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BFIN > SEC Filings for BFIN > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for BANKFINANCIAL CORP


30-Oct-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 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


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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
Loan origination activity continued to improve in the third quarter of 2013, especially in the residential loan, multi-family loan and commercial loan categories. Continued improvement in loan origination volumes remains essential to offsetting the ongoing effects of yield compression on our net interest income. Net loan payoffs increased in the third quarter of 2013 due to the reduction of lesser-quality loan balances.
Asset quality improved during the third quarter of 2013 due in part to our focus on accelerated resolution methodologies. In addition, we continued to reduce OREO balances at an acceptable rate with minimal impact to earnings and capital during the quarter.
Noninterest income remained stable in the third quarter of 2013 due to slightly higher deposit services fee income and higher insurance-related revenues. Noninterest expense declined in the third quarter of 2013 despite the continuing impact of credit resolution expense. As the remainder of 2013 progresses, we expect that noninterest expense related to information technology expense and nonperforming 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 the
Consolidated Financial Statements of the Company and related notes included
elsewhere in this Quarterly Report.
                                                   September 30, 2013       December 31, 2012       Change
                                                                    (Dollars in thousands)
Selected Financial Condition Data:
Total assets                                     $          1,441,948     $         1,481,192     $ (39,244 )
Loans, net                                                  1,035,331               1,030,465         4,866
Loans held for sale                                                15                   2,166        (2,151 )
Securities, at fair value                                      83,409                  77,832         5,577
Core deposit intangible                                         2,583                   3,038          (455 )
Deposits                                                    1,249,833               1,282,351       (32,518 )
Borrowings                                                      2,883                   5,567        (2,684 )
Equity                                                        174,311                 172,890         1,421



                                 Three Months Ended                        Nine Months Ended
                                    September 30,                            September 30,
                                 2013           2012         Change        2013          2012        Change
                                                          (Dollars in thousands)
Selected Operating Data:
Interest and dividend income $  12,107       $  14,468     $ (2,361 )   $  37,096     $ 46,926     $ (9,830 )
Interest expense                   882           1,036         (154 )       2,811        3,388         (577 )
Net interest income             11,225          13,432       (2,207 )      34,285       43,538       (9,253 )
Provision (recovery) for
loan losses                       (437 )         4,453       (4,890 )         491        7,194       (6,703 )
Net interest income after
provision (recovery) for
loan losses                     11,662           8,979        2,683        33,794       36,344       (2,550 )
Noninterest income               1,539           1,831         (292 )       5,914        5,081          833
Noninterest expense             12,162          16,032       (3,870 )      37,915       43,512       (5,597 )
Income (loss) before income
tax expense                      1,039          (5,222 )      6,261         1,793       (2,087 )      3,880
Income tax expense                   -               -            -             -            -            -
Net income (loss)            $   1,039       $  (5,222 )   $  6,261     $   1,793     $ (2,087 )   $  3,880


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                                                Three Months Ended September 30,             Nine Months Ended September 30,
                                                2013                     2012                   2013                  2012
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
(loss) to average total assets) (1)                0.29 %                  (1.39 )%                0.16 %               (0.18 )%
Return on equity (ratio of net income
(loss) to average equity) (1)                      2.38                   (10.20 )                 1.37                 (1.36 )
Average equity to average assets                  12.13                    13.62                  12.03                 13.40
Net interest rate spread (1) (2)                   3.21                     3.69                   3.28                  3.97
Net interest margin (1) (3)                        3.26                     3.76                   3.34                  4.04
Efficiency ratio (4)                              95.28                   105.04                  94.32                 89.50
Noninterest expense to average total
assets (1)                                         3.38                     4.26                   3.48                  3.81
Average interest-earning assets to
average interest-bearing liabilities             121.95                   123.54                 121.33                123.16
Dividends declared per share              $           -         $           0.01          $        0.02         $        0.03
Dividend payout ratio                              N.M.                     N.M.                   N.M.                  N.M.


                                                         At September 30,   At December 31,
                                                               2013               2012
Asset Quality Ratios:
Nonperforming assets to total assets (5)                        2.18 %             2.59 %
Nonperforming loans to total loans                              2.47               2.67
Allowance for loan losses to nonperforming loans               61.08              64.39
Allowance for loan losses to total loans                        1.51               1.72
Capital Ratios:
Equity to total assets at end of period                        12.09 %            11.67 %
Tier 1 leverage ratio (Bank only)                              10.10               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 September 30, 2013 and December 31, 2012 Total assets decreased $39.2 million, or 2.6%, to $1.442 billion at September 30, 2013, from $1.481 billion at December 31, 2012. The decrease in total assets was primarily due to a decrease in cash and cash equivalents, other real estate owned, and FDIC prepaid insurance, partially offset by increases in loans receivable and securities. Net loans increased $4.9 million to $1.035 billion at September 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 increased $5.6 million to $83.4 million at September 30, 2013, from $77.8 million at December 31, 2012. Net cash and cash equivalents decreased by $32.3 million to $243.5 million at September 30, 2013, from $275.8 million at December 31, 2012.


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In December 2009, the Bank was required by an FDIC 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, which represented the unused portion of the FDIC prepaid assessments. Total liabilities decreased by $40.7 million, or 3.1%, to $1.268 billion at September 30, 2013, from $1.308 billion at December 31, 2012. Total deposits decreased $32.5 million, or 2.5%, to $1.250 billion at September 30, 2013, from $1.282 billion at December 31, 2012, primarily due to pricing adjustments that we made on certificates of deposit and other interest-bearing deposits in anticipation of additional excess liquidity resulting from loan payments and bulk loan sales. Certificates of deposit decreased $26.0 million, or 8.5%, to $279.3 million at September 30, 2013, from $305.3 million at December 31, 2012. Core deposits increased to 77.7% of total deposits at September 30, 2013, from 76.2% of total deposits at December 31, 2012. Noninterest-bearing demand deposits decreased $1.5 million, or 1.1%, to $133.1 million at September 30, 2013, from $134.6 million at December 31, 2012. Savings accounts increased $2.0 million, or 1.4%, to $146.7 million at September 30, 2013, from $144.7 million at December 31, 2012. Money market and interest-bearing NOW accounts decreased $7.0 million, or 1.0%, to $690.8 million at September 30, 2013, from $697.8 million at December 31, 2012.
Total stockholders' equity was $174.3 million at September 30, 2013, compared to $172.9 million at December 31, 2012. The increase in total stockholders' equity was primarily due to the $1.8 million net income that we recorded for the nine months ended September 30, 2013, which was partially offset by the $422,000 in dividends that were paid to our stockholders. The unallocated shares of common stock that our ESOP owns were reflected as a $11.5 million reduction to stockholders' equity at September 30, 2013, compared to a $12.2 million reduction at December 31, 2012.
Operating results for the three months ended September 30, 2013 and 2012 Net Income. We had net income of $1.0 million for the three months ended September 30, 2013, compared to a $5.2 million loss for the three months ended September 30, 2012. Earnings per basic and fully diluted share of common stock were $0.05 for the three months ended September 30, 2013, compared to a loss of $0.26 per basic and fully diluted share of common stock for the three months ended September 30, 2012.
Net Interest Income. Net interest income was $11.2 million for the three months ended September 30, 2013, compared to $13.4 million for the same period in 2012. The decrease reflected a $2.4 million, or 16.3%, decrease in interest income and a $154,000, or 14.9%, 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 $55.2 million, or 3.9%, to $1.365 billion for the three months ended September 30, 2013, from $1.420 billion for the same period in 2012. Our net interest rate spread decreased by 48 basis points to 3.21% for the three months ended September 30, 2013, from 3.69% for the same period in 2012. Our net interest margin decreased by 50 basis points to 3.26% for the three months ended September 30, 2013, from 3.76% 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 the decreased average balance and yields of our interest-bearing liabilities. The yield on interest-earning assets decreased 53 basis points to 3.52% for the three months ended September 30, 2013, from 4.05% for the same period in 2012, and the cost of interest-bearing liabilities decreased five basis points to 0.31% for the three months ended September 30, 2013, from 0.36% 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 September 30,
                                            2013                                                2012
                         Average                                             Average
                       Outstanding                                         Outstanding
                         Balance         Interest       Yield/Rate (1)       Balance         Interest       Yield/Rate (1)
                                                             (Dollars in thousands)
Interest-earning
Assets:
Loans                 $ 1,019,402     $     11,680             4.55 %     $ 1,125,600     $     13,978             4.94 %
Securities                 68,109              241             1.40            74,260              342             1.83
Stock in FHLBC              6,068                5             0.33             9,614                8             0.33
Other                     271,046              181             0.26           210,355              140             0.26
Total
interest-earning
assets                  1,364,625           12,107             3.52         1,419,829           14,468             4.05
Noninterest-earning
assets                     75,936                                              84,609
Total assets          $ 1,440,561                                         $ 1,504,438
Interest-bearing
Liabilities:
Savings deposits      $   147,230               38             0.10       $   143,248               37             0.10
Money market accounts     340,578              280             0.33           346,523              318             0.37
NOW accounts              344,571               88             0.10           335,346              106             0.13
Certificates of
deposit                   283,775              474             0.66           316,738              549             0.69
Total deposits          1,116,154              880             0.31         1,141,855            1,010             0.35
Borrowings                  2,813                2             0.28             7,449               26             1.39
Total
interest-bearing
liabilities             1,118,967              882             0.31         1,149,304            1,036             0.36
Noninterest-bearing
deposits                  132,120                                             135,352
Noninterest-bearing
liabilities                14,684                                              14,925
Total liabilities       1,265,771                                           1,299,581
Equity                    174,790                                             204,857
Total liabilities and
equity                $ 1,440,561                                         $ 1,504,438
Net interest income                   $     11,225                                        $     13,432
Net interest rate
spread (2)                                                     3.21 %                                              3.69 %
Net interest-earning
assets (3)            $   245,658                                         $   270,525
Net interest margin
(4)                                                            3.26 %                                              3.76 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                121.95 %                                            123.54 %

(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 recovery for loan losses totaled $437,000 for the three months ended September 30, 2013, compared to a provision for loan losses of $4.5 million for the same period in 2012. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $773,000, or 4.9%, to $15.1 million at September 30, 2013, compared to $15.8 million at June 30, 2013. The growth in our loan portfolio is focused on loan types with lower loss ratios based on our historical loss experience. Our loan portfolio increased by $21.7 million in the quarter; however, all of the loan growth occurred within lower-risk loan types. Accordingly, the improvement in the overall risk composition of the loan portfolio and the reduction in portfolio loss ratios due to the weighted-average aging of loss occurrence timing more than fully funded the allowance required for the loan growth experienced during the quarter. Net charge-offs were $784,000 for the three months ended September 30, 2013, which was partially offset by the decrease in the reserve established for loans individually evaluated for impairment of $448,000 for the three months ended September 30, 2013. The allowance for loan losses as a percentage of nonperforming loans was 61.08% at September 30, 2013, compared to 57.05% at June 30, 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 September 30,
                                                        2013                   2012             Change
                                                                  (Dollars in thousands)
Deposit service charges and fees                 $           520         $           548     $      (28 )
Other fee income                                             373                     374             (1 )
Insurance commissions and annuities income                   106                     125            (19 )
Gain on sale of loans, net                                    32                     210           (178 )
Loss on disposition of premises and equipment                  -                      (7 )            7
Loan servicing fees                                          112                     124            (12 )
Amortization of servicing assets                             (49 )                   (61 )           12
Recovery of servicing assets                                   6                       6              -
Earnings on bank owned life insurance                         84                     109            (25 )
Trust income                                                 172                     171              1
Other                                                        183                     232            (49 )
Total noninterest income                         $         1,539         $         1,831     $     (292 )

Noninterest income decreased by $292,000 to $1.5 million for the three months ended September 30, 2013, from $1.8 million for the same period in 2012. Noninterest income for the three months ended September 30, 2013, included a $32,000 gain on sale of loans, compared to a $210,000 gain on sale of loans that was recorded for the same period in 2012.


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