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BFIN > SEC Filings for BFIN > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for BANKFINANCIAL CORP


6-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Information Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words "believe," "may," "will," "should," "could," "expect," "estimate," "intend," "anticipate," "project," "plan," or similar expressions. Forward looking statements speak only as of the date made. They are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions. Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) the failure of the real estate market to recover or further declines in real estate values that adversely impact the value of our loan collateral and OREO, asset dispositions and the level of borrower equity in their investments; (ii) the persistence or worsening of adverse economic conditions in general and in the Chicago metropolitan area in particular, including high or increasing unemployment levels, that could result in increased delinquencies in our loan portfolio or a decline in the value of our investment securities and the collateral for our loans; (iii) results of supervisory monitoring or examinations by regulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (iv) interest rate movements and their impact on customer behavior and our net interest margin; (v) less than anticipated loan growth due to a lack of demand for specific loan products, competitive pressures or a dearth of borrowers who meet our underwriting standards; (vi) changes, disruptions or illiquidity in national or global financial markets; (vii) the credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs or changes in estimates relating to the computation of our allowance for loan losses; (viii) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury


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and Federal Reserve Board; (ix) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors' pricing initiatives on our deposit products; (x) the impact of new legislation or regulatory changes, including the Dodd-Frank Act and Basel III, on our products, services, operations and operating expenses; (xi) higher federal deposit insurance premiums; (xii) higher than expected overhead, infrastructure and compliance costs; (xiii) changes in accounting principles, policies or guidelines; and
(xiv) and our failure to achieve expected synergies and cost savings from acquisitions. These risks and uncertainties, as well as the Risk Factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made. Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and all amendments thereto, as filed with the Securities and Exchange Commission. Overview
Continuing the trends commenced in the fourth quarter of 2012, loan origination activity improved in the second quarter of 2013, especially in the multifamily and commercial leasing categories. On a year-over-year comparative basis, loan originations increased by 75% with particular strength in multifamily loan originations, commercial loan originations and commercial lease originations. Continued improvement in loan origination volumes remains essential to offsetting the ongoing effects of yield compression on our net interest income. Net loan payoffs decreased during the course of the second quarter of 2013. Our priority for loan portfolio management continues to be the retention of our highest quality loan exposures while expediting the reduction of lesser-quality loan balances.
Asset quality was essentially constant. In addition, we continued to reduce OREO balances at an acceptable rate with minimal impact to earnings and capital during the quarter.
Beginning in the fourth quarter of 2012, and continuing in 2013, we determined that for certain performing classified and non-performing multifamily and non-residential real estate loans, the most cost-effective and expeditious resolution method was to decline to renew the loans upon maturity or to utilize other remedies provided by our loan documents to accelerate the maturity date of the loans, coupled with an attempt in appropriate cases to negotiate a final resolution in the form of a deed-in-lieu of foreclosure. Of the $4.7 million in loans placed on non-accrual in the second quarter of 2013, $2.6 million related to affirmative steps that we took to expedite resolution. We believe this approach has the potential to further reduce classified and non-performing assets more rapidly and with lower litigation costs given the time and expense inherent within the current judicial foreclosure processes.
National economic factors improved slightly in the second quarter of 2013, while the local Chicago metropolitan economic factors declined slightly. Our provision for loan losses increased in the second quarter of 2013 due principally to the growth in the loan portfolio and receipt of updated appraisals on several small loans that are subject to annual impairment testing.
Non-interest income declined in the second quarter of 2013 due to reduced income from mortgage banking and sales of non-performing loans. Income from deposit services and loan fee income improved modestly in the second quarter of 2013. Non-interest expense declined in the second quarter of 2013 despite the continuing impact of credit collection expense. Advertising expense increased due to expanded loan marketing activity. The Company's full-time equivalent employment levels declined from 347 to 308 during the second quarter of 2013, reflecting the initial implementation of our updated operations review. We expanded our residential and commercial loan originations staffing by 10% during the second quarter of 2013 as a re-deployment of resources from transaction processing and support functions. As the remainder of 2013 progresses, we expect that non-interest expense related to information technology expense and non-performing assets management expense will begin to trend downward.


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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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere in this Quarterly Report.
                                    June 30, 2013      December 31, 2012       Change
                                                  (Dollars in thousands)
Selected Financial Condition Data:
Total assets                       $     1,461,132    $         1,481,192    $ (20,060 )
Loans, net                               1,012,316              1,030,465      (18,149 )
Loans held-for-sale                            276                  2,166       (1,890 )
Securities, at fair value                   53,014                 77,832      (24,818 )
Core deposit intangible                      2,732                  3,038         (306 )
Deposits                                 1,262,096              1,282,351      (20,255 )
Borrowings                                   2,940                  5,567       (2,627 )
Equity                                     173,229                172,890          339



                                                                              Six Months Ended
                              Three Months Ended June 30,                         June 30,
                                   2013            2012        Change        2013          2012        Change
                                                           (Dollars in thousands)
Selected Operating Data:
Interest and dividend income $       12,276     $ 15,824     $ (3,548 )   $  24,989     $ 32,458     $ (7,469 )
Interest expense                        935        1,112         (177 )       1,929        2,352         (423 )
Net interest income                  11,341       14,712       (3,371 )      23,060       30,106       (7,046 )
Provision for loan losses               206        1,745       (1,539 )         928        2,741       (1,813 )
Net interest income after
provision for loan losses            11,135       12,967       (1,832 )      22,132       27,365       (5,233 )
Noninterest income                    1,509        1,418           91         4,375        3,250        1,125
Noninterest expense                  12,568       14,044       (1,476 )      25,753       27,480       (1,727 )
Income before income tax
expense                                  76          341         (265 )         754        3,135       (2,381 )
Income tax expense                        -         (457 )        457             -            -            -
Net income                   $           76     $    798     $   (722 )   $     754     $  3,135     $ (2,381 )


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                                                                                        Six Months Ended
                                               Three Months Ended June 30,                  June 30,
                                                2013                 2012             2013            2012
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) (1)                          0.02 %                0.21 %         0.10 %          0.41 %
Return on equity (ratio of net income to
average equity) (1)                                0.17                  1.56           0.86            3.08
Average equity to average assets                  12.02                 13.42          11.98           13.29
Net interest rate spread (1) (2)                   3.25                  4.04           3.32            4.11
Net interest margin (1) (3)                        3.31                  4.11           3.38            4.18
Efficiency ratio (4)                              97.81                 87.07          93.87           82.38
Noninterest expense to average total
assets (1)                                         3.46                  3.68           3.53            3.58
Average interest-earning assets to
average interest-bearing liabilities             121.24                123.50         121.02          122.98
Dividends declared per share              $        0.02         $        0.01     $     0.02      $     0.02
Dividend payout ratio                              N.M.                  N.M.           N.M.            N.M.


                                                                               At December 31,
                                                           At June 30, 2013          2012
Asset Quality Ratios:
Nonperforming assets to total assets (5)                            2.56 %            2.59 %
Nonperforming loans to total loans                                  3.03              2.67
Allowance for loan losses to nonperforming loans                   54.78             64.39
Allowance for loan losses to total loans                            1.66              1.72
Capital Ratios:
Equity to total assets at end of period                            11.86 %           11.67 %
Tier 1 leverage ratio (Bank only)                                   9.86              9.60
Other Data:
Number of full-service offices                                        20                20
Employees (full-time equivalents)                                    308               352

(1) Ratios annualized.

(2) The net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the period.

(3) The net interest margin represents net interest income divided by average total interest-earning assets for the period.

(4) The efficiency ratio represents noninterest expense, divided by the sum of net interest income and noninterest income.

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

N.M. Not Meaningful

Comparison of Financial Condition at June 30, 2013 and December 31, 2012 Total assets decreased $20.1 million, or 1.4%, to $1.461 billion at June 30, 2013, from $1.481 billion at December 31, 2012. The decrease in total assets was primarily due to a decrease in loans receivable and securities. The decrease was partially offset by an increase in cash and cash equivalents. Net loans decreased $18.1 million to $1.012 billion at June 30, 2013, from $1.030 billion at December 31, 2012. In December 2012, we designated certain owner-occupied and investor-owned one-to-four family residential loans with a carrying value of $7.5 million as "held for sale" in preparation for a bulk sale. The bulk sale of these one-to-four family residential loans was completed in February 2013. Securities decreased $24.8 million to $53.0 million at June 30, 2013, from $77.8 million at December 31, 2012. Net cash and cash equivalents increased by $36.3 million to $312.1 million at June 30, 2013, from $275.8 million at December 31, 2012.


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In December 2009, the Bank was required by an FDIC final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments in the fourth quarter of 2009, to prepay $6.8 million in estimated assessments through 2012. On June 29, 2013, the Bank received a $2.7 million refund, the unused portion of the FDIC prepaid assessments.
Total liabilities decreased by $20.4 million, or 1.6%, to $1.288 billion at June 30, 2013, from $1.308 billion at December 31, 2012. Total deposits decreased $20.3 million, or 1.6%, to $1.262 billion at June 30, 2013, from $1.282 billion at December 31, 2012, primarily due to deposit pricing adjustments that we made in anticipation of additional excess liquidity resulting from loan payments and bulk sales of loans. Certificates of deposit decreased $18.2 million, or 6.0%, to $287.0 million at June 30, 2013, from $305.3 million at December 31, 2012. Core deposits increased to 77.3% of total deposits at June 30, 2013, from 76.2% of total deposits at December 31, 2012. Noninterest-bearing demand deposits increased $2.5 million, or 1.9%, to $137.1 million at June 30, 2013, from $134.6 million at December 31, 2012. Savings accounts increased $3.0 million, or 2.1%, to $147.8 million at June 30, 2013, from $144.7 million at December 31, 2012. Money market and interest-bearing NOW accounts decreased $7.6 million, or 1.1%, to $690.2 million at June 30, 2013, from $697.8 million at December 31, 2012.
Other liabilities increased $2.6 million, or 26.54%, to $12.2 million at June 30, 2013, from $9.7 million at December 31, 2012 primarily due to the purchase of an investment security not settled at June 30, 2013 for $2.5 million.
Total stockholders' equity was $173.2 million at June 30, 2013, compared to $172.9 million at December 31, 2012. The increase in total stockholders' equity was primarily due to the $754,000 net income that we recorded for six months ended June 30, 2013. The unallocated shares of common stock that our ESOP owns were reflected as a $11.7 million reduction to stockholders' equity at June 30, 2013, compared to a $12.2 million reduction at December 31, 2012. Operating results for the three months ended June 30, 2013 and 2012 Net Income. We had net income of $76,000 for the three months ended June 30, 2013, compared to $798,000 for the three months ended June 30, 2012. There were no earnings per share of common stock for the three months ended June 30, 2013, compared to $0.04 per basic and fully diluted share for the three months ended June 30, 2012.
Net Interest Income. Net interest income was $11.3 million for the three months ended June 30, 2013, compared to $14.7 million for the same period in 2012. The decrease reflected a $3.5 million decrease in interest income, partially offset by a $177,000 decrease in interest expense.
The decrease in net interest income was primarily attributable to a lower level of average interest-earning assets and a decrease in the yield on interest earning assets. Total average interest-earning assets decreased $66.3 million, or 4.6%, to $1.374 billion for the three months ended June 30, 2013, from $1.440 billion for the same period in 2012. Our net interest rate spread decreased by 79 basis points to 3.25% for the three months ended June 30, 2013, from 4.04% for the same period in 2012. Our net interest margin decreased by 80 basis points to 3.31% for the three months ended June 30, 2013, from 4.11% for the same period in 2012. The decrease in the net interest spread and margin was a result of lower yields on interest earning assets, which was partially offset by a lower cost of funds. The yield on interest earning assets decreased 84 basis points to 3.58% for the three months ended June 30, 2013, from 4.42% for the same period in 2012, and the cost of interest bearing liabilities decreased five basis points to 0.33% for the three months ended June 30, 2013, from 0.38% for the same period in 2012.


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Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs,
and certain other information. No tax-equivalent yield adjustments were made, as
the effect of these adjustments would not be material. Average balances are
daily average balances. Nonaccrual loans are included in the computation of
average balances, but have been reflected in the table as loans carrying a zero
yield. The yields set forth below include the effect of deferred fees and
expenses, discounts and premiums, purchase accounting adjustments that are
amortized or accreted to interest income or expense.
                                                           Three Months Ended June 30,
                                            2013                                                2012
                         Average                                             Average
                       Outstanding                                         Outstanding
                         Balance         Interest       Yield/Rate (1)       Balance         Interest       Yield/Rate (1)
                                                             (Dollars in thousands)
Interest-earning
Assets:
Loans                 $ 1,014,591     $     11,854             4.69 %     $ 1,184,803     $     15,312             5.20 %
Securities                 57,022              219             1.54            77,077              387             2.02
Stock in FHLBC              6,809                6             0.35            10,741                9             0.34
Other                     295,433              197             0.27           167,526              116             0.28
Total
interest-earning
assets                  1,373,855           12,276             3.58         1,440,147           15,824             4.42
Noninterest-earning
assets                     79,558                                              85,479
Total assets          $ 1,453,413                                         $ 1,525,626
Interest-bearing
Liabilities:
Savings deposits      $   148,568               38             0.10       $   146,404               37             0.10
Money market accounts     343,303              294             0.34           343,415              311             0.36
NOW accounts              346,457               95             0.11           333,299              104             0.13
Certificates of
deposit                   291,966              506             0.70           333,237              632             0.76
Total deposits          1,130,294              933             0.33         1,156,355            1,084             0.38
Borrowings                  2,865                2             0.28             9,756               28             1.15
Total
interest-bearing
liabilities             1,133,159              935             0.33         1,166,111            1,112             0.38
Noninterest-bearing
deposits                  128,162                                             135,252
Noninterest-bearing
liabilities                17,449                                              19,554
Total liabilities       1,278,770                                           1,320,917
Equity                    174,643                                             204,709
Total liabilities and
equity                $ 1,453,413                                         $ 1,525,626
Net interest income                   $     11,341                                        $     14,712
Net interest rate
spread (2)                                                     3.25 %                                              4.04 %
Net interest-earning
assets (3)            $   240,696                                         $   274,036
Net interest margin
(4)                                                            3.31 %                                              4.11 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                121.24 %                                            123.50 %

(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 Loan Losses
We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower's ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.
The provision for loan losses totaled $206,000 for the three months ended June 30, 2013, compared to $1.7 million for the same period in 2012. The provision for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. Net charge-offs were $562,000 for the three months ended June 30, 2013, compared to $2.5 million for the same period in 2012. The allowance for loan losses as a percentage of nonperforming loans was 54.78% at June 30, 2013, compared to 59.24% at March 31, 2013. Loans collectively evaluated for impairment increased $6.2 million, or 0.6%, to $998.8 million at June 30, 2013, compared to $992.6 million at March 31, 2013. The related loan loss decreased $74,000, or 0.46%, to $15.8 million at June 30, 2013, compared to $15.9 million at March 31, 2013.
A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the portion of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower's obligation to repay is legally discharged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.

Noninterest Income
                                                 Three Months Ended June 30,
                                                   2013               2012         Change
                                                         (Dollars in thousands)
Deposit service charges and fees              $        509       $        521     $  (12 )
Other fee income                                       410                383         27
Insurance commissions and annuities income              86                112        (26 )
Gain (loss) on sale of loans, net                       (4 )              118       (122 )
Loss on disposition of premises and equipment            -               (157 )      157
Loan servicing fees                                    114                119         (5 )
. . .
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