BFIN-2014.03.31 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2014
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from             to             
Commission File Number 0-51331
 
BANKFINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
 
Maryland
75-3199276
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification No.)
 
 
15W060 North Frontage Road, Burr Ridge, Illinois 60527
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (800) 894-6900
Not Applicable
(Former name or former address, if changed since last report)
  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date. At April 28, 2014, there were 21,101,966 shares of Common Stock, $0.01 par value, outstanding.





BANKFINANCIAL CORPORATION
Form 10-Q
March 31, 2014
Table of Contents
 
 
Page
Number
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 


Table of Contents

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


 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Cash and due from other financial institutions
$
13,869

 
$
15,781

Interest-bearing deposits in other financial institutions
137,855

 
145,176

Cash and cash equivalents
151,724

 
160,957

Securities, at fair value
115,977

 
110,907

Loans receivable, net of allowance for loan losses:
March 31, 2014, $14,181 and December 31, 2013, $14,154
1,097,888

 
1,098,077

Other real estate owned, net
8,670

 
6,306

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

 
6,068

Premises and equipment, net
34,882

 
35,328

Accrued interest receivable
3,728

 
3,933

Core deposit intangible
2,284

 
2,433

Bank owned life insurance
22,022

 
21,958

Other assets
5,299

 
7,627

Total assets
$
1,448,542

 
$
1,453,594

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
129,732

 
$
126,680

Interest-bearing
1,123,087

 
1,126,028

Total deposits
1,252,819

 
1,252,708

Borrowings
2,668

 
3,055

Advance payments by borrowers for taxes and insurance
8,056

 
10,432

Accrued interest payable and other liabilities
8,135

 
11,772

Total liabilities
1,271,678

 
1,277,967

Commitments and contingent liabilities


 


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

 

Common Stock, $0.01 par value, 100,000,000 shares authorized;
21,101,966 shares issued at March 31, 2014 and December 31, 2013
211

 
211

Additional paid-in capital
193,610

 
193,594

Retained earnings (deficit)
(6,400
)
 
(7,342
)
Unearned Employee Stock Ownership Plan shares
(11,013
)
 
(11,255
)
Accumulated other comprehensive income
456

 
419

Total stockholders’ equity
176,864

 
175,627

Total liabilities and stockholders’ equity
$
1,448,542

 
$
1,453,594


See accompanying notes to the consolidated financial statements.

1

Table of Contents

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

 
For the Three Months Ended March 31,
 
2014
 
2013
Interest and dividend income
 
 
 
Loans, including fees
$
11,699

 
$
12,278

Securities
296

 
250

Other
91

 
185

Total interest income
12,086

 
12,713

Interest expense
 
 
 
Deposits
810

 
986

Borrowings
2

 
8

Total interest expense
812

 
994

Net interest income
11,274

 
11,719

Provision for loan losses
476

 
722

Net interest income after provision for loan losses
10,798

 
10,997

Noninterest income
 
 
 
Deposit service charges and fees
433

 
499

Other fee income
527

 
538

Insurance commissions and annuities income
87

 
109

Gain on sale of loans, net
24

 
1,417

Loss on sale of securities (includes $7 accumulated other comprehensive income reclassifications for unrealized net losses on available for sale securities for the three months ended March 31, 2014)
(7
)
 

Gain on disposition of premises and equipment, net
2

 

Loan servicing fees
104

 
123

Amortization and impairment of servicing assets
(36
)
 
(33
)
Earnings on bank owned life insurance
64

 
70

Trust
164

 
181

Other
170

 
125

 
1,532

 
3,029

Noninterest expense
 
 
 
Compensation and benefits
5,958

 
6,752

Office occupancy and equipment
1,914

 
1,948

Advertising and public relations
162

 
146

Information technology
639

 
758

Supplies, telephone, and postage
391

 
452

Amortization of intangibles
149

 
156

Nonperforming asset management
104

 
694

Operations of other real estate owned
257

 
511

FDIC insurance premiums
479

 
492

Other
1,318

 
1,439

 
11,371

 
13,348

Income before income taxes
959

 
678

Income tax expense
17

 

Net income
$
942

 
$
678

 
 
 
 
Basic earnings per common share
$
0.05

 
$
0.03

Diluted earnings per common share
$
0.05

 
$
0.03

Weighted average common shares outstanding
20,098,655

 
19,964,028

Diluted weighted average common shares outstanding
20,110,700

 
19,964,028


See accompanying notes to the consolidated financial statements.

2

Table of Contents

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) - Unaudited

 
For the Three Months Ended March 31,
 
 
2014
 
2013
 
Net income
$
942

 
$
678

 
Unrealized holding gain (loss) arising during the period, net of tax
30

 
(124
)
 
Reclassification adjustment for losses included in net income
7

 

 
Net current period other comprehensive gain (loss)
37

 
(124
)
 
Comprehensive income
$
979

 
$
554

 


See accompanying notes to the consolidated financial statements.

3

Table of Contents

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


 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Deficit)
 
Unearned
Employee
Stock
Ownership
Plan
Shares
 
Accumulated
Other
Comprehen-sive
Income
 
Total
Balance at January 1, 2013
$
211

 
$
193,590

 
$
(9,796
)
 
$
(12,233
)
 
$
1,118

 
$
172,890

Net income

 

 
678

 

 

 
678

Other comprehensive income, net of tax effects

 

 

 

 
(124
)
 
(124
)
ESOP shares earned

 
(46
)
 

 
241

 

 
195

Balance at March 31, 2013
$
211

 
$
193,544

 
$
(9,118
)
 
$
(11,992
)
 
$
994

 
$
173,639

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
211

 
$
193,594

 
$
(7,342
)
 
$
(11,255
)
 
$
419

 
$
175,627

Net income

 

 
942

 

 

 
942

Other comprehensive income, net of tax effects

 

 

 

 
37

 
37

Nonvested stock awards-stock-based compensation expense

 
17

 

 

 

 
17

ESOP shares earned

 
(1
)
 

 
242

 

 
241

Balance at March 31, 2014
$
211

 
$
193,610

 
$
(6,400
)
 
$
(11,013
)
 
$
456

 
$
176,864


See accompanying notes to the consolidated financial statements.

4

Table of Contents

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

 
For the Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
942

 
$
678

Adjustments to reconcile to net income to net cash from operating activities
 
 
 
Provision for loan losses
476

 
722

ESOP shares earned
241

 
195

Stock–based compensation expense
17

 

Depreciation and amortization
972

 
1,111

Amortization of premiums and discounts on securities and loans
(110
)
 
(214
)
Amortization of core deposit and other intangible assets
149

 
156

Amortization and impairment of servicing assets
36

 
33

Net change in net deferred loan origination costs
(32
)
 
14

Net loss on sale of other real estate owned
6

 
69

Net gain on sale of loans
(24
)
 
(1,417
)
Net loss on sale of securities
7

 

Net gain on disposition of premises and equipment
(2
)
 

Loans originated for sale
(519
)
 
(3,357
)
Proceeds from sale of loans
543

 
4,163

Other real estate owned valuation adjustments
44

 
89

Net change in:
 
 
 
Accrued interest receivable
205

 
195

Earnings on bank owned life insurance
(64
)
 
(70
)
Other assets
2,202

 
1,163

Accrued interest payable and other liabilities
(3,637
)
 
(1,263
)
Net cash from operating activities
1,452

 
2,267

Cash flows from investing activities
 
 
 
Securities
 
 
 
Proceeds from maturities
5,402

 
14,626

Proceeds from principal repayments
1,898

 
4,938

Proceeds from sales of securities
3,663

 

Purchases of securities
(16,013
)
 
(3,175
)
Loans receivable
 
 
 
Principal payments on loans receivable
103,592

 
130,457

Originated for investment
(106,604
)
 
(105,573
)
Proceeds from sale of loans

 
2,868

Proceeds of redemption of Federal Home Loan Bank of Chicago stock

 
846

Proceeds from sale of other real estate owned
154

 
2,667

Purchase of premises and equipment, net
(125
)
 
(14
)
Net cash from (used in) investing activities
(8,033
)
 
47,640



Continued

5

Table of Contents

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

 
For the Three Months Ended March 31,
 
2014
 
2013
Cash flows from financing activities
 
 
 
Net change in deposits
$
111

 
$
(10,801
)
Net change in borrowings
(387
)
 
(2,827
)
Net change in advance payments by borrowers for taxes and insurance
(2,376
)
 
(915
)
Net cash used in financing activities
(2,652
)
 
(14,543
)
Net change in cash and cash equivalents
(9,233
)
 
35,364

Beginning cash and cash equivalents
160,957

 
275,764

Ending cash and cash equivalents
$
151,724

 
$
311,128

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
824

 
$
1,014

Income taxes paid
11

 

Income taxes refunded

 
461

Loans transferred to other real estate owned
2,568

 
555



See accompanying notes to the consolidated financial statements.

6

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois, is the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”).
Principles of Consolidation: The interim unaudited consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BF Asset Recovery Corporation (collectively, “the Company”), and reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three- month period ended March 31, 2014 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2014.
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, other intangible assets, stock-based compensation, impairment of securities and fair value of financial instruments are particularly subject to change and the effect of such change could be material to the financial statements.
Reclassifications: Certain reclassifications have been made in the prior period’s financial statements to conform them to the current period’s presentation.
These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission.



7


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

NOTE 2 - EARNINGS PER SHARE

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock.
 
For the Three Months Ended March 31,
 
2014
 
2013
Net income available to common stockholders
$
942

 
$
678

Average common shares outstanding
21,101,966

 
21,072,966

Less:
 
 
 
Unearned ESOP shares
(977,561
)
 
(1,108,938
)
Unvested restricted stock shares
(25,750
)
 

Weighted average common shares outstanding
20,098,655

 
19,964,028

Add - Net effect of dilutive stock options and unvested restricted stock
12,045

 

Diluted weighted average common shares outstanding
20,110,700

 
19,964,028

Basic earnings per common share
$
0.05

 
$
0.03

Diluted earnings per common share
$
0.05

 
$
0.03

 



8


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

NOTE 3 - SECURITIES

The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income are shown below.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
March 31, 2014
 
 
 
 
 
 
 
Certificates of deposit
$
75,621

 
$

 
$

 
$
75,621

Municipal securities
180

 
5

 

 
185

Equity mutual fund
500

 

 

 
500

Mortgage-backed securities - residential
26,017

 
1,291

 
(127
)
 
27,181

Collateralized mortgage obligations - residential
12,486

 
39

 
(69
)
 
12,456

SBA-guaranteed loan participation certificates
34

 

 

 
34

 
$
114,838

 
$
1,335

 
$
(196
)
 
$
115,977

December 31, 2013
 
 
 
 
 
 
 
Certificates of deposit
$
65,010

 
$

 
$

 
$
65,010

Municipal securities
180

 
7

 

 
187

Equity mutual fund
500

 

 
(3
)
 
497

Mortgage-backed securities - residential
27,229

 
1,295

 
(160
)
 
28,364

Collateralized mortgage obligations - residential
16,851

 
35

 
(72
)
 
16,814

SBA-guaranteed loan participation certificates
35

 

 

 
35

 
$
109,805

 
$
1,337

 
$
(235
)
 
$
110,907

Mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities or agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support. All securities reflected in the preceding table were classified as available-for-sale at March 31, 2014 and December 31, 2013.
The amortized cost and fair values of securities by contractual maturity are shown below. Securities not due at a single maturity date are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
March 31, 2014
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
75,801

 
$
75,806

Equity mutual fund
500

 
500

Mortgage-backed securities - residential
26,017

 
27,181

Collateralized mortgage obligations - residential
12,486

 
12,456

SBA-guaranteed loan participation certificates
34

 
34

 
$
114,838

 
$
115,977




9


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

NOTE 3 - SECURITIES (continued)

Sales of securities were as follows:
 
For the Three Months Ended March 31,
 
2014
 
2013
Proceeds
$
3,663

 
$

Gross gains

 

Gross losses
7

 

Securities with unrealized losses not recognized in income are as follows:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - residential
$
2,569

 
$
(127
)
 
$

 
$

 
$
2,569

 
$
(127
)
Collateralized mortgage obligations - residential
10,313

 
(69
)
 

 

 
10,313

 
(69
)
 
$
12,882

 
$
(196
)
 
$

 
$

 
$
12,882

 
$
(196
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Equity mutual fund
$
497

 
$
(3
)
 
$

 
$

 
$
497

 
$
(3
)
Mortgage-backed securities - residential
2,806

 
(160
)
 

 

 
2,806

 
(160
)
Collateralized mortgage obligations - residential
11,233

 
(72
)
 

 

 
11,233

 
(72
)
 
$
14,536

 
$
(235
)
 
$

 
$

 
$
14,536

 
$
(235
)
The Company evaluates marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if a marketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary.
Certain residential mortgage-backed securities and a collateralized mortgage obligation that the Company holds in its investment portfolio were in an unrealized loss position at March 31, 2014, but the unrealized losses were not considered significant under the Company’s impairment testing methodology. In addition, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell these securities before their anticipated recovery occurs.



10


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

NOTE 4 - LOANS RECEIVABLE

Loans receivable are as follows:
 
March 31, 2014
 
December 31, 2013
One-to-four family residential real estate
$
197,831

 
$
201,382

Multi-family mortgage
416,356

 
396,058

Nonresidential real estate
251,873

 
263,567

Construction and land
3,396

 
6,570

Commercial loans
53,661

 
54,255

Commercial leases
185,474

 
187,112

Consumer
2,476

 
2,317

 
1,111,067

 
1,111,261

Net deferred loan origination costs
1,002

 
970

Allowance for loan losses
(14,181
)
 
(14,154
)
Loans, net
$
1,097,888

 
$
1,098,077

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
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
20

 
$
5

 
$
3,508

 
$
3,533

 
$
3,918

 
$
101

 
$
193,812

 
$
197,831

Multi-family mortgage
195

 

 
4,515

 
4,710

 
6,937

 

 
409,419

 
416,356

Nonresidential real estate
257

 

 
3,715

 
3,972

 
9,758

 
153

 
241,962

 
251,873

Construction and land
12

 

 
244

 
256

 
270

 

 
3,126

 
3,396

Commercial loans

 

 
669

 
669

 

 
23

 
53,638

 
53,661

Commercial leases

 

 
942

 
942

 
8

 

 
185,466

 
185,474

Consumer

 

 
99

 
99

 
77

 

 
2,399

 
2,476

 
$
484

 
$
5

 
$
13,692

 
$
14,181

 
$
20,968

 
$
277

 
$
1,089,822

 
1,111,067

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
 
 
 
 
1,002

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
(14,181
)
Loans, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,097,888




11


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

NOTE 4 - LOANS RECEIVABLE (continued)

 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated  for
impairment
 
Purchased impaired loans
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated  for
impairment
 
Purchased
impaired
loans
 
Collectively
evaluated  for
impairment
 
Total
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
26

 
$
5

 
$
3,817

 
$
3,848

 
$
3,692

 
$
100

 
$
197,590

 
$
201,382

Multi-family mortgage
255

 

 
4,189

 
4,444

 
7,031

 

 
389,027

 
396,058

Nonresidential real estate
77

 

 
3,658

 
3,735

 
4,381

 
1,633

 
257,553

 
263,567

Construction and land
12

 

 
381

 
393

 
383

 

 
6,187

 
6,570

Commercial loans

 

 
731

 
731

 

 
23

 
54,232

 
54,255

Commercial leases

 

 
946

 
946

 

 

 
187,112

 
187,112

Consumer

 

 
57

 
57

 
77

 

 
2,240

 
2,317

 
$
370

 
$
5

 
$
13,779

 
$
14,154

 
$
15,564

 
$
1,756

 
$
1,093,941

 
1,111,261

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
 
 
 
 
970

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
(14,154
)
Loans, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,098,077

Activity in the allowance for loan losses is as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Beginning balance
$
14,154

 
$
18,035

Loans charged offs:
 
 
 
One-to-four family residential real estate
(56
)
 
(369
)
Multi-family mortgage
(90
)
 
(236
)
Nonresidential real estate
(580
)
 
(79
)
Construction and land

 
(927
)
Commercial loans
(22
)
 
(19
)
Commercial leases

 

Consumer
(6
)
 

 
(754
)
 
(1,630
)
Recoveries:
 
 
 
One-to-four family residential real estate
11

 
242

Multi-family mortgage
14

 
57

Nonresidential real estate
20

 
19

Construction and land
250

 
2

Commercial loans
8

 
5

Consumer
2

 
1

 
305

 
326

Net charge-off
(449
)
 
(1,304
)
Provision for loan losses
476

 
722

Ending balance
$
14,181

 
$
17,453




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)

Impaired loans
Several of the following disclosures are presented by “recorded investment,” which the FASB defines as “the amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.” The following represents the components of recorded investment:
Loan principal balance
Less unapplied payments
Plus negative unapplied balance
Less escrow balance
Plus negative escrow balance
Plus unamortized net deferred loan costs
Less unamortized net deferred loan fees
Plus unamortized premium
Less unamortized discount
Less previous charge-offs
Plus recorded accrued interest
Less reserve for uncollected interest
= Recorded investment
The following tables present loans individually evaluated for impairment by class of loans, excluding purchased impaired loans:
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2014
 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
4,243

 
$
2,865

 
$
1,356

 
$

 
$
2,598

 
$
4

One-to-four family residential real estate - non-owner occupied
835

 
776

 
43

 

 
788

 

Multi-family mortgage
5,294

 
4,297

 
4

 

 
4,281

 
10

Wholesale commercial lending
524

 
524

 

 

 
131

 
8

Nonresidential real estate
8,963

 
7,954

 
394

 

 
4,385

 
16

Land
160

 
150

 
8

 

 
178

 

Commercial loans - secured
77

 
77

 

 

 
77

 
1

Non-rated commercial leases
8

 
8

 

 

 
2

 

 
20,104

 
16,651

 
1,805

 

 
12,440

 
39

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate - non-owner occupied
383

 
267

 
127

 
20

 
343

 

Multi-family mortgage
2,586

 
2,093

 
470

 
195

 
2,256

 
9

Nonresidential real estate
2,425

 
1,752

 
641

 
257

 
1,007

 
16

Land
180

 
119

 
60

 
12

 
119

 

 
5,574

 
4,231

 
1,298

 
484

 
3,725

 
25

Total
$
25,678

 
$
20,882

 
$
3,103

 
$
484

 
$
16,165

 
$
64




13


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

NOTE 4 - LOANS RECEIVABLE (continued)

 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
3,656

 
$
2,540

 
$
1,102

 
$

 
$
3,693

 
$
20

One-to-four family residential real estate - non-owner occupied
875

 
706

 
137

 

 
591

 

Multi-family mortgage
5,466

 
4,449

 
4

 

 
6,098

 
27

Wholesale commercial lending

 

 

 

 
306

 

Nonresidential real estate
4,062

 
3,313

 
253

 

 
4,054

 
33

Land
274

 
263

 
8

 

 
169

 

Commercial loans - secured
77

 
77

 

 

 
83

 

 
14,410

 
11,348

 
1,504

 

 
14,994

 
80

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate - non-owner occupied
490

 
438

 
38

 
26

 
393

 
2

Multi-family mortgage
3,144

 
2,541

 
573

 
255

 
2,998

 
125

Nonresidential real estate
1,343

 
1,048

 
255

 
77

 
2,148

 
15

Land
180

 
119

 
60

 
12

 
1,265

 

 
5,157

 
4,146

 
926

 
370

 
6,804

 
142

Total
$
19,567

 
$
15,494

 
$
2,430

 
$
370

 
$
21,798

 
$
222

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 amounts of these purchased impaired loans are as follows:
 
March 31, 2014
 
December 31, 2013
One-to-four family residential real estate
$
101

 
$
100

Nonresidential real estate
153

 
1,633

Commercial loans
23

 
23

Outstanding balance
$
277

 
$
1,756

Carrying amount, net of allowance ($5 at March 31, 2014 and December 31, 2013)
$
272

 
$
1,751




14


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

NOTE 4 - LOANS RECEIVABLE (continued)

Accretable yield, or income expected to be collected, related to purchased impaired loans are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Beginning balance
$
37

 
$
196

Reclassifications from nonaccretable difference
(2
)
 

Accretion of income
18

 
50

Ending balance
$
17

 
$
146

For the above purchased impaired loans, there was no change to the allowance for loan losses for the three months ended March 31, 2014. For the above purchased impaired loans, the allowance for loan losses was decreased by $9,000 for the three months ended March 31, 2013.
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:
 
March 31, 2014
 
December 31, 2013
Contractually required payments receivable of loans purchased:
 
 
 
One-to-four family residential real estate
$
832

 
$
832

Nonresidential real estate
203

 
1,999

Commercial loans
222

 
222

 
$
1,257

 
$
3,053

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



15


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

NOTE 4 - LOANS RECEIVABLE (continued)

Nonaccrual loans
The following tables present the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans, excluding purchased impaired loans:
 
Loan Balance
 
Recorded
Investment
 
Loans Past
Due Over 90
Days, Still
Accruing
March 31, 2014
 
 
 
 
 
One-to-four family residential real estate
$
3,989

 
$
3,965

 
$

One-to-four family residential real estate – non owner occupied
1,047

 
1,043

 

Multi-family mortgage
7,625

 
6,617

 

Nonresidential real estate
9,281

 
8,715

 

Land
273

 
269

 

Commercial loans – secured
77

 
77

 

Non-rated commercial leases
8

 
8

 

 
$
22,300

 
$
20,694

 
$

December 31, 2013
 
 
 
 
 
One-to-four family residential real estate
$
3,516

 
$
3,498

 
$

One-to-four family residential real estate – non owner occupied
1,190

 
1,143

 

Multi-family mortgage
8,142

 
7,098

 
228

Nonresidential real estate
4,748

 
4,214

 

Land
387

 
382

 

Commercial loans – secured
77

 
77

 

Consumer
12

 
12

 

 
$
18,072

 
$
16,424

 
$
228

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The Company’s reserve for uncollected loan interest was $1.4 million and $1.3 million at March 31, 2014 and December 31, 2013, respectively. Except for purchased impaired loans, when a loan is on non-accrual status and the ultimate collectability of the total principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.



16


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

NOTE 4 - LOANS RECEIVABLE (continued)

Past Due Loans
The following tables present the aging of the recorded investment of loans at March 31, 2014 by class of loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
One-to-four family residential real estate
$
598

 
$
1,295

 
$
3,351

 
$
5,244

 
$
138,288

 
$
143,532

One-to-four family residential real estate - non-owner occupied
143

 

 
1,002

 
1,145

 
52,521

 
53,666

Multi-family mortgage
3,748

 
547

 
5,235

 
9,530

 
318,791

 
328,321

Wholesale commercial lending

 

 

 

 
85,942

 
85,942

Nonresidential real estate
1,177

 
1,842

 
7,821

 
10,840

 
238,840

 
249,680

Construction

 

 

 

 
93

 
93

Land

 

 
269

 
269

 
3,002

 
3,271

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured
85

 

 

 
85

 
11,916

 
12,001

Unsecured
18

 

 

 
18

 
3,360

 
3,378

Municipal

 

 

 

 
2,531

 
2,531

Warehouse lines
22

 

 

 
22

 
8,276

 
8,298

Health care

 

 

 

 
17,470

 
17,470

Aviation

 

 

 

 
1,090

 
1,090

Other

 

 

 

 
9,024

 
9,024

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases
249

 

 

 
249

 
147,115

 
147,364

Below investment grade
153

 

 
8

 
161

 
12,979

 
13,140

Non-rated
18

 

 

 
18

 
23,616

 
23,634

Lease pools

 

 

 

 
2,430

 
2,430

Consumer
3

 

 

 
3

 
2,482

 
2,485

 
$
6,214

 
$
3,684

 
$
17,686

 
$
27,584

 
$
1,079,766

 
$
1,107,350

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

 
$

 
$
101

 
$
101

 
$

 
$
101

Nonresidential real estate

 

 
153

 
153

 

 
153

Commercial – secured

 

 
23

 
23

 

 
23

 
$

 
$

 
$
277

 
$
277

 
$

 
$
277




17


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

NOTE 4 - LOANS RECEIVABLE (continued)

The following tables present the aging of the recorded investment of loans at December 31, 2013 by class of loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
One-to-four family residential real estate
$
751

 
$
424

 
$
2,876

 
$
4,051

 
$
142,058

 
$
146,109

One-to-four family residential real estate - non-owner occupied
905

 

 
960

 
1,865

 
52,676

 
54,541

Multi-family mortgage
2,193

 
1,716

 
6,354

 
10,263

 
303,903

 
314,166

Wholesale commercial lending

 

 

 

 
78,531

 
78,531

Nonresidential real estate
4,432

 
1,363

 
3,969

 
9,764

 
249,194

 
258,958

Construction


 


 


 

 
2,486

 
2,486

Land

 

 
382

 
382

 
3,684

 
4,066

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured
9

 

 

 
9

 
15,971

 
15,980

Unsecured
25

 

 

 
25

 
4,117

 
4,142

Municipal

 

 

 

 
2,849

 
2,849

Warehouse lines

 

 

 

 
1,927

 
1,927

Health care

 

 

 

 
19,381

 
19,381

Aviation

 

 

 

 
1,102

 
1,102

Other

 

 

 

 
9,006

 
9,006

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases

 

 

 

 
147,374

 
147,374

Below investment grade
8

 

 

 
8

 
14,739

 
14,747

Non-rated

 

 

 

 
23,175

 
23,175

Lease pools

 

 

 

 
3,011

 
3,011

Consumer
3

 
4

 
4

 
11

 
2,317

 
2,328

 
$
8,326

 
$
3,507

 
$
14,545

 
$
26,378

 
$
1,077,501

 
$
1,103,879

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

 
$

 
$
100

 
$
100


$

 
$
100

Nonresidential real estate

 

 
1,631

 
1,631



 
1,631

Commercial loans – secured

 

 
23

 
23



 
23

 
$

 
$

 
$
1,754

 
$
1,754

 
$

 
$
1,754


Troubled Debt Restructurings
The Company evaluates loan extensions or modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a TDR. In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where



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)

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 $3.4 million of TDRs at March 31, 2014, compared to $3.3 million at December 31, 2013, with $53,000 in specific valuation reserves allocated to those loans at March 31, 2014 and December 31, 2013. The Company had no outstanding commitments to borrowers whose loans were classified as TDRs at either date.
The following table presents loans classified as TDRs:
 
March 31, 2014
 
December 31, 2013
One-to-four family residential real estate
$
2,108

 
$
2,093

Multi-family mortgage
522

 
518

Troubled debt restructured loans – accrual loans
2,630

 
2,611

One-to-four family residential real estate
384

 
342

Multi-family mortgage
384

 
384

Troubled debt restructured loans – nonaccrual loans
768

 
726

Total troubled debt restructured loans
$
3,398

 
$
3,337

Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the A note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established. These notes will be no longer included in the above tables as a TDR in the subsequent calendar year.
During the three months ending March 31, 2014 and 2013, the terms of certain loans were modified and classified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
The following tables present TDR activity:
 
Three Months Ended March 31,
 
2014
 
2013
 
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
2

 
$
121

 
$
80

 
1

 
$
384

 
$
384

 
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 March 31, 2014
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
28

 
$
52

 
$
80




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)

 
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 March 31, 2013
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
384

 
$

 
$
384

The TDRs described above had no material impact on interest income, resulted in no change to the allowance for loan losses allocated and resulted in charge-offs of $41,000 for the three months ended March 31, 2014. The TDRs had no impact on interest income, resulted in no change to the allowance for loan losses allocated and resulted in no charge-offs for the three months ended March 31, 2013.
There were no TDRs for which there was a payment default during the three months ended March 31, 2014 and 2013 within twelve months following the modification.
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 months ending March 31, 2014 and 2013 that did not meet the definition of a TDR. These loans had a total recorded investment of $739,000 and $324,000 at March 31, 2014 and 2013, respectively. 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:
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. Loans categorized as Substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time. The risk rating guidance published by the Office of the Comptroller of the Currency clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated Substandard.
Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified Substandard/Performing with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The loans were placed on nonaccrual status.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans.



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)

As of March 31, 2014, based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard
 
Nonaccrual
 
Total
One-to-four family residential real estate
$
136,175

 
$
625

 
$
3,003

 
$
3,983

 
$
143,786

One-to-four family residential real estate - non-owner occupied
52,214

 

 
687

 
1,144

 
54,045

Multi-family mortgage
314,560

 
4,550

 
4,739

 
6,412

 
330,261

Wholesale commercial lending
84,928

 

 
1,167

 

 
86,095

Nonresidential real estate
231,279

 
4,235

 
7,454

 
8,905

 
251,873

Construction
89

 

 

 

 
89

Land
2,800

 
128

 
109

 
270

 
3,307

Commercial loans:
 
 
 
 
 
 
 
 

Secured
11,818

 

 
74

 
100

 
11,992

Unsecured
2,437

 
60

 
878

 

 
3,375

Municipal
2,515

 

 

 

 
2,515

Warehouse lines
9,021

 

 

 

 
9,021

Health care
17,425

 

 

 

 
17,425

Aviation
1,089

 

 

 

 
1,089

Other
8,244

 

 

 

 
8,244

Commercial leases:
 
 
 
 
 
 
 
 

Investment rated commercial leases
146,500

 

 

 

 
146,500

Below investment grade
13,055

 

 

 
8

 
13,063

Non-rated
23,308

 

 
184

 

 
23,492

Lease pools
2,419

 

 

 

 
2,419

Consumer
2,475

 

 
1

 

 
2,476

Total
$
1,062,351

 
$
9,598

 
$
18,296

 
$
20,822

 
$
1,111,067

 



21


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

NOTE 4 - LOANS RECEIVABLE (continued)

As of December 31, 2013, based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard
 
Nonaccrual
 
Total
One-to-four family residential real estate
$
140,716

 
$
269

 
$
1,941

 
$
3,508

 
$
146,434

One-to-four family residential real estate - non-owner occupied
53,010

 

 
693

 
1,245

 
54,948

Multi-family mortgage
300,230

 
6,471

 
3,890

 
7,031

 
317,622

Wholesale commercial lending
74,569

 
2,694

 
1,173

 

 
78,436

Nonresidential real estate
237,751

 
6,306

 
13,645

 
5,865

 
263,567

Construction
2,484

 

 

 

 
2,484

Land
2,871

 

 
832

 
383

 
4,086

Commercial loans:
 
 
 
 
 
 
 
 

Secured
15,824

 

 
78

 
100

 
16,002

Unsecured
3,173

 
67

 
899

 

 
4,139

Municipal
2,812

 

 

 

 
2,812

Warehouse lines
1,904

 

 

 

 
1,904

Health care
19,330

 

 

 

 
19,330

Aviation
1,100

 

 

 

 
1,100

Other
8,968

 

 

 

 
8,968

Commercial leases:
 
 
 
 
 
 
 
 

Investment rated commercial leases
146,471

 

 

 

 
146,471

Below investment grade
14,626

 

 

 

 
14,626

Non-rated
22,805

 

 
210

 

 
23,015

Lease pools
3,000

 

 

 

 
3,000

Consumer
2,316

 

 
1

 

 
2,317

Total
$
1,053,960

 
$
15,807

 
$
23,362

 
$
18,132

 
$
1,111,261

NOTE 5 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security (Level 1). If Level 1 measurement inputs are not available for a marketable equity security, we determine its fair value based on the quoted price of a similar security traded in an active market (Level 2). The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).



22


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

NOTE 5 - FAIR VALUE (continued)

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).
Impaired Loans: At the time a loan is considered impaired, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans carried at fair value generally require a partial charge-off and a specific valuation allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, if applicable. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. In addition, a discount is typically applied to account for sales and holding expenses. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The method utilized to estimate the fair value of loans does not necessarily represent an exit price.
Other Real Estate Owned: Assets acquired through foreclosure or transfers in lieu of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Although the fair value of the property normally will be based on an appraisal (or other evaluation), the valuation should be consistent with the price that a market participant will pay to purchase the property at the measurement date. Circumstances may exist that indicate that the appraised value is not an accurate measurement of the property's current fair value. Examples of such circumstances include changed economic conditions since the last appraisal, stale appraisals, or imprecision and subjectivity in the appraisal process (i.e., actual sales for less than the appraised amount). Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. The fair values of mortgage servicing rights are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 3).



23


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

NOTE 5 - FAIR VALUE (continued)

The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2014
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
75,621

 
$

 
$
75,621

Municipal securities

 
185

 

 
185

Equity mutual fund
500

 

 

 
500

Mortgage-backed securities – residential

 
27,181

 

 
27,181

Collateralized mortgage obligations – residential

 
12,456

 

 
12,456

SBA-guaranteed loan participation certificates

 
34

 

 
34

 
$
500

 
$
115,477

 
$

 
$
115,977

December 31, 2013
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
65,010

 
$

 
$
65,010

Municipal securities

 
187

 

 
187

Equity mutual fund
497

 

 

 
497

Mortgage-backed securities - residential

 
28,364

 

 
28,364

Collateralized mortgage obligations – residential

 
16,814

 

 
16,814

SBA-guaranteed loan participation certificates

 
35

 

 
35

 
$
497

 
$
110,410

 
$

 
$
110,907




24


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

NOTE 5 - FAIR VALUE (continued)

The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:
 
Fair Value Measurement Using
 
 
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2014
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$

 
$
295

 
$
295

Multi-family mortgage

 

 
1,898

 
1,898

Nonresidential real estate

 

 
1,495

 
1,495

Construction and land

 

 
107

 
107

 
$

 
$

 
$
3,795

 
$
3,795

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

 
$

 
$
74

 
$
74

Nonresidential real estate

 

 
172

 
172

Land

 

 
171

 
171

 
$

 
$

 
$
417

 
$
417

Mortgage servicing rights
$

 
$

 
$
187

 
$
187

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$

 
$
460

 
$
460

Multi-family mortgage

 

 
2,286

 
2,286

Nonresidential real estate

 

 
971

 
971

Construction and land

 

 
107

 
107

 
$

 
$

 
$
3,824

 
$
3,824

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

 
$

 
$
297

 
$
297

Nonresidential real estate

 

 
460

 
460

Land

 

 
1,019

 
1,019

 
$

 
$

 
$
1,776

 
$
1,776

Mortgage servicing rights
$

 
$

 
$
198

 
$
198

Impaired loans, including purchased impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans, with specific valuation allowances, had a carrying amount of $4.3 million, with a valuation allowance of $489,000 at March 31, 2014, compared to a carrying amount of $4.2 million, with a valuation allowance of $375,000 at December 31, 2013, resulting in an increase in the provision for loan losses of $114,000 for the three months ended March 31, 2014.
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 $1.3 million less a valuation allowance of $904,000, or $417,000 at March 31, 2014, compared to $2.7 million less a valuation allowance of $902,000, or $1.8 million at December 31, 2013. There were $44,000 of valuation adjustments of OREO recorded for the three months ended March 31, 2014.



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)

Mortgage servicing rights, which are carried at lower of cost or fair value, had a carrying amount of $187,000 at March 31, 2014, and $198,000 at December 31, 2013. A pre-tax provision of $4,000 on our mortgage servicing rights portfolio was included in noninterest income for the three months ended March 31, 2014, compared to a recovery of $26,000 for the same period in 2013.
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 March 31, 2014:
 
Fair Value
 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
295

 
Sales comparison
 
Discount applied to valuation
 
16.9%
(17%)
Multi-family mortgage loans
1,898

 
Sales comparison
 
Comparison between sales and income approaches
 
9.5% to 16.9%
(13%)
 
 
 
Income approach
 
Cap Rate
 
11% to 13.8%
(12%)
Nonresidential real estate loans
1,495

 
Sales comparison
 
Comparison between sales and income approaches
 
-1.4% to 34.9%
(22%)
 
 
 
Income approach
 
Cap Rate
 
10%
Construction and land loans
107

 
Sales comparison
 
Discount applied to valuation
 
21.8%
(22%)
Impaired loans
$
3,795

 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate
$
74

 
Sales comparison
 
Discount applied to valuation
 
9.6%
(10%)
Nonresidential real estate
172

 
Sales comparison
 
Comparison between sales and income approaches
 
15.6%
(16%)
Land
171

 
Sales comparison
 
Discount applied to valuation
 
8.7% to 11.2%
(11%)
Other real estate owned
$
417

 
 
 
 
 
 
Mortgage servicing rights
$
187

 
Third party
valuation
 
Present value of future servicing income based on prepayment speeds
 
11.6 % to 25.1%
(15%)
 
 
 
Third party
valuation
 
Present value of future servicing income based on default rates
 
12%



26


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

NOTE 5 - FAIR VALUE (continued)

The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013:
 
Fair Value
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans
 
 
 
 
 
 
 
One-to-four family residential real estate
$
460

 
Sales comparison
 
Discount applied to valuation
 
7.5% to 12.8%
(10%)
Multi-family mortgage
2,286

 
Sales comparison
 
Comparison between sales and income approaches
 
12.3% to 19.4%
(17%)
 
 
 
Income approach
 
Cap Rate
 
7.25% to 13.8%
(9%)
Nonresidential real estate
971

 
Sales comparison
 
Comparison between sales and income approaches
 
-3.0% to 45.1%
(11%)
 
 
 
Income approach
 
Cap Rate
 
10% to 10.7%
(10%)
Construction and land loans
107

 
Sales comparison
 
Discount applied to valuation
 
21%
 
$
3,824

 
 
 
 
 
 
Other real estate owned
 
 
 
 
 
 
 
One-to-four family residential real estate
$
297

 
Sales comparison
 
Discount applied to valuation
 
5.0% to 9.4%
(8%)
Nonresidential real estate
460

 
Sales comparison
 
Comparison between sales and income approaches
 
0% to 10.1%
(7%)
Land
1,019

 
Sales comparison
 
Discount applied to valuation
 
0% to 10.2%
(2%)
 
$
1,776

 
 
 
 
 
 
Mortgage servicing rights
$
198

 
Third party
valuation
 
Present value of future servicing income based on prepayment speeds
 
11.4 % to 23.5%
(15%)
 
 
 
Third party
valuation
 
Present value of future servicing income based on default rates
 
12%



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 carrying amount and estimated fair value of financial instruments are as follows:
 
 
 
Fair Value Measurements at
 March 31, 2014 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
151,724

 
$
13,869

 
$
137,855

 
$

 
$
151,724

Securities
115,977

 
500

 
115,477

 

 
115,977

Loans held for sale

 

 

 

 

Loans receivable, net of allowance for loan losses
1,097,888

 

 
1,038,395

 
3,795

 
1,042,190

FHLBC stock
6,068

 

 

 

 
N/A

Accrued interest receivable
3,728

 

 
3,728

 

 
3,728

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
129,732

 
$

 
$
129,732

 
$

 
$
129,732

Savings deposits
156,174

 

 
156,174

 

 
156,174

NOW and money market accounts
706,994

 

 
706,994

 

 
706,994

Certificates of deposit
259,919

 

 
260,225

 

 
260,225

Borrowings
2,668

 

 
2,666

 

 
2,666

Accrued interest payable
101

 

 
101

 

 
101

 
 
 
Fair Value Measurements at
 December 31, 2013 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
160,957

 
$
15,781

 
$
145,176

 
$

 
$
160,957

Securities
110,907

 
497

 
110,410

 

 
110,907

Loans held for sale

 

 

 

 

Loans receivable, net of allowance for loan losses
1,098,077

 

 
1,049,111

 
3,824

 
1,052,935

FHLBC stock
6,068

 

 

 

 
N/A

Accrued interest receivable
3,933

 

 
3,933

 

 
3,933

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
126,680

 
$

 
$
126,680

 
$

 
$
126,680

Savings deposits
149,602

 

 
149,602

 

 
149,602

NOW and money market accounts
700,804

 

 
700,804

 

 
700,804

Certificates of deposit
275,622

 

 
276,022

 

 
276,022

Borrowings
3,055

 

 
3,057

 

 
3,057

Accrued interest payable
113

 

 
113

 

 
113

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.



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)

Loans: The estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid. The estimated fair values of loans held for sale are based on quoted market prices.
FHLBC Stock: It is not practicable to determine the fair value of FHLBC stock due to the restrictions placed on its transferability.
Deposit Liabilities: The estimated fair value for certificates of deposit has been determined by calculating the present value of future cash flows based on estimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of noninterest-bearing demand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level that approximates the local market area. Additionally, these deposits can be withdrawn on demand.
Borrowings: The estimated fair values of advances from the FHLBC and notes payable are based on current market rates for similar financing. The estimated fair value of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.
Accrued Interest: The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of unfunded loan commitments, standby letters of credit, and unused lines of credit. The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.
While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “expect,” “estimate,” “intend,” “anticipate,” “project,” “plan,” or similar expressions. Forward looking statements speak only as of the date made. They are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.
Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) the failure of the real estate market to recover or further declines in real estate values that adversely impact the value of our loan collateral and OREO, asset dispositions and the level of borrower equity in their investments; (ii) the persistence or worsening of adverse economic conditions in general and in the Chicago metropolitan area in particular, including high or increasing unemployment levels, that could result in increased delinquencies in our loan portfolio or a decline in the value of our investment securities and the collateral for our loans; (iii) results of supervisory monitoring or examinations by regulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (iv) interest rate movements



29


Table of Contents


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 and Basel III, on our products, services, operations and operating expenses; (xi) higher federal deposit insurance premiums; (xii) higher than expected overhead, infrastructure and compliance costs; (xiii) changes in accounting principles, policies or guidelines; and (xiv) and our failure to achieve expected synergies and cost savings from acquisitions.
These risks and uncertainties, as well as the Risk Factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, 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, 2013, and all amendments thereto, as filed with the Securities and Exchange Commission.
Overview
The year 2014 started slowly but business activity accelerated during the course of the first quarter of 2014. Loan and deposit balances remained constant. Loan origination volumes decreased compared to the fourth quarter of 2013; however, loan pipelines began to expand in the latter part of the first quarter of 2014. We expect to increase loan portfolio balances during the remainder of 2014 at a rate at least equal to the percentage growth experienced in the same time period in 2013.
Core earnings per share increased due principally to ongoing improvements in core operating expenses. Core net interest income was essentially stable as increased revenues from higher loan balances in the multifamily real estate loan category were offset by loan renewals at lower rates. We believe that loan renewal volume for 2014 peaked in the first quarter of 2014 and we expect that it will progressively decline in succeeding quarters. Non-interest income was lower due to lower deposit account transaction volumes, particularly in debit card activity, in the first two months of the quarter. Non-interest expense continued to trend toward targeted levels despite higher occupancy and employee benefits costs due to seasonal factors.
Our ratio of classified assets to total capital remained stable in the first quarter of 2014 as further improvements in loan portfolio quality resulting from repayments of performing classified and non-performing loans were primarily offset by certain loans being placed on non-accrual status in preparation for restructuring transactions in the second quarter of 2014 or due to timing issues relating to an external refinance. Absent currently unforeseen events, we expect to resume our path to achieve our historical asset quality levels at or before the end of 2014.



30


Table of Contents


SELECTED FINANCIAL DATA
The following summary information is derived from the consolidated financial statements of the Company. For additional information, reference is made to the Consolidated Financial Statements of the Company and related notes included elsewhere in this Quarterly Report.
 
March 31, 2014
 
December 31, 2013
 
Change
 
(Dollars in thousands)
Selected Financial Condition Data:
 
 
 
 
 
Total assets
$
1,448,542

 
$
1,453,594

 
$
(5,052
)
Loans, net
1,097,888

 
1,098,077

 
(189
)
Securities, at fair value
115,977

 
110,907

 
5,070

Core deposit intangible
2,284

 
2,433

 
(149
)
Deposits
1,252,819

 
1,252,708

 
111

Borrowings
2,668

 
3,055

 
(387
)
Equity
176,864

 
175,627

 
1,237


 
Three Months Ended March 31,
 
 
 
 
2014
 
2013
 
Change
 
 
(Dollars in thousands)
Selected Operating Data:
 
 
 
 
 
 
Interest and dividend income
$
12,086

 
$
12,713

 
$
(627
)
 
Interest expense
812

 
994

 
(182
)
 
Net interest income
11,274

 
11,719

 
(445
)
 
Provision for loan losses
476

 
722

 
(246
)
 
Net interest income after provision for loan losses
10,798

 
10,997

 
(199
)
 
Noninterest income
1,532

 
3,029

 
(1,497
)
 
Noninterest expense
11,371

 
13,348

 
(1,977
)
 
Income before income tax expense
959

 
678

 
281

 
Income tax expense
17

 

 
17

 
Net income
$
942

 
$
678

 
$
264

 




31


Table of Contents


 
Three Months Ended March 31,
 
 
2014
 
2013
 
Selected Financial Ratios and Other Data:
 
 
 
 
Performance Ratios:
 
 
 
 
Return on assets (ratio of net income to average total assets) (1)
0.26
%
 
0.19
%
 
Return on equity (ratio of net income to average equity) (1)
2.12

 
1.55

 
Average equity to average assets
12.29

 
11.95

 
Net interest rate spread (1) (2)
3.30

 
3.39

 
Net interest margin (1) (3)
3.34

 
3.45

 
Efficiency ratio (4)
88.79

 
90.51

 
Noninterest expense to average total assets (1)
3.15

 
3.65

 
Average interest-earning assets to average interest-bearing liabilities
121.85

 
120.81

 
Dividends declared per share
$

 
$

 
Dividend payout ratio
N.M.

 
N.M.

 
 
At March 31, 2014
 
At December 31, 2013
Asset Quality Ratios:
 
 
 
Nonperforming assets to total assets (5)
2.05
%
 
1.70
%
Nonperforming loans to total loans
1.89

 
1.66

Allowance for loan losses to nonperforming loans
67.62

 
76.89

Allowance for loan losses to total loans
1.28

 
1.27

Capital Ratios:
 
 
 
Equity to total assets at end of period
12.21
%
 
12.08
%
Tier 1 leverage ratio (Bank only)
10.31

 
10.16

Other Data:
 
 
 
Number of full-service offices
19

 
20

Employees (full-time equivalents)
281

 
301

(1)
Ratios annualized.
(2)
The net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the period.
(3)
The net interest margin represents net interest income divided by average total interest-earning assets for the period.
(4)
The efficiency ratio represents noninterest expense, divided by the sum of net interest income and noninterest income.
(5)
Nonperforming assets include nonperforming loans and other real estate owned.

N.M. Not Meaningful

Comparison of Financial Condition at March 31, 2014 and December 31, 2013
Total assets decreased $5.1 million, or 0.3%, to $1.449 billion at March 31, 2014, from $1.454 billion at December 31, 2013. The decrease in total assets was primarily due to a decrease in cash and cash equivalents, partially offset by increases in securities and OREO. Securities increased $5.1 million to $116.0 million at March 31, 2014, from $110.9 million at December 31, 2013. Cash and cash equivalents decreased by $9.2 million to $151.7 million at March 31, 2014, from $161.0 million at December 31, 2013.
Total liabilities decreased by $6.3 million, or 0.5%, to $1.272 billion at March 31, 2014, from $1.278 billion at December 31, 2013. Total deposits remained constant at $1.253 billion at March 31, 2014 and December 31, 2013. Certificates of deposit decreased $15.7 million, or 5.7%, to $259.9 million at March 31, 2014, from $275.6 million at December 31, 2013. Noninterest-



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bearing demand deposits increased $3.1 million, or 2.4%, to $129.7 million at March 31, 2014, from $126.7 million at December 31, 2013. Savings accounts increased $6.6 million, or 4.4%, to $156.2 million at March 31, 2014, from $149.6 million at December 31, 2013. Money market and interest-bearing NOW accounts decreased $6.2 million, or 0.9%, to $707.0 million at March 31, 2014, from $700.8 million at December 31, 2013. Core deposits increased to 79.3% of total deposits at March 31, 2014, from 78.0% of total deposits at December 31, 2013.
Total stockholders’ equity was $176.9 million at March 31, 2014, compared to $175.6 million at December 31, 2013. The increase in total stockholders’ equity was primarily due to the $942,000 of net income that we recorded for the three months ended March 31, 2014. The unallocated shares of common stock that our ESOP owns were reflected as an $11.0 million reduction to stockholders’ equity at March 31, 2014, compared to an $11.3 million reduction at December 31, 2013.
Operating results for the three months ended March 31, 2014 and 2013
Net Income. We had net income of $942,000 for the three months ended March 31, 2014, compared to $678,000 for the three months ended March 31, 2013. Earnings per basic and fully diluted share of common stock were $0.05 for the three months ended March 31, 2014, compared to $0.03 per basic and fully diluted share of common stock for the three months ended March 31, 2013.
Net Interest Income. Net interest income was $11.3 million for the three months ended March 31, 2014, compared to $11.7 million for the same period in 2013. The decrease reflected a $627,000, or 4.9%, decrease in interest income and a $182,000, or 18.3%, decrease in interest expense.
The decrease in net interest income was primarily attributable to decreases in average interest-earning assets and the yield on interest-earning assets. Total average interest-earning assets decreased $11.9 million, or 0.9%, to $1.367 billion for the three months ended March 31, 2014, from $1.379 billion for the same period in 2013. Our net interest rate spread decreased by nine basis points to 3.30% for the three months ended March 31, 2014, from 3.39% for the same period in 2013. Our net interest margin decreased by 11 basis points to 3.34% for the three months ended March 31, 2014, from 3.45% for the same period in 2013. The decrease in the net interest rate spread and net interest margin was a result of lower yields on interest-earning assets, which was partially offset by decreases in the average balance and yields of our interest-bearing liabilities. The yield on interest-earning assets decreased 15 basis points to 3.59% for the three months ended March 31, 2014, from 3.74% for the same period in 2013, and the cost of interest-bearing liabilities decreased six basis points to 0.29% for the three months ended March 31, 2014, from 0.35% for the same period in 2013.



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Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses, discounts and premiums, purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
Three Months Ended March 31,
 
2014
 
2013
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,114,433

 
$
11,699

 
4.26
%
 
$
1,028,907

 
$
12,278

 
4.84
%
Securities
115,089

 
296

 
1.04

 
73,284

 
250

 
1.39

Stock in FHLBC
6,068

 
5

 
0.33

 
8,026

 
6

 
0.30

Other
131,635

 
86

 
0.26

 
268,939

 
179

 
0.27

Total interest-earning assets
1,367,225

 
12,086

 
3.59

 
1,379,156

 
12,713

 
3.74

Noninterest-earning assets
75,442

 
 
 
 
 
82,963

 
 
 
 
Total assets
$
1,442,667

 
 
 
 
 
$
1,462,119

 
 
 
 
Interest-bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
152,142

 
38

 
0.10

 
$
145,932

 
37

 
0.10

Money market accounts
346,893

 
277

 
0.32

 
345,483

 
313

 
0.37

NOW accounts
351,310

 
88

 
0.10

 
346,495

 
105

 
0.12

Certificates of deposit
269,100

 
407

 
0.61

 
300,528

 
531

 
0.72

Total deposits
1,119,445

 
810

 
0.29

 
1,138,438

 
986

 
0.35

Borrowings
2,582

 
2

 
0.31

 
3,187

 
8

 
1.02

Total interest-bearing liabilities
1,122,027

 
812

 
0.29

 
1,141,625

 
994

 
0.35

Noninterest-bearing deposits
125,108

 
 
 
 
 
128,365

 
 
 
 
Noninterest-bearing liabilities
18,201

 
 
 
 
 
17,363

 
 
 
 
Total liabilities
1,265,336

 
 
 
 
 
1,287,353

 
 
 
 
Equity
177,331

 
 
 
 
 
174,766

 
 
 
 
Total liabilities and equity
$
1,442,667

 
 
 
 
 
$
1,462,119

 
 
 
 
Net interest income
 
 
$
11,274

 
 
 
 
 
$
11,719

 
 
Net interest rate spread (2)
 
 
 
 
3.30
%
 
 
 
 
 
3.39
%
Net interest-earning assets (3)
$
245,198

 
 
 
 
 
$
237,531

 
 
 
 
Net interest margin (4)
 
 
 
 
3.34
%
 
 
 
 
 
3.45
%
Ratio of interest-earning assets to interest-bearing liabilities
121.85
%
 
 
 
 
 
120.81
%
 
 
 
 
(1)
Annualized
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.



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Table of Contents


Provision for Loan Losses
We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.
The provision for loan losses totaled $476,000 for the three months ended March 31, 2014, compared to $722,000 for the same period in 2013. The provision for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $87,000, or 0.63%, to $13.7 million at March 31, 2014, compared to $13.8 million at December 31, 2013. Net charge-offs were $449,000 for the three months ended March 31, 2014. The reserve established for loans individually evaluated for impairment increased $114,000 for the three months ended March 31, 2014. The allowance for loan losses as a percentage of nonperforming loans was 67.62% at March 31, 2014, compared to 76.89% at December 31, 2013.
A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the portion of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legally discharged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.
Noninterest Income
 
Three Months Ended March 31,
 
 
 
2014
 
2013
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
433

 
$
499

 
$
(66
)
Other fee income
527

 
538

 
(11
)
Insurance commissions and annuities income
87

 
109

 
(22
)
Gain on sale of loans, net
24

 
1,417

 
(1,393
)
Loss on sales of securities
(7
)
 

 
(7
)
Gain on disposition of premises and equipment
2

 

 
2

Loan servicing fees
104

 
123

 
(19
)
Amortization of servicing assets
(32
)
 
(59
)
 
27

Recovery (impairment) of servicing assets
(4
)
 
26

 
(30
)
Earnings on bank owned life insurance
64

 
70

 
(6
)
Trust income
164

 
181

 
(17
)
Other
170

 
125

 
45

Total noninterest income
$
1,532

 
$
3,029

 
$
(1,497
)
Noninterest income decreased by $1.5 million to $1.5 million for the three months ended March 31, 2014, from $3.0 million for the same period in 2013, due in substantial part to a lower gain on loan sales. Noninterest income for the three months ended March 31, 2014 included a $24,000 gain on sale of loans, compared to a $1.4 million gain on sale of loans that was recorded for the same period in 2013, which included recurring loan sale activity combined with the completion of the sale of the owner-occupied and investor-owned one-to- four family residential loans that we designated as held for sale at December 31, 2012.



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Table of Contents


Noninterest Expense
 
Three Months Ended March 31,
 
 
 
2014
 
2013
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
5,958

 
$
6,752

 
$
(794
)
Office occupancy and equipment
1,914

 
1,948

 
(34
)
Advertising and public relations
162

 
146

 
16

Information technology
639

 
758

 
(119
)
Supplies, telephone and postage
391

 
452

 
(61
)
Amortization of intangibles
149

 
156

 
(7
)
Nonperforming asset management
104

 
694

 
(590
)
Loss on sale other real estate owned
6

 
69

 
(63
)
Valuation adjustments of other real estate owned
44

 
89

 
(45
)
Operations of other real estate owned
207

 
353

 
(146
)
FDIC insurance premiums
479

 
492

 
(13
)
Other
1,318

 
1,439

 
(121
)
Total noninterest expense
$
11,371

 
$
13,348

 
$
(1,977
)
Noninterest expense decreased by $2.0 million, or 14.8%, to $11.4 million for the three months ended March 31, 2014, from $13.3 million for the same period in 2013, due in substantial part to decreases in compensation and benefits expense and nonperforming asset management and OREO expenses. Compensation and benefits expense decreased $794,000, primarily due to a reduction in full time equivalent employees to 281 at March 31, 2014 from 347 at March 31, 2013. Nonperforming asset management and OREO expenses decreased $844,000, or 70.0%, to $361,000 for the three months ended March 31, 2014 from $1.2 million for the same period in 2013. Nonperforming asset management expenses decreased $590,000, or 85.0%, to $104,000 for the three months ended March 31, 2014, from $694,000 for the same period in 2013, primarily due to a decline in nonperforming assets and expenses relating to resolutions and accelerated dispositions of nonperforming assets. OREO expenses decreased $146,000, or 41.4%, to $207,000 for the three months ended March 31, 2014, from $353,000 for the same period in 2013. The results for the three months ended March 31, 2014 included a $44,000 OREO valuation adjustment, compared to an $89,000 OREO valuation adjustment for the same period in 2013. Noninterest expense for the three months ended March 31, 2013 also included the payment of $203,000 of settlements concerning two sold mortgage loans.
Income Taxes
For the three months ended March 31, 2014, we recorded $17,000 income tax expense for state taxes. For the three months ended March 31, 2013, we recorded no income tax expense or benefit due to the full valuation allowance we have established for deferred tax assets.
Nonperforming Loans and Assets
We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At March 31, 2014, we had no loans in this category.
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



36


Table of Contents


or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.
Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.
As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as–is”, “as–stabilized” or “as–improved” basis is most likely to produce the highest net realizable value. If we determine that the “as–stabilized” or “as–improved” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of March 31, 2014, substantially all impaired real estate loan collateral and OREO were valued on an “as–is basis.”
Estimates of the net realizable value of real estate collateral also include a deduction for the expected costs to sell the collateral or such other deductions from the cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, we generally apply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs to sell the collateral. For OREO, we generally apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.



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Nonperforming Assets Summary
The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets.
 
March 31, 2014
 
December 31, 2013
 
Change
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
One-to-four family residential
$
5,008

 
$
4,641

 
$
367

Multi-family mortgage
6,617

 
7,098

 
(481
)
Nonresidential real estate
8,715

 
4,214

 
4,501

Construction and land
269

 
382

 
(113
)
Commercial
77

 
89

 
(12
)
Commercial leases
8

 

 
8

 
20,694

 
16,424

 
4,270

Loans Past Due Over 90 Days, still accruing

 
228

 
(228
)
Other real estate owned:
 
 
 
 
 
One-to-four family residential
1,098

 
901

 
197

Multi-family mortgage
3,220

 
1,921

 
1,299

Nonresidential real estate
2,086

 
1,181

 
905

Land
258

 
275

 
(17
)
 
6,662

 
4,278

 
2,384

Nonperforming assets (excluding purchased impaired loans and purchased other real estate owned)
27,356

 
20,930

 
6,426

Purchased impaired loans:
 
 
 
 
 
One-to-four family residential
101

 
100

 
1

Nonresidential real estate
153

 
1,633

 
(1,480
)
Commercial
23

 
23

 

 
277

 
1,756

 
(1,479
)
Purchased other real estate owned:
 
 
 
 
 
One-to-four family residential
156

 
176

 
(20
)
Land
1,852

 
1,852

 

 
2,008

 
2,028

 
(20
)
Purchased impaired loans and other real estate owned
2,285

 
3,784

 
(1,499
)
Total nonperforming assets
$
29,641

 
$
24,714

 
$
4,927

Ratios:
 
 
 
 
 
Nonperforming loans to total loans
1.89
%
 
1.66
%
 
 
Nonperforming loans to total loans (1)
1.86

 
1.50

 
 
Nonperforming assets to total assets
2.05

 
1.70

 
 
Nonperforming assets to total assets(1)
1.89

 
1.44

 
 
(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


Nonperforming Assets
Nonperforming assets totaled $29.6 million at March 31, 2014 and $24.7 million at December 31, 2013, a $4.9 million increase. The increase was primarily attributable to lending relationships with three borrowers, one of which was resolved shortly after the close of the first quarter of 2014, and a $2.4 million increase in OREO. Based on current information and pending agreements to sell OREO, we expect that there will be continued improvements in asset quality in the second quarter of 2014 and the remainder of the year.
One of the three lending relationships contributing to the increase was a $2.2 million matured commercial real estate loan that we placed on non-accrual status because a planned external refinancing was not completed by March 31, 2014. The external refinancing was completed early in the second quarter of 2014 and the proceeds were sufficient to repay all amounts due under the loan other than $38,000 of interest. The unpaid interest was refinanced with a new amortizing secured note.
The other two lending relationships contributing to the increase involved $2.6 million of commercial real estate loans to two borrowers. The loans had previously been classified as Substandard/Performing loans. We placed the loans on nonaccrual status in the first quarter of 2014 based on the receipt of updated financial information that indicated that the borrowers’ debt service capacities no longer supported accrual status. In addition, we recorded impairment charges of $741,000 with respect to these loans to facilitate possible split-note restructuring transactions. Both borrowers have continued to remit their loan payments. We will conduct further evaluations of the borrowers’ debt service capacities, collateral positions and business prospects in the second quarter of 2014 to determine the loan structure that will be necessary to return the loans to accrual status after a period of sustained performance.
We continue to experience modest quantities of defaults on residential loans principally due either to the borrower’s personal financial condition or deteriorated collateral value. In the first quarter of 2014, seven residential loans with total balances of $976,000 were placed on non-accrual status. The remaining loans that were placed on non-accrual status in the first quarter of 2014 were small multifamily or commercial real estate loans for which we believed that non-renewal at maturity or formal collection action was the most effective method to achieve repayment in the shortest amount of time.
Other Real Estate Owned
Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.
The following tables represent the rollfoward of OREO and the composition of OREO properties:
 
Three Months Ended March 31,
 
2014
 
2013
 
(Dollars in thousands)
Beginning balance
$
6,306

 
$
10,358

New foreclosed properties
2,568

 
555

Valuation adjustments
(44
)
 
(89
)
Loss on sale of other real estate owned
(6
)
 
(69
)
Proceeds from sales of other real estate owned
(154
)
 
(2,667
)
Ending balance
$
8,670

 
$
8,088




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Table of Contents


 
March 31, 2014
 
December 31, 2013
 
(Dollars in thousands)
One-to-four family residential
$
1,098

 
$
901

Multi-family mortgage
3,220

 
1,921

Nonresidential real estate
2,086

 
1,181

Land
258

 
275

 
6,662

 
4,278

Acquired other real estate owned:
 
 
 
One-to-four family residential
156

 
176

Land
1,852

 
1,852

 
2,008

 
2,028

Total other real estate owned
$
8,670

 
$
6,306

Liquidity and Capital Resources
Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize additional sources of funds through FHLBC advances. We had no outstanding advances at March 31, 2014.
As of March 31, 2014, we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on our liquidity. As of March 31, 2014, we had no other material commitments for capital expenditures.
Capital Management
Capital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the Office of the Comptroller of the Currency that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Adequately capitalized institutions require regulatory approval to accept brokered deposits. If undercapitalized, a financial institution’s capital distributions, asset growth and expansion are limited, and for the submission of a capital restoration is required.
The Company and the Bank have adopted Capital Plans that 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



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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.
Actual capital ratios and minimum required ratios for the Bank were:
 
Actual Ratio
 
Minimum required to be Well Capitalized Under Prompt Corrective Action Provisions
 
Minimum Capital Ratios Established under Capital Plans
March 31, 2014
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
Consolidated
17.52
%
 
8.00
%
 
N/A

BankFinancial, F.S.B.
15.17

 
8.00

 
12.00
%
Tier 1 (core) capital (to risk-weighted assets)
 
 
 
 
 
Consolidated
16.27

 
4.00

 
N/A

BankFinancial, F.S.B.
13.92

 
4.00

 
8.00

Tier 1 (core) capital (to adjusted total assets)
 
 
 
 
 
Consolidated
12.05

 
4.00

 
N/A

BankFinancial, F.S.B.
10.31

 
4.00

 
8.00

December 31, 2013
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
Consolidated
17.28

 
8.00

 
N/A

BankFinancial, F.S.B.
14.93

 
8.00

 
12.00

Tier 1 (core) capital (to risk-weighted assets)
 
 
 
 
 
Consolidated
16.03

 
4.00

 
N/A

BankFinancial, F.S.B.
13.68

 
4.00

 
8.00

Tier 1 (core) capital (to adjusted total assets)
 
 
 
 
 
Consolidated
11.92

 
4.00

 
N/A

BankFinancial, F.S.B.
10.16

 
4.00

 
8.00

The Bank was notified that, as of March 31, 2014 and December 31, 2013, it was considered well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since those notifications that management believes have changed the Bank’s prompt corrective action capitalization category.
In July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised.  The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a



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"capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule becomes effective for the Bank on January 1, 2015.  The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015.  Management is in the process of evaluating the expected impact of these new capital requirements on the Company's and the Bank's regulatory capital position.
Capital Management - Company Total stockholders’ equity was $176.9 million at March 31, 2014, compared to $175.6 million at December 31, 2013. The increase in total stockholders’ equity was primarily due to the $942,000 net income that we recorded for the three months ended March 31, 2014. The unallocated shares of common stock that our ESOP owns were reflected as a $11.0 million reduction to stockholders’ equity at March 31, 2014, compared to a $11.3 million reduction at December 31, 2013.
Quarterly Cash Dividends. As a result of the regulatory restructuring occasioned by the Dodd-Frank Act, the Company is subject to Federal Reserve Board Supervisory Letter SR 09-4, which provides that a holding company should, among other things, notify and make a submission to the Federal Reserve Bank prior to declaring a dividend if its net income for the current quarter is not sufficient to fully fund the dividend, and consider eliminating, deferring or significantly reducing its dividends if its net income for the current quarter is not sufficient to fully fund the dividends, or if its net income for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends. The Company will continue to consult with, and seek the prior approval of, the Federal Reserve Bank prior to declaring any dividends.
Stock Repurchase Program. Our Board of Directors had authorized the repurchase of up to 5,047,423 shares of our common stock. The repurchase authorization expired on November 15, 2012. The authorization permitted shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization was utilized at management's discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of Directors. As of March 31, 2014, the Company had repurchased 4,239,134 shares of its common stock out of the 5,047,423 shares that had been authorized for repurchase. Federal Reserve Board Supervisory Letter SR 09-4 provides that holding companies experiencing financial weaknesses such as operating losses should notify and make a submission to the Federal Reserve Bank before redeeming or repurchasing common stock. The Company has no plans to conduct such discussions with the Federal Reserve supervisory staff or engage in stock repurchases at this time.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. A significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.
The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors’ Asset/Liability Management Committee then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets



42


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by increasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investment portfolio as available-for-sale so as to provide flexibility in liquidity management.
We utilize a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes.
Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the U.S. Treasury yield curve as of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.
Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.
Quantitative Analysis. The following table sets forth, as of March 31, 2014, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
 
Estimated Decrease in NPV
 
Decrease in Estimated
Net Interest Income
Change in Interest Rates (basis points)
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
+400
$
(20,033
)
 
(13.57
)%
 
$
(7,296
)
 
(16.60
)%
+300
(7,857
)
 
(5.32
)
 
(5,439
)
 
(12.37
)
+200
(7,169
)
 
(4.86
)
 
(3,679
)
 
(8.37
)
+100
(3,802
)
 
(2.58
)
 
(1,969
)
 
(4.48
)
0

 

 

 

The Company has opted not to include an estimate for a decrease in rates at March 31, 2014 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 March 31, 2014, in the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 4.86% decrease in NPV and a $3.7 million decrease in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Because of the shortcomings mentioned above, management considers many additional factors such as projected changes in loan and deposit balances and various projected forward interest rate scenarios when evaluating strategies for managing interest rate risk. Accordingly, although the NPV and net interest income table provides



43


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an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
ITEM 4.
 CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2014. 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 March 31, 2014, 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.



44



PART II
ITEM 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.
ITEM 1A.
RISK FACTORS
Not applicable.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Unregistered Sale of Equity Securities. Not applicable.
(b)
Use of Proceeds. Not applicable
(c)
Repurchases of Equity Securities.
The Company’s Board of Directors had authorized the repurchase of up to 5,047,423 shares of our common stock. The repurchase authorization expired on November 15, 2012. In accordance with this authorization, the Company had repurchased 4,239,134 shares of its common stock as of March 31, 2014. The Company has no plans to engage in stock repurchases at this time.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
None
ITEM 6.
EXHIBITS
Exhibit Number
 
Description
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101
 
The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statement of conditions, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows and (iv) the notes to consolidated financial statements.

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



45



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BANKFINANCIAL CORPORATION
 
 
 
 
 
 
 
Dated:
April 30, 2014
 
By:
/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




46

BFIN-2014.03.31-10Q-EX31.1


Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, F. Morgan Gasior, certify that:
1)
I have reviewed this quarterly 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 the 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 subsidiaries, 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.

Dated:
April 30, 2014
 
By:
/s/ F. Morgan Gasior
 
 
 
 
 
F. Morgan Gasior
 
 
 
 
 
Chairman of the Board, Chief Executive Officer and President




BFIN-2014.03.31-10Q-EX31.2


Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul A. Cloutier, certify that:
1)
I have reviewed this quarterly 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 the 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 subsidiaries, 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.
Dated:
April 30, 2014
 
By:
/s/ Paul A. Cloutier
 
 
 
 
 
Paul A. Cloutier
 
 
 
 
 
Executive Vice President and Chief Financial Officer



BFIN-2014.03.31 10Q-EX32


Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President of BankFinancial Corporation, a Maryland corporation (the “Company”) and Paul A. Cloutier, Executive Vice President and Chief Financial Officer of the Company, each certify in his capacity as an officer of the Company that he has reviewed the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “Report”) and that to the best of his knowledge:
1.
the Report fully complies with the requirements of Sections 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.
 
 
 
BANKFINANCIAL CORPORATION
 
 
 
 
 
 
 
Dated:
April 30, 2014
 
By:
/s/ F. Morgan Gasior
 
 
 
 
 
F. Morgan Gasior
 
 
 
 
 
Chairman of the Board and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
/s/ Paul A. Cloutier
 
 
 
 
 
Paul A. Cloutier
 
 
 
 
 
Chief Financial Officer
 

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