BFIN-2012.9.30-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2012
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from              to             
Commission File Number 0-51331
 
 
 
 
 BANKFINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
 
 
 
 
 
Maryland
75-3199276
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification No.)
 
 
15W060 North Frontage Road, Burr Ridge, Illinois
60527
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (800) 894-6900
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer

¨
Accelerated filer

x
 
 
 
 
 
 
Non-accelerated filer

¨
Smaller reporting company

¨
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.
21,072,966 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of November 5, 2012.


Table of Contents

BANKFINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
Page
Number
 
 
 
Item 1.
Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


Table of Contents

PART I

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data) – (Unaudited)
 
September 30,
2012
 
December 31, 2011
ASSETS
 
 
 
Cash and due from other financial institutions
$
19,619

 
$
24,247

Interest-bearing deposits in other financial institutions
217,110

 
96,457

Cash and cash equivalents
236,729

 
120,704

Securities, at fair value
81,748

 
92,832

Loans held-for-sale
551

 
1,918

Loans receivable, net of allowance for loan losses: September 30, 2012, $20,588 and December 31, 2011, $31,726
1,080,489

 
1,227,391

Other real estate owned
14,994

 
22,480

Stock in Federal Home Loan Bank, at cost
9,067

 
16,346

Premises and equipment, net
38,555

 
39,155

Accrued interest receivable
4,395

 
5,573

Core deposit intangible
3,195

 
3,671

Bank owned life insurance
21,562

 
21,207

FDIC prepaid expense
3,118

 
4,351

Income tax receivable
461

 
1,809

Other assets
5,008

 
6,138

Total assets
$
1,499,872

 
$
1,563,575

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
134,474

 
$
142,084

Interest-bearing
1,143,722

 
1,190,468

Total deposits
1,278,196

 
1,332,552

Borrowings
6,946

 
9,322

Advance payments by borrowers taxes and insurance
7,327

 
10,976

Accrued interest payable and other liabilities
9,406

 
10,868

Total liabilities
1,301,875

 
1,363,718

Commitments and contingent liabilities

 

Stockholders’ equity:
 
 
 
Preferred Stock, $0.01 par value, 25,000,000 shares authorized, none issued or outstanding

 

Common Stock, $0.01 par value, 100,000,000 shares authorized; 21,072,966 shares issued at September 30, 2012 and December 31, 2011
211

 
211

Additional paid-in capital
193,754

 
193,801

Retained earnings
15,226

 
17,946

Unearned Employee Stock Ownership Plan shares
(12,479
)
 
(13,212
)
Accumulated other comprehensive income
1,285

 
1,111

Total stockholders’ equity
197,997

 
199,857

Total liabilities and stockholders’ equity
$
1,499,872

 
$
1,563,575


 
 
 
See accompanying notes to consolidated financial statements.
3

Table of Contents

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data) – (Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
13,978

 
$
17,350

 
$
45,402

 
$
49,915

Securities
342

 
566

 
1,171

 
2,156

Other
148

 
74

 
353

 
267

Total interest income
14,468

 
17,990

 
46,926

 
52,338

Interest expense
 
 
 
 
 
 
 
Deposits
1,010

 
1,593

 
3,308

 
5,342

Borrowings
26

 
36

 
80

 
193

Total interest expense
1,036

 
1,629

 
3,388

 
5,535

Net interest income
13,432

 
16,361

 
43,538

 
46,803

Provision for loan losses
4,453

 
7,384

 
7,194

 
12,983

Net interest income after provision for loan losses
8,979

 
8,977

 
36,344

 
33,820

Noninterest income
 
 
 
 
 
 
 
Deposit service charges and fees
548

 
699

 
1,626

 
2,004

Other fee income
374

 
381

 
1,142

 
1,176

Insurance commissions and annuities income
125

 
146

 
359

 
470

Gain on sale of loans, net
210

 
83

 
595

 
141

Gain (loss) on disposition of premises and equipment, net
(7
)
 
1

 
(164
)
 
(19
)
Loan servicing fees
124

 
138

 
371

 
407

Amortization and impairment of servicing assets
(55
)
 
(105
)
 
(235
)
 
(210
)
Earnings on bank owned life insurance
109

 
165

 
355

 
485

Trust
171

 
199

 
545

 
491

Other
232

 
156

 
487

 
368

Total noninterest income
1,831

 
1,863

 
5,081

 
5,313

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
6,333

 
6,229

 
19,453

 
19,949

Office occupancy and equipment
1,627

 
1,845

 
5,125

 
5,449

Advertising and public relations
136

 
333

 
447

 
830

Information technology
1,127

 
1,085

 
3,534

 
3,124

Supplies, telephone, and postage
416

 
450

 
1,254

 
1,264

Amortization of intangibles
156

 
470

 
476

 
1,322

Nonperforming asset management
1,728

 
1,267

 
4,085

 
3,001

Operations of other real estate owned
2,742

 
1,588

 
4,985

 
2,896

FDIC insurance premiums
642

 
354

 
1,299

 
1,107

Acquisition costs

 

 

 
1,761

Other
1,125

 
1,016

 
2,854

 
2,812

Total noninterest expense
16,032

 
14,637

 
43,512

 
43,515

Loss before income taxes
(5,222
)
 
(3,797
)
 
(2,087
)
 
(4,382
)
Income tax benefit

 
(1,901
)
 

 
(2,735
)
Net Loss
$
(5,222
)
 
$
(1,896
)
 
$
(2,087
)
 
$
(1,647
)
 
 
 
 
 
 
 
 
Basic loss per common share
$
(0.26
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.08
)
Diluted loss per common share
$
(0.26
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
19,914,992

 
19,738,440

 
19,871,368

 
19,714,217

Diluted weighted average common shares outstanding
19,914,992

 
19,738,440

 
19,871,368

 
19,714,217


 
 
 
See accompanying notes to consolidated financial statements.
4

Table of Contents

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands) – (Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net loss
$
(5,222
)
 
$
(1,896
)
 
$
(2,087
)
 
$
(1,647
)
Unrealized holding gain (loss) arising during the period
210

 
14

 
174

 
(1,034
)
Tax effect

 
(5
)
 

 
394

Change in other comprehensive loss, net of tax effect
210

 
9

 
174

 
(640
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(5,012
)
 
$
(1,887
)
 
$
(1,913
)
 
$
(2,287
)
 


 
 
 
See accompanying notes to consolidated financial statements.
5

Table of Contents

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except per share data) – (Unaudited)
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Unearned
Employee
Stock
Ownership
Plan Shares
 
Accumulated
Other
Comprehensive
Income
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2011
$
211

 
$
194,186

 
$
71,278

 
$
(14,190
)
 
$
1,800

 
$
253,285

Net loss

 

 
(1,647
)
 

 

 
(1,647
)
Change in other comprehensive income, net of tax effects

 

 

 

 
(640
)
 
(640
)
Nonvested stock awards-stock-based compensation expense

 
43

 

 

 

 
43

Cash dividends declared on common stock ($0.21 per share)

 

 
(4,425
)
 

 

 
(4,425
)
ESOP shares earned

 
(246
)
 

 
732

 

 
486

Balance at September 30, 2011
$
211

 
$
193,983

 
$
65,206

 
$
(13,458
)
 
$
1,160

 
$
247,102

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012
$
211

 
$
193,801

 
$
17,946

 
$
(13,212
)
 
$
1,111

 
$
199,857

Net loss

 

 
(2,087
)
 

 

 
(2,087
)
Change in other comprehensive income, net of tax effects

 

 

 

 
174

 
174

Nonvested stock awards-stock-based compensation expense

 
41

 

 

 

 
41

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

 

 
(633
)
 

 

 
(633
)
ESOP shares earned

 
(88
)
 

 
733

 

 
645

Balance at September 30, 2012
$
211

 
$
193,754

 
$
15,226

 
$
(12,479
)
 
$
1,285

 
$
197,997


 
 
 
See accompanying notes to consolidated financial statements.
6

Table of Contents

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine months ended September 30, 2012 and 2011
(In thousands) – (Unaudited)
 
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net loss
$
(2,087
)
 
$
(1,647
)
Adjustments to reconcile net loss to net cash from operating activities
 
 
 
Provision for loan losses
7,194

 
12,983

ESOP shares earned
645

 
486

Stock-based compensation expense
41

 
43

Depreciation and amortization
3,417

 
3,369

Amortization of premiums and discounts on securities and loans
(2,185
)
 
(2,047
)
Amortization of core deposit intangible
476

 
1,322

Amortization and impairment of servicing assets
235

 
210

Net change in net deferred loan origination costs
81

 
413

Net gain on sale of other real estate owned
(126
)
 
(98
)
Net gain on sale of loans
(595
)
 
(141
)
Net loss disposition of premises and equipment
164

 
19

Loans originated for sale
(13,806
)
 
(9,287
)
Proceeds from sale of loans
15,768

 
10,756

Net change in:
 
 
 
Deferred income tax

 
(3,056
)
Accrued interest receivable
1,178

 
188

Earnings on bank owned life insurance
(355
)
 
(485
)
Other assets
6,158

 
2,792

Accrued interest payable and other liabilities
(1,462
)
 
(1,220
)
Net cash from operating activities
14,741

 
14,600

Cash flows from investing activities
 
 
 
Securities
 
 
 
Proceeds from maturities
22,424

 
28,459

Proceeds from principal repayments
15,413

 
9,677

Proceeds from sales of securities

 
29,491

Purchases of securities
(26,659
)
 
(32,656
)
Loans receivable
 
 
 
Principal payments on loans receivable
394,621

 
476,445

Purchases of loans
(3,190
)
 
(153,119
)
Originated for investment
(255,751
)
 
(443,936
)
Proceeds of redemption of Federal Reserve Bank stock

 
155

Proceeds of redemption of Federal Home Loan Bank of Chicago stock
7,279

 

Proceeds from sale of other real estate owned
9,871

 
5,559

Purchases of premises and equipment, net
(1,885
)
 
(1,385
)
Cash acquired in acquisition

 
61,619

Net cash from (used in) investing activities
162,123

 
(19,691
)
 
 
 
 
(Continued)
 

 
 
 
See accompanying notes to consolidated financial statements.
7

Table of Contents

 BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine months ended September 30, 2012 and 2011
(In thousands) – (Unaudited)
 
 
2012
 
2011
Cash flows from financing activities
 
 
 
Net change in deposits
(54,181
)
 
(95,392
)
Net change in borrowings
(2,376
)
 
(14,496
)
Net change in advance payments by borrowers for taxes and insurance
(3,649
)
 
6,762

Cash dividends paid on common stock
(633
)
 
(4,425
)
Net cash used in financing activities
(60,839
)
 
(107,551
)
 
 
 
 
Net change in cash and cash equivalents
116,025

 
(112,642
)
Beginning cash and cash equivalents
120,704

 
220,810

Ending cash and cash equivalents
$
236,729

 
$
108,168

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
3,432

 
$
5,431

Income taxes paid

 

Income taxes refunded
1,406

 
101

Loans transferred to other real estate owned
6,236

 
8,846

 
 
 
 
Supplemental disclosures of noncash investing activities – Acquisition:
 
 
 
Noncash assets acquired:
 
 
 
Securities
 
 
$
10,177

Loans receivable
 
 
118,147

Other real estate owned
 
 
6,965

Stock in Federal Home Loan Bank and Federal Reserve Bank
 
 
903

Goodwill
 
 
1,296

Premises and equipment, net
 
 
7,442

Accrued interest receivable
 
 
355

Core deposit intangible
 
 
2,660

FDIC prepaid expense
 
 
774

Income tax receivable
 
 
774

Deferred taxes, net
 
 
2,662

Other assets
 
 
42

Total noncash items acquired
 
 
152,197

Liabilities assumed:
 
 
 
Deposits
 
 
212,939

Advance payments by borrowers taxes and insurance
 
 
34

Accrued interest payable and other liabilities
 
 
843

Total liabilities assumed
 
 
213,816

Cash and cash equivalents acquired
 
 
$
61,619

 


 
 
 
See accompanying notes to consolidated financial statements.
8

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



NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois, is the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”).
Principles of Consolidation: The interim unaudited consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BF Asset Recovery Corporation (collectively, “the Company”) and reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three- and nine-month periods ended September 30, 2012, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2012.
Certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, mortgage servicing rights, deferred tax assets, stock-based compensation, the impairment of securities and the fair value of financial instruments are particularly subject to change and the effect of such change could be material to the financial statements.
Reclassifications: Certain reclassifications have been made in the prior period’s financial statements to conform them to the current period’s presentation.
These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.
 

9

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


NOTE 2 – LOSS PER SHARE
Amounts reported in 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 September 30,
 
Nine months ended September 30,

2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net loss available to common stockholders
$
(5,222
)
 
$
(1,896
)
 
$
(2,087
)
 
$
(1,647
)
 
 
 
 
 
 
 
 
Average common shares outstanding
21,072,966

 
21,072,966

 
21,072,966

 
21,072,966

Less:
 
 
 
 
 
 
 
Unearned ESOP shares
(1,157,974
)
 
(1,325,859
)
 
(1,198,988
)
 
(1,350,082
)
Unvested restricted stock shares

 
(8,667
)
 
(2,610
)
 
(8,667
)
Weighted average common shares outstanding
19,914,992

 
19,738,440

 
19,871,368

 
19,714,217

 
 
 
 
 
 
 
 
Basic loss per common share
$
(0.26
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
19,914,992

 
19,738,440

 
19,871,368

 
19,714,217

Net effect of dilutive stock options and unvested restricted stock

 

 

 

Weighted average diluted common shares outstanding
19,914,992

 
19,738,440

 
19,871,368

 
19,714,217

 
 
 
 
 
 
 
 
Diluted loss per common share
$
(0.26
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
Number of anti-dilutive stock options excluded from the diluted earnings per share calculation
141,000

 
2,080,553

 
141,000

 
2,080,553

Weighted average exercise price of anti-dilutive stock options
$
17.21

 
$
16.54

 
$
17.21

 
$
16.54



10

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


NOTE 3 – SECURITIES
The following table summarizes the amortized cost and fair value of securities and the corresponding gross unrealized gains and losses recognized in accumulated other comprehensive income:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2012
 
 
 
 
 
 
 
Certificates of deposit
$
31,491

 
$

 
$

 
$
31,491

Municipal securities
515

 
24

 

 
539

Equity mutual fund
500

 
34

 

 
534

Mortgage-backed securities – residential
33,438

 
1,754

 
(1
)
 
35,191

Collateralized mortgage obligations – residential
13,793

 
159

 
(2
)
 
13,950

SBA-guaranteed loan participation certificates
43

 

 

 
43

 
$
79,780

 
$
1,971

 
$
(3
)
 
$
81,748

December 31, 2011
 
 
 
 
 
 
 
Certificates of deposit
$
30,448

 
$

 
$

 
$
30,448

Municipal securities
515

 
36

 

 
551

Equity mutual fund
500

 
24

 

 
524

Mortgage-backed securities – residential
34,691

 
1,385

 

 
36,076

Collateralized mortgage obligations – residential
24,837

 
372

 
(23
)
 
25,186

SBA-guaranteed loan participation certificates
47

 

 

 
47

 
$
91,038

 
$
1,817

 
$
(23
)
 
$
92,832

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

September 30, 2012

Amortized
Cost
 
Fair
Value
 
 
 
 
Within one year
$
31,656

 
$
31,657

One to five years
350

 
373

 
32,006

 
32,030

Equity mutual fund
500

 
534

Mortgage-backed securities – residential
33,438

 
35,191

Collateralized mortgage obligations – residential
13,793

 
13,950

SBA-guaranteed loan participation certificates
43

 
43

Total
$
79,780

 
$
81,748



11

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

NOTE 3 - SECURITIES (continued)


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

Less than 12 Months
 
12 Months or More
 
Total

Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities – residential
$
72

 
$
1

 
$

 
$

 
$
72

 
$
1

Collateralized mortgage obligations – residential

 

 
1,973

 
2

 
1,973

 
2

Total
$
72

 
$
1

 
$
1,973

 
$
2

 
$
2,045

 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations – residential
$

 
$

 
$
2,134

 
$
23

 
$
2,134

 
$
23

The Company evaluates marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if a marketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary.
Certain residential mortgage-backed securities and residential collateralized mortgage obligations that the Company holds in its investment portfolio remained in an unrealized loss position at September 30, 2012, but the unrealized losses were not considered significant under the Company’s impairment testing methodology. In addition, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell the securities before an anticipated recovery occurs.

NOTE 4 – LOANS RECEIVABLE
Loans receivable are as follows:
 
September 30, 2012
 
December 31, 2011
 
 
 
 
One-to-four family residential real estate loans
$
238,810

 
$
272,032

Multi-family mortgage loans
374,164

 
423,615

Nonresidential real estate loans
288,976

 
311,641

Construction and land loans
13,774

 
19,852

Commercial loans
61,053

 
93,932

Commercial leases
121,200

 
134,990

Consumer loans
2,273

 
2,147

Total loans
1,100,250

 
1,258,209

Net deferred loan origination costs
827

 
908

Allowance for loan losses
(20,588
)
 
(31,726
)
Loans, net
$
1,080,489

 
$
1,227,391

  


12

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

NOTE 4 – LOANS RECEIVABLE (continued)

The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method:
 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated
for
impairment
 
Purchased
impaired
loans
 
Collectively
evaluated
for
impairment
 
Total
 
Individually
evaluated for
impairment
 
Purchased
impaired
loans
 
Collectively
evaluated  for
impairment
 
Total
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
264

 
$
68

 
$
4,862

 
$
5,194

 
$
6,618

 
$
2,125

 
$
230,067

 
$
238,810

Multi-family mortgage loans
637

 

 
4,357

 
4,994

 
11,952

 
1,528

 
360,684

 
374,164

Nonresidential real estate loans
2,246

 
8

 
5,282

 
7,536

 
25,834

 
2,610

 
260,532

 
288,976

Construction and land loans
239

 
134

 
451

 
824

 
3,551

 
1,634

 
8,589

 
13,774

Commercial loans
55

 
9

 
1,302

 
1,366

 
631

 
357

 
60,065

 
61,053

Commercial leases

 

 
525

 
525

 
68

 

 
121,132

 
121,200

Consumer loans

 

 
149

 
149

 

 

 
2,273

 
2,273

Total
$
3,441

 
$
219

 
$
16,928

 
$
20,588

 
$
48,654

 
$
8,254

 
$
1,043,342

 
1,100,250

Net deferred loan origination costs
 
 
 

 
 
 
 
 
 
 
827

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
(20,588
)
Loans, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,080,489

 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated for
impairment
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated for
impairment
 
Purchased
impaired
loans
 
Collectively
evaluated  for
impairment
 
Total
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
1,883

 
$
4,220

 
$
6,103

 
$
14,181

 
$
3,941

 
$
253,910

 
$
272,032

Multi-family mortgage loans
1,881

 
4,201

 
6,082

 
20,380

 
1,418

 
401,817

 
423,615

Nonresidential real estate loans
8,126

 
5,630

 
13,756

 
32,669

 
3,375

 
275,597

 
311,641

Construction and land loans
959

 
725

 
1,684

 
3,263

 
4,788

 
11,801

 
19,852

Commercial loans
2,079

 
1,460

 
3,539

 
3,160

 
1,078

 
89,694

 
93,932

Commercial leases
22

 
482

 
504

 
22

 

 
134,968

 
134,990

Consumer loans
3

 
55

 
58

 
3

 

 
2,144

 
2,147

Total
$
14,953

 
$
16,773

 
$
31,726

 
$
73,678

 
$
14,600

 
$
1,169,931

 
1,258,209

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
908

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
(31,726
)
Loans, net
 
 
 
 
 
 
 
 
 
 
 
 
$
1,227,391

 

13

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

NOTE 4 – LOANS RECEIVABLE (continued)

Activity in the allowance for loan losses is as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Beginning balance
$
30,878

 
$
22,963

 
$
31,726

 
$
22,180

Loans charged off
 
 
 
 
 
 
 
One-to-four family residential real estate loans
(3,145
)
 
(584
)
 
(4,408
)
 
(2,627
)
Multi-family mortgage loans
(2,159
)
 
(842
)
 
(2,848
)
 
(1,621
)
Nonresidential real estate loans
(5,435
)
 
(12
)
 
(8,070
)
 
(12
)
Construction and land loans
(806
)
 
(121
)
 
(1,038
)
 
(2,270
)
Commercial loans
(3,536
)
 

 
(3,705
)
 
(42
)
Commercial leases
(68
)
 

 
(68
)
 

Consumer loans
(72
)
 
(70
)
 
(95
)
 
(87
)
 
(15,221
)
 
(1,629
)
 
(20,232
)
 
(6,659
)
Recoveries:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
7

 
33

 
192

 
40

Multi-family mortgage loans
11

 
3

 
491

 
124

Nonresidential real estate loans
7

 
5

 
322

 
68

Construction and land loans
6

 

 
248

 

Commercial loans
421

 
15

 
610

 
38

Commercial leases

 

 

 

Consumer loans
26

 
4

 
37

 
4

Recoveries
478

 
60

 
1,900

 
274

 
 
 
 
 
 
 
 
Net charge-off
(14,743
)
 
(1,569
)
 
(18,332
)
 
(6,385
)
Provision for loan losses
4,453

 
7,384

 
7,194

 
12,983

 
 
 
 
 
 
 
 
Ending balance
$
20,588

 
$
28,778

 
$
20,588

 
$
28,778

 

Impaired Loans
Impaired loans are summarized as follows:
 
September 30,
2012
 
December 31, 2011
Loans with allocated allowance for loan losses
$
30,996

 
$
45,649

Loans with no allocated allowance for loan losses
17,658

 
28,029

 
48,654

 
73,678

Purchased impaired loans
8,254

 
14,600

Total impaired loans
$
56,908

 
$
88,278



14

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

NOTE 4 – LOANS RECEIVABLE (continued)

The following table includes the unpaid principal balances and recorded investment for impaired loans, by class, with the associated allowance amount, if applicable. In addition, the table includes the average recorded investments in the impaired loans and the related amount of interest recognized for the duration of the impairment within the period reported.
 
 
 
 
 
 
 
 
 
For the Three Months ended September 30, 2012
 
For the Nine Months ended September 30, 2012
 
Unpaid Principal
Balance
 
Recorded
Investment
 
Partial Charge-offs
 
Allowance
for Loan
Losses
Allocated
 
Average Recorded
Investment
 
Interest
Income
Recognized
 
Average Recorded
Investment
 
Interest
Income
Recognized
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
4,756

 
$
3,017

 
$
1,678

 
$

 
$
2,195

 
$
23

 
$
2,169

 
$
77

One-to-four family residential real estate loans – non-owner occupied
1,819

 
1,493

 
359

 

 
4,322

 

 
5,535

 
95

Multi-family mortgage loans
6,488

 
5,989

 
688

 

 
10,039

 

 
11,345

 
146

Wholesale commercial lending

 

 

 

 

 

 

 

Nonresidential real estate loans
8,063

 
6,551

 
1,616

 

 
6,878

 
36

 
6,933

 
116

Land loans
1,199

 
1,198

 

 

 
847

 
19

 
339

 
28

Commercial loans – secured
457

 

 
455

 

 
149

 

 
191

 

Commercial loans – unsecured
842

 
78

 
752

 

 
41

 
10

 
16

 
10

Non-rated commercial leases
137

 
68

 
68

 

 
35

 
4

 
14

 
4

Consumer loans
3

 

 
3

 

 

 

 

 

 
23,764

 
18,394

 
5,619

 

 
24,506

 
92

 
26,542

 
476

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

 

 

 

 
3,335

 

 
3,552

 
25

One-to-four family residential real estate loans – non-owner occupied
2,894

 
2,152

 
757

 
264

 
2,598

 

 
2,308

 

Multi-family mortgage loans
8,039

 
6,566

 
1,775

 
637

 
7,348

 

 
7,819

 
126

Nonresidential real estate loans
24,016

 
19,905

 
4,202

 
2,246

 
23,148

 
32

 
25,366

 
171

Land loans
3,136

 
2,385

 
751

 
239

 
2,963

 

 
3,207

 

Commercial loans – secured
2,174

 
552

 
1,611

 
55

 
1,873

 

 
2,651

 

Commercial loans – unsecured

 

 

 

 
334

 

 
356

 

Non-rated commercial leases

 

 

 

 
80

 

 
46

 

Consumer loans

 

 

 

 
2

 

 
3

 

 
40,259

 
31,560

 
9,096

 
3,441

 
41,681

 
32

 
45,308

 
322

Total
$
64,023

 
$
49,954

 
$
14,715

 
$
3,441

 
$
66,187

 
$
124

 
$
71,850

 
$
798


15

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

NOTE 4 – LOANS RECEIVABLE (continued)

 
Loan Balance
 
Recorded
Investment
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
December 31, 2011
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
2,329

 
$
2,347

 
$

 
$
623

 
$
24

One-to-four family residential real estate loans – non-owner occupied
5,945

 
5,868

 

 
2,499

 
266

Multi-family mortgage loans
8,910

 
9,113

 

 
5,567

 
378

Wholesale commercial lending
3,304

 
3,300

 

 
338

 
35

Nonresidential real estate loans
7,304

 
7,468

 

 
5,977

 
275

Construction loans

 

 

 
77

 

Land loans

 

 

 
70

 

Commercial loans – secured
237

 
244

 

 
448

 
45

Commercial loans – unsecured

 

 

 

 
41

Commercial loans – other

 

 

 
44

 
15

 
28,029

 
28,340

 

 
15,643

 
1,079

With an allowance recorded:
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
3,970

 
4,145

 
1,055

 
1,406

 
2

One-to-four family residential real estate loans – non-owner occupied
1,937

 
2,051

 
828

 
2,962

 

Multi-family mortgage loans
8,166

 
8,594

 
1,881

 
4,307

 
5

Wholesale commercial lending

 

 

 
4,066

 

Nonresidential real estate loans
25,365

 
26,157

 
8,126

 
12,134

 
75

Construction loans

 

 

 
1,392

 

Land loans
3,263

 
3,315

 
959

 
2,128

 
82

Commercial loans – secured
2,869

 
3,144

 
2,048

 
3,253

 

Commercial loans – unsecured
54

 
63

 
31

 
150

 

Commercial loans – other

 

 

 
22

 

Non-rated commercial leases
22

 
22

 
22

 
98

 

Consumer loans
3

 
3

 
3

 

 

 
45,649

 
47,494

 
14,953

 
31,918

 
164

Total
$
73,678

 
$
75,834

 
$
14,953

 
$
47,561

 
$
1,243




16

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

NOTE 4 – LOANS RECEIVABLE (continued)

Purchased Impaired Loans
As a result of its acquisition of Downers Grove National Bank, the Company holds purchased loans for which there was evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected as of the date of the acquisition. The carrying amount of these purchased impaired loans is as follows:
 
September 30,
2012
 
December 31, 2011
 
 
 
 
One-to-four family residential real estate loans
$
2,125

 
$
3,941

Multi-family mortgage loans
1,528

 
1,418

Nonresidential real estate loans
2,610

 
3,375

Construction loans

 
813

Land loans
1,634

 
3,975

Commercial loans
357

 
1,078

Outstanding balance
$
8,254

 
$
14,600

 
 
 
 
Carrying amount, net of allowance
($219,000 at September 30, 2012, none at December 31, 2011)
$
8,035

 
$
14,600

Accretable yield, or income expected to be collected, related to purchased impaired loans is as follows: 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Beginning balance
$
832

 
$
3,022

 
$
2,270

 
$

New loans purchased

 

 

 
3,410

Disposals
249

 

 
771

 

Accretion of income
179

 
388

 
1,095

 
776

Ending balance
$
404

 
$
2,634

 
$
404

 
$
2,634

For the above purchased impaired loans, the Company decreased the allowance for loan losses by $5,000 during the three months ended September 30, 2012, and increased the allowance for loan losses by $219,000 during the nine months ended September 30, 2012. No allowance for loan losses was recorded for these loans for the three and nine months ended September 30, 2011.
Purchased impaired loans for which it was probable at the date of acquisition that all contractually required payments would not be collected are as follows: 
 
September 30,
2012
 
December 31, 2011
Contractually required payments receivable of loans purchased:
 
 
 
One-to-four family residential real estate loans
$
3,186

 
$
5,886

Multi-family mortgage loans
3,199

 
3,456

Nonresidential real estate loans
3,898

 
5,395

Construction loans

 
1,314

Land loans
1,941

 
8,152

Commercial loans
635

 
7,672

Consumer loans

 
33

Total
$
12,859

 
$
31,908

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

17

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

NOTE 4 – LOANS RECEIVABLE (continued)

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:
 
Loan Balance
 
Recorded
Investment
 
Loans Past
Due Over 90
Days, still
accruing
September 30, 2012
 
 
 
 
 
One-to-four family residential real estate loans
$
7,526

 
$
7,768

 
$

One-to-four family residential real estate loans – non owner occupied
3,808

 
3,869

 

Multi-family mortgage loans
11,501

 
12,090

 
248

Nonresidential real estate loans
25,541

 
26,167

 

Land loans
3,584

 
3,583

 

Commercial loans – secured
553

 
553

 

Commercial loans – unsecured
194

 
197

 

Non-rated commercial leases
68

 
68

 

Consumer loans
6

 
6

 

 
$
52,781

 
$
54,301

 
$
248

December 31, 2011
 
 
 
 
 
One-to-four family residential real estate loans
$
6,199

 
$
6,488

 
$
40

One-to-four family residential real estate loans – non owner occupied
4,510

 
4,647

 

Multi-family mortgage loans
14,983

 
15,495

 

Nonresidential real estate loans
30,396

 
31,104

 
125

Land loans
3,263

 
3,315

 
185

Commercial loans – secured
2,885

 
3,144

 

Commercial loans – unsecured
55

 
63

 

Non-rated commercial leases
22

 
22

 

Consumer loans
3

 
3

 

 
$
62,316

 
$
64,281

 
$
350

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans.
The Company’s reserve for uncollected loan interest was $1.7 million and $2.7 million at September 30, 2012 and December 31, 2011, respectively. Except for purchased impaired loans, when a loan is on non-accrual status and the ultimate collectability of the total principal balance of the impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.
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.


18

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

NOTE 4 – LOANS RECEIVABLE (continued)

Past Due Loans
The following table presents the aging of the recorded investment in past due loans by class of loans, excluding purchased impaired loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days  or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
1,653

 
$
696

 
$
5,987

 
$
8,336

 
$
162,329

 
$
170,665

One-to-four family residential real estate loans – non-owner occupied
504

 
51

 
2,226

 
2,781

 
63,900

 
66,681

Multi-family mortgage loans
1,243

 

 
9,634

 
10,877

 
307,022

 
317,899

Wholesale commercial lending

 

 

 

 
53,045

 
53,045

Nonresidential real estate loans
4,142

 
4,254

 
23,472

 
31,868

 
253,985

 
285,853

Construction loans

 

 

 

 
457

 
457

Land loans
1,130

 

 
3,124

 
4,254

 
7,424

 
11,678

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured
784

 

 
553

 
1,337

 
20,465

 
21,802

Unsecured
1,287

 
68

 
141

 
1,496

 
6,940

 
8,436

Municipal loans

 

 

 

 
5,340

 
5,340

Warehouse lines

 

 

 

 
2,746

 
2,746

Health care

 

 

 

 
13,944

 
13,944

Other

 

 

 

 
8,647

 
8,647

Commercial leases:
 
 
 
 
 
 


 
 
 


Investment rated commercial leases
112

 
169

 

 
281

 
85,490

 
85,771

Below investment grade

 

 

 

 
7,870

 
7,870

Non-rated

 

 
69

 
69

 
24,134

 
24,203

Lease pools

 

 

 

 
4,107

 
4,107

Consumer loans
4

 

 
6

 
10

 
2,273

 
2,283

Total
$
10,859

(1)
$
5,238

(1)
$
45,212

 
$
61,309

 
$
1,030,118

 
$
1,091,427

(1)
 48% of the combined 30-89 days past due loans had matured and are the in the process of analysis for renewal.
The following table presents the aging of the recorded investment in past due purchased impaired loans by class of loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days  or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans – non-owner occupied
$

 
$

 
$
1,092

 
$
1,092

 
$
1,033

 
$
2,125

Multi-family mortgage loans

 

 
1,528

 
1,528

 

 
1,528

Nonresidential real estate loans

 

 
1,163

 
1,163

 
1,447

 
2,610

Construction loans

 

 

 

 

 

Land loans

 

 
1,359

 
1,359

 
271

 
1,630

Commercial loans – secured

 

 
357

 
357

 

 
357

Total
$

 
$

 
$
5,499

 
$
5,499

 
$
2,751

 
$
8,250


19

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

NOTE 4 – LOANS RECEIVABLE (continued)

The following table presents the aging of the recorded investment in past due loans by class of loans, excluding purchased impaired loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days  or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
2,259

 
$
605

 
$
5,925

 
$
8,789

 
$
182,895

 
$
191,684

One-to-four family residential real estate loans – non-owner occupied
2,307

 
122

 
3,005

 
5,434

 
71,114

 
76,548

Multi-family mortgage loans
6,002

 
4,176

 
13,237

 
23,415

 
327,488

 
350,903

Wholesale commercial lending
785

 

 

 
785

 
67,723

 
68,508

Nonresidential real estate loans
3,387

 
6,183

 
17,971

 
27,541

 
279,628

 
307,169

Construction loans

 
520

 

 
520

 
1,336

 
1,856

Land loans
5,445

 
1,152

 
462

 
7,059

 
6,273

 
13,332

Commercial loans:
 
 
 
 
 
 

 
 
 
 
Secured
17

 

 
3,143

 
3,160

 
26,193

 
29,353

Unsecured
435

 
3

 
63

 
501

 
9,387

 
9,888

Municipal loans

 

 

 

 
6,471

 
6,471

Warehouse lines

 

 

 

 
9,862

 
9,862

Health care

 

 

 

 
29,510

 
29,510

Other

 

 

 

 
8,425

 
8,425

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases
294

 

 

 
294

 
84,378

 
84,672

Below investment grade

 

 

 

 
6,263

 
6,263

Non-rated
290

 
 
 
23

 
313

 
37,053

 
37,366

Lease pools

 

 

 

 
7,824

 
7,824

Consumer loans
7

 

 

 
7

 
2,152

 
2,159

Total
$
21,228

(1)
$
12,761

(1)
$
43,829

 
$
77,818

 
$
1,163,975

 
$
1,241,793

(1)
46% of the combined 30-89 days past due loans had matured and are the in the process of analysis for renewal.
The following table presents the aging of the recorded investment in past due purchased impaired loans by class of loans: 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days  or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans – non-owner occupied
$

 
$

 
$
2,835

 
$
2,835

 
$
1,087

 
$
3,922

Multi-family mortgage loans

 

 
1,418

 
1,418

 

 
1,418

Nonresidential real estate loans
996

 

 
1,681

 
2,677

 
688

 
3,365

Construction loans

 

 
813

 
813

 

 
813

Land loans

 

 
3,578

 
3,578

 
369

 
3,947

Commercial loans – secured

 

 
807

 
807

 
162

 
969

Commercial loans – unsecured

 

 
34

 
34

 

 
34

Total
$
996

 
$

 
$
11,166

 
$
12,162

 
$
2,306

 
$
14,468




20

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

NOTE 4 – LOANS RECEIVABLE (continued)

Troubled Debt Restructuring
The Company evaluates loan extensions and modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a troubled debt restructuring (“TDR”). In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or another concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.
The Company had $9.5 million of TDRs at September 30, 2012 compared to $18.1 million at December 31, 2011, with $147,000 in specific valuation allowances allocated to those loans at September 30, 2012, and $1.2 million in specific valuation allowances allocated at December 31, 2011. The Company had no outstanding commitments to borrowers whose loans are classified as TDRs.
The following table presents loans by class that are classified as TDRs: 
 
September 30, 2012
 
December 31, 2011
One-to-four family residential real estate
$
4,113

 
$
5,619

Multi-family mortgage
2,150

 
5,783

Nonresidential real estate

 
2,220

Commercial loans – secured

 
238

Troubled debt restructured loans – accrual loans
6,263

 
13,860

One-to-four family residential real estate
1,351

 
556

Multi-family mortgage
1,603

 
717

Nonresidential real estate
296

 
2,960

Commercial loans – secured

 

Consumer loans
3

 
3

Troubled debt restructured loans – nonaccrual loans
3,253

 
4,236

Total troubled debt restructured loans
$
9,516

 
$
18,096

During the three- and nine-month periods ending September 30, 2012 and 2011, the terms of certain loans were modified and classified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
The following tables present loans, by loan class, that were modified as TDRs during the following periods: 
 
For the three months ended September 30, 2012
 
For the nine months ended September 30, 2012
 
Number
of loans
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
 
Number
of loans
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
One-to-four family residential real estate
17

 
$
1,441

 
$
1,441

 
24

 
$
2,100

 
$
2,100

Multi-family mortgage

 

 

 
1

 
700

 
500

Total
17

 
$
1,441

 
$
1,441

 
25

 
$
2,800

 
$
2,600

 

21

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

NOTE 4 – LOANS RECEIVABLE (continued)


Due to
reduction in
interest rate
 
Due to
extension of
maturity date
 
Due to
permanent
reduction in
recorded
investment
 
Total
For the three months ended September 30, 2012
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
1,441

 
$

 
$
1,441

For the nine months ended September 30, 2012
 
 
 
 
 
 
 
One-to-four family residential real estate
$
504

 
$
1,596

 
$

 
$
2,100

Multi-family mortgage

 

 
500

 
500

Total
$
504

 
$
1,596

 
$
500

 
$
2,600

The TDRs described above had no impact on interest income for the three and nine months ended September 30, 2012. There was no impact on the allowance for loan losses in the three months ended September 30, 2012 and an increase in the allowance for loan losses of $198,000 during the nine- months ended September 30, 2012. The above TDRs also resulted in no charge offs for the three months ended September 30, 2012 and charge offs of $470,000 for the nine months ended September 30, 2012, respectively.
The following table presents loans, by loan class, that were modified as TDRs for which there was a payment default within twelve months following the modification during the following periods:

For the three months ended September 30, 2012
 
For the nine months ended September 30, 2012
 
Number
of loans
 
Recorded
investment
 
Number
of loans
 
Recorded
investment
One-to-four family residential real estate

 
$

 
5

 
$
864

Nonresidential real estate

 

 
4

 
3,308

Total

 
$

 
9

 
$
4,172

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

For the three months ended September 30, 2011
 
For the nine months ended September 30, 2011
 
Number
of
borrowers
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
 
Number
of
borrowers
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
One-to-four family residential real estate
10

 
$
2,712

 
$
2,652

 
108

 
$
8,308

 
$
6,738

Multi-family mortgage

 

 

 
3

 
1,136

 
1,108

Nonresidential real estate
2

 
1,108

 
1,032

 
3

 
1,108

 
1,032

Commercial loans-secured
3

 
277

 
259

 
3

 
277

 
259

Total
15

 
$
4,097

 
$
3,943

 
117

 
$
10,829

 
$
9,137



22

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

NOTE 4 – LOANS RECEIVABLE (continued)

 
Due to
reduction in
interest rate
 
Due to
extension of
maturity date
 
Due to
permanent
reduction in
recorded
investment
 
Total
For the three months ended September 30, 2011
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
2,652

 
$

 
$
2,652

Multi-family mortgage

 

 

 

Nonresidential real estate

 

 
855

 
855

Commercial loans-secured

 
259

 

 
259

Total
$

 
$
2,911

 
$
855

 
$
3,766

For the nine months ended September 30, 2011
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
2,734

 
$
4,004

 
$
6,738

Multi-family mortgage
1,108

 

 

 
1,108

Nonresidential real estate

 

 
1,032

 
1,032

Commercial loans-secured

 
259

 

 
259

Total
$
1,108

 
$
2,993

 
$
5,036

 
$
9,137

The TDRs described above decreased interest income by $5,000, increased the allowance for loan losses by $155,000 and resulted in no charge offs during the three months ended September 30, 2011.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
The terms of certain other loans were modified during the three- and nine- months ended September 30, 2012 that did not meet the definition of a TDR. These loans have a total recorded investment as of September 30, 2012 of $288,000. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Watch List. Loans classified as Watch List exhibit transitory risk. Loan debt service coverage is somewhat erratic, future coverage is uncertain, liquidity is strained and leverage capacity is considered minimal. Indicators of potential deterioration of repayment sources have resulted in uncertainty or unknown factors concerning credit status.
Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. The risk rating guidance published by the Office of the Comptroller of the Currency (“OCC”) clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to be distinct for the loan

23

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

NOTE 4 – LOANS RECEIVABLE (continued)

to be rated Substandard.
Doubtful. An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans. Watch list loans are also considered “Pass” rated loans.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
 
Pass
 
Watch List
 
Special
Mention
 
Substandard (1), (2)
 
Doubtful
 
Total
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
158,480

 
$
2,494

 
$

 
$
9,094

 
$

 
$
170,068

One-to-four family residential real estate loans – non-owner occupied
52,010

 
3,797

 
1,223

 
11,712

 

 
68,742

Multi-family mortgage loans
250,821

 
35,236

 
8,343

 
26,632

 
98

 
321,130

Wholesale commercial lending
47,421

 
2,829

 

 
2,784

 

 
53,034

Nonresidential real estate loans
164,206

 
37,575

 
34,444

 
52,751

 

 
288,976

Construction loans

 

 
455

 

 

 
455

Land loans
1,345

 
1,554

 
2,645

 
7,775

 

 
13,319

Commercial loans:
 
 
 
 
 
 
 
 
 
 

Secured
16,302

 
1,734

 
2,107

 
1,975

 

 
22,118

Unsecured
3,043

 
1,841

 
598

 
2,824

 
79

 
8,385

Municipal loans
5,302

 

 

 

 

 
5,302

Warehouse lines
2,722

 

 

 

 

 
2,722

Health care
11,659

 
808

 
1,445

 

 

 
13,912

Other
8,479

 

 

 
135

 

 
8,614

Commercial leases:
 
 
 
 
 
 
 
 
 
 
 
Investment rated commercial leases
85,270

 

 

 

 

 
85,270

Below investment grade
7,809

 

 

 

 

 
7,809

Non-rated
23,965

 
1

 

 

 
68

 
24,034

Lease pools
4,087

 

 

 

 

 
4,087

Consumer loans
2,267

 

 

 
6

 

 
2,273

Total
$
845,188

 
$
87,869

 
$
51,260

 
$
115,688

 
$
245

 
$
1,100,250

(1)
The Company has assigned the purchased impaired loans that it acquired in its acquisition of Downers Grove National Bank to the Substandard risk classification category.
(2)
The Dodd-Frank Act abolished the Bank’s former primary federal regulator, the Office of Thrift of Supervision (“OTS”), effective on July 21, 2011, and transferred the authority for examining, regulating and supervising federal savings banks from the OTS to the OCC. The OCC’s published guidance on the assignment of loan risk ratings is different in some respects from the published guidance of the OTS, particularly as it relates to the assignment of a "substandard" rating performing loans with well-defined weaknesses that do not present a probability of default or loss. At September 30, 2012, $53.8 million of loans that were classified “Substandard” pursuant to applicable OCC loan risk rating guidance were performing and on accrual status.

24

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

NOTE 4 – LOANS RECEIVABLE (continued)

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
 
Pass
 
Watch List
 
Special
Mention
 
Substandard (1), (2)
 
Doubtful
 
Total
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
183,611

 
$
657

 
$
51

 
$
7,108

 
$

 
$
191,427

One-to-four family residential real estate loans – non-owner occupied
61,455

 
7,058

 

 
12,092

 

 
80,605

Multi-family mortgage loans
301,339

 
24,288

 
6,021

 
21,855

 
1,648

 
355,151

Wholesale commercial lending
64,743

 
959

 

 
2,762

 

 
68,464

Nonresidential real estate loans
208,826

 
30,428

 
18,659

 
53,728

 

 
311,641

Construction loans
968

 

 
363

 
1,325

 

 
2,656

Land loans
7,519

 
143

 

 
9,534

 

 
17,196

Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Secured
24,152

 
937

 
415

 
4,049

 
464

 
30,017

Unsecured
6,436

 
343

 
38

 
3,010

 
46

 
9,873

Municipal loans
6,381

 

 

 

 

 
6,381

Warehouse lines
9,830

 

 

 

 

 
9,830

Health care
27,046

 
1,014

 
1,376

 

 

 
29,436

Other
8,395

 

 

 

 

 
8,395

Commercial leases:
 
 
 
 
 
 
 
 
 
 
 
Investment rated commercial leases
83,947

 

 

 

 

 
83,947

Below investment grade
6,004

 
205

 

 

 

 
6,209

Non-rated
36,944

 
82

 

 
22

 

 
37,048

Lease pools
7,786

 

 

 

 

 
7,786

Consumer loans
2,144

 

 

 
3

 

 
2,147

Total
$
1,047,526

 
$
66,114

 
$
26,923

 
$
115,488

 
$
2,158

 
$
1,258,209

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


NOTE 5 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

25

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

NOTE 5 - FAIR VALUE (continued)


Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security (Level 1). If Level 1 measurement inputs are not available for a marketable equity security, we determine its fair value based on the quoted price of a similar security traded in an active market (Level 2). The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).
Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific valuation allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, if applicable. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. In addition, a discount is typically applied to account for sales and holding expenses. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The method utilized to estimate the fair value of loans does not necessarily represent an exit price.
Other Real Estate Owned: Assets acquired through foreclosure or transfers in lieu of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Although the fair value of the property normally will be based on an appraisal (or other evaluation), the valuation should be consistent with the price that a market participant will pay to purchase the property at the measurement date. Circumstances may exist that indicate that the appraised value is not an accurate measurement of the property's current fair value. Examples of such circumstances include changed economic conditions since the last appraisal, stale appraisals, or imprecision and subjectivity in the appraisal process (i.e., actual sales for less than the appraised amount). Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. The fair values of mortgage servicing rights are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2).

26

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

NOTE 5 - FAIR VALUE (continued)


The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value Measurements Using
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
September 30, 2012
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
31,491

 
$

 
$
31,491

Municipal securities

 
539

 

 
539

Equity mutual fund
534

 

 

 
534

Mortgage-backed securities – residential

 
35,191

 

 
35,191

Collateralized mortgage obligations – residential

 
13,950

 

 
13,950

SBA-guaranteed loan participation certificates

 
43

 

 
43

 
$
534

 
$
81,214

 
$

 
$
81,748

December 31, 2011
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
30,448

 
$

 
$
30,448

Municipal securities

 
551

 

 
551

Equity mutual fund
524

 

 

 
524

Mortgage-backed securities – residential

 
36,076

 

 
36,076

Collateralized mortgage obligations – residential

 
25,186

 

 
25,186

SBA-guaranteed loan participation certificates

 
47

 

 
47

 
$
524

 
$
92,308

 
$

 
$
92,832

 

27

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

NOTE 5 - FAIR VALUE (continued)


The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:
 
Fair Value Measurement Using
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
September 30, 2012
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$

 
$

 
$
1,859

 
$
1,859

Multi-family mortgage loans

 

 
5,605

 
5,605

Nonresidential real estate loans

 

 
17,438

 
17,438

Construction and land loans

 

 
2,146

 
2,146

Commercial loans

 

 
497

 
497

Impaired loans
$

 
$

 
$
27,545

 
$
27,545

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

 
$

 
$
2,740

 
$
2,740

Multi-family mortgage

 

 
1,985

 
1,985

Nonresidential real estate

 

 
4,821

 
4,821

Land

 

 
5,448

 
5,448

Other real estate owned
$

 
$

 
$
14,994

 
$
14,994

Mortgage servicing rights
$

 
$
245

 
$

 
$
245

December 31, 2011
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$

 
$

 
$
4,024

 
$
4,024

Multi-family mortgage loans

 

 
6,285

 
6,285

Nonresidential real estate loans

 

 
17,239

 
17,239

Construction and land loans

 

 
2,304

 
2,304

Commercial loans

 

 
844

 
844

Impaired loans
$

 
$

 
$
30,696

 
$
30,696

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

 
$

 
$
5,655

 
$
5,655

Multi-family mortgage

 

 
3,655

 
3,655

Nonresidential real estate

 

 
7,451

 
7,451

Land

 

 
5,719

 
5,719

Other real estate owned
$

 
$

 
$
22,480

 
$
22,480

Mortgage servicing rights
$

 
$
344

 
$

 
$
344

Impaired loans, excluding purchased impaired loans, that are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $48.7 million, with a valuation allowance of $3.4 million at September 30, 2012, compared to a carrying amount of $73.7 million, with a valuation allowance of $15.0 million at December 31, 2011, resulting in a decrease in the provision for loan losses for these impaired loans of $10.7 million and $11.5 million for the three and nine months ended September 30, 2012, respectively.
Other real estate owned (“OREO”), which is carried at the lower of cost or fair value less costs to sell, had a carrying value of $15.0 million at September 30, 2012, which included write-downs of $2.4 million and $3.8 million for the three and nine months

28

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

NOTE 5 - FAIR VALUE (continued)


ended September 30, 2012, respectively, compared to $22.5 million at December 31, 2011, which included write-downs of $4.0 million for the year ended December 31, 2011.
Mortgage servicing rights, which are carried at lower of cost or fair value, had a carrying amount of $1.1 million at September 30, 2012, of which $796,000 related to fixed rate loans and $275,000 related to adjustable rate loans. Mortgage servicing rights had a carrying amount of $1.2 million at December 31, 2011, of which $895,000 related to fixed rate loans and $309,000 related to adjustable rate loans. A pre-tax recovery of $6,000 and provision of $38,000 on our mortgage servicing rights portfolio was included in noninterest income for the three and nine months ended September 30, 2012, respectively, compared to $32,000 provision for mortgage servicing rights for the same periods in 2011.
The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2012:

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

NOTE 5 - FAIR VALUE (continued)


 
Fair Value
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
1,859

 
Sales comparison
 
Discount applied to valuation
 
5%-30%
(10%)
Multi-family mortgage loans
5,605

 
Sales comparison
 
Comparison between sales and income approaches
 
8%-18%
(10.97%)
 
 
 
Income approach
 
Cap Rate
 
7% to 13%
(8.78%)
Nonresidential real estate loans
17,438

 
Sales comparison
 
Comparison between sales and income approaches
 
8%-10%
(9.52%)
 
 
 
Income approach
 
Cap Rate
 
7.5%-11%
(8.94%)
Construction and land loans
2,146

 
Sales comparison
 
Discount applied to valuation
 
5%-30%
(10%)
Commercial loans
497

 
Sales comparison
 
Discount applied to valuation
 
5%-30%
(10%)
Impaired loans
$
27,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate
$
2,740

 
Sales comparison
 
Discount applied to valuation
 
1%-32%
(9%)
Multi-family mortgage
1,985

 
Sales comparison
 
Comparison between sales and income approaches
 
7%-58%
(34%)
Nonresidential real estate
4,821

 
Sales comparison
 
Comparison between sales and income approaches
 
3%-53%
(25%)
Land
5,448

 
Sales comparison
 
Discount applied to valuation
 
1%-22%
(10%)
Other real estate owned
$
14,994

 
 
 
 
 
 
Mortgage servicing rights
$
245

 
Third party
valuation
 
Present value of future servicing income based on prepayment speeds
 
13.4 % - 28.7%
(19.30%)
Mortgage servicing rights
 
 
Third party
valuation
 
Present value of future servicing income based on default rates
 
12%

30

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

NOTE 5 - FAIR VALUE (continued)


The carrying amount and estimated fair value of financial instruments is as follows:
 
 
 
Fair Value Measurements at September 30, 2012 Using:
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
236,729

 
$
19,619

 
$
217,110

 
$

 
$
236,729

Securities
81,748

 
534

 
81,214

 

 
81,748

Loans held-for-sale
551

 

 
551

 

 
551

Loans receivable, net of allowance for loan losses
1,080,489

 

 
1,035,232

 
27,545

 
1,062,777

FHLBC stock
9,067

 

 

 

 
N/A

Accrued interest receivable
4,395

 

 
4,395

 

 
4,395

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
(134,474
)
 
$

 
$
(134,474
)
 
$

 
$
(134,474
)
Savings deposits
(143,212
)
 

 
(143,212
)
 

 
(143,212
)
NOW and money market accounts
(687,414
)
 

 
(687,414
)
 

 
(687,414
)
Certificates of deposit
(313,096
)
 

 
(315,473
)
 

 
(315,473
)
Borrowings
(6,946
)
 

 
(6,975
)
 

 
(6,975
)
Accrued interest payable
(168
)
 

 
(168
)
 

 
(168
)

 
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets
 
 
 
Cash and cash equivalents
$
120,704

 
$
120,704

Securities
92,832

 
92,832

Loans held-for-sale
1,918

 
1,918

Loans receivable, net of allowance for loan losses
1,227,391

 
1,217,377

FHLBC stock
16,346

 
N/A

Accrued interest receivable
5,573

 
5,573

Financial liabilities
 
 
 
Noninterest-bearing demand deposits
$
(142,084
)
 
$
(142,084
)
Savings deposits
(144,515
)
 
(144,515
)
NOW and money market accounts
(681,542
)
 
(681,542
)
Certificates of deposit
(364,411
)
 
(365,952
)
Borrowings
(9,322
)
 
(9,412
)
Accrued interest payable
(212
)
 
(212
)
For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents: The estimated fair values for cash and cash equivalents are based on their carrying value due to the short-term nature of these assets.
Loans: The estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be re-priced or repaid. The estimated fair values of loans held-for-sale are based on quoted market prices.

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

NOTE 5 - FAIR VALUE (continued)


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.
Deposit Liabilities: The estimated fair value for certificates of deposit is determined by calculating the present value of future cash flows based on estimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of noninterest-bearing demand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level that approximates the local market area. Additionally, these deposits can be withdrawn on demand.
Borrowings: The estimated fair values of advances from the FHLBC and notes payable are based on current market rates for similar financing. The estimated fair value of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.
Accrued Interest: The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of unfunded loan commitments, standby letters of credit, and unused lines of credit. The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.
While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.

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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “expect,” “estimate,” “intend,” “anticipate,” “project,” “plan,” or similar expressions. Forward looking statements speak only as of the date made. They are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.
Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) the failure of the real estate market to recover or further declines in real estate values that adversely impact the value of our loan collateral and OREO, asset dispositions and borrower equity in their investments; (ii) the persistence or worsening of adverse economic conditions in general and in the Chicago metropolitan area in particular, including high or increasing unemployment levels, that could result in increased delinquencies in our loan portfolio or a decline in the value of our investment securities and the collateral for our loans; (iii) results of supervisory monitoring or examinations by regulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (iv) interest rate movements and their impact on customer behavior and our net interest margin; (v) less than anticipated loan growth due to a lack of demand for specific loan products, competitive pressures or a dearth of borrowers who meet our underwriting standards; (vi) changes, disruptions or illiquidity in national or global financial markets; (vii) the credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs or changes in estimates relating to the computation of our allowance for loan losses; (viii) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board; (ix) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors’ pricing initiatives on our deposit products; (x) the impact of new legislation or regulatory changes, including the Dodd-Frank Act, on our products, services, operations and operating expenses; (xi) higher federal deposit insurance premiums; (xii) higher than expected overhead, infrastructure and compliance costs; (xiii) changes in accounting principles, policies or guidelines; and (xiv) and our failure to achieve expected synergies and cost savings from acquisitions.
These risks and uncertainties, as well as the Risk Factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.

Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and all amendments thereto, as filed with the Securities and Exchange Commission.


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Table of Contents

Overview
During the third quarter of 2012, national economic activity decelerated and local economic conditions in our primary Chicago metropolitan market area reflected at best minimal growth. The principal challenges in the local economy continue to be persistent unemployment and uneven economic growth, both of which continue to impact real estate values. Competitive factors also had an increasing impact during the quarter, as pricing and underwriting competition for multi-family and commercial real estate loans and commercial leases remained intense.
Loan portfolio balances declined in all categories except consumer loans; however, loan pipelines for multifamily, commercial real estate, commercial health care and commercial leasing are at their highest levels in the past four quarters. Residential loan balances declined due to scheduled loan amortizations and prepayments of our fixed-rate loan portfolio. Multi-family loan balances declined due to intensified pricing and underwriting competition, including the entry of new competitors into the sector. In approximately 50% of the cases in which we received a payoff on a multi-family loan, we elected not to match the competitor's offer based on the particular merits of the credit exposure, which involved unmonitored cash-out refinance transactions. Commercial real estate loan balances declined due to slightly lower loan origination volumes and certain targeted portfolio reductions. We expect to see continued targeted portfolio reductions within the commercial real estate portfolio through the first quarter of 2013, potentially fully offset by improved loan origination volumes. Commercial and industrial loan balances declined primarily for cyclical reasons due to state government health care payables practices and due to quarter-end activity on commercial lease bridge lines of credit; we expect these balances to return gradually to their customary balances over the next three to six months. Commercial lease origination volumes improved during the quarter; we expect this portfolio to return to positive growth in the fourth quarter of 2012. Our focus for the remainder of 2012 will be to maintain current overall loan portfolio levels and to more aggressively increase originations in certain selected loan categories such as residential loans, multifamily loans, commercial loans and commercial leases consistent with market opportunities.
We engaged in the accelerated disposition of certain OREO assets during the third quarter of 2012. Our evaluation methodology involves an assessment of the disposition strategy that provides the highest cash proceeds within a defined period of time. During the third quarter of 2012, we changed our disposition strategy on certain income-producing OREO assets from an ordinary-liquidation pricing model to an aggressive pricing model designed to stimulate market demand. For the third quarter of 2012, we closed $2.4 million in total OREO sales and had accepted offers on an additional $4.3 million in OREO balances; the total activity represented 38.6% of our June 30, 2012 OREO balances. Our third quarter of 2012 results reflect the write-downs and expenses related to OREO transfers and sales.
Management is evaluating, but not yet finalized or presented to the Board for approval, a more comprehensive plan to reduce nonperforming assets through accelerated dispositions during the fourth quarter of 2012. In this regard, we continued evaluations of certain non-performing loans and OREO for which a targeted disposition strategy aimed at long-term equity investors may be the most appropriate strategy. If approved by the Board, the objectives of such a plan would be to achieve a meaningful reduction of non-performing loans and OREO by the end of 2012 such that the future potential impacts to earnings in 2013 and future years from credit-related costs are materially diminished.
Our general loan loss reserve requirement remained stable in the third quarter of 2012 due principally to a reduction of loan portfolio balances offset by increased reserves for residential and home-equity loans pursuant to new regulatory standards. Pursuant to newly-applicable OCC guidance, we charged off $10.8 million of our specific valuation allowances during the quarter and recorded $3.8 million in additional charge-offs related to updated appraisals received on non-performing loans.
Given our excess liquidity position, we continued to reduce our competitive posture with respect to pricing on single-service certificate of deposit accounts, which has been successful in producing a decline in these account balances. Pricing conditions for local deposits, whether low-balance core deposits, certificates of deposit or high-balance, high-yield transaction accounts, remained generally favorable due to very low market yields and continued weak industry-wide loan demand.
Our net interest spread and net interest margin declined due to declines in loan yields and the decline in loan balances. We anticipate that current market conditions on new loans and leases and lower effective yields resulting from scheduled loan repayments and loan renewals will likely cause some additional compression of our net interest margin and net interest spread; however, we believe that the preponderance of portfolio yield reductions have already occurred and we may be able to offset some of the impact of lower market yields with loan growth in the coming quarters. Given the quantity and volatility of the variables affecting our net interest margin and net interest spread, we are unable to confidently predict what the Company's net interest margin and net interest spread will be for the remainder of 2012 and 2013.
Non-interest income was higher in the third quarter of 2012 due to stabilization in deposit service fees and other non-interest income categories. Non-interest expense was materially higher due to factors relating to non-performing asset / OREO management and valuations; however, our core non-interest expense was stable.

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Table of Contents


Selected Financial Data
The following tables summarize the major components of the changes in our balance sheet at September 30, 2012 and December 31, 2011, and in our statement of operations for the three and nine month periods ended September 30, 2012 and September 30, 2011.
 
 
September 30,
2012
 
December 31, 2011
 
Change

(Dollars in thousands)

 
 
 
 
 
Total assets
$
1,499,872

 
$
1,563,575

 
$
(63,703
)
Cash and cash equivalents
236,729

 
120,704

 
116,025

Securities
81,748

 
92,832

 
(11,084
)
Loans receivable, net
1,080,489

 
1,227,391

 
(146,902
)
Deposits
1,278,196

 
1,332,552

 
(54,356
)
Borrowings
6,946

 
9,322

 
(2,376
)
Stockholders’ equity
197,997

 
199,857

 
(1,860
)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
 
(Dollars in thousands)
Selected Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
14,468

 
$
17,990

 
$
(3,522
)
 
$
46,926

 
$
52,338

 
$
(5,412
)
Interest expense
1,036

 
1,629

 
(593
)
 
3,388

 
5,535

 
(2,147
)
Net interest income
13,432

 
16,361

 
(2,929
)
 
43,538

 
46,803

 
(3,265
)
Provision for loan losses
4,453

 
7,384

 
(2,931
)
 
7,194

 
12,983

 
(5,789
)
Net interest income after provision for loan losses
8,979

 
8,977

 
2

 
36,344


33,820

 
2,524

Noninterest income
1,831

 
1,863

 
(32
)
 
5,081

 
5,313

 
(232
)
Noninterest expense
16,032

 
14,637

 
1,395

 
43,512

 
43,515

 
(3
)
Loss before income taxes
(5,222
)
 
(3,797
)
 
(1,425
)
 
(2,087
)
 
(4,382
)
 
2,295

Income tax benefit

 
(1,901
)
 
1,901

 

 
(2,735
)
 
2,735

Net loss
$
(5,222
)
 
$
(1,896
)
 
$
(3,326
)
 
$
(2,087
)
 
$
(1,647
)
 
$
(440
)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Performance Ratios:
 
 
 
 
 
 
 
Return on assets (ratio of net loss to average total assets) (1)
(1.39
)%
 
(0.46
)%
 
(0.18
)%
 
(0.14
)%
Return on equity (ratio of net loss to average equity) (1)
(10.20
)
 
(3.01
)
 
(1.36
)
 
(0.88
)
Net interest rate spread (1) (2)
3.69

 
4.19

 
3.97

 
4.06

Net interest margin (1) (3)
3.76

 
4.29

 
4.04

 
4.17

Average equity to average assets
13.62

 
15.25

 
13.40

 
15.41

Efficiency ratio (4)
105.04

 
80.32

 
89.50

 
83.50

Noninterest expense to average total assets (1)
4.26

 
3.54

 
3.81

 
3.57

Average interest-earning assets to average interest-bearing liabilities
123.54

 
122.52

 
123.16

 
122.62

(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.

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Table of Contents

 
At September 30, 2012
 
At December 31, 2011
Selected Financial Ratios and Other Data:
 
 
 
Asset Quality Ratios:
 
 
 
Nonperforming assets to total assets
5.07
%
 
6.36
%
Nonaccrual loans to total loans
5.55

 
6.11

Allowance for loan losses to nonperforming loans
33.73

 
41.25

Allowance for loan losses to total loans
1.87

 
2.52

Capital Ratios:
 
 
 
Equity to total assets at end of period
13.20

 
12.78

Tier 1 leverage ratio (Bank only)
11.13

 
10.48

Other Data:
 
 
 
Number of full service offices
20

 
20

Employees (full-time equivalent basis)
347

 
357


Comparison of Financial Condition at September 30, 2012 and December 31, 2011
Total assets decreased $63.7 million, or 4.1%, to $1.500 billion at September 30, 2012, from $1.564 billion at December 31, 2011. Cash and cash equivalents increased $116.0 million, or 96.1%, to $236.7 million at September 30, 2012, from $120.7 million at December 31, 2011, as a result of the decreases in investment securities and loans. Securities decreased by $11.1 million, or 11.9%, to $81.7 million at September 30, 2012, from $92.8 million at December 31, 2011, primarily due to cash flows in our residential mortgage-backed and collateralized mortgage obligation portfolio. Net loans receivable decreased $146.9 million, or 12.0%, to $1.080 billion at September 30, 2012, from $1.227 billion at December 31, 2011, due in part to loan payoffs, and intense pricing and underwriting competition for multi-family and commercial real estate loans and commercial and industrial loans.
Total liabilities decreased by $61.8 million, or 4.5%, to $1.302 billion at September 30, 2012, from $1.364 billion at December 31, 2011. Total deposits decreased $54.4 million, or 4.1%, to $1.278 billion at September 30, 2012, from $1.333 billion at December 31, 2011, primarily due to our decision to reduce our competitive posture with respect to pricing on single-service certificate of deposit accounts. Certificates of deposit decreased $51.3 million, or 14.1%, to $313.1 million at September 30, 2012, from $364.4 million at December 31, 2011. Core deposits increased to 75.5% of total deposits at September 30, 2012, from 72.6% of total deposits at December 31, 2011. Noninterest-bearing demand deposits decreased $7.6 million, or 5.4%, to $134.5 million at September 30, 2012, from $142.1 million at December 31, 2011. Savings accounts decreased $1.3 million, or 0.9%, to $143.2 million at September 30, 2012, from $144.5 million at December 31, 2011. Money market and interest-bearing NOW accounts increased $5.9 million, or 0.9%, to $687.4 million at September 30, 2012, from $681.5 million at December 31, 2011.
Total stockholders' equity decreased $1.9 million to $198.0 million at September 30, 2012, compared to $199.9 million at December 31, 2011. The decrease was primarily due to the net loss of $2.1 million. The unallocated shares of common stock that our ESOP owns were reflected as a $12.5 million reduction to stockholders' equity at September 30, 2012.
Operating Results for the Three Months Ended September 30, 2012 and 2011
Net Loss. We had a net loss of $5.2 million for the three months ended September 30, 2012, compared to a net loss of $1.9 million for the three months ended September 30, 2011. Our loss per share of common stock was $0.26 per basic and fully diluted share, respectively, for the three months ended September 30, 2012 compared to $0.10 per basic and fully diluted share for the three-month period ended September 30, 2011.
Net Interest Income. Net interest income was $13.4 million for the three months ended September 30, 2012, a decrease of $2.9 million, or 17.9% from $16.4 million for the same period in 2011. The decrease reflected a $3.5 million decrease in interest income and a $593,000 decrease in interest expense.
The decrease in net interest income was primarily attributable to a lower level of average interest-earning assets. Total average interest-earning assets decreased $94.0 million, or 6.2%, to $1.420 billion for the three months ended September 30, 2012, from $1.514 billion for the same period in 2011. Our net interest rate spread decreased by 50 basis points to 3.69% for the three months ended September 30, 2012, from 4.19% for the same period in 2011. Our net interest margin decreased by 53 basis points to 3.76% for the three months ended September 30, 2012, from 4.29% for the same period in 2011. The decrease in the net interest spread and margin was a result of lower yields on interest earning assets, which was partially offset by a lower cost of funds. The yield on interest earning assets decreased 66 basis points to 4.05% for the three months ended September 30, 2012, from 4.71% for the same period in 2011, and the cost of interest bearing liabilities decreased 16 basis points to 0.36% for the three months

36

Table of Contents

ended September 30, 2012, from 0.52% for the same period in 2011.

Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, because the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans have been included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include, where applicable, the effect of deferred fees and expenses, discounts and premiums, and purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
Three months ended September 30,
 
2012
 
2011
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate
(1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate
(1)
 
(Dollars in thousands)
Interest-earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,125,600

 
$
13,978

 
4.94
%
 
$
1,304,805

 
$
17,350

 
5.28
%
Securities
74,260

 
342

 
1.83

 
97,984

 
566

 
2.29

Stock in FHLB
9,614

 
8

 
0.33

 
16,346

 
4

 
0.10

Other
210,355

 
140

 
0.26

 
94,681

 
70

 
0.29

Total interest-earning assets
1,419,829

 
14,468

 
4.05

 
1,513,816

 
17,990

 
4.71

Noninterest-earning assets
84,609

 
 
 
 
 
137,899

 
 
 
 
Total assets
$
1,504,438

 
 
 
 
 
$
1,651,715

 
 
 
 
Interest-bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
143,248

 
37

 
0.10

 
$
143,289

 
46

 
0.13

Money market accounts
346,523

 
318

 
0.37

 
354,150

 
391

 
0.44

Interest-bearing NOW accounts
335,346

 
106

 
0.13

 
328,494

 
115

 
0.14

Certificates of deposit
316,738

 
549

 
0.69

 
399,435

 
1,041

 
1.03

Total deposits
1,141,855

 
1,010

 
0.35

 
1,225,368

 
1,593

 
0.52

Borrowings
7,449

 
26

 
1.39

 
10,220

 
36

 
1.40

Total interest-bearing liabilities
1,149,304

 
1,036

 
0.36

 
1,235,588

 
1,629

 
0.52

Noninterest-bearing deposits
135,352

 
 
 
 
 
140,347

 
 
 
 
Noninterest-bearing liabilities
14,925

 
 
 
 
 
23,857

 
 
 
 
Total liabilities
1,299,581

 
 
 
 
 
1,399,792

 
 
 
 
Equity
204,857

 
 
 
 
 
251,923

 
 
 
 
Total liabilities and equity
$
1,504,438

 
 
 
 
 
$
1,651,715

 
 
 
 
Net interest income
 
 
$
13,432

 
 
 
 
 
$
16,361

 
 
Net interest rate spread (2)
 
 
 
 
3.69
%
 
 
 
 
 
4.19
%
Net interest-earning assets (3)
$
270,525

 
 
 
 
 
$
278,228

 
 
 
 
Net interest margin (4)
 
 
 
 
3.76
%
 
 
 
 
 
4.29
%
Ratio of interest-earning assets to interest-bearing liabilities
123.54
%
 
 
 
 
 
122.52
%
 
 
 
 
(1)
Annualized.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.


37

Table of Contents

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonaccrual and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.
Based on our evaluation of the above factors, we recorded a $408,000 provision to the general portion of the allowance for loan losses. In Call Report preparation guidance issued in connection with the transition of federal savings banks from OTS to OCC supervision, the OCC announced that the specific valuation allowances that the OTS' accounting guidance historically permitted federal savings banks to maintain for collateral dependent loans should be eliminated. We adopted this methodology in the third quarter 2012 and charged off $10.8 million of specific valuation allowances. This one time charge did not impact earnings or the provision for loan losses for the quarter ended September 30, 2012; however, the $10.8 million of specific valuation allowance charge-offs were included in total charge-offs for the quarter ended September 30, 2012 and reduced our recorded balances for loans, the allowance for loan losses, nonaccrual loans and impaired loans.
A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the amount of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legally discharged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.

Past Due Loans
The following table reflects investment and business loans past due less than 90 days at September 30, 2012, excluding purchased impaired loans.
 
Loan Balances
 
30 - 59 Days
Past Due
 
60 - 89 Days
Past Due
 
Total
30 - 89  Days
Past Due
 
(Dollars in thousands)
Multi-family mortgage loans
$
747

 
$

 
$
747

Nonresidential real estate loans
1,526

 
4,091

 
5,617

Construction and land loans
1,120

 

 
1,120

Commercial
2,046

 
69

 
2,115

Past due investment and business loans
$
5,439

 
$
4,160

 
$
9,599

 
 
 
 
 
 
Matured loans
$
3,542

 
$
4,151

 
$
7,693

% of past due investment and business loans matured
65.12
%
 
99.78
%
 
80.14
%
At September 30, 2012, our past due multi-family, nonresidential real estate, construction and development and commercial loans totaled $9.6 million. Of the $9.6 million in past due loans, $7.7 million, or 80.1%, were “Pass” rated matured loans that were in the process of renewal. The remaining $1.9 million of the past due loans were subject to informal collection activities intended to bring the loan current.


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Table of Contents

Nonperforming Loans and Assets
We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At September 30, 2012, we had one loan totaling $248,000 in this category and we had three loans totaling $350,000 in this category at December 31, 2011.
We typically obtain new third–party appraisals or collateral valuations when we place a loan on nonaccrual status, conduct impairment testing or conduct a TDR unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.
Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.
As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. ASC 820-10 provides guidance for measuring the fair value of OREO property. Although the fair value of the property normally will be based on an appraisal (or other evaluation), the valuation should be consistent with the price that a market participant will pay to purchase the property at the measurement date. Circumstances may exist that indicate that the appraised value is not an accurate measurement of the property's current fair value. As of September 30, 2012, all of our impaired real estate loan collateral and OREO were valued on an “as–is basis.”
Estimates of the net realizable value of real estate collateral also include a deduction for the expected costs to sell the collateral or such other deductions from the cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, we apply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs to sell the collateral. For OREO, we apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.



39

Table of Contents

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.
 
September 30, 2012
 
June 30, 2012
 
Change
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
One-to-four family residential
$
11,334

 
$
14,214

 
$
(2,880
)
Multi-family mortgage
11,501

 
12,640

 
(1,139
)
Nonresidential real estate
25,541

 
30,096

 
(4,555
)
Construction and land
3,584

 
4,005

 
(421
)
Commercial
747

 
3,533

 
(2,786
)
Commercial leases
68

 
159

 
(91
)
Consumer
6

 
13

 
(7
)
Total nonaccrual loans
52,781

 
64,660

 
(11,879
)
Other real estate owned:
 
 
 
 
 
One-to-four family residential
2,420

 
3,365

 
(945
)
Multi-family mortgage
1,985

 
2,645

 
(660
)
Nonresidential real estate
4,244

 
4,496

 
(252
)
Land
1,761

 
1,665

 
96

Total other real estate owned
10,410

 
12,171

 
(1,761
)
Nonperforming assets (excluding purchased impaired loans and purchased other real estate owned)
63,191

 
76,831

 
(13,640
)
Purchased impaired loans
 
 
 
 
 
One-to-four family residential
2,125

 
2,297

 
(172
)
Multi-family mortgage
1,528

 
1,491

 
37

Nonresidential real estate
2,610

 
2,661

 
(51
)
Construction and land
1,634

 
2,324

 
(690
)
Commercial
357

 
677

 
(320
)
Total nonaccrual loans
8,254

 
9,450

 
(1,196
)
Purchased other real estate owned:
 
 
 
 
 
One-to-four family residential
320

 
535

 
(215
)
Nonresidential real estate
577

 
927

 
(350
)
Land
3,687

 
3,618

 
69

Total other real estate owned
4,584

 
5,080

 
(496
)
Purchased impaired loans and other real estate owned
12,838

 
14,530

 
(1,692
)
Total nonperforming assets
$
76,029

 
$
91,361

 
$
(15,332
)
Ratios:
 
 
 
 
 
Nonperforming loans to total loans
5.55
%
 
6.45
%
 
 
Nonperforming loans to total loans (1)
4.80

 
5.63

 
 
Nonperforming assets to total assets
5.07

 
6.00

 
 
Nonperforming assets to total assets(1)
4.21

 
5.05

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


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Table of Contents

Loans on Nonaccrual Status
Non-accrual loans decreased to $52.8 million at September 30, 2012, from $64.7 million at June 30, 2012. The decrease was due in part to the elimination of $10.8 million in specific valuation allowances pursuant to OCC guidance.
Material activity related to significant non-performing assets previously disclosed was as follows:
We have a $6.1 million total credit exposure consisting of seven loans that are secured by industrial/flex suburban Chicago commercial real estate owned by a family-owned entity. Five of these loans were non-performing at September 30, 2012. During the third quarter of 2012, we reached an agreement with the borrowers to renew certain of these loans and to extend the maturity dates of the remaining loans at market rates and terms, with enhanced cross-collateralization arrangements and the ownership's providing supplementary cash resources and ongoing cash payment support as needed. The agreement was consummated early in the fourth quarter of 2012. Following a period of sustained performance, we believe that the five non-performing loans will return to accrual status in 2013 and that the basis of their adverse classification will have been fully resolved.

Other Real Estate Owned
Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal as discussed above. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.
 
Balance at June 30, 2012
 
Additions
 
Write-
downs  and
receipts
 
Sale
 
Balance at September 30, 2012
 
(Dollars in thousands)
One-to-four family residential
$
3,365

 
$
360

 
$
(434
)
 
$
(871
)
 
$
2,420

Multi-family mortgage
2,645

 
470

 
(912
)
 
(218
)
 
1,985

Nonresidential real estate
4,496

 
856

 
(970
)
 
(138
)
 
4,244

Land
1,665

 
97

 
(1
)
 

 
1,761

 
12,171

 
1,783

 
(2,317
)
 
(1,227
)
 
10,410

Acquired other real estate owned:
 
 
 
 
 
 
 
 
 
One-to-four family residential
535

 

 
(35
)
 
(180
)
 
320

Nonresidential real estate
927

 

 

 
(350
)
 
577

Land
3,618

 
686

 

 
(617
)
 
3,687

 
5,080

 
686

 
(35
)
 
(1,147
)
 
4,584

Total other real estate owned
$
17,251

 
$
2,469

 
$
(2,352
)
 
$
(2,374
)
 
$
14,994

We closed sales of OREO in the amount of $2.4 million of net book value in the third quarter of 2012, compared to OREO sales in the amount of $3.1 million of net book value in the third quarter of 2011.
We market real estate for sale based on an estimate of its net realizable value. Depending on the levels of market interest received during the initial period of market exposure, we may reduce the offering price in subsequent periods; if we do so, the new offering price becomes the new net realizable value. We may also accept an offer to purchase a given real estate asset at a price below the net realizable value if there has been limited interest at the original offering price and we conclude that further market exposure time (even at a price lower than the current offering price but higher than the proposed actual sales price) will not produce materially better results given the holding costs and property management risks incurred over time.

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Table of Contents

The following table summarizes noninterest income for three-month periods ended September 30, 2012 and 2011:
 
Three months ended September 30,
 
 
 
2012
 
2011
 
Change
 
(Dollars in thousands)
Noninterest income:
 
 
 
 
 
Deposit service charges and fees
$
548

 
$
699

 
$
(151
)
Other fee income
374

 
381

 
(7
)
Insurance commissions and annuities income
125

 
146

 
(21
)
Gain on sale of loans, net
210

 
83

 
127

Loss on disposition of premises and equipment, net
(7
)
 
1

 
(8
)
Loan servicing fees
124

 
138

 
(14
)
Amortization of servicing assets
(61
)
 
(73
)
 
12

Recovery (impairment) of servicing assets
6

 
(32
)
 
38

Earnings on bank owned life insurance
109

 
165

 
(56
)
Trust income
171

 
199

 
(28
)
Other
232

 
156

 
76

Total noninterest income
$
1,831

 
$
1,863

 
$
(32
)
Noninterest Income. Noninterest income decreased $32,000, or 1.7%, to $1.8 million for the three months ended September 30, 2012, from $1.9 million for the same period in 2011. Deposit service charges and fees decreased $151,000, or 21.6%, to $548,000 for the three months ended September 30, 2012, from $699,000 for the same period in 2011. Income from insurance and annuity commissions decreased $21,000, or 14.4%, to $125,000 for the three months ended September 30, 2012, from $146,000 for the same period in 2011. Gains on sales of loans increased by $127,000 to $210,000 for the three months ended September 30, 2012, from $83,000 for the same period in 2011. In the third quarter 2012, we recorded a recovery of $6,000 on mortgage servicing rights, compared to pre-tax provision of $32,000 for the same period in 2011. Earnings on bank-owned life insurance were $109,000 for the three months ended September 30, 2012, compared to $165,000 for the same period in 2011.
The following table summarizes noninterest expense for the three-month periods ended September 30, 2012 and 2011:
 
Three months ended September 30,
 
 
 
2012
 
2011
 
Change
 
(Dollars in thousands)
Noninterest Expense:
 
 
 
 
 
Compensation and benefits
$
6,333

 
$
6,229

 
$
104

Office occupancy and equipment
1,627

 
1,845

 
(218
)
Advertising and public relations
136

 
333

 
(197
)
Information technology
1,127

 
1,085

 
42

Supplies, telephone, and postage
416

 
450

 
(34
)
Amortization of intangibles
156

 
470

 
(314
)
Nonperforming asset management
1,728

 
1,267

 
461

Loss (gain) on sale of other real estate owned
(42
)
 
16

 
(58
)
Operations of other real estate owned
432

 
563

 
(131
)
Write down of other real estate owned
2,352

 
1,009

 
1,343

FDIC insurance premiums
642

 
354

 
288

Other
1,125

 
1,016

 
109

Total noninterest expense
$
16,032

 
$
14,637

 
$
1,395

Noninterest Expense. Noninterest expense increased $1.4 million to $16.0 million for the three months ended September 30, 2012, from $14.6 million for the three months ended September 30, 2011, due in substantial part to increased nonperforming asset management expenses and increased write downs of OREO. Net expense from nonperforming asset management increased to $1.7 million for the three months ended September 30, 2012, from $1.3 million for the same period in 2011. These expenses include legal expenses of $942,000, compared to $242,000 for the same period in 2011, and real estate tax expenses of $611,000, compared to $132,000 for the same period in 2011. Write downs on OREO for the three months ended September 30, 2012 were $2.4 million, compared to $1.0 million for the same period in 2011.

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Table of Contents

Net expense from operations of OREO was $432,000 for the three months ended September 30, 2012, compared to $563,000 for the same period in 2011. Net expense from operations of OREO for the three months ended September 30, 2012 included legal, insurance, real estate tax and receiver expenses of $279,000, compared to $346,000 for the same period in 2011. Maintenance and repair expense for OREO was $67,000 for the three months ended September 30, 2012, compared to $64,000 for the same period 2011. We recorded gains on sales of OREO of $42,000 for the three months ended September 30, 2012, compared to a loss of $16,000 for the same period in 2011.
Income Tax Benefit. We recorded no income tax expense or benefit for the three months ended September 30, 2012, compared to an income tax benefit of $1.9 million for the three months ended September 30, 2011. The effective tax rate for the three months ended September 30, 2011 was 50.1%.

Operating Results for the Nine Months Ended September 30, 2012 and 2011
Net Loss. We had net loss of $2.1 million for the nine months ended September 30, 2012, compared to a net loss of $1.7 million for the nine months ended September 30, 2011. Our loss per share of common stock was $0.11 per basic and fully diluted share, respectively, for the nine months ended September 30, 2012 compared to $0.08 per basic and fully diluted share for the nine month period ended September 30, 2011.
Net Interest Income. Net interest income was $43.5 million for the nine months ended September 30, 2012, a decrease of $3.3 million, or 7.0% from $46.8 million for the same period in 2011. The decrease reflected a $5.4 million decrease in interest income and a $2.1 million decrease in interest expense.
The decrease in net interest income was primarily attributable to a lower level of average interest-earning assets. Total average interest-earning assets decreased $62.3 million, or 4.2%, to $1.438 billion for the nine months ended September 30, 2012, from $1.500 billion for the same period in 2011. Our net interest rate spread decreased by nine basis points to 3.97% for the nine months ended September 30, 2012, from 4.06% for the same period in 2011. Our net interest margin decreased 13 basis points to 4.04% for the nine months ended September 30, 2012, from 4.17% for the same period in 2011. The decrease in the net interest spread and margin was a result of lower yields on interest earning assets, offset by lower cost of funds. The yield on interest earning assets decreased 30 basis points to 4.36% for the nine months ended September 30, 2012, from 4.66% for the same period in 2011, and the cost of interest bearing liabilities decreased 21 basis points to 0.39% for the nine months ended September 30, 2012, from 0.60% for the same period in 2011.


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Table of Contents

Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, because the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans have been included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include, where applicable, the effect of deferred fees and expenses, discounts and premiums, and purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
For the nine months ended September 30,
 
2012
 
2011
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate
(1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate
(1)
 
(Dollars in thousands)
Interest-earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,181,807

 
$
45,402

 
5.13
%
 
$
1,253,801

 
$
49,915

 
5.32
%
Securities
79,877

 
1,171

 
1.96

 
109,746

 
2,156

 
2.63

Stock in FHLB
11,392

 
21

 
0.25

 
16,208

 
12

 
0.10

Other
164,830

 
332

 
0.27

 
120,497

 
255

 
0.28

Total interest-earning assets
1,437,906

 
46,926

 
4.36

 
1,500,252

 
52,338

 
4.66

Noninterest-earning assets
85,848

 
 
 
 
 
124,122

 
 
 
 
Total assets
$
1,523,754

 
 
 
 
 
$
1,624,374

 
 
 
 
Interest-bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
145,057

 
111

 
0.10

 
$
131,953

 
174

 
0.18

Money market accounts
345,097

 
943

 
0.37

 
350,471

 
1,249

 
0.48

Interest-bearing NOW accounts
333,382

 
308

 
0.12

 
320,572

 
413

 
0.17

Certificates of deposit
335,155

 
1,946

 
0.78

 
406,633

 
3,506

 
1.15

Total deposits
1,158,691

 
3,308

 
0.38

 
1,209,629

 
5,342

 
0.59

Borrowings
8,790

 
80

 
1.22

 
13,853

 
193

 
1.86

Total interest-bearing liabilities
1,167,481

 
3,388

 
0.39

 
1,223,482

 
5,535

 
0.60

Noninterest-bearing deposits
134,184

 
 
 
 
 
129,993

 
 
 
 
Noninterest-bearing liabilities
17,915

 
 
 
 
 
20,584

 
 
 
 
Total liabilities
1,319,580

 
 
 
 
 
1,374,059

 
 
 
 
Equity
204,174

 
 
 
 
 
250,315

 
 
 
 
Total liabilities and equity
$
1,523,754

 
 
 
 
 
$
1,624,374

 
 
 
 
Net interest income
 
 
$
43,538

 
 
 
 
 
$
46,803

 
 
Net interest rate spread (2)
 
 
 
 
3.97
%
 
 
 
 
 
4.06
%
Net interest-earning assets (3)
$
270,425

 
 
 
 
 
$
276,770

 
 
 
 
Net interest margin (4)
 
 
 
 
4.04
%
 
 
 
 
 
4.17
%
Ratio of interest-earning assets to interest-bearing liabilities
123.16
%
 
 
 
 
 
122.62
%
 
 
 
 
(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

Table of Contents

Provision for Loan Losses. We recorded a provision for loan losses of $7.2 million for the nine months ended September 30, 2012, compared to a provision for loan losses of $13.0 million for the nine months ended September 30, 2011. We also recorded a $155,000 provision to the general portion of the allowance for loan losses. In Call Report preparation guidance issued in connection with the transition of federal savings banks from OTS to OCC supervision, the OCC announced that the specific valuation allowances that the OTS' accounting guidance historically permitted federal savings banks to maintain for collateral dependent loans should be eliminated. We adopted this methodology in the third quarter 2012 and charged off $10.8 million of specific valuation allowances. This one time charge did not impact earnings or the provision for loan losses for the nine months ended September 30, 2012; however, the $10.8 million of specific valuation allowance charge-offs were included in total charge-offs for the nine months ended September 30, 2012 and reduced our recorded balances for loans, the allowance for loan losses, nonaccrual loans and impaired loans.
Nonperforming Assets Summary
The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets at the dates indicated.
 
September 30, 2012
 
December 31, 2011
 
Change
 
(Dollars in thousands)
 
 
Nonaccrual loans:
 
 
 
 
 
One-to-four family residential
$
11,334

 
$
10,709

 
$
625

Multi-family mortgage
11,501

 
14,983

 
(3,482
)
Nonresidential real estate
25,541

 
30,396

 
(4,855
)
Construction and land
3,584

 
3,263

 
321

Commercial
747

 
2,940

 
(2,193
)
Commercial leases
68

 
22

 
46

Consumer
6

 
3

 
3

Total nonaccrual loans
52,781

 
62,316

 
(9,535
)
Other real estate owned:
 
 
 
 
 
One-to-four family residential
2,420

 
5,328

 
(2,908
)
Multi-family mortgage
1,985

 
3,655

 
(1,670
)
Nonresidential real estate
4,244

 
4,905

 
(661
)
Land
1,761

 
2,237

 
(476
)
Total other real estate owned
10,410

 
16,125

 
(5,715
)
Nonperforming assets (excluding purchased impaired loans and purchased other real estate owned)
63,191

 
78,441

 
(15,250
)
Purchased impaired loans
 
 
 
 
 
One-to-four family residential
2,125

 
3,941

 
(1,816
)
Multi-family mortgage
1,528

 
1,418

 
110

Nonresidential real estate
2,610

 
3,375

 
(765
)
Construction and land
1,634

 
4,788

 
(3,154
)
Commercial
357

 
1,078

 
(721
)
Total nonaccrual loans
8,254

 
14,600

 
(6,346
)
Purchased other real estate owned:
 
 
 
 
 
One-to-four family residential
320

 
327

 
(7
)
Nonresidential real estate
577

 
2,546

 
(1,969
)
Land
3,687

 
3,482

 
205

Total other real estate owned
4,584

 
6,355

 
(1,771
)
Purchased impaired loans and other real estate owned
12,838

 
20,955

 
(8,117
)
Total nonperforming assets
$
76,029

 
$
99,396

 
$
(23,367
)
Ratios:
 
 
 
 
 
Nonperforming loans to total loans
5.55
%
 
6.11
%
 
 
Nonperforming loans to total loans (1)
4.80

 
4.95

 
 
Nonperforming assets to total assets
5.07

 
6.36

 
 
Nonperforming assets to total assets(1)
4.21

 
5.02

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

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Other Real Estate Owned
Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal as discussed above. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.
 
Balance at December 31, 2011
 
Additions
 
Write-
downs  and
receipts
 
Sale
 
Balance at September 30, 2012
 
(Dollars in thousands)
One-to-four family residential
$
5,328

 
$
748

 
$
(653
)
 
$
(3,003
)
 
$
2,420

Multi-family mortgage
3,655

 
583

 
(1,200
)
 
(1,053
)
 
1,985

Nonresidential real estate
4,905

 
1,945

 
(1,542
)
 
(1,064
)
 
4,244

Land
2,237

 
97

 
(48
)
 
(525
)
 
1,761

 
16,125

 
3,373

 
(3,443
)
 
(5,645
)
 
10,410

Acquired other real estate owned:
 
 
 
 
 
 
 
 
 
One-to-four family residential
327

 
1,299

 
(70
)
 
(1,236
)
 
320

Nonresidential real estate
2,546

 

 
(294
)
 
(1,675
)
 
577

Land
3,482

 
1,563

 
(168
)
 
(1,190
)
 
3,687

 
6,355

 
2,862

 
(532
)
 
(4,101
)
 
4,584

Total other real estate owned
$
22,480

 
$
6,235

 
$
(3,975
)
 
$
(9,746
)
 
$
14,994

We closed sales of OREO in the amount of $9.7 million of net book value in the nine months of 2012, compared to sales in the amount of $5.3 million in the first nine months of 2011.
The following table summarizes noninterest income for nine month periods ended September 30, 2012 and 2011:
 
Nine months ended September 30,
 
 
 
2012
 
2011
 
Change
 
(Dollars in thousands)
Noninterest income:
 
 
 
 
 
Deposit service charges and fees
$
1,626

 
$
2,004

 
$
(378
)
Other fee income
1,142

 
1,176

 
(34
)
Insurance commissions and annuities income
359

 
470

 
(111
)
Gain on sale of loans, net
595

 
141

 
454

Loss on disposition of premises and equipment, net
(164
)
 
(19
)
 
(145
)
Loan servicing fees
371

 
407

 
(36
)
Amortization of servicing assets
(197
)
 
(178
)
 
(19
)
Impairment of servicing assets
(38
)
 
(32
)
 
(6
)
Earnings on bank owned life insurance
355

 
485

 
(130
)
Trust income
545

 
491

 
54

Other
487

 
368

 
119

Total noninterest income
$
5,081

 
$
5,313

 
$
(232
)

Noninterest Income. Noninterest income decreased $232,000, or 4.4%, to $5.1 million for the nine months ended September 30, 2012, from $5.3 million for the same period in 2011. Income from insurance and annuity commissions decreased $111,000, or 23.6%, to $359,000 for the nine months ended September 30, 2012, from $470,000 for the same period in 2011. Gains on sales of loans increased by $454,000 to $595,000 for the nine months ended September 30, 2012, from $141,000 for the same period in 2011. In the nine months ended September 30, 2012 we recorded a pre-tax provision of $38,000 on our mortgage servicing rights portfolio, compared to $32,000 for the same period in 2011. Earnings on bank-owned life insurance were $355,000 for the nine months ended September 30, 2012, compared to $485,000 for the same period in 2011. Trust department income was $545,000 for the nine months ended September 30, 2012, compared to $491,000 for the same period in 2011.

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The following table summarizes noninterest expense for the nine month periods ended September 30, 2012 and 2011:
 
Nine months ended
September 30,
 
 
 
2012
 
2011
 
Change
 
(Dollars in thousands)
Noninterest Expense:
 
 
 
 
 
Compensation and benefits
$
19,453

 
$
19,949

 
$
(496
)
Office occupancy and equipment
5,125

 
5,449

 
(324
)
Advertising and public relations
447

 
830

 
(383
)
Information technology
3,534

 
3,124

 
410

Supplies, telephone and postage
1,254

 
1,264

 
(10
)
Amortization of intangibles
476

 
1,322

 
(846
)
Nonperforming asset management
4,085

 
3,001

 
1,084

Loss (gain) on sale of other real estate owned
(126
)
 
(98
)
 
(28
)
Operations of other real estate owned
1,334

 
1,506

 
(172
)
Write down of other real estate owned
3,777

 
1,488

 
2,289

FDIC insurance premiums
1,299

 
1,107

 
192

Acquisition expenses

 
1,761

 
(1,761
)
Other
2,854

 
2,812

 
42

Total noninterest expense
$
43,512

 
$
43,515

 
$
(3
)

Noninterest Expense. Noninterest expense was $43.5 million for the nine months ended September 30, 2012 and 2011. The results for the nine months ended September 30, 2011 included $1.7 million of expenses relating to the acquisition of Downers Grove National Bank. Net expense from nonperforming asset management increased to $4.1 million for the nine months ended September 30, 2012, from $3.0 million for the same period in 2011. Net expense from nonperforming asset management for the nine months ended September 30, 2012 included legal expenses of $1.9 million for the nine months ended September 30, 2012, compared to $593,000 for the same period in 2011, and real estate tax expenses of $1.5 million for the nine months ended September 30, 2012, compared to $965,000 for the same period in 2011.
We recorded net gains from sales of OREO in the amount of $126,000 for the nine months ended September 30, 2012, compared to $98,000 for the same period in 2011. Net expense from operations of OREO was $1.3 million for the nine months ended September 30, 2012, compared to $1.5 million for the same period in 2011. Net expense from operations of OREO for the nine months ended September 30, 2012 included legal, insurance, real estate tax and receiver expenses of $919,000, compared to $1.4 million for the same period in 2011. Maintenance and repair expense for OREO was $212,000 for the nine months ended September 30, 2012, compared to $146,000 for the same period 2011. Write-downs on OREO for the nine months ended September 30, 2012 were $3.8 million in write-downs, compared to $1.5 million for the same period in 2011.
Income Tax Expense (Benefit). We recorded no income tax expense or benefit for the nine months ended September 30, 2012, compared to an income tax benefit of $2.7 million for the nine months ended September 30, 2011. The effective tax rate for the nine months ended September 30, 2011 was 62.4% 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 nine months ended September 30, 2011 related to the write-up of state deferred tax assets.

Liquidity and Capital Resources
Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of lending and investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, and proceeds from borrowings are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. The Bank is a member of the FHLBC, which provides an additional source of short-term and long-term funding. The outstanding borrowing from the FHLBC was $3.0 million at September 30, 2012, at an interest rate of 2.99%; this borrowing will mature in less than one year. The outstanding FHLBC borrowing was $3.0 million

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Table of Contents

at December 31, 2011.
The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and stock repurchases. The primary source of liquidity for the Company currently is $11.0 million in cash and cash equivalents as of September 30, 2012 and cash dividends from our subsidiary, the Bank.
As a result of the regulatory restructuring occasioned by the Dodd-Frank Act, the Company is now subject to Federal Reserve Board Supervisory Letter SR 09-4, which provides that a holding company should, among other things, inform the Federal Reserve Bank prior to declaring a dividend if its net income for the current quarter is not sufficient to fully fund the dividend, and inform the Federal Reserve Bank and consider eliminating, deferring or significantly reducing its dividends if its net income for the current quarter is not sufficient to fully fund the dividends, or if its net income for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends. The Company declared and paid cash dividends of $633,000, or $0.03 per share, to our stockholders during the first nine months of 2012. The Company will continue to consult with, and seek the prior approval of, the Federal Reserve Bank prior to declaring any dividends.
As of September 30, 2012, we were not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of September 30, 2012, we had no other material commitments for capital expenditures.
Capital Resources. Total stockholders' equity decreased $1.9 million to $198.0 million at September 30, 2012, compared to $199.9 million at December 31, 2011. The decrease was primarily due to the net loss of $2.1 million. The unallocated shares of common stock that our ESOP owns were reflected as a $12.5 million reduction to stockholders' equity at September 30, 2012.
Our Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. The authorization permits shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization may be utilized at management's discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of Directors. The repurchase authorization will expire on November 15, 2012, unless extended by the Board of Directors. As of September 30, 2012, the Company had repurchased 4,239,134 shares of its common stock out of the 5,047,423 shares that have been authorized for repurchase. No shares were repurchased during the nine months ended September 30, 2012. Federal Reserve Board Supervisory Letter SR 09-4 provides that holding companies experiencing financial weaknesses such as operating losses should consult with the appropriate Federal Reserve supervisory staff before redeeming or repurchasing common stock. The Company has no plans to conduct stock repurchases in the immediate future, and will not conduct further stock repurchase without first consulting with and obtaining the prior approval of the Federal Reserve Bank.
On June 6, 2012, the OCC and the other federal bank regulatory agencies issued a series of proposed rules to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”). The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the proposed rules establish a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement, and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The proposed rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rules will become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019.
The Company and the Bank have adopted Capital Plans that requires the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%. The minimum capital ratios set forth in the Capital Plans will be increased and other minimum capital requirements will be established if and as necessary to comply with the Basel III requirements as such requirements become applicable to the Company and the Bank. In accordance with the Capital Plans, neither the Company nor the Bank will pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank’s total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels. In addition, the Company will continue to maintain its ability to serve as a source of financial strength to the Bank by holding at least $5.0 million of cash or liquid assets for that purpose.

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Table of Contents

At September 30, 2012 and December 31, 2011, the Bank’s actual regulatory capital ratios, the minimum capital ratios required to be considered well-capitalized in the Prompt Corrective Action rules and the minimum capital ratios established under the Bank’s Capital Plans were:
 
Actual Ratio
 
Minimum
Required to Be
Well Capitalized
Under Prompt
Corrective  Action
Provisions
 
Minimum Capital Ratios
Established under Capital
Plans
September 30, 2012
 
 
 
 
 
Total capital (to risk-weighted assets)
16.96%
 
8.00%
 
12.00%
Tier 1 (core) capital (to risk-weighted assets)
15.70%
 
4.00%
 
8.00%
Tier 1 (core) capital (to adjusted total assets)
11.13%
 
4.00%
 
8.00%
December 31, 2011
 
 
 
 
 
Total capital (to risk-weighted assets)
14.72%
 
8.00%
 
12.00%
Tier 1 (core) capital (to risk-weighted assets)
13.45%
 
4.00%
 
8.00%
Tier 1 (core) capital (to adjusted total assets)
10.48%
 
4.00%
 
8.00%
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Analysis. We believe that our most significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.
The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors’ Asset/Liability Management Committee then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans for our loan portfolio, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investment portfolio securities as available-for-sale so as to provide flexibility in liquidity management.
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.

49

Table of Contents

Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the US Treasury yield curve as of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.
Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.
Quantitative Analysis. The following table sets forth, as of September 30, 2012, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the US Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
Change in Interest Rates
(basis points)
Estimated Increase in NPV
 
Decrease in Estimated Net
Interest Income
 
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
 
 
 
(dollars in thousands)
 
 
+400
$
6,560

 
3.84
%
 
$
(1,143
)
 
(2.30
)%
+300
6,182

 
3.62

 
(650
)
 
(1.31
)
+200
4,969

 
2.91

 
(322
)
 
(0.65
)
+100
3,203

 
1.88

 
(153
)
 
(0.31
)
0

 

 

 

The Company has opted not to include an estimate for a decrease in rates at September 30, 2012 as the results are not relevant given the current targeted fed funds rate of the Federal Open Market Committee. The table set forth above indicates that at September 30, 2012, in the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 2.91% increase in NPV and a $322,000 decrease in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

50

Table of Contents


ITEM 4.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2012. Based on that evaluation, the Company’s management, including the Chairman, President, and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2012, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

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 September 30, 2012. The Company did not conduct any repurchases during the third quarter of 2012. The current share repurchase authorization will expire on November 15, 2012, unless extended.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable

ITEM 5.
OTHER INFORMATION
None

ITEM 6.
EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

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Table of Contents

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:
November 7, 2012

 
 
 
 
 
 
 

/s/    F. MORGAN GASIOR
 
 

F. Morgan Gasior
 
 

Chairman of the Board, Chief Executive Officer and President
 
 
 
 
 
 

/s/    PAUL A. CLOUTIER
 
 

Paul A. Cloutier
 
 

Executive Vice President and Chief Financial Officer

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Table of Contents


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.
 
 
 
101
 
The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows and (iv) the notes to consolidated financial statements.


54
BFIN-2012.09.30-Ex-31.1


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: November 7, 2012
 
/s/ F. MORGAN GASIOR
F. Morgan Gasior
Chairman of the Board, Chief Executive Officer and President


BFIN-2012.09.30-Ex-31.2


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: November 7, 2012
 
/s/ PAUL A. CLOUTIER
Paul A. Cloutier
Executive Vice President and Chief Financial Officer


BFIN-2012.09.30-Ex-32.1


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 September 30, 2012 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:
November 7, 2012
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.


BFIN-2012.09.30-Ex-32.2


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 September 30, 2012 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:
November 7, 2012
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.