended June 30, 2011 and 2010:

 

    Three months ended
June  30,
       
           2011                   2010                 Change       
    (Dollars in thousands)  

Noninterest Expense:

     

Compensation and benefits

  $ 7,120      $ 6,552      $ 568   

Office occupancy and equipment

    1,736        1,609        127   

Advertising and public relations

    260        303        (43

Information technology

    1,091        961        130   

Supplies, telephone and postage

    439        406        33   

Amortization of intangibles

    470        399        71   

Nonperforming asset management

    1,279        355        924   

Gain on sale of other real estate owned

    (57     107        (164

Operations of other real estate owned

    912        393        519   

FDIC insurance premiums

    186        532        (346

Acquisition expenses

    240        -        240   

Other

    947        753        194   
 

 

 

   

 

 

   

 

 

 

Total noninterest expense

  $ 14,623      $ 12,370      $ 2,253   
 

 

 

   

 

 

   

 

 

 

Noninterest Expense. Noninterest expense was $14.6 million for the three months ended June 30, 2011, compared to $12.4 million for the three months ended June 30, 2010, primarily due to expense relating to the acquisition of Downers Grove National Bank and an increase in nonperforming asset and OREO expense. Compensation and benefits expense increased $568,000, or 8.7%, to $7.1 million, from $6.6 million for the same period in 2010. This increase is due primarily to residual transitional staffing expenses relating to Downers Grove National Bank and additional staffing that is required for the trust department and the two additional branch offices that were acquired in the transaction. Office occupancy and equipment expense increased $127,000, or 7.9%, to $1.7 million, compared to $1.6 million for the same period in 2010.

Net expense from nonperforming asset management was $1.3 million for the three months ended June 30, 2011, compared to $355,000 for the same period in 2010. Net expense from nonperforming asset management included $532,000 for real estate taxes, $312,000 in maintenance and repair expenses and $313,000 in receiver expenses. These expenses were partially offset by $329,000 rental collections

We recorded a gain from sales of OREO in the amount of $57,000 for the three months ended June 30, 2011, compared to a $107,000 loss for the same period in 2010. Net expense from operations of OREO was $912,000 for the three months ended June 30, 2011, compared to $393,000 for the same period in 2010. Net expense from operations of OREO included $253,000 for legal, insurance and property manager fee expenses for the three months ended June 30, 2011, compared to $26,000 for the same period in 2010. Real estate taxes for OREO was $290,000 for the three months ended June 30, 2011, compared to $66,000 for the same period in 2010. Net expense from operations of OREO for the current quarter also included $296,000 in write-downs on other real estate owned, compared to $133,000 for the same period in 2010.

Income Tax Expense (Benefit). We recorded an income tax expense of $145,000 for the three months ended June 30, 2011 compared to an income tax benefit of $161,000 recorded for the same period 2010. The effective tax rate for the three months ended June 30, 2011 was 12.4% compared to 35.9% in 2010.

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

Net Income (Loss). We had net income of $249,000 for the six months ended June 30, 2011, compared to $428,000 for the six months ended June 30, 2010, due in substantial part to transaction expenses that we recorded in connection with our multi-family loan purchase from Citibank and the acquisition of Downers Grove National Bank. Our earnings per share of common stock for the six months ended June 30, 2011 was $0.01 per basic and fully diluted share, respectively, compared to $0.02 per basic and fully diluted share, respectively, for the six-month period ending June 30, 2010.

 

 

51


Net Interest Income. Net interest income increased by $4.5 million, or 17.1%, to $30.4 million for the six months ended June 30, 2011, from $26.0 million for the six months ended June 30, 2010. The increase reflected a $752,000 increase in interest income, and a $3.7 million decrease in interest expense. Our net interest rate spread increased by 60 basis points to 3.99% for the six months ended June 30, 2011, from 3.39% for the same period in 2010. Our net interest margin increased by 48 basis points to 4.11% for the six months ended June 30, 2011, from 3.63% for the same period in 2010.

Interest income increased $752,000, or 2.2%, to $34.3 million for the six months ended June 30, 2011, from $33.6 million for the six months ended June 30, 2010. The increase in interest income was primarily attributable to the increase in average interest-earning assets and the impact of a lower average yield on interest-earning assets. The average yield on interest-earning assets declined five basis points to 4.64% for the six months ended June 30, 2011, compared to 4.69% for the same period in 2010. Total average interest-earning assets increased $48.3 million, or 3.3%, to $1.493 billion for the six months ended June 30, 2011, from $1.445 billion for the same period in 2010. The increase in average interest-earning assets was due in substantial part to a $53.9 million, or 4.6%, increase in average loans receivable, and a net increase of $23.4 million, or 25.3%, in the average balance of securities.

Interest income from loans, the most significant portion of interest income, increased $1.1 million, or 3.5%, to $32.6 million for the six months ended June 30, 2011, from $31.5 million for the same period in 2010. The increase in interest income from loans resulted primarily from an increase of $53.9 million, or 4.6%, in average loans receivable to $1.228 billion for the six months ended June 30, 2011, from $1.174 billion for the same period in 2010, partially offset by a net decrease of six basis points in the average yield on loans to 5.35% for the six months ended June 30, 2011, from 5.41% for the same period in 2010.

Interest income from securities decreased by $328,000, or 17.1%, to $1.6 million for the six months ended June 30, 2011, from $1.9 million for the same period in 2010. The decrease in interest income from securities was primarily due to a 142 basis point decrease in the average yield on securities to 2.77% for the six months ended June 30, 2011 from 4.19% for the same period in 2010. The decrease in the average yield of securities was partially offset by an increase of $23.4 million, or 25.3%, in the average outstanding balance of securities to $115.7 million for the six months ended June 30, 2011, from $92.4 million for the same period in 2010.

Interest income on interest-bearing deposits decreased by $17,000, or 8.4%, to $185,000 for the six months ended June 30, 2011, from $202,000 for the same period in 2010. The decrease in interest income from interest-bearing deposits was primarily due to a decrease of $29.5 million, or 18.1%, in the average outstanding balance of interest-bearing deposits to $133.6 million for the six months ended June 30, 2011, from $163.1 million for the same period in 2010, partially offset by a three basis point increase in the average yield on interest-bearing deposits to 0.28% for the six months ended June 30, 2011 from 0.25% for the same period in 2010.

The FHLBC paid a dividend of $8,000 on its common stock in the six months ended June 30, 2011; no dividend was paid in the first six months of 2010.

Interest expense decreased $3.7 million, or 48.6%, to $3.9 million for the six months ended June 30, 2011, from $7.6 million for the six months ended June 30, 2010. The decrease in interest expense was due to a decrease in the weighted average interest rates that we paid on deposit accounts and on borrowings, partially offset by an increase in the balance of our average interest-bearing liabilities. The cost of our average interest-bearing liabilities decreased by 65 basis points to 0.65% for the six months ended June 30, 2011, from 1.30% for the same period in 2010. Our average interest-bearing liabilities increased $36.1 million, to $1.217 billion for the six months ended June 30, 2011, from $1.181 billion for the same period in 2010.

Interest expense on deposits decreased $3.3 million, or 46.9%, to $3.7 million for the six months ended June 30, 2011, from $7.1 million for the six months ended June 30, 2010. The decrease in interest expense on deposits reflected a 63 basis point decrease in the average rate paid on interest-bearing deposits to 0.63% for the six months ended June 30, 2011, from 1.26% for same period in 2010. The decrease in the average rate paid on interest-bearing deposits was partially offset by a $66.9 million, or 5.9%, increase in average interest-bearing deposits to $1.202 billion for the six months ended June 30, 2011, from $1.135 billion for the same period in 2010.

Interest expense on money market accounts decreased $1.1 million, or 56.2%, to $855,000 for the six months ended

 

 

52


June 30, 2011, from $2.0 million for the six months ended June 30, 2010. The decrease in interest expense on money market accounts reflected a 67 basis point decrease in the interest rate paid on these deposits to 0.49% for the six months ended June 30, 2011, from 1.16% for the same period in 2010, partially offset by a $9.8 million, or 2.9%, increase in the average balance of money market accounts to $348.6 million for the six months ended June 30, 2011, from $338.8 million for the same period in 2010.

Interest expense on interest-bearing NOW account deposits decreased $609,000, or 66.9%, to $301,000 for the six months ended June 30, 2011, from $910,000 for the six months ended June 30, 2010. The decrease in interest expense on interest-bearing NOW accounts reflected a 44 basis point decrease in the interest rates paid on interest-bearing NOW account deposits to 0.19% for the six months ended June 30, 2011, from 0.63% for the same period in 2010, partially offset by an increase of $24.1 million, or 8.2%, in the average balance of interest-bearing NOW account deposits to $316.5 million for the six months ended June 30, 2011, from $292.5 million for the same period in 2010.

Interest expense on certificates of deposit decreased $1.5 million, or 37.7%, to $2.5 million for the six months ended June 30, 2011, from $4.0 million for the six months ended June 30, 2010. The decrease in interest expense on certificates of deposit was due to a 76 basis point decrease in the interest rates paid on certificates of deposit to 1.21% for the six months ended June 30, 2011, from 1.97% for the same period in 2010, partially offset by an increase of $5.2 million, or 1.3%, in the average balance of certificates of deposit to $410.3 million for the six months ended June 30, 2011, from $405.1 million for the same period in 2010.

Interest expense on borrowings decreased $386,000, or 71.1%, to $157,000 for the six months ended June 30, 2011, from $543,000 for the same period in 2010. The decrease in interest expense on borrowings was due to a $30.9 million, or 66.3%, decrease of our average borrowings to $15.7 million for the six months ended June 30, 2011, from $46.6 million for the same period in 2010, and a 33 basis point decrease in interest rates paid on borrowings to 2.02% for the six months ended June 30, 2011, from 2.35% for the same period in 2010.

 

 

53


Average Balance Sheets

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

 

    For the six months ended June 30,  
    2011     2010  
    Average
  Outstanding  
Balance
        Interest           Yield/Rate  
(1)
    Average
  Outstanding  
Balance
        Interest           Yield/Rate  
(1)
 
    (Dollars in thousands)  

Interest-earning Assets:

           

Loans

  $ 1,227,877      $ 32,565        5.35   $ 1,174,025      $ 31,476        5.41

Securities

    115,726        1,590        2.77        92,373        1,918        4.19   

Stock in FHLB

    16,138        8        0.10        15,598        -        -   

Other

    133,618        185        0.28        163,082        202        0.25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    1,493,359        34,348        4.64        1,445,078        33,596        4.69   
   

 

 

       

 

 

   

Noninterest-earning assets

    117,116            121,696       
 

 

 

       

 

 

     

Total assets

  $ 1,610,475          $ 1,566,774       
 

 

 

       

 

 

     

Interest-bearing Liabilities:

           

Savings deposits

  $ 126,191        128        0.20      $ 98,299        244        0.50   

Money market accounts

    348,601        855        0.49        338,834        1,953        1.16   

Interest-bearing NOW accounts

    316,545        301        0.19        292,481        910        0.63   

Certificates of deposit

    410,292        2,465        1.21        405,105        3,956        1.97   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    1,201,629        3,749        0.63        1,134,719        7,063        1.26   

Borrowings

    15,701        157        2.02        46,558        543        2.35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    1,217,330        3,906        0.65        1,181,277        7,606        1.30   
   

 

 

       

 

 

   

Noninterest-bearing deposits

    124,729            102,423       

Noninterest-bearing liabilities

    18,918            18,964       
 

 

 

       

 

 

     

Total liabilities

    1,360,977            1,302,664       

Equity

    249,498            264,110       
 

 

 

       

 

 

     

Total liabilities and equity

  $ 1,610,475          $ 1,566,774       
 

 

 

       

 

 

     

Net interest income

    $ 30,442          $ 25,990     
   

 

 

       

 

 

   

Net interest rate spread (2)

        3.99         3.39

Net interest-earning assets (3)

  $ 276,029          $ 263,801       
 

 

 

       

 

 

     

Net interest margin (4)

        4.11         3.63

Ratio of interest-earning assets to interest-bearing liabilities

    122.67         122.33    

 

 

  (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.

 

 

54


Provision for Loan Losses. Based on our evaluation of the above factors, we recorded a provision for loan losses of $5.6 million for the six months ended June 30, 2011, compared to a provision for loan losses of $3.5 million for the six months ended June 30, 2010. Of the $5.6 million total provision for loan losses, the general valuation allowance increased by $1.6 million and the remaining $4.0 million represents net charge-off activity and specific valuation allowances.

The general valuation allowance increased $1.6 million primarily due to a mild deterioration in national and local economic factors, an initial allowance for the Downers Grove National Bank performing loan portfolio and an increase in the historical loss ratio for non-owner-occupied one-to-four family loans. In general, all other historical loss ratios were stable.

Net charge-offs of $4.8 million were offset by a decrease of $789,000 of specific valuation allowances allocated to impaired loans. The $789,000 decrease in specific valuation allowances allocated to impaired loans reflected an increase of $1.6 million from updated collateral valuations on real estate collateral, net of $2.4 million of charge offs related to properties transferred to OREO in 2011. Of the total charge-offs, $1.3 million related to the final disposition of a single non-owner-occupied single family residential property and $2.1 million related to a TDR commenced in the first quarter of 2011 involving multiple loans to certain borrowers and a partnership in which they are members that are secured by non-owner-occupied single-family residential rental properties. The remaining amounts involved a variety of smaller impaired loans for which final resolution was reached in the first half of 2011.

 

 

55


Nonperforming Assets Summary

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

 

        June 30,    
2011
        December 31,    
2010
        Change      
    (Dollars in thousands)  

Nonaccrual loans

     

One-to-four family residential real estate loans

  $ 7,485      $ 5,748      $ 1,737   

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

    5,178        4,311        867   

Multi-family mortgage loans

    7,955        8,823        (868

Wholesale commercial lending

    4,405        4,405        -   

Nonresidential real estate loans

    12,393        12,428        (35

Construction loans

    121        3,274        (3,153

Land loans

    383        2,865        (2,482

Commercial loans – secured

    3,632        3,511        121   

Commercial loans – unsecured

    158        158        -   

Commercial loans – other

    96        97        (1

Non-rated commercial leases

    72        72        -   

Consumer loans

           3        (3
 

 

 

   

 

 

   

 

 

 

Nonaccrual loans

    41,878        45,695        (3,817

Other real estate owned and in process

     

One-to-four family residential real estate

    5,659        3,015        2,644   

Multi-family mortgage

    3,987        2,486        1,501   

Nonresidential real estate loans

    6,896        7,376        (480

Land

    3,218        1,745        1,473   
 

 

 

   

 

 

   

 

 

 

Other real estate owned and in process – excluding purchased OREO

    19,760        14,622        5,138   

Purchased other real estate owned

    7,272        -        7,272   
 

 

 

   

 

 

   

 

 

 

Other real estate owned and in process

    27,032        14,622        12,410   
 

 

 

   

 

 

   

 

 

 

Nonperforming assets

  $ 68,910      $ 60,317      $ 8,593   
 

 

 

   

 

 

   

 

 

 

 

 

56


Other Real Estate Owned and In Process

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

 

    Balance at
 December 31, 
2010
      Additions       Acquired
other real
estate owned,
net
     Write-downs          Sale           Balance at  
June 30,
2011
 
    (Dollars in thousands)  

One-to-four family residential

  $ 3,015      $ 3,244      $ 327      $ (119   $ (481   $ 5,986   

Multi-family mortgage

    2,486        2,388               (105     (782     3,987   

Nonresidential real estate

    7,376        302        3,006        (254     (528     9,902   

Land

    1,745        1,473        3,939               -        7,157   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned and in process

  $ 14,622      $ 7,407      $ 7,272      $ (478   $ (1,791   $ 27,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Of the total increase in other real estate owned and in process of $12.4 million, $7.3 million is attributable to our acquisition of Downers Grove National Bank.

Troubled Debt Restructurings

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

 

        June 30,    
2011
      December 31,  
2010
         Change       
    (dollars in thousands)  

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

  $ 3,449      $      $ 3,449   

Multi-family mortgage

    2,791        1,675        1,116   

Nonresidential real estate

    2,784        1,699        1,085   
 

 

 

   

 

 

   

 

 

 

Troubled debt restructured loans – accrual loans

    9,024        3,374        5,650   

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

    793             $ 793   

Multi-family mortgage

    10        13        (3

Nonresidential real estate

    2,026        3,137        (1,111

Commercial loans – secured

    73               73   
 

 

 

   

 

 

   

 

 

 

Troubled debt restructured loans – nonaccrual loans

    2,902        3,150        (248
 

 

 

   

 

 

   

 

 

 

Total troubled debt restructured loans

  $ 11,926      $ 6,524      $ 5,402   
 

 

 

   

 

 

   

 

 

 

TDR loans increased $5.4 million during the first half of 2011. Total loans classified as TDRs were 0.91% of total loans at June 30, 2011, and 0.61% of the total loans at December 31, 2010.

Of the $11.9 million in loans that were classified as TDRs at June 30, 2011, 76% were on accrual status and continued to perform according to the terms of the applicable loan agreements. Of the $6.5 million in loans that were classified as TDRs at December 31, 2010, $3.4 million, or 52%, remained on accrual status as of that date.

 

 

57


The following table summarizes noninterest income for six-month periods ended June 30, 2011 and 2010:

 

         Six months ended June 30,            
         2011             2010             Change      
     (Dollars in thousands)  

Noninterest income:

      

Deposit service charges and fees

   $ 1,303      $ 1,565      $ (262

Other fee income

     795        934        (139

Insurance commissions and annuities income

     324        314        10   

Gain on sale of loans, net

     58        115        (57

Gain on sale of securities

     -        31        (31

Loss on disposition of premises and equipment, net

     (20     (17     (3

Loan servicing fees

     269        324        (55

Amortization and impairment of servicing assets

     (105     (321     216   

Earnings on bank owned life insurance

     320        171        149   

Trust income

     292        24        268   

Other

     214        127        87   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 3,450      $ 3,267      $ 183   
  

 

 

   

 

 

   

 

 

 

Noninterest Income. Noninterest income increased $183,000, or 5.6%, to $3.4 million for the six months ended June 30, 2011, from $3.3 million for the same period in 2010. Deposit service charges and fees decreased $262,000, or 16.7%, to $1.3 million for the six months ended June 30, 2011, from $1.6 million for the same period in 2010. Other fee income decreased $139,000, or 14.9%, to $795,000 for the six months ended June 30, 2011, compared to $934,000 for the same period in 2010. Gains on sales of loans were $57,000, a decrease of $58,000 for the six months ended June 30, 2011, compared to $115,000 for the same period in 2010, due to a decrease in the volume of loan sales. Loan servicing income decreased $55,000, or 17.0%, to $269,000 for the six months ended June 30, 2011, from $324,000 for the same period in 2010. In the first half of 2010, we recorded a recovery of our mortgage servicing rights portfolio of $57,000 due to the combined effects of market interest rates and their concomitant effect on prepayment speeds, compared to no reserve for the same period in 2011. Earnings on bank-owned life insurance were $320,000 for the six months ended June 30, 2011, compared to $171,000 for the same period in 2010. Trust department income increased $268,000 to $292,000 for the six months ended June 30, 2011, compared to $24,000 for the same period in 2010, due to the acquisition of Downers Grove National Bank on March 18, 2011. Other income increased $87,000 to $214,000 for the six months ended June 30, 2011, from $127,000 for the same period in 2010.

The following table summarizes noninterest expense for the six-month periods ended June 30, 2011 and 2010:

 

         Six months ended June 30,             
         2011             2010              Change      
     (Dollars in thousands)  

Noninterest Expense:

       

Compensation and benefits

   $ 13,720      $ 13,763       $ (43

Office occupancy and equipment

     3,604        3,410         194   

Advertising and public relations

     497        519         (22

Information technology

     2,039        1,882         157   

Supplies, telephone and postage

     814        767         47   

Amortization of intangibles

     852        804         48   

Nonperforming asset management

     1,734        622         1,112   

Gain on sale of other real estate owned

     (109     107         (216

Operations of other real estate owned

     1,417        527         890   

FDIC insurance premiums

     753        1,087         (334

Acquisition expenses

     1,771        -         1,771   

Other

     1,786        1,560         226   
  

 

 

   

 

 

    

 

 

 

Total noninterest expense

   $ 28,878      $ 25,048       $ 3,830   
  

 

 

   

 

 

    

 

 

 

Noninterest Expense. Noninterest expense was $28.9 million for the six months ended June 30, 2011, compared to $25.0 million for the six months ended June 30, 2010, an increase of $3.8 million, or 15.3% primarily due to

 

 

58


expense relating to the acquisition of Downers Grove National Bank and an increase in nonperforming asset and OREO expense. Compensation and benefits expense decreased $43,000, to $13.7 million, from $13.8 million for the same period in 2010. This decrease reflected a $534,000 decrease in stock-based compensation expense, as the majority of stock awards fully vested in December 2010, offset by residual transitional staffing expenses relating to Downers Grove National Bank and additional staffing that is required for the trust department and the two additional branch offices that were acquired in the transaction. Office occupancy and equipment expense increased $194,000, or 5.7%, to $3.6 million, compared to $3.4 million for the same period in 2010.

Net expense from nonperforming asset management was $1.7 million for the six months ended June 30, 2011, compared to $622,000 for the same period in 2010. Net expense from nonperforming asset management included $833,000 for real estate taxes for the six months ended June 30, 2011, compared to no expenses for real estate taxes for the same period in 2010.

We recorded a gain from sales of OREO of $109,000 for the six months ended June 30, 2011, compared to a $107,000 loss for the same period in 2010. Net expense from operations of OREO was $1.4 million for the six months ended June 30, 2011, compared to $527,000 for the same period in 2010. Net expense from operations of OREO included $513,000 for legal, insurance and receiver or property manager fee expenses for the six months ended June 30, 2011 compared to $49,000 for the same period in 2010. Real estate taxes for other real estate owned was $374,000 for the six months ended June 30, 2011, compared to $130,000 for the same period 2010. Net expense from operations of other real estate owned for the current quarter also included $474,000 in write-downs or losses on other real estate owned, compared to $188,000 for the same period in 2010.

Acquisition expense recorded included $1.8 million in expenses relating to the acquisition of Downers Grove National Bank, including $432,000 in data processing contracts and operational expenses, and $687,000 that was recorded for contract and severance payments. Also recorded was $398,000 of expenses relating to the multi-family loan purchase from Citibank.

Income Tax Expense (Benefit). We recorded an income tax benefit of $834,000 for the six months ended June 30, 2011, compared to an income tax expense of $265,000 for the same period in 2010. The effective tax rate for the six months ended June 30, 2011 was 142.6% compared to 38.2% in 2010 due to the impact of permanent book versus tax differences in relation to pre-tax income. As a result of the Illinois corporate income tax rate increase, we recorded an additional tax benefit of $227,000 for the six months ended June 30, 2011 related to the write-up of state deferred tax assets.

Liquidity and Capital Resources

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

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, 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. The Bank is a member of the FHLBC, which provides an additional source of short-term and long-term funding. Outstanding borrowings from the FHLBC were $6.0 million at June 30, 2011, at a weighted average interest rate of 3.29%. A total of $3.0 million of these borrowings will mature in less than one year. Outstanding FHLBC borrowings were $16.0 million at December 31, 2010.

The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and stock repurchases. The primary source of liquidity for the Company currently is $12.8 million in cash and cash equivalents as of June 30, 2011 and cash dividends from our subsidiary, the Bank.

As of June 30, 2011, we were not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of June 30, 2011, we had no other material commitments for

 

 

59


capital expenditures.

Capital Resources. Total stockholders’ equity was $250.4 million at June 30, 2011, compared to $253.3 million at December 31, 2010. The decrease in total stockholders’ equity was primarily due to the combined impact of our declaration and payment of cash dividends totaling $3.0 million and a $649,000 decrease in accumulated other comprehensive income during that period, partially offset by net income of $249,000 for the six months ended June 30, 2011. The unallocated shares of common stock that our ESOP owns were reflected as a $13.7 million reduction to stockholders’ equity at June 30, 2011, compared to a $14.2 million reduction to stockholders’ equity at December 31, 2010.

As of June 30, 2011, the Company had repurchased 4,239,134 shares of its common stock out of the 5,047,423 shares that have been authorized for repurchase by the Company’s Board of Directors. As previously disclosed, the authorization permits shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization may be utilized at management’s discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of Directors. The authorization may be suspended, terminated or modified at any time prior to November 15, 2011 for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed relevant. These factors will also affect the timing and amount of share repurchases. For additional information, see “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. (c) Repurchases of Our Equity Securities.”

At June 30, 2011 and December 31, 2010, the actual regulatory capital ratios and minimum required regulatory ratios for the Bank were:

 

         Actual Ratio       Minimum
     Required for    
Capital
Adequacy
Purposes
  Minimum Required to  Be
Well Capitalized Under
    Prompt Corrective Action    

Provisions

June 30, 2011

            

Total capital (to risk-weighted assets)

       14.99 %       8.00 %       10.00 %

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

       13.90         4.00         6.00  

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

       11.28         4.00         5.00  

December 31, 2010

            

Total capital (to risk-weighted assets)

       18.38 %       8.00 %       10.00 %

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

       17.20         4.00         6.00  

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

       12.48         4.00         5.00  

As of June 30, 2011 and December 31, 2010, the Office of Thrift Supervision (“OTS”) categorized the Bank as 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 institution’s well-capitalized status.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was signed by the President on July 21, 2010, provides for the transfer of the authority for regulating and supervising federal savings banks from the OTS to the Office of the Comptroller of the Currency (“OCC”), and the authority for regulating and supervising savings and loan holding companies and their non-depository subsidiaries from the OTS to the Board of Governors of the Federal Reserve Board (“FRB”). The transfer occurred on July 21, 2011. The Dodd-Frank Act also created a new federal agency, the Consumer Financial Protection Bureau (“CFPB”), as an independent bureau of the Federal Reserve Board, to conduct rule-making, supervision, and enforcement of federal consumer financial protection and fair lending laws and regulations. The CFPB has examination and primary enforcement authority in connection with these laws and regulations for depository institutions with total assets of more than $10 billion. Depository institutions with $10 billion or less in total assets are examined for compliance with these laws and regulations by their primary federal regulators, and are subject to their enforcement authority. Because of these

 

 

60


changes, the OCC became the primary federal regulator of the Bank and the FRB became the primary federal regulator of the Company on the transfer date. The Bank is not subject to the examination or the primary enforcement authority of the CFPB.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches

 

 

61


in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.

Quantitative Analysis. The following table sets forth, as of June 30, 2011, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the US Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

Change in

Interest Rates

  

Estimated Increase in NPV

 

        Decrease in Estimated Net

Interest Income

(basis points)

  

Amount

  

Percent

 

Amount

 

Percent

     (dollars in thousands)        (dollars in thousands)    
    +400         $     12,229          4.89 %     $     (5,224       (8.25 )%
    +300           11,046          4.42         (3,681 )       (5.82 )
    +200           8,814          3.53         (2,415 )       (3.82 )
    +100           5,579          2.23         (1,136 )       (1.80 )
                                        

The Company has opted not to include an estimate for a decrease in rates at June 30, 2011 as the results are not relevant given the current targeted fed funds rate of the Federal Open Market Committee. The table set forth above indicates that at June 30, 2011, in the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 3.53% increase in NPV and a $2.4 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.

 

 

62


ITEM 4.  CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2011. Based on that evaluation, the Company’s management, including the Chairman, President, and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2011, 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.

 

 

63


PART II

 

ITEM 1. LEGAL PROCEEDINGS

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

 

ITEM 1A. RISK FACTORS

Not applicable.

 

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

 

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

 

  (b)  Use of Proceeds. Not applicable

 

  (c)  Repurchases of Equity Securities.

The Company’s Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. In accordance with this authorization, the Company had repurchased 4,239,134 shares of its common stock as of June 30, 2011. The Company did not conduct any repurchases during the second quarter of 2011. The current share repurchase authorization will expire on November 15, 2011, unless extended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. REMOVED AND RESERVED

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

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

 

 

64


SIGNATURES

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

 

  BANKFINANCIAL CORPORATION
 

(Registrant)

 

Date: August 4, 2011

   
 

/s/    F. MORGAN GASIOR                

   

    F. Morgan Gasior

   

    Chairman of the Board, Chief Executive Officer and President

 

 

/s/    PAUL A. CLOUTIER                                    

   

    Paul A. Cloutier

   

    Executive Vice President and Chief Financial Officer

 

 

65


INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

31.1  

Certification of F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

31.2  

Certification of Paul A. Cloutier, Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

32.1  

Certification of F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  

Certification of Paul A. Cloutier, Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Interactive data as required by regulation S-K will be filed by amendment to this Quarterly Report on Form 10-Q.

 

 

66

Certification of F. Morgan Gasior, CEO, Pursuant to Rule 13a-14(a)

Exhibit 31.1

CERTIFICATION

I, F. Morgan Gasior, certify that:

 

1)

I have reviewed this report on Form 10-Q of BankFinancial Corporation;

 

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4)

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 4, 2011

 

/s/    F. MORGAN GASIOR

F. Morgan Gasior

Chairman of the Board, Chief Executive Officer and President

 

 

 

67

Certification of Paul A. Cloutier, CFO, Pursuant to Rule 13a-14(a)

Exhibit 31.2

CERTIFICATION

I, Paul A. Cloutier, certify that:

 

1)

I have reviewed this report on Form 10-Q of BankFinancial Corporation;

 

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4)

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 4, 2011

 

/s/    PAUL A. CLOUTIER

Paul A. Cloutier

Executive Vice President and Chief Financial Officer

 

 

 

68

Certification of F. Morgan Gasior, CEO, Pursuant to Section 1350

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BankFinancial Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/    F. MORGAN GASIOR

  

Dated: August 4, 2011

F. Morgan Gasior

  

Chairman of the Board, Chief Executive Officer and President

  

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

 

 

 

69

Certification of Paul A. Cloutier,CFO, Pursuant to Section 1350

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BankFinancial Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul A. Cloutier, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/    PAUL A. CLOUTIER

  

Dated: August 04, 2011

Paul A. Cloutier

Executive Vice President and Chief Financial Officer

  

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

 

 

 

70