10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2015
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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date. At October 26, 2015, there were 20,501,966 shares of Common Stock, $0.01 par value, outstanding.





BANKFINANCIAL CORPORATION
Form 10-Q
September 30, 2015
Table of Contents
 
 
Page
Number
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 


Table of Contents

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


 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Cash and due from other financial institutions
$
8,809

 
$
9,693

Interest-bearing deposits in other financial institutions
52,661

 
49,888

Cash and cash equivalents
61,470

 
59,581

Securities, at fair value
104,242

 
121,174

Loans receivable, net of allowance for loan losses:
September 30, 2015, $10,081 and December 31, 2014, $11,990
1,162,298

 
1,172,356

Other real estate owned, net
4,809

 
6,358

Stock in Federal Home Loan Bank, at cost
6,257

 
6,257

Premises and equipment, net
33,063

 
34,286

Accrued interest receivable
4,000

 
3,926

Core deposit intangible
1,441

 
1,855

Bank owned life insurance
22,335

 
22,193

Deferred taxes
27,733

 
31,643

Other assets
3,775

 
5,781

Total assets
$
1,431,423

 
$
1,465,410

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
233,192

 
$
134,129

Interest-bearing
948,342

 
1,077,584

Total deposits
1,181,534

 
1,211,713

Borrowings
18,048

 
12,921

Advance payments by borrowers for taxes and insurance
7,755

 
11,489

Accrued interest payable and other liabilities
11,012

 
13,166

Total liabilities
1,218,349

 
1,249,289

 


 


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; 20,501,966 shares issued at September 30, 2015 and 21,101,966 shares issued at December 31, 2014
205

 
211

Additional paid-in capital
186,992

 
193,845

Retained earnings
34,815

 
31,584

Unearned Employee Stock Ownership Plan shares
(9,544
)
 
(10,276
)
Accumulated other comprehensive income
606

 
757

Total stockholders’ equity
213,074

 
216,121

Total liabilities and stockholders’ equity
$
1,431,423

 
$
1,465,410


See accompanying notes to the consolidated financial statements.

1

Table of Contents

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
11,792

 
$
11,983

 
$
35,451

 
$
35,767

Securities
267

 
283

 
851

 
866

Other
88

 
102

 
249

 
303

Total interest income
12,147

 
12,368

 
36,551

 
36,936

Interest expense
 
 
 
 
 
 
 
Deposits
695

 
744

 
2,068

 
2,327

Borrowings
4

 
2

 
8

 
5

Total interest expense
699

 
746

 
2,076

 
2,332

Net interest income
11,448

 
11,622

 
34,475

 
34,604

Provision for (recovery of) loan losses
(956
)
 
(1,413
)
 
(2,168
)
 
20

Net interest income after provision for (recovery of) loan losses
12,404

 
13,035

 
36,643

 
34,584

Noninterest income
 
 
 
 
 
 
 
Deposit service charges and fees
562

 
527

 
1,493

 
1,438

Other fee income
502

 
563

 
1,638

 
1,677

Insurance commissions and annuities income
68

 
106

 
217

 
279

Gain on sale of loans, net
37

 
39

 
92

 
107

Loss on sale of securities (includes $7 accumulated other comprehensive income reclassifications for unrealized net losses on available for sale securities for the nine months ended September 30, 2014)

 

 

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

 

 
(1
)
 
5

Loan servicing fees
85

 
102

 
271

 
310

Amortization and impairment of servicing assets
(50
)
 
(32
)
 
(107
)
 
(112
)
Earnings on bank owned life insurance
48

 
57

 
142

 
182

Trust
172

 
171

 
529

 
505

Other
285

 
215

 
660

 
556

 
1,709

 
1,748

 
4,934

 
4,940

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
5,329

 
5,492

 
16,188

 
17,046

Office occupancy and equipment
1,537

 
1,687

 
4,902

 
5,227

Advertising and public relations
212

 
272

 
783

 
741

Information technology
686

 
674

 
1,982

 
2,004

Supplies, telephone, and postage
393

 
394

 
1,189

 
1,169

Amortization of intangibles
136

 
143

 
414

 
435

Nonperforming asset management
244

 
418

 
442

 
619

Operations of other real estate owned
334

 
494

 
780

 
1,160

FDIC insurance premiums
202

 
208

 
699

 
1,157

Other
1,159

 
1,375

 
3,397

 
3,952

 
10,232

 
11,157

 
30,776

 
33,510

Income before income taxes
3,881

 
3,626

 
10,801

 
6,014

Income tax expense
1,532

 
36

 
4,242

 
78

Net income
$
2,349

 
$
3,590

 
$
6,559

 
$
5,936

Basic earnings per common share
$
0.12

 
$
0.17

 
$
0.33

 
$
0.29

Diluted earnings per common share
$
0.12

 
$
0.17

 
$
0.33

 
$
0.29

Weighted average common shares outstanding
19,725,707

 
20,218,951

 
19,999,089

 
20,154,912

Diluted weighted average common shares outstanding
19,731,302

 
20,235,407

 
20,004,694

 
20,170,964


See accompanying notes to the consolidated financial statements.

2

Table of Contents

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
2,349

 
$
3,590

 
$
6,559

 
$
5,936

Unrealized holding loss arising during the period
(34
)
 
(26
)
 
(244
)
 
(52
)
Tax effect
13

 

 
93

 

Unrealized holding loss arising during the period, net of tax
(21
)
 
(26
)
 
(151
)
 
(52
)
Reclassification adjustment for losses included in net income

 

 

 
7

Other comprehensive loss
(21
)
 
(26
)
 
(151
)
 
(45
)
Comprehensive income
$
2,328

 
$
3,564

 
$
6,408

 
$
5,891



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 (Loss)
 
Total
Balance at January 1, 2014
$
211

 
$
193,594

 
$
(7,342
)
 
$
(11,255
)
 
$
419

 
$
175,627

Net income

 

 
5,936

 

 

 
5,936

Other comprehensive loss, net of tax

 

 

 

 
(45
)
 
(45
)
Nonvested stock awards-stock-based compensation expense

 
52

 

 

 

 
52

Cash dividends declared on common stock ($0.05 per share)

 

 
(1,055
)
 

 

 
(1,055
)
ESOP shares earned

 
28

 

 
733

 

 
761

Balance at September 30, 2014
$
211

 
$
193,674

 
$
(2,461
)
 
$
(10,522
)
 
$
374

 
$
181,276

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
211

 
$
193,845

 
$
31,584

 
$
(10,276
)
 
$
757

 
$
216,121

Net income

 

 
6,559

 

 

 
6,559

Other comprehensive loss, net of tax

 

 

 

 
(151
)
 
(151
)
Repurchase and retirement of common stock (600,000 shares)
(6
)
 
(7,382
)
 

 

 

 
(7,388
)
Nonvested stock awards-stock-based compensation expense, net of tax

 
351

 

 

 

 
351

Cash dividends declared on common stock ($0.16 per share)

 

 
(3,328
)
 

 

 
(3,328
)
ESOP shares earned

 
178

 

 
732

 

 
910

Balance at September 30, 2015
$
205

 
$
186,992

 
$
34,815

 
$
(9,544
)
 
$
606

 
$
213,074


See accompanying notes to the consolidated financial statements.

4

Table of Contents

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

 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
6,559

 
$
5,936

Adjustments to reconcile to net income to net cash from operating activities
 
 
 
Provision for (recovery of) loan losses
(2,168
)
 
20

ESOP shares earned
910

 
761

Stock–based compensation expense
351

 
52

Depreciation and amortization
2,754

 
2,864

Amortization of premiums and discounts on securities and loans
(214
)
 
(325
)
Amortization of core deposit intangible
414

 
435

Amortization and impairment of servicing assets
107

 
112

Net change in net deferred loan origination costs
(384
)
 
(99
)
Net gain on sale of other real estate owned
(91
)
 
(40
)
Net gain on sale of loans
(92
)
 
(107
)
Net loss on sale of securities

 
7

Net loss (gain) on disposition of premises and equipment
1

 
(5
)
Loans originated for sale
(3,593
)
 
(3,492
)
Proceeds from sale of loans
3,685

 
3,599

Other real estate owned valuation adjustments
467

 
392

Net change in:
 
 
 
Accrued interest receivable
(74
)
 
343

Earnings on bank owned life insurance
(142
)
 
(182
)
Other assets
5,906

 
3,638

Accrued interest payable and other liabilities
(2,154
)
 
(13
)
Net cash from operating activities
12,242

 
13,896

Cash flows from investing activities
 
 
 
Securities
 
 
 
Proceeds from maturities
53,410

 
43,924

Proceeds from principal repayments
5,888

 
5,259

Proceeds from sales of securities

 
3,663

Purchases of securities
(42,643
)
 
(57,023
)
Loans receivable
 
 
 
Loan participations sold
3,350

 

Principal payments on loans receivable
333,644

 
322,271

Originated for investment
(326,624
)
 
(363,909
)
Purchase of Federal Home Loan Bank of Chicago stock

 
(189
)
Proceeds from sale of other real estate owned
2,487

 
3,790

Purchase of premises and equipment, net
(363
)
 
(362
)
Net cash from (used in) investing activities
29,149

 
(42,576
)

Continued

5

Table of Contents

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

 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Net change in deposits
$
(30,179
)
 
$
(34,406
)
Net change in borrowings
5,127

 
(221
)
Net change in advance payments by borrowers for taxes and insurance
(3,734
)
 
(3,670
)
Stock repurchased
(7,388
)
 

Cash dividends paid on common stock
(3,328
)
 
(1,055
)
Net cash used in financing activities
(39,502
)
 
(39,352
)
Net change in cash and cash equivalents
1,889

 
(68,032
)
Beginning cash and cash equivalents
59,581

 
160,957

Ending cash and cash equivalents
$
61,470

 
$
92,925

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
2,113

 
$
2,344

Income taxes paid
262

 
114

Loans transferred to other real estate owned
1,314

 
3,836




See accompanying notes to the consolidated financial statements.

6

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois, is the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”).
Principles of Consolidation: The interim unaudited consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BF Asset Recovery Corporation (collectively, “the Company”), and reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three- and nine-month periods ended September 30, 2015 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2015.
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.
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, 2014, as filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
In January 2014, the FASB amended existing guidance to clarify when a creditor should derecognize a loan receivable and recognize a collateral asset. An in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This amendment is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this standard did not have a material impact on the Company’s results of operation or financial position.
In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update will become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
In June 2014, the FASB amended existing guidance related to repurchase-to-maturity transactions, repurchase financings, and disclosures (ASU 2014-11, Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures). These amendments align the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be



7


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 (continued)


accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. These amendments require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. These amendments also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. These amendments are effective for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition, but an additional disclosure has been added to the financial statements.
NOTE 2 - EARNINGS PER SHARE
Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income available to common stockholders
$
2,349

 
$
3,590

 
$
6,559

 
$
5,936

Average common shares outstanding
20,501,966

 
21,101,966

 
20,803,065

 
21,101,966

Less:
 
 
 
 
 
 
 
Unearned ESOP shares
(768,327
)
 
(866,193
)
 
(792,551
)
 
(926,705
)
Unvested restricted stock shares
(7,932
)
 
(16,822
)
 
(11,425
)
 
(20,349
)
Weighted average common shares outstanding
19,725,707

 
20,218,951

 
19,999,089

 
20,154,912

Add - Net effect of dilutive stock options and unvested restricted stock
5,595

 
16,456

 
5,605

 
16,052

Diluted weighted average common shares outstanding
19,731,302

 
20,235,407

 
20,004,694

 
20,170,964

Basic earnings per common share
$
0.12

 
$
0.17

 
$
0.33

 
$
0.29

Diluted earnings per common share
$
0.12

 
$
0.17

 
$
0.33

 
$
0.29

 
Stock options for 1,215,697 shares of common stock were not considered in computing diluted earnings per share for the period ended September 30, 2015 because they were antidilutive.



8


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

NOTE 3 - SECURITIES

The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income are shown below:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
September 30, 2015
 
 
 
 
 
 
 
Certificates of deposit
$
76,194

 
$

 
$

 
$
76,194

Equity mutual fund
500

 
12

 

 
512

Mortgage-backed securities - residential
18,944

 
957

 
(25
)
 
19,876

Collateralized mortgage obligations - residential
7,596

 
49

 
(10
)
 
7,635

SBA-guaranteed loan participation certificates
25

 

 

 
25

 
$
103,259

 
$
1,018

 
$
(35
)
 
$
104,242

December 31, 2014
 
 
 
 
 
 
 
Certificates of deposit
$
86,049

 
$

 
$

 
$
86,049

Equity mutual fund
500

 
9

 

 
509

Mortgage-backed securities - residential
23,433

 
1,218

 
(40
)
 
24,611

Collateralized mortgage obligations - residential
9,936

 
53

 
(13
)
 
9,976

SBA-guaranteed loan participation certificates
29

 

 

 
29

 
$
119,947

 
$
1,280

 
$
(53
)
 
$
121,174

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 U.S. government has affirmed its commitment to support. All securities reflected in the preceding table were classified as available-for-sale at September 30, 2015 and December 31, 2014.
The amortized cost and fair values of securities by contractual maturity are shown below. Securities not due at a single maturity date, if any, are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
September 30, 2015
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
76,194

 
$
76,194

Equity mutual fund
500

 
512

Mortgage-backed securities - residential
18,944

 
19,876

Collateralized mortgage obligations - residential
7,596

 
7,635

SBA-guaranteed loan participation certificates
25

 
25

 
$
103,259

 
$
104,242




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:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - residential
$

 
$

 
$
1,743

 
$
(25
)
 
$
1,743

 
$
(25
)
Collateralized mortgage obligations - residential

 

 
1,405

 
(10
)
 
1,405

 
(10
)
 
$

 
$

 
$
3,148

 
$
(35
)
 
$
3,148

 
$
(35
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - residential
$

 
$

 
$
2,126

 
$
(40
)
 
$
2,126

 
$
(40
)
Collateralized mortgage obligations - residential

 

 
1,847

 
(13
)
 
1,847

 
(13
)
 
$

 
$

 
$
3,973

 
$
(53
)
 
$
3,973

 
$
(53
)
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 certain collateralized mortgage obligations that the Company holds in its investment portfolio were in an unrealized loss position at September 30, 2015, 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:
 
September 30, 2015
 
December 31, 2014
One-to-four family residential real estate
$
164,124

 
$
180,337

Multi-family mortgage
478,057

 
480,349

Nonresidential real estate
223,528

 
234,500

Construction and land
1,322

 
1,885

Commercial loans
80,216

 
66,882

Commercial leases
221,622

 
217,143

Consumer
1,927

 
2,051

 
1,170,796

 
1,183,147

Net deferred loan origination costs
1,583

 
1,199

Allowance for loan losses
(10,081
)
 
(11,990
)
Loans, net
$
1,162,298

 
$
1,172,356

The following tables present the balance in the allowance for loan losses and loans receivable by portfolio segment and based on impairment method:
 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
1,601

 
$
1,601

 
$
3,353

 
$
160,771

 
$
164,124

Multi-family mortgage
3

 
3,885

 
3,888

 
3,487

 
474,570

 
478,057

Nonresidential real estate
66

 
2,629

 
2,695

 
4,097

 
219,431

 
223,528

Construction and land

 
74

 
74

 

 
1,322

 
1,322

Commercial loans
17

 
772

 
789

 
75

 
80,141

 
80,216

Commercial leases

 
1,006

 
1,006

 

 
221,622

 
221,622

Consumer

 
28

 
28

 

 
1,927

 
1,927

 
$
86

 
$
9,995

 
$
10,081

 
$
11,012

 
$
1,159,784

 
1,170,796

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
1,583

Allowance for loan losses
 
 
 
 
 
 
 
 
 
(10,081
)
Loans, net
 
 
 
 
 
 
 
 
 
 
$
1,162,298




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
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
8

 
$
2,140

 
$
2,148

 
$
4,174

 
$
176,163

 
$
180,337

Multi-family mortgage
226

 
4,979

 
5,205

 
5,282

 
475,067

 
480,349

Nonresidential real estate
236

 
2,704

 
2,940

 
4,690

 
229,810

 
234,500

Construction and land

 
80

 
80

 

 
1,885

 
1,885

Commercial loans

 
554

 
554

 
76

 
66,806

 
66,882

Commercial leases

 
1,009

 
1,009

 

 
217,143

 
217,143

Consumer

 
54

 
54

 

 
2,051

 
2,051

 
$
470

 
$
11,520

 
$
11,990

 
$
14,222

 
$
1,168,925

 
1,183,147

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
1,199

Allowance for loan losses
 
 
 
 
 
 
 
 
 
(11,990
)
Loans, net
 
 
 
 
 
 
 
 
 
 
$
1,172,356




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)


Activity in the allowance for loan losses is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
10,810

 
$
14,452

 
$
11,990

 
$
14,154

Loans charged off:
 
 
 
 
 
 
 
One-to-four family residential real estate
(125
)
 
(298
)
 
(327
)
 
(644
)
Multi-family mortgage
(9
)
 
(97
)
 
(189
)
 
(781
)
Nonresidential real estate
(26
)
 
(695
)
 
(289
)
 
(1,461
)
Construction and land

 

 

 
(1
)
Commercial loans

 
(78
)
 
(98
)
 
(100
)
Commercial leases

 
(8
)
 

 
(8
)
Consumer
(3
)
 

 
(11
)
 
(10
)
 
(163
)
 
(1,176
)
 
(914
)
 
(3,005
)
Recoveries:
 
 
 
 
 
 
 
One-to-four family residential real estate
16

 
26

 
295

 
134

Multi-family mortgage
169

 
11

 
177

 
31

Nonresidential real estate
24

 
116

 
49

 
400

Construction and land
38

 
29

 
44

 
287

Commercial loans
143

 
1,005

 
606

 
1,027

Commercial leases

 

 
1

 

Consumer

 
1

 
1

 
3

 
390

 
1,188

 
1,173

 
1,882

Net recoveries (charge-offs)
227

 
12

 
259

 
(1,123
)
Provision for (recovery of) loan losses
(956
)
 
(1,413
)
 
(2,168
)
 
20

Ending balance
$
10,081

 
$
13,051

 
$
10,081

 
$
13,051

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 Company held one purchased impaired loan at September 30, 2015 and December 31, 2014, with a recorded investment value of $52,000.



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)


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:
 
 
 
 
 
 
 
 
 
Three months ended
September 30, 2015
 
Nine months ended
September 30, 2015
 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
3,543

 
$
2,830

 
$
785

 
$

 
$
2,742

 
$
6

 
$
2,674

 
$
19

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

 
520

 
57

 

 
704

 
6

 
1,126

 
31

Multi-family mortgage
2,763

 
2,739

 

 

 
1,970

 
19

 
1,856

 
69

Wholesale commercial lending
513

 
508

 

 

 
510

 
9

 
515

 
26

Nonresidential real estate
2,907

 
2,682

 
212

 

 
2,741

 
24

 
2,999

 
97

 
10,293

 
9,279

 
1,054

 

 
8,667

 
64

 
9,170

 
242

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family mortgage
238

 
233

 

 
3

 
587

 

 
1,483

 

Nonresidential real estate
1,481

 
1,389

 
67

 
66

 
1,106

 

 
2,114

 
14

Commercial loans - secured
76

 
75

 

 
17

 
19

 

 
8

 

 
1,795

 
1,697

 
67

 
86

 
1,712

 

 
3,605

 
14

Total
$
12,088

 
$
10,976

 
$
1,121

 
$
86

 
$
10,379

 
$
64

 
$
12,775

 
$
256




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)


 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
3,246

 
$
2,656

 
$
649

 
$

 
$
2,777

 
$
44

One-to-four family residential real estate - non-owner occupied
1,481

 
1,425

 
57

 

 
745

 
76

Multi-family mortgage
3,174

 
2,593

 
481

 

 
3,419

 
120

Wholesale commercial lending
519

 
513

 

 

 
401

 

Nonresidential real estate
2,118

 
2,068

 
6

 

 
4,175

 
72

Commercial loans - secured
76

 
76

 

 

 
93

 
3

 
10,614

 
9,331

 
1,193

 

 
11,610

 
315

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate - non-owner occupied
115

 
78

 
37

 
8

 
202

 

Multi-family mortgage
2,713

 
2,131

 
624

 
226

 
2,343

 
48

Nonresidential real estate
2,950

 
2,605

 
326

 
236

 
1,718

 
67

 
5,778

 
4,814

 
987

 
470

 
4,263

 
115

Total
$
16,392

 
$
14,145

 
$
2,180

 
$
470

 
$
15,873

 
$
430




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:
 
Loan Balance
 
Recorded
Investment
 
Loans Past
Due Over 90
Days, Still
Accruing
September 30, 2015
 
 
 
 
 
One-to-four family residential real estate
$
3,139

 
$
2,539

 
$

One-to-four family residential real estate – non owner occupied
359

 
413

 

Multi-family mortgage
1,482

 
1,399

 

Nonresidential real estate
2,575

 
2,263

 

Commercial loans – secured
76

 
75

 

 
$
7,631

 
$
6,689

 
$

December 31, 2014
 
 
 
 
 
One-to-four family residential real estate
$
4,793

 
$
4,210

 
$

One-to-four family residential real estate – non owner occupied
291

 
198

 

Multi-family mortgage
5,638

 
4,481

 

Nonresidential real estate
4,023

 
3,245

 

Commercial loans – secured
76

 
76

 

Consumer
3

 
3

 

 
$
14,824

 
$
12,213

 
$

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 $275,000 and $464,000 at September 30, 2015 and December 31, 2014, respectively. When a loan is on non-accrual status and the ultimate collectability of the total principal of the loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.



16


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
NOTE 4 - LOANS RECEIVABLE (continued)


Past Due Loans
The following tables present the aging of the recorded investment of loans at September 30, 2015 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
$
61

 
$
376

 
$
2,272

 
$
2,709

 
$
117,063

 
$
119,772

One-to-four family residential real estate - non-owner occupied
3

 

 
413

 
416

 
43,895

 
44,311

Multi-family mortgage
517

 
178

 
882

 
1,577

 
317,154

 
318,731

Wholesale commercial lending

 
399

 

 
399

 
156,295

 
156,694

Nonresidential real estate

 

 
2,262

 
2,262

 
219,879

 
222,141

Construction

 

 

 

 
31

 
31

Land

 

 

 

 
1,289

 
1,289

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured

 

 
75

 
75

 
22,731

 
22,806

Unsecured

 

 

 

 
3,217

 
3,217

Municipal

 

 

 

 
1,610

 
1,610

Warehouse lines

 

 

 

 
15,406

 
15,406

Health care

 

 

 

 
20,030

 
20,030

Aviation

 

 

 

 
1,023

 
1,023

Other

 

 

 

 
16,425

 
16,425

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases

 
20

 

 
20

 
159,008

 
159,028

Below investment grade

 

 

 

 
7,377

 
7,377

Non-rated

 
86

 

 
86

 
46,341

 
46,427

Lease pools

 

 

 

 
10,257

 
10,257

Consumer

 

 

 

 
1,935

 
1,935

 
$
581

 
$
1,059

 
$
5,904

 
$
7,544

 
$
1,160,966

 
$
1,168,510

 



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, 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
$
1,415

 
$
276

 
$
3,844

 
$
5,535

 
$
126,054

 
$
131,589

One-to-four family residential real estate - non-owner occupied
320

 
165

 
198

 
683

 
47,350

 
48,033

Multi-family mortgage
2,314

 
1,187

 
3,363

 
6,864

 
334,173

 
341,037

Wholesale commercial lending

 

 

 

 
135,395

 
135,395

Nonresidential real estate
376

 
444

 
3,245

 
4,065

 
227,078

 
231,143

Construction

 

 

 

 
63

 
63

Land

 

 

 

 
1,814

 
1,814

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured

 

 
76

 
76

 
11,863

 
11,939

Unsecured

 
1

 

 
1

 
1,884

 
1,885

Municipal

 

 

 

 
2,243

 
2,243

Warehouse lines

 

 

 

 
14,362

 
14,362

Health care

 

 

 

 
24,154

 
24,154

Aviation

 

 

 

 
1,111

 
1,111

Other

 

 

 

 
11,339

 
11,339

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases
426

 

 

 
426

 
160,830

 
161,256

Below investment grade
136

 

 

 
136

 
11,246

 
11,382

Non-rated
8

 

 

 
8

 
35,672

 
35,680

Lease pools

 

 

 

 
10,180

 
10,180

Consumer
18

 
1

 
3

 
22

 
2,038

 
2,060

 
$
5,013

 
$
2,074

 
$
10,729

 
$
17,816

 
$
1,158,849

 
$
1,176,665

Troubled Debt Restructurings
The Company evaluates loan extensions or modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a TDR. In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.
The Company had $3.0 million of TDRs at September 30, 2015 and December 31, 2014. There were no specific valuation reserves allocated to those loans at September 30, 2015 and $38,000 in specific valuation reserves were allocated at December 31, 2014. The Company had no outstanding commitments to borrowers whose loans were classified as TDRs at either date.



18


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
NOTE 4 - LOANS RECEIVABLE (continued)


The following table presents loans classified as TDRs:
 
September 30, 2015
 
December 31, 2014
One-to-four family residential real estate
$
1,657

 
$
1,917

Multi-family mortgage
1,126

 
510

Troubled debt restructured loans – accrual loans
2,783

 
2,427

One-to-four family residential real estate
208

 
230

Multi-family mortgage

 
346

Troubled debt restructured loans – nonaccrual loans
208

 
576

Total troubled debt restructured loans
$
2,991

 
$
3,003

During the three and nine months ending September 30, 2015 and 2014, the terms of certain loans were modified and classified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
The following tables present TDR activity:
 
Three Months Ended September 30,
 
2015
 
2014
 
Number
of loans
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
 
Number
of loans
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
One-to-four family residential real estate
5

 
$
338

 
$
211

 
1

 
$
345

 
$
345

Commercial loans - secured

 

 

 
1

 
210

 
5

Total
5

 
$
338

 
$
211

 
2

 
$
555

 
$
350

 
Due to
reduction in
interest rate
 
Due to
extension of
maturity date
 
Due to
permanent
reduction in
recorded
investment
 
Total
For the Three Months Ended September 30, 2015
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
79

 
$
132

 
$
211

For the Three Months Ended September 30, 2014
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
345

 
$

 
$
345

Commercial loans - secured

 

 
5

 
5

Total
$

 
$
345

 
$
5

 
$
350

The TDRs described above had no impact on interest income, resulted in no change to the allowance for loan losses allocated and resulted in charge-offs of $127,000 for the three months ended September 30, 2015. The TDRs had no impact on interest income, resulted in no change to the allowance for loan losses allocated and resulted in $205,000 of charge-offs for the three months ended September 30, 2014.



19


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
NOTE 4 - LOANS RECEIVABLE (continued)


 
Nine Months Ended September 30,
 
2015
 
2014
 
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
6

 
$
401

 
$
274

 
4

 
$
485

 
$
444

Commercial loans - secured

 

 

 
1

 
210

 
5

Total
6

 
$
401

 
$
274

 
5

 
$
695

 
$
449

 
Due to
reduction in
interest rate
 
Due to
extension of
maturity date
 
Due to
permanent
reduction in
recorded
investment
 
Total
For the Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
142

 
$
132

 
$
274

For the Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
One-to-four family residential real estate
$
19

 
$
373

 
$
52

 
$
444

Commercial loans - secured

 

 
5

 
5

Total
$
19

 
$
373

 
$
57

 
$
449

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 $127,000 of charge-offs for the nine months ended September 30, 2015. The TDRs decreased interest income by $1,000, resulted in no change to the allowance for loan losses allocated and resulted in charge-offs of $246,000 for the nine months ended September 30, 2014.
The following table presents TDRs for which there was a payment default during the nine months ending September 30, 2015 and 2014 within twelve months following the modification.
 
2015
 
2014
 
Number
of loans
 
Recorded
investment
 
Number
of loans
 
Recorded
investment
One-to-four family residential real estate
1

 
$
27

 
1

 
$
28

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
The TDRs for which there was a payment default resulted in no change to the allowance for loan losses allocated and resulted in no charge-offs during the nine months ending September 30, 2015 and September 30, 2014.
There were certain other loan modifications during the three and nine months ending September 30, 2015 and 2014 that did not meet the definition of a TDR. These loans had a total recorded investment of $2.6 million and $1.6 million at September 30, 2015 and 2014, 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.



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)


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 as Nonaccrual has all the weaknesses inherent in one classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans.
As of September 30, 2015, 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
$
117,242

 
$

 
$
429

 
$
2,114

 
$
119,785

One-to-four family residential real estate - non-owner occupied
43,705

 
223

 

 
411

 
44,339

Multi-family mortgage
312,554

 
456

 
5,741

 
1,404

 
320,155

Wholesale commercial lending
157,389

 

 
513

 

 
157,902

Nonresidential real estate
197,920

 
18,065

 
5,259

 
2,284

 
223,528

Construction
31

 

 

 

 
31

Land
472

 

 
819

 

 
1,291

Commercial loans:
 
 
 
 
 
 
 
 

Secured
22,509

 

 
148

 
75

 
22,732

Unsecured
2,651

 

 
555

 

 
3,206

Municipal
1,599

 

 

 

 
1,599

Warehouse lines
16,369

 

 

 

 
16,369

Health care
19,995

 

 

 

 
19,995

Aviation
1,021

 

 

 

 
1,021

Other
15,294

 

 

 

 
15,294

Commercial leases:
 
 
 
 
 
 
 
 

Investment rated commercial leases
157,893

 

 

 

 
157,893

Below investment grade
7,336

 

 

 

 
7,336

Non-rated
46,175

 

 

 

 
46,175

Lease pools
10,218

 

 

 

 
10,218

Consumer
1,927

 

 

 

 
1,927

Total
$
1,132,300

 
$
18,744

 
$
13,464

 
$
6,288

 
$
1,170,796

 



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, 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
$
126,102

 
$
615

 
$
1,046

 
$
4,228

 
$
131,991

One-to-four family residential real estate - non-owner occupied
46,253

 
931

 
964

 
198

 
48,346

Multi-family mortgage
336,557

 
609

 
3,430

 
4,515

 
345,111

Wholesale commercial lending
134,719

 

 
519

 

 
135,238

Nonresidential real estate
223,385

 
1,170

 
6,698

 
3,247

 
234,500

Construction
60

 

 

 

 
60

Land
1,212

 

 
613

 

 
1,825

Commercial loans:
 
 
 
 
 
 
 
 

Secured
11,863

 

 
7

 
76

 
11,946

Unsecured
1,147

 
40

 
698

 

 
1,885

Municipal
2,213

 

 

 

 
2,213

Warehouse lines
11,296

 

 

 

 
11,296

Health care
24,127

 

 

 

 
24,127

Aviation
1,108

 

 

 

 
1,108

Other
14,307

 

 

 

 
14,307

Commercial leases:
 
 
 
 
 
 
 
 

Investment rated commercial leases
160,208

 

 

 

 
160,208

Below investment grade
11,309

 

 

 

 
11,309

Non-rated
35,473

 

 

 

 
35,473

Lease pools
10,153

 

 

 

 
10,153

Consumer
2,048

 

 

 
3

 
2,051

Total
$
1,153,540

 
$
3,365

 
$
13,975

 
$
12,267

 
$
1,183,147

NOTE 5 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are shown below.
 
 
September 30, 2015
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater Than 90 days
 
Total
Repurchase agreements and repurchase-to-maturity transactions
 
$
3,048

 
$

 
$

 
$

 
$
3,048

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition
 
$
3,048

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater Than 90 days
 
Total
Repurchase agreements and repurchase-to-maturity transactions
 
$
2,921

 
$

 
$

 
$

 
$
2,921

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition
 
$
2,921




22


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

NOTE 5 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (continued)


Securities sold under agreements to repurchase were secured by mortgage-backed securities with a carrying amount of $6.1 million and $6.8 million at September 30, 2015 and December 31, 2014, respectively. Also included in total borrowings were advances from the Federal Home Loan Bank of Chicago (the "FHLBC") of $15.0 million and $10.0 million at September 30, 2015 and December 31, 2014, respectively.
As the securities’ values fluctuate due to market conditions, the Company has no control over the market value.  The Company is obligated to promptly transfer additional securities if the market value of the securities fall below the repurchase price, per the agreement.
NOTE 6 - 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).
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. 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 in accordance with the allowance policy.
Other Real Estate Owned: Assets acquired through or instead of loan 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 which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. The fair values of mortgage servicing rights are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2).



23


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

NOTE 6 - FAIR VALUE (continued)


The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
September 30, 2015
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
76,194

 
$

 
$
76,194

Equity mutual fund
512

 

 

 
512

Mortgage-backed securities – residential

 
19,876

 

 
19,876

Collateralized mortgage obligations – residential

 
7,635

 

 
7,635

SBA-guaranteed loan participation certificates

 
25

 

 
25

 
$
512

 
$
103,730

 
$

 
$
104,242

December 31, 2014
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
86,049

 
$

 
$
86,049

Equity mutual fund
509

 

 

 
509

Mortgage-backed securities - residential

 
24,611

 

 
24,611

Collateralized mortgage obligations – residential

 
9,976

 

 
9,976

SBA-guaranteed loan participation certificates

 
29

 

 
29

 
$
509

 
$
120,665

 
$

 
$
121,174




24


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

NOTE 6 - FAIR VALUE (continued)


The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:
 
Fair Value Measurement Using
 
 
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
September 30, 2015
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
Multi-family mortgage
$

 
$

 
$
230

 
$
230

Nonresidential real estate

 

 
1,323

 
1,323

Commercial loans

 

 
58

 
58

 
$

 
$

 
$
1,611

 
$
1,611

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

 
$

 
$
42

 
$
42

Multi-family mortgage

 

 
962

 
962

Nonresidential real estate

 

 
107

 
107

Land

 

 
749

 
749

 
$

 
$

 
$
1,860

 
$
1,860

Mortgage servicing rights
$

 
$
297

 
$

 
$
297

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$

 
$
70

 
$
70

Multi-family mortgage

 

 
1,905

 
1,905

Nonresidential real estate

 

 
2,369

 
2,369

 
$

 
$

 
$
4,344

 
$
4,344

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

 
$

 
$
55

 
$
55

Multi-family mortgage

 

 
1,265

 
1,265

Nonresidential real estate

 

 
126

 
126

Land

 

 
753

 
753

 
$

 
$

 
$
2,199

 
$
2,199

Mortgage servicing rights
$

 
$
160

 
$

 
$
160

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans and have specific valuation allowances, had a carrying amount of $1.7 million and a valuation allowance of $86,000 at September 30, 2015, compared to a carrying amount of $4.8 million and a valuation allowance of $470,000 at December 31, 2014, resulting in a decrease in the provision for loan losses of $384,000 for the nine months ended September 30, 2015, and an increase in the provision for loan losses of $345,000 for the nine months ended September 30, 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 $2.9 million and a valuation allowance of $1.0 million at September 30, 2015, compared to a carrying value of $3.0 million and a valuation allowance of $803,000 at December 31, 2014. There were $467,000 of valuation adjustments of OREO recorded for



25


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

NOTE 6 - FAIR VALUE (continued)


the nine months ended September 30, 2015, and $392,000 of valuation adjustments of OREO recorded for the nine months ended September 30, 2014.
A pre-tax provision of $2,000 on our mortgage servicing rights portfolio was included in noninterest income for the nine months ended September 30, 2015, compared to a pre-tax provision of $6,000 for the same period in 2014.
The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2015:
 
Fair Value
 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans:
 
 
 
 
 
 
 
Multi-family mortgage loans
$
230

 
Sales comparison
 
Comparison between sales and income approaches
 
10%
 
 
 
Income approach
 
Cap Rate
 
10%
Nonresidential real estate loans
1,323

 
Sales comparison
 
Comparison between sales and income approaches
 
-25.74% to 1.24%
(-21%)
 
 
 
Income approach
 
Cap Rate
 
8.5%
Commercial loans
58

 
Sales comparison
 
Discount applied to valuation
 
34.3%
Impaired loans
$
1,611

 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate
$
42

 
Sales comparison
 
Discount applied to valuation
 
-0.35% to 2.8%
(0.03%)
Multi-family mortgage
962

 
Sales comparison
 
Comparison between sales and income approaches
 
-67.74% to 11.68%
(7%)
Nonresidential real estate loans
107

 
Sales comparison
 
Comparison between sales and income approaches
 
58%
Land
749

 
Sales comparison
 
Discount applied to valuation
 
-7.7% to 17.24%
(6%)
Other real estate owned
$
1,860

 
 
 
 
 
 



26


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

NOTE 6 - 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, 2014:
 
Fair Value
 
Valuation
Technique(s)
 
Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans
 
 
 
 
 
 
 
One-to-four family residential real estate
$
70

 
Sales comparison
 
Discount applied to valuation
 
4.8%
Multi-family mortgage
1,905

 
Sales comparison
 
Comparison between sales and income approaches
 
-2.1%- 43.7%
(41%)
 
 
 
Income approach
 
Cap Rate
 
9.6%-13.8%
(10%)
Nonresidential real estate
2,369

 
Sales comparison
 
Comparison between sales and income approaches
 
-2.1%-33.9%
(24%)
 
 
 
Income approach
 
Cap Rate
 
10%-11%
(10%)
 
$
4,344

 
 
 
 
 
 
Other real estate owned
 
 
 
 
 
 
 
One-to-four family residential real estate
$
55

 
Sales comparison
 
Discount applied to valuation
 
6.3%-7.7%
(7%)
Multi-family mortgage
1,265

 
Sales comparison
 
Comparison between sales and income approaches
 
-6.6%-13.5% (0.4%)
Nonresidential real estate
126

 
Sales comparison
 
Comparison between sales and income approaches
 
32.3%
Land
753

 
Sales comparison
 
Discount applied to valuation
 
-21.9%-4.2%
(-10%)
 
$
2,199

 
 
 
 
 
 



27


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

NOTE 6 - FAIR VALUE (continued)


The carrying amount and estimated fair value of financial instruments are as follows:
 
 
 
Fair Value Measurements at
September 30, 2015 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
61,470

 
$
8,809

 
$
52,661

 
$

 
$
61,470

Securities
104,242

 
512

 
103,730

 

 
104,242

Loans receivable, net of allowance for loan losses
1,162,298

 

 
1,159,706

 
1,611

 
1,161,317

FHLBC stock
6,257

 

 

 

 
N/A

Accrued interest receivable
4,000

 

 
4,000

 

 
4,000

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
233,192

 
$

 
$
233,192

 
$

 
$
233,192

Savings deposits
152,585

 

 
152,585

 

 
152,585

NOW and money market accounts
572,860

 

 
572,860

 

 
572,860

Certificates of deposit
222,897

 

 
222,878

 

 
222,878

Borrowings
18,048

 

 
18,049

 

 
18,049

Accrued interest payable
46

 

 
46

 

 
46

 
 
 
Fair Value Measurements at
 December 31, 2014 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
59,581

 
$
9,693

 
$
49,888

 
$

 
$
59,581

Securities
121,174

 
509

 
120,665

 

 
121,174

Loans receivable, net of allowance for loan losses
1,172,356

 

 
1,166,181

 
4,344

 
1,170,525

FHLBC stock
6,257

 

 

 

 
N/A

Accrued interest receivable
3,926

 

 
3,926

 

 
3,926

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
134,129

 
$

 
$
134,129

 
$

 
$
134,129

Savings deposits
154,532

 

 
154,532

 

 
154,532

NOW and money market accounts
690,193

 

 
690,193

 

 
690,193

Certificates of deposit
232,859

 

 
232,588

 

 
232,588

Borrowings
12,921

 

 
12,908

 

 
12,908

Accrued interest payable
89

 

 
89

 

 
89

For purposes of the above table, the following assumptions were used:
Cash and Cash Equivalents: The estimated fair values for cash and cash equivalents are based on their carrying value due to the short-term nature of these assets.
Loans: The estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid. The estimated fair values of loans held for sale are based on quoted market prices.
FHLBC Stock: It is not practicable to determine the fair value of FHLBC stock due to the restrictions placed on its transferability.



28


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

NOTE 6 - FAIR VALUE (continued)


Deposit Liabilities: The estimated fair value for certificates of deposit has been determined by calculating the present value of future cash flows based on estimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of noninterest-bearing demand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level that approximates the local market area. Additionally, these deposits can be withdrawn on demand.
Borrowings: The estimated fair values of advances from the FHLBC and notes payable are based on current market rates for similar financing. The estimated fair value of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.
Accrued Interest: The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of unfunded loan commitments, standby letters of credit, and unused lines of credit. The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.
While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.
NOTE 7 – EQUITY INCENTIVE PLANS
On June 27, 2006, the Company’s stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan, which authorized the Human Resources Committee of the Board of Directors of the Company to grant a variety of cash- and equity-based incentive awards, including stock options, stock appreciation rights, restricted stock, performance shares and other incentive awards, to employees and directors aggregating up to 3,425,275 shares of the Company’s common stock.
The Human Resources Committee may grant stock options to purchase shares of the Company’s common stock to certain employees and directors of the Company. The exercise price for the stock options is the fair market value of the common stock on the dates of the grants.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. The risk-free interest rate was determined using the yield available on the option grant date for a zero-coupon U.S. Treasury security with a term equivalent to the expected life of the option. The expected life for options granted represents the period the option is expected to be outstanding and was determined by applying the simplified method as allowed by SAB 107. The expected volatility for options issued in 2015 was determined using the Company’s historical data. Estimated forfeitures were assumed to be zero due to the lack of historical experience for the Company. On August 10, 2015 the Company awarded a total of 1,215,697 stock options to officers and directors.
The Company estimated the grant date fair value of options awarded in 2015 using Black-Scholes Option-Pricing model with the following assumptions:
 
 
2015 Assumptions
Risk-free interest rate
 
0.51
%
Expected option life (years)
 
1.3

Expected stock price volatility
 
18.35
%
Dividend yield
 
1.33
%
The Company recognized $280,000 of stock-based compensation expenses relating to the granting of stock options for the three months ended and nine months ended September 30, 2015.



29


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

NOTE 7 – EQUITY INCENTIVE PLANS (continued)

A summary of the activity in the stock option plan for 2015 follows:
Stock Options
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value (1)
Stock options outstanding at December 31, 2014
 

 
$

 
 
 
$

Stock options granted
 
1,215,697

 
11.99

 
 
 
 
Stock options exercised
 

 

 
 
 
 
Stock options expired
 

 

 
 
 
 
Stock options forfeited
 

 

 
 
 
 
Stock options outstanding at September 30, 2015
 
1,215,697

 
$
11.99

 
1.7
 
$
535

Stock options exercisable at September 30, 2015
 
303,924

 
$
11.99

 
1.7
 
$
134

Fully vested and expected to vest
 
1,215,697

 
$
11.99

 
1.7
 
$
535

(1) Stock option aggregate intrinsic value represents the number of shares subject to options multiplied by the difference (if positive) in the closing market price of the common stock underlying the options on the date shown and the weighted average exercise price.
The weighted average fair value of the options granted is $0.92 per option. As of September 30, 2015, there was $839,000 of total unrecognized compensation cost related to the nonvested stock options granted under the Plan. The cost is expected to be recognized ratably over the remaining three quarterly installments.
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) less than anticipated loan growth due to intense competition for high quality loans and leases, particularly in terms of pricing and credit underwriting, or a dearth of borrowers who meet our underwriting standards; (ii) the impact of re-pricing and competitors’ pricing initiatives on loan and deposit products; (iii) interest rate movements and their impact on the economy, customer behavior and our net interest margin; (iv) adverse economic conditions in general and in the Chicago metropolitan area in particular 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; (v) declines in real estate values that adversely impact the value of our loan collateral, Other Real Estate Owned ("OREO"), asset dispositions and the level of borrower equity in their investments; (vi) borrowers that experience legal or financial difficulties that we do not currently foresee; (vii) 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; (viii) changes, disruptions or



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illiquidity in national or global financial markets; (ix) 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; (x) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; (xi) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors' pricing initiatives on our deposit products; (xii) the impact of new legislation or regulatory changes, including the Dodd-Frank Act and Basel III, on our products, services, operations and operating expenses; (xiii) higher federal deposit insurance premiums; (xiv) higher than expected overhead, infrastructure and compliance costs; (xv) changes in accounting principles, policies or guidelines; and (xvi) privacy and cybersecurity risks.
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, 2014, 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, 2014, and all amendments thereto, as filed with the Securities and Exchange Commission.
Overview
Total loans increased modestly due to stronger originations in commercial and industrial loans, partially offset by reduced originations of multi-family loans and commercial leases, as well as loan repayments that resulted in further improvements in our asset quality. Competitive factors continue to intensify in all loan segments. We are encouraged by an increase in loan opportunities in our commercial-related loan segments, but it is becoming more difficult to predict the quantity of new loan originations due to the various competitive factors we encounter. Nevertheless, the combination of our existing loan prospects and continuing marketing efforts provide us reason to believe that our commercial-related loan originations may achieve more meaningful net loan portfolio growth in the remainder of 2015 and into early 2016.
Our average yield on loans declined due to the comparatively lower yields on the floating-rate commercial and industrial loan portfolio, the continued impact of loan renewals at reduced market yields, and loan prepayments on higher-yield loans and leases. Our net interest margin declined principally due to lower yields on our loan portfolio, partially offset by improved yields in the investment securities portfolio and a slightly reduced cost of funds. Non-interest income increased due primarily to continued higher deposit-account related income. We continued to reduce our core noninterest expense consistent with our expectations for 2015.
Our ratio of nonperforming loans to total loans was 0.57% and our ratio of non-performing assets to total assets was 0.80% at September 30, 2015. Non-performing asset expense increased in the third quarter due in part to collection expenses and due in part to a seasonally higher volume of updated valuations on non-performing assets. As we reduce non-performing assets and non-performing asset expense, we expect to redeploy these resources into additional commercial-related loan originations capacity during the remainder of 2015 and early 2016.




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SELECTED FINANCIAL DATA
The following summary information is derived from the consolidated financial statements of the Company. For additional information, reference is made to the Consolidated Financial Statements of the Company and related notes included elsewhere in this Quarterly Report.
 
September 30, 2015
 
December 31, 2014
 
Change
 
(Dollars in thousands)
Selected Financial Condition Data:
 
 
 
 
 
Total assets
$
1,431,423

 
$
1,465,410

 
$
(33,987
)
Loans, net
1,162,298

 
1,172,356

 
(10,058
)
Securities, at fair value
104,242

 
121,174

 
(16,932
)
Core deposit intangible
1,441

 
1,855

 
(414
)
Deposits
1,181,534

 
1,211,713

 
(30,179
)
Borrowings
18,048

 
12,921

 
5,127

Equity
213,074

 
216,121

 
(3,047
)

 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Selected Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Interest and dividend income
$
12,147

 
$
12,368

 
$
(221
)
 
$
36,551

 
$
36,936

 
$
(385
)
Interest expense
699

 
746

 
(47
)
 
2,076

 
2,332

 
(256
)
Net interest income
11,448

 
11,622

 
(174
)
 
34,475

 
34,604

 
(129
)
Provision for (recovery of) loan losses
(956
)
 
(1,413
)
 
457

 
(2,168
)
 
20

 
(2,188
)
Net interest income after provision for (recovery of) loan losses
12,404

 
13,035

 
(631
)
 
36,643

 
34,584

 
2,059

Noninterest income
1,709

 
1,748

 
(39
)
 
4,934

 
4,940

 
(6
)
Noninterest expense
10,232

 
11,157

 
(925
)
 
30,776

 
33,510

 
(2,734
)
Income before income tax expense
3,881

 
3,626

 
255

 
10,801

 
6,014

 
4,787

Income tax expense
1,532

 
36

 
1,496

 
4,242

 
78

 
4,164

Net income
$
2,349

 
$
3,590

 
$
(1,241
)
 
$
6,559

 
$
5,936

 
$
623





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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Selected Financial Ratios and Other Data:
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
Return on assets (ratio of net income to average total assets) (1)
0.65
%
 
1.01
%
 
0.61
%
 
0.55
%
Return on equity (ratio of net income to average equity) (1)
4.41

 
7.98

 
4.06

 
4.43

Average equity to average assets
14.85

 
12.60

 
14.92

 
12.42

Net interest rate spread (1) (2)
3.33

 
3.35

 
3.37

 
3.34

Net interest margin (1) (3)
3.40

 
3.40

 
3.43

 
3.39

Efficiency ratio (4)
77.77

 
83.45

 
78.09

 
84.74

Noninterest expense to average total assets (1)
2.85

 
3.13

 
2.84

 
3.11

Average interest-earning assets to average interest-bearing liabilities
134.89

 
123.36

 
130.22

 
122.61

Dividends declared per share
$
0.08

 
$
0.04

 
$
0.16

 
$
0.05

Dividend payout ratio
69.82
%
 
23.50
%
 
50.74
%
 
17.78
%
 
At September 30, 2015
 
At December 31, 2014
Asset Quality Ratios:
 
 
 
Nonperforming assets to total assets (5)
0.80
%
 
1.27
%
Nonperforming loans to total loans
0.57

 
1.03

Allowance for loan losses to nonperforming loans
150.71

 
98.17

Allowance for loan losses to total loans
0.86

 
1.01

Capital Ratios:
 
 
 
Equity to total assets at end of period
14.89
%
 
14.75
%
Tier 1 leverage ratio (Bank only)
11.27
%
 
11.45
%
Other Data:
 
 
 
Number of full-service offices
19

 
19

Employees (full-time equivalents)
264

 
269

(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.
Comparison of Financial Condition at September 30, 2015 and December 31, 2014
Total assets decreased $34.0 million, or 2.3%, to $1.431 billion at September 30, 2015, from $1.465 billion at December 31, 2014. The decrease in total assets was primarily due to decreases in securities and loans. Partially offsetting this decrease was a $1.9 million, or 3.2%, increase in cash and cash equivalents to $61.5 million at September 30, 2015, from $59.6 million at December 31, 2014.
Loans decreased $10.1 million, or 0.9%, to $1.162 billion at September 30, 2015, from $1.172 billion at December 31, 2014. At September 30, 2015, our loan portfolio included $867.0 million of real estate loans, which represented 74.1% of the loan portfolio. The Bank’s primary lending area consists of the counties where our branch offices are located, and contiguous counties in the State of Illinois. We derive the most significant portion of our revenues from these geographic areas. We also engage in multi-family lending activities in carefully selected metropolitan areas outside our primary lending area and engage in certain types of commercial lending and leasing activities on a nationwide basis. At September 30, 2015, $676.2 million, or 78.0%, of our real estate loans



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were in Illinois, while $76.6 million, or 8.8%, were in Texas, $53.2 million, or 6.1%, were in Colorado, and $21.6 million, or 2.5%, were in Minnesota. This information reflects the location of the collateral for these real estate loans, but does not necessarily reflect the location of the borrower.
Total liabilities decreased by $30.9 million, or 2.5%, to $1.218 billion at September 30, 2015, from $1.249 billion at December 31, 2014, primarily due to decreases in money market and interest-bearing demand accounts and certificates of deposits. These decreases were partially offset by an increase in non-interest bearing demand accounts.
Total deposits decreased $30.2 million, or 2.5%, to $1.182 billion at September 30, 2015, from $1.212 billion at December 31, 2014. Noninterest-bearing demand deposits increased $99.1 million, or 73.9%, to $233.2 million at September 30, 2015, from $134.1 million at December 31, 2014. Money market and interest-bearing NOW accounts decreased $117.3 million, or 17.0%, to $572.9 million at September 30, 2015, from $690.2 million at December 31, 2014. Certificates of deposit decreased $10.0 million, or 4.3%, to $222.9 million at September 30, 2015, from $232.9 million at December 31, 2014. Core deposits (savings, money market, noninterest-bearing demand and NOW accounts) were 81.1% and 80.8% of total deposits at September 30, 2015 and December 31, 2014, respectively. The volatility noted in overall transaction account balances is consistent with seasonal fluctuations observed in previous years.
The changes in the balances of noninterest bearing demand deposits and money market and interest-bearing NOW accounts were due in substantial part to efforts we undertook through the third quarter of 2015 to simplify our deposit account options.  As part of this process, we discontinued several older account types and converted the discontinued account types to current account types.  During the third quarter of 2015, we converted approximately 9,400 older account types, totaling $80 million, to current account types.  Approximately 48% of the converted accounts, or 4,500 accounts, were interest-bearing demand accounts that were converted to non-interest bearing demand accounts.  Approximately $45 million of the accounts that were converted to non-interest bearing account types have balances that could migrate to interest-bearing accounts if interest rates were to increase materially; accordingly, we have incorporated the possibility of such migration into our various interest-rate risk management scenarios.
Borrowings increased $5.1 million to $18.0 million at September 30, 2015, from $12.9 million at December 31, 2014 due to a $5.0 million increase in outstanding FHLBC advances to $15.0 million at September 30, 2015, from $10.0 million at December 31, 2014.
Total stockholders’ equity was $213.1 million at September 30, 2015, compared to $216.1 million at December 31, 2014. The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 600,000 shares of our common stock during the nine months ended September 30, 2015 at a total cost of $7.4 million, and our declaration and payment of cash dividends totaling $3.3 million during this period. These items were partially offset by net income of $6.6 million that we recorded for the nine months ended September 30, 2015. The unallocated shares of common stock that our ESOP owns were reflected as a $9.5 million reduction to stockholders’ equity at September 30, 2015, compared to a $10.3 million reduction at December 31, 2014.
Operating results for the three months ended September 30, 2015 and 2014
Net Income. We had net income of $2.3 million and $3.6 million for the three months ended September 30, 2015 and 2014, respectively. Earnings per basic and fully diluted share of common stock were $0.12 for the three months ended September 30, 2015, compared to $0.17 for the three months ended September 30, 2014.
Net Interest Income. Net interest income was $11.4 million for the three months ended September 30, 2015, compared to $11.6 million for the three months ended September 30, 2014. The decrease in net interest income reflected a $221,000, or 1.8%, decrease in interest income, partially offset by a $47,000, or 6.3%, decrease in interest expense.
The decrease in net interest income was primarily attributable to decreases in the yield on interest-earning assets and net average interest-earning assets. Total average interest-earning assets decreased $19.0 million, or 1.40%, to $1.336 billion for the three months ended September 30, 2015, from $1.355 billion for the same period in 2014. Our net interest rate spread decreased by two basis point to 3.33% for the three months ended September 30, 2015, from 3.35% for the same period in 2014. Our net interest margin remained at 3.40% for the three months ended September 30, 2015 and 2014. The yield on interest-earning assets decreased one basis point to 3.61% for the three months ended September 30, 2015, from 3.62% for the same period in 2014, and the cost of interest-bearing liabilities increased one basis point to 0.28% for the three months ended September 30, 2015, from 0.27% for the same period in 2014.



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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 and purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
For the Three Months Ended September 30,
 
2015
 
2014
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,164,251

 
$
11,792

 
4.02
%
 
$
1,127,735

 
$
11,983

 
4.22
%
Securities
102,578

 
267

 
1.03

 
114,805

 
283

 
0.98

Stock in FHLBC
6,257

 
7

 
0.44

 
6,257

 
8

 
0.51

Other
63,326

 
81

 
0.51

 
106,639

 
94

 
0.35

Total interest-earning assets
1,336,412

 
12,147

 
3.61

 
1,355,436

 
12,368

 
3.62

Noninterest-earning assets
98,337

 
 
 
 
 
72,114

 
 
 
 
Total assets
$
1,434,749

 
 
 
 
 
$
1,427,550

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
154,413

 
41

 
0.11

 
$
153,256

 
40

 
0.10

Money market accounts
333,613

 
261

 
0.31

 
348,410

 
281

 
0.32

NOW accounts
270,175

 
92

 
0.14

 
346,204

 
89

 
0.10

Certificates of deposit
223,432

 
301

 
0.53

 
247,672

 
334

 
0.54

Total deposits
981,633

 
695

 
0.28

 
1,095,542

 
744

 
0.27

Borrowings
9,100

 
4

 
0.17

 
3,185

 
2

 
0.25

Total interest-bearing liabilities
990,733

 
699

 
0.28

 
1,098,727

 
746

 
0.27

Noninterest-bearing deposits
211,438

 
 
 
 
 
131,626

 
 
 
 
Noninterest-bearing liabilities
19,517

 
 
 
 
 
17,268

 
 
 
 
Total liabilities
1,221,688

 
 
 
 
 
1,247,621

 
 
 
 
Equity
213,061

 
 
 
 
 
179,929

 
 
 
 
Total liabilities and equity
$
1,434,749

 
 
 
 
 
$
1,427,550

 
 
 
 
Net interest income
 
 
$
11,448

 
 
 
 
 
$
11,622

 
 
Net interest rate spread (2)
 
 
 
 
3.33
%
 
 
 
 
 
3.35
%
Net interest-earning assets (3)
$
345,679

 
 
 
 
 
$
256,709

 
 
 
 
Net interest margin (4)
 
 
 
 
3.40
%
 
 
 
 
 
3.40
%
Ratio of interest-earning assets to interest-bearing liabilities
134.89
%
 
 
 
 
 
123.36
%
 
 
 
 
(1)
Annualized.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.



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Provision for (Recovery of) 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.
We had a recovery of loan losses of $956,000 for the three months ended September 30, 2015, compared to a recovery of $1.4 million for the same period in 2014. The provision for or recovery of loan losses is a function of the allowance for loan loss methodology that 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 $750,000, or 7.0%, to $10.0 million at September 30, 2015, from $10.7 million at June 30, 2015. The reserve established for loans individually evaluated for impairment increased $21,000, or 32.3%, to $86,000 at September 30, 2015, from $65,000 at June 30, 2015. Net recoveries were $227,000 for the three months ended September 30, 2015. The allowance for loan losses as a percentage of nonperforming loans was 150.71% at September 30, 2015, compared to 124.86% at June 30, 2015.
A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the portion of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legally discharged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.
Noninterest Income
 
Three Months Ended
September 30,
 
 
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
562

 
$
527

 
$
35

Other fee income
502

 
563

 
(61
)
Insurance commissions and annuities income
68

 
106

 
(38
)
Gain on sale of loans, net
37

 
39

 
(2
)
Loan servicing fees
85

 
102

 
(17
)
Amortization of servicing assets
(35
)
 
(36
)
 
1

Recovery (impairment) of servicing assets
(15
)
 
4

 
(19
)
Earnings on bank owned life insurance
48

 
57

 
(9
)
Trust income
172

 
171

 
1

Other
285

 
215

 
70

Total noninterest income
$
1,709

 
$
1,748

 
$
(39
)
Noninterest income totaled $1.7 million for the three months ended September 30, 2015 and for the three months ended September 30, 2014. Deposit service charges and fees increased $35,000 and other fee income decreased $61,000 for the three months ended September 30, 2015. Noninterest income for the three months ended September 30, 2015 included a $37,000 gain on sale of loans, compared to a $39,000 gain on sale of loans that was recorded for the same period in 2014. Earnings on bank owned life insurance decreased $9,000 for the three months ended September 30, 2015 to $48,000, from $57,000 for the same period in 2014.



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Table of Contents


Noninterest Expense
 
Three Months Ended
September 30,
 
 
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
5,329

 
$
5,492

 
$
(163
)
Office occupancy and equipment
1,537

 
1,687

 
(150
)
Advertising and public relations
212

 
272

 
(60
)
Information technology
686

 
674

 
12

Supplies, telephone and postage
393

 
394

 
(1
)
Amortization of intangibles
136

 
143

 
(7
)
Nonperforming asset management
244

 
418

 
(174
)
Gain (loss) on sale other real estate owned
(11
)
 
52

 
(63
)
Valuation adjustments of other real estate owned
231

 
315

 
(84
)
Operations of other real estate owned
114

 
127

 
(13
)
FDIC insurance premiums
202

 
208

 
(6
)
Other
1,159

 
1,375

 
(216
)
Total noninterest expense
$
10,232

 
$
11,157

 
$
(925
)
Noninterest expense decreased by $925,000, or 8.3%, to $10.2 million for the three months ended September 30, 2015, from $11.2 million for the same period in 2014, due in substantial part to decreases in compensation and benefits expense, and expense for nonperforming asset management and other real estate owned. Total compensation and benefit expense for the three months ended September 30, 2015 decreased $163,000, or 3.0%, primarily due to a reduction in full-time equivalent employees to 264 at September 30, 2015, from 270 at September 30, 2014, which was partially offset by $280,000 in stock option expense for the three months ended September 30, 2015.
Nonperforming asset management expense decreased $174,000 or 41.6%, to $244,000 for the three months ended September 30, 2015, compared to $418,000 for the same period in 2014. OREO expense decreased $160,000, or 32.4%, to $334,000 for the three months ended September 30, 2015, from $494,000 for the three months ended September 30, 2014. OREO expense for the three months ended September 30, 2015 included gain on sale of OREO $11,000, compared to a loss of $52,000 for the three months ended September 30, 2014.
Income Taxes
For the three months ended September 30, 2015, we recorded income tax expense of $1.5 million, compared to $36,000 for the three months ended September 30, 2014. Our effective tax rate for the three months ended September 30, 2015 was 39.5%. For the three months ended September 30, 2014, income tax expense consisted solely of expense for state taxes.
Operating results for the nine months ended September 30, 2015 and 2014
Net Income. We had net income of $6.6 million for the nine months ended September 30, 2015, compared to $5.9 million for the nine months ended September 30, 2014. Our earnings per basic and fully diluted share of common stock were $0.33 for the nine months ended September 30, 2015, and $0.29 per basic and fully diluted share for the same period in 2014.
Net Interest Income. Net interest income was $34.5 million for the nine months ended September 30, 2015, compared to $34.6 million for the nine months ended September 30, 2014. A $385,000 decrease in interest income was partially offset by a $256,000 decrease in interest expense.
Total average interest-earning assets decreased $21.7 million, or 1.6%, to $1.343 billion for the nine months ended September 30, 2015, from $1.364 billion for the same period in 2014. Our net interest rate spread increased by three basis points to 3.37% for the nine months ended September 30, 2015, from 3.34% for the same period in 2014. Our net interest margin increased by four basis points to 3.43% for the nine months ended September 30, 2015, from 3.39% for the same period in 2014. The increase in the net interest spread and net interest margin was primarily a result of increased yield on interest-earning assets, which was partially offset by a lower cost of funds. The yield on interest-earning assets increased two basis points to 3.64% for the nine



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months ended September 30, 2015, from 3.62% for the same period in 2014, and the cost of interest-bearing liabilities decreased one basis point to 0.27% for the nine months ended September 30, 2015, from 0.28% for the same period in 2014.
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.
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,159,592

 
$
35,451

 
4.09
%
 
$
1,120,523

 
$
35,767

 
4.27
%
Securities
110,674

 
851

 
1.03

 
114,194

 
866

 
1.01

Stock in FHLBC
6,257

 
23

 
0.49

 
6,184

 
20

 
0.43

Other
66,110

 
226

 
0.46

 
123,406

 
283

 
0.31

Total interest-earning assets
1,342,633

 
36,551

 
3.64

 
1,364,307

 
36,936

 
3.62

Noninterest-earning assets
101,597

 
 
 
 
 
73,946

 
 
 
 
Total assets
$
1,444,230

 
 
 
 
 
$
1,438,253

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
156,189

 
122

 
0.10

 
$
153,818

 
118

 
0.10

Money market accounts
337,828

 
797

 
0.32

 
349,146

 
842

 
0.32

NOW accounts
304,020

 
270

 
0.12

 
349,116

 
265

 
0.10

Certificates of deposit
227,905

 
879

 
0.52

 
257,799

 
1,102

 
0.57

Total deposits
1,025,942

 
2,068

 
0.27

 
1,109,879

 
2,327

 
0.28

Borrowings
5,070

 
8

 
0.21

 
2,808

 
5

 
0.24

Total interest-bearing liabilities
1,031,012

 
2,076

 
0.27

 
1,112,687

 
2,332

 
0.28

Noninterest-bearing deposits
176,112

 
 
 
 
 
128,422

 
 
 
 
Noninterest-bearing liabilities
21,582

 
 
 
 
 
18,555

 
 
 
 
Total liabilities
1,228,706

 
 
 
 
 
1,259,664

 
 
 
 
Equity
215,524

 
 
 
 
 
178,589

 
 
 
 
Total liabilities and equity
$
1,444,230

 
 
 
 
 
$
1,438,253

 
 
 
 
Net interest income
 
 
$
34,475

 
 
 
 
 
$
34,604

 
 
Net interest rate spread (2)
 
 
 
 
3.37
%
 
 
 
 
 
3.34
%
Net interest-earning assets (3)
$
311,621

 
 
 
 
 
$
251,620

 
 
 
 
Net interest margin (4)
 
 
 
 
3.43
%
 
 
 
 
 
3.39
%
Ratio of interest-earning assets to interest-bearing liabilities
130.22
%
 
 
 
 
 
122.61
%
 
 
 
 
(1)
Annualized.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.



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Provision for (Recovery of) Loan Losses
We recorded a recovery of loan losses of $2.2 million for the nine months ended September 30, 2015, compared to a provision for loan losses of $20,000 for the same period in 2014. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $1.5 million, or 13.2%, to $10.0 million at September 30, 2015, from $11.5 million at December 31, 2014. The reserve established for loans individually evaluated for impairment decreased $384,000 for the nine months ended September 30, 2015. Net recoveries of $259,000 were recorded for the nine months ended September 30, 2015, compared to charge-offs of $1.1 million for the nine months ended September 30, 2014. The allowance for loan losses as a percentage of nonperforming loans was 150.71% at September 30, 2015, compared to 98.17% at December 31, 2014.
Noninterest Income
 
Nine Months Ended
September 30,
 
 
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
1,493

 
$
1,438

 
$
55

Other fee income
1,638

 
1,677

 
(39
)
Insurance commissions and annuities income
217

 
279

 
(62
)
Gain on sale of loans, net
92

 
107

 
(15
)
Loss on sales of securities

 
(7
)
 
7

Gain (loss) on disposition of premises and equipment
(1
)
 
5

 
(6
)
Loan servicing fees
271

 
310

 
(39
)
Amortization of servicing assets
(105
)
 
(106
)
 
1

Impairment of servicing assets
(2
)
 
(6
)
 
4

Earnings on bank owned life insurance
142

 
182

 
(40
)
Trust income
529

 
505

 
24

Other
660

 
556

 
104

Total noninterest income
$
4,934

 
$
4,940

 
$
(6
)
Noninterest income was $4.9 million for the nine months ended September 30, 2015 and 2014. Deposit service charges and fees increased $55,000 and other fee income decreased $39,000 for the nine months ended September 30, 2015. Noninterest income for the nine months ended September 30, 2015 included a $92,000 gain on sale of loans, compared to a $107,000 gain on sale of loans that was recorded for the same period in 2014. Earnings on bank owned life insurance decreased $40,000 for the nine months ended September 30, 2015 to $142,000, from $182,000 for the nine months ended September 30, 2014.



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Noninterest Expense
 
Nine Months Ended
September 30,
 
 
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
16,188

 
$
17,046

 
$
(858
)
Office occupancy and equipment
4,902

 
5,227

 
(325
)
Advertising and public relations
783

 
741

 
42

Information technology
1,982

 
2,004

 
(22
)
Supplies, telephone and postage
1,189

 
1,169

 
20

Amortization of intangibles
414

 
435

 
(21
)
Nonperforming asset management
442

 
619

 
(177
)
Gain on sale other real estate owned
(91
)
 
(40
)
 
(51
)
Valuation adjustments of other real estate owned
467

 
392

 
75

Operations of other real estate owned
404

 
808

 
(404
)
FDIC insurance premiums
699

 
1,157

 
(458
)
Other
3,397

 
3,952

 
(555
)
Total noninterest expense
$
30,776

 
$
33,510

 
$
(2,734
)
Noninterest expense decreased by $2.7 million, or 8.2%, to $30.8 million for the nine months ended September 30, 2015, from $33.5 million for the nine months ended September 30, 2014. Total compensation and benefit expense for the nine months ended September 30, 2015 decreased $858,000, or 5.0%, primarily due to a reduction in full-time equivalent employees to 264 at September 30, 2015, from 269 at December 31, 2014 and 270 at September 30, 2014, which was partially offset by $280,000 in stock option expense for the nine months ended September 30, 2015. Noninterest expense for the nine months ended September 30, 2015 included $1.2 million of nonperforming asset management and OREO expense, compared to $1.8 million of nonperforming asset management and OREO expense for the same period in 2014. Nonperforming asset management and OREO expenses decreased $557,000, or 31.3% for the nine months ended September 30, 2015, primarily due to a decline in nonperforming assets and OREO properties, a decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets, and a $200,000 reimbursement that we received for legal, receivership and other expenses in connection with the final resolution of certain loans. Noninterest expense for the nine months ended September 30, 2015 included a $467,000 valuation adjustment to OREO properties, compared to a $392,000 valuation adjustment to OREO properties for the same period in 2014. The OREO valuation adjustments were based on updated appraisals. OREO expense decreased $404,000, or 50.0%, to $404,000 for the nine months ended September 30, 2015, compared to $808,000 for the nine months ended September 30, 2014. OREO expense for the nine months ended September 30, 2014 included a $140,000 litigation settlement payment concerning a purchased impaired OREO property.
Income Taxes
For the nine months ended September 30, 2015, we recorded income tax expense of $4.2 million, compared to $78,000 for the nine months ended September 30, 2014. Our effective tax rate for the nine months ended September 30, 2015 was 39.3%. For the nine months ended September 30, 2014, income tax expense consisted solely of expense for state taxes.
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



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received or the renewal of the loan has not occurred for administrative reasons. At September 30, 2015, 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 analysis unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.
Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.
As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as–is”, “as–stabilized” or “as–completed” basis is most likely to produce the highest net realizable value. If we determine that the “as–stabilized” or “as–completed” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of September 30, 2015, 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.
 
September 30, 2015
 
June 30, 2015
 
December 31, 2014
 
Quarter Change
 
Nine Month Change
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
2,952

 
$
3,468

 
$
4,408

 
$
(516
)
 
$
(1,456
)
Multi-family mortgage
1,399

 
2,382

 
4,481

 
(983
)
 
(3,082
)
Nonresidential real estate
2,263

 
2,732

 
3,245

 
(469
)
 
(982
)
Commercial
75

 
75

 
76

 

 
(1
)
Consumer

 
1

 
3

 
(1
)
 
(3
)
 
6,689

 
8,658

 
12,213

 
(1,969
)
 
(5,524
)
Other real estate owned:
 
 
 
 
 
 
 
 
 
One-to-four family residential
325

 
471

 
806

 
(146
)
 
(481
)
Multi-family mortgage
1,474

 
2,018

 
2,307

 
(544
)
 
(833
)
Nonresidential real estate
1,289

 
1,240

 
885

 
49

 
404

Land
51

 
51

 
135

 

 
(84
)
 
3,139

 
3,780

 
4,133

 
(641
)
 
(994
)
Nonperforming assets (excluding purchased other real estate owned)
9,828

 
12,438

 
16,346

 
(2,610
)
 
(6,518
)
Purchased other real estate owned:
 
 
 
 
 
 
 
 
 
One-to-four family residential

 

 
457

 

 
(457
)
Land
1,670

 
1,759

 
1,768

 
(89
)
 
(98
)
 
1,670

 
1,759

 
2,225

 
(89
)
 
(555
)
Total nonperforming assets
$
11,498

 
$
14,197

 
$
18,571

 
$
(2,699
)
 
$
(7,073
)
Ratios:
 
 
 
 
 
 
 
 
 
Nonperforming loans to total loans
0.57
%
 
0.74
%
 
1.03
%
 
 
 
 
Nonperforming assets to total assets
0.80

 
0.99

 
1.27

 
 
 
 
Nonperforming assets to total assets(1)
0.69

 
0.86

 
1.11

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



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Nonperforming Assets
Nonperforming assets totaled $11.5 million at September 30, 2015, $14.2 million at June 30, 2015, and $18.6 million at December 31, 2014. Nonperforming assets decreased $2.7 million and $7.1 million, respectively, for the three and nine months ended September 30, 2015. Although we experience occasional isolated instances of new non-accrual loans, we believe that continuing our aggressive resolution posture will maintain the trends favoring very strong asset quality.
We assigned a Special Mention risk rating to loans to a single commercial borrower with a total combined balance of $16.5 million collateralized primarily with real estate assets with a recently appraised value of approximately $25.3 million as of September 30, 2015. The borrower operates a multi-store retail business in the Chicago metropolitan area. To maintain competitiveness and profitability, the borrower relocated or closed several underperforming stores and a warehouse, and as a result, owns five real estate parcels that are now non-essential to the borrower’s core business. Some parcels are now fully or partially leased, but expenses associated with the discontinued operations have adversely impacted the borrower’s operating results as presented in the audited consolidated financial statements that we receive from the borrower annually, as well as the borrower’s cash flow. We are monitoring the borrower’s financial performance and the status of the process the borrower has initiated to sell certain of the non-core real estate assets. If the borrower manages the cash flow from its core business appropriately through the seasonal fluctuations that are inherent to its industry and successfully implements its non-core asset disposition plans, we believe that the borrower’s financial performance can improve significantly. However, further adverse developments in the core business or material delays in the disposition of non-core assets may require us to take further action.
We continue to experience modest quantities of defaults on residential real estate loans principally due either to the borrower’s personal financial condition or deteriorated collateral value.
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 roll-forward of OREO and the composition of OREO properties:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Beginning balance
$
5,539

 
$
7,704

 
$
6,358

 
$
6,306

New foreclosed properties
147

 
376

 
1,314

 
3,836

Payments received

 

 

 
(10
)
Valuation adjustments
(231
)
 
(315
)
 
(467
)
 
(392
)
Gain (loss) on sale of other real estate owned
11

 
(52
)
 
91

 
40

Proceeds from sales of other real estate owned
(657
)
 
(1,723
)
 
(2,487
)
 
(3,790
)
Ending balance
$
4,809

 
$
5,990

 
$
4,809

 
$
5,990




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September 30, 2015
 
December 31, 2014
 
(Dollars in thousands)
One-to-four family residential
$
325

 
$
806

Multi-family mortgage
1,474

 
2,307

Nonresidential real estate
1,289

 
885

Land
51

 
135

 
3,139

 
4,133

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

 
457

Land
1,670

 
1,768

 
1,670

 
2,225

Total other real estate owned
$
4,809

 
$
6,358

Liquidity and Capital Resources
Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities and lease payments. 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 outstanding FHLBC advances of $15 million at September 30, 2015.
The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and stock repurchases. The primary source of liquidity for the Company as of September 30, 2015 was $16.6 million in cash and cash equivalents, and potential future cash dividends from the Bank.
As of September 30, 2015, we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on our liquidity. As of September 30, 2015, 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.
We are subject to minimum risk-based capital limitations as set forth by federal banking regulations at both the consolidated Company level and the Bank level. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments and letters of credit, are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. For purposes of the risk-based capital guidelines, total capital is defined as the sum of “Common Equity Tier 1”, “Additional Tier 1” and “Tier 2” capital elements. Common Equity Tier 1 is comprised of common stock, related surplus and



44


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retained earnings. Additional Tier 1 capital includes, with certain restrictions, noncumulative perpetual preferred stock, certain grandfathered regulatory capital instruments and minority interests in consolidated subsidiaries. Tier 2 capital includes, with certain limitations, perpetual preferred stock not included in Tier 1 capital, subordinate debt, certain maturing capital instruments, and the allowance for loan and credit losses.
In March 2015, the Company implemented the Basel III capital rules that reformed the regulatory capital framework for banking institutions. The U.S. banking regulatory agencies have implemented the reforms which are designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.
Changes that affected the Company include the additional constraints on the inclusion of deferred tax assets in capital, increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Under the new regulations the Company elected a one-time opt-out to exclude Accumulated Other Comprehensive Income (AOCI) from regulatory capital in the first quarter of 2015.
The Company and the Bank have each adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%. The minimum capital ratios set forth in the Regulatory Capital Plans may be increased and other minimum capital requirements may be established if and as necessary to comply with the Basel III requirements now applicable to the Company and the Bank. In accordance with the Regulatory 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.
The following table shows the Company' s and the Bank's capital amounts and ratios and regulatory thresholds under Basel III at September 30, 2015:
 
Risk-based
 
Leverage
 
Common Tier 1
 
Tier 1
 
Total Capital
 
Tier 1
Company
 
 
 
 
 
 
 
Regulatory capital
$
189,216

 
$
189,216

 
$
199,302

 
$
189,216

Well-capitalized requirement
67,818

 
83,468

 
104,335

 
70,575

Regulatory capital - excess
$
121,398

 
$
105,748

 
$
94,967

 
$
118,641

Capital
18.14
%
 
18.14
%
 
19.10
%
 
13.41
%
Minimum capital requirement
4.50
%
 
6.00
%
 
8.00
%
 
4.00
%
Well capitalized requirement (1)
6.50
%
 
8.00
%
 
10.00
%
 
5.00
%
 
 
 
 
 
 
 
 
Bank
 
 
 
 
 
 
 
Regulatory capital
159,118

 
159,118

 
169,204

 
159,118

Well-capitalized requirement
67,804

 
83,451

 
104,314

 
70,588

Regulatory capital - excess
$
91,314

 
$
75,667

 
$
64,890

 
$
88,530

Capital
15.25
%
 
15.25
%
 
16.22
%
 
11.27
%
Minimum capital requirement
4.50
%
 
6.00
%
 
8.00
%
 
4.00
%
Well capitalized requirement (1)
6.50
%
 
8.00
%
 
10.00
%
 
5.00
%
(1)
The ratios for the well-capitalized requirement are only applicable to the Bank. However, the Company manages its capital position as if the requirement applies to the consolidated entity and has presented the ratios as if they also applied to the Company.



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Consolidated Actual Ratio
 
BankFinancial F.S.B.
Actual Ratio
 
Required for Capital Adequacy Purposes Pre-Basel III
 
To be Well-Capitalized Under Pre-Basel III Regulatory Requirements
December 31, 2014
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
18.31
%
 
16.21
%
 
8.00
%
 
10.00
%
Tier 1 (core) capital (to risk-weighted assets)
17.21

 
15.11

 
4.00

 
6.00

Tier 1 (core) capital (to adjusted total assets)
13.04

 
11.45

 
4.00

 
5.00

As of September 30, 2015, the Bank and the Company were well-capitalized with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.
Capital Management - Company Total stockholders’ equity was $213.1 million at September 30, 2015, compared to $216.1 million at December 31, 2014. The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 600,000 shares of our common stock during the nine months ended September 30, 2015 at a total cost of $7.4 million, and our declaration and payment of cash dividends totaling $3.3 million during this period. These items were partially offset by net income of $6.6 million that we recorded for the nine months ended September 30, 2015. The unallocated shares of common stock that our ESOP owns were reflected as a $9.5 million reduction to stockholders’ equity at September 30, 2015, compared to a $10.3 million reduction at December 31, 2014.
Cash Dividends. We declared cash dividends of $0.16 per share for the nine months ended September 30, 2015, compared to a cash dividend of $0.05 per share for the nine months ended September 30, 2014.
Stock Repurchase Program. On March 30, 2015, the Company announced that its Board had authorized the repurchase of up to 1,055,098 shares of the Company’s common stock, which represents approximately 5% of the Company’s issued and outstanding shares of common stock. The authorization will expire on December 31, 2015 unless extended by the Board. As of September 30, 2015, the Company had repurchased 600,000 shares of its common stock out of the 1,055,098 that had been authorized for repurchase in 2015. Since its inception, the Company has repurchased 4,839,134 shares of its common stock.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. A significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.
The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors’ Asset/Liability Management Committee then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investment portfolio as available-for-sale so as to provide flexibility in liquidity management.
We utilize a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes.
Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the U.S. Treasury yield curve as of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.
Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.
Quantitative Analysis. The following table sets forth, as of September 30, 2015, 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
 
Increase (Decrease) in Estimated
Net Interest Income
Change in Interest Rates (basis points)
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
+400
$
(34,662
)
 
(15.76
)%
 
$
(573
)
 
(1.26
)%
+300
(24,307
)
 
(11.05
)
 
(356
)
 
(0.78
)
+200
(15,763
)
 
(7.17
)
 
(71
)
 
(0.16
)
+100
(1,118
)
 
(0.51
)
 
20

 
0.04

0

 

 

 

The Company has opted not to include an estimate for a decrease in rates at September 30, 2015 as the results are not considered relevant given the current targeted fed funds rate of the Federal Open Market Committee. The table set forth above indicates that at September 30, 2015, in the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience an 7.17% decrease in NPV and a $71,000 decrease in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. 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 an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
ITEM 4.
 CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2015. Based on that evaluation, the Company’s



46


Table of Contents


management, including the Chairman, President, and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2015, 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.



47



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
There have been no material changes to the risk factors disclosed in the Company’s Annual Report in Form 10-K for the year ended December 31, 2014.
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.
 
 
 
 
 
 
 
 
 
On March 30, 2015, the Company announced that its Board had authorized the repurchase of up to 1,055,098 shares of the Company’s common stock. In accordance with this authorization, we have repurchased 600,000 shares of our common stock as of September 30, 2015. There were no share repurchases conducted in the third quarter of 2015. The authorization will expire on December 31, 2015 unless extended by the Board.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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, 2015, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statement of conditions, (ii) consolidated statements of operations, (iii)  consolidated statements of comprehensive income, (iv)  consolidated statements of changes in stockholder's equity, (v) consolidated statements of cash flows and (vi) 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.



48



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BANKFINANCIAL CORPORATION
 
 
 
 
 
 
 
Dated:
October 28, 2015
 
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




49

Exhibit


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:
October 28, 2015
 
By:
/s/ F. Morgan Gasior
 
 
 
 
 
F. Morgan Gasior
 
 
 
 
 
Chairman of the Board, Chief Executive Officer and President




Exhibit


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:
October 28, 2015
 
By:
/s/ Paul A. Cloutier
 
 
 
 
 
Paul A. Cloutier
 
 
 
 
 
Executive Vice President and Chief Financial Officer



Exhibit


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 September 30, 2015 (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:
October 28, 2015
 
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.