|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The discussion and analysis that follows focuses on certain factors affecting our consolidated financial condition at December 31, 2019 and 2018, and our consolidated results of operations for the two years ended December 31, 2019. Our consolidated financial statements, the related notes and the discussion of our critical accounting policies appearing elsewhere in this Annual Report should be read in conjunction with this discussion and analysis.
Overview
The Company recorded net income of $11.7 million for the year ended December 31, 2019 and basic and diluted earnings per common share for the year ended December 31, 2019 were $0.75.
For the year December 31, 2019, multi-family and nonresidential real estate loans declined by $73.9 million (9.6%) due to lower originations volume in 2019. Commercial loans and commercial leases declined by $68.5 million (14.1%) due primarily to planned reductions in investment-rated leases and of certain Regional Commercial Banking and National Healthcare Lending commercial loan relationships, offset by modest net growth in other commercial leases. Total commercial-related loan balances were $1.117 billion at the end of 2019, and now comprise 95.1% of the Company’s total loans, compared to 94.6% at the end of 2018.
The Company’s asset quality improved in 2019. The ratio of nonperforming loans to total loans was 0.07% and the ratio of nonperforming assets to total assets was 0.07% at December 31, 2019. Nonperforming commercial-related loans represented 0.03% of total commercial-related loans.
Total retail and commercial deposits declined slightly in 2019. Retail depositors continue to seek higher interest rates, and the Company moderated its competitive position to better manage its cost of funds given its strong liquidity position. Commercial depositors continue to use deposits to repay commercial lines of credit whenever possible. The Company’s liquid assets were 12.8% of total assets at December 31, 2019.
The Company’s capital position remained strong with the Bank's Tier 1 leverage ratio of 11.48%. During 2019, the Company maintained its quarterly dividend rate at $0.10 per share. The Company repurchased 1,203,050 common shares during the year ended December 31, 2019, which represented 7.3% of the Company’s common shares that were outstanding on December 31, 2018. The Company’s book value per share increased in 2019 by 0.4% to $11.41 per share.
Results of Operations
Net Income
Comparison of Year 2019 to 2018. We recorded net income of $11.7 million for the year ended December 31, 2019, compared to net income of $19.3 million for 2018. The decrease in net income was primarily due to the $3.8 million provision for loss recorded in 2019 combined with the 2018 recording of several gains, including $7.0 million of realized and unrealized gains on sale of the Company’s Class B Visa common shares and $1.4 million of income from a death benefit on a bank-owned life insurance policy as a result of the death of a retired Bank executive. Our basic earnings per share of common stock was $0.75 for the year ended December 31, 2019, compared to $1.11 per share of common stock for the year ended December 31, 2018.
Net Interest Income
Net interest income is our primary source of revenue. Net interest income equals the excess of interest income plus fees earned on interest-earning assets over interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders' equity, also support interest-earning assets.
The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in Note 1 of “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report on Form 10-K.
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, and discounts and premiums that are amortized or accreted to interest income or expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Average
Outstanding
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Average
Outstanding
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Average
Outstanding
Balance
|
|
Interest
|
|
Yield/Rate
|
|
(Dollars in thousands)
|
Interest-earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
1,257,506
|
|
|
$
|
60,568
|
|
|
4.82
|
%
|
|
$
|
1,289,121
|
|
|
$
|
57,052
|
|
|
4.43
|
%
|
|
$
|
1,323,376
|
|
|
$
|
53,227
|
|
|
4.02
|
%
|
Securities
|
79,984
|
|
|
2,082
|
|
|
2.60
|
|
|
105,831
|
|
|
2,229
|
|
|
2.11
|
|
|
106,534
|
|
|
1,474
|
|
|
1.38
|
|
Stock in FHLB and FRB
|
7,657
|
|
|
364
|
|
|
4.75
|
|
|
8,212
|
|
|
428
|
|
|
5.21
|
|
|
8,494
|
|
|
409
|
|
|
4.82
|
|
Other
|
103,664
|
|
|
2,394
|
|
|
2.31
|
|
|
81,941
|
|
|
1,578
|
|
|
1.93
|
|
|
88,548
|
|
|
1,069
|
|
|
1.21
|
|
Total interest-earning assets
|
1,448,811
|
|
|
65,408
|
|
|
4.51
|
|
|
1,485,105
|
|
|
61,287
|
|
|
4.13
|
|
|
1,526,952
|
|
|
56,179
|
|
|
3.68
|
|
Noninterest-earning assets
|
70,808
|
|
|
|
|
|
|
73,930
|
|
|
|
|
|
|
90,464
|
|
|
|
|
|
Total assets
|
$
|
1,519,619
|
|
|
|
|
|
|
$
|
1,559,035
|
|
|
|
|
|
|
$
|
1,617,416
|
|
|
|
|
|
Interest-bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
$
|
152,567
|
|
|
424
|
|
|
0.28
|
|
|
$
|
157,350
|
|
|
286
|
|
|
0.18
|
|
|
$
|
160,266
|
|
|
186
|
|
|
0.12
|
|
Money market accounts
|
245,730
|
|
|
2,230
|
|
|
0.91
|
|
|
278,366
|
|
|
1,985
|
|
|
0.71
|
|
|
304,868
|
|
|
1,204
|
|
|
0.39
|
|
NOW accounts
|
269,856
|
|
|
1,150
|
|
|
0.43
|
|
|
279,422
|
|
|
856
|
|
|
0.31
|
|
|
274,585
|
|
|
537
|
|
|
0.20
|
|
Certificates of deposit
|
427,044
|
|
|
9,324
|
|
|
2.18
|
|
|
352,731
|
|
|
5,434
|
|
|
1.54
|
|
|
364,792
|
|
|
3,511
|
|
|
0.96
|
|
Total deposits
|
1,095,197
|
|
|
13,128
|
|
|
1.20
|
|
|
1,067,869
|
|
|
8,561
|
|
|
0.80
|
|
|
1,104,511
|
|
|
5,438
|
|
|
0.49
|
|
Borrowings
|
4,216
|
|
|
89
|
|
|
2.11
|
|
|
45,870
|
|
|
656
|
|
|
1.43
|
|
|
54,899
|
|
|
651
|
|
|
1.19
|
|
Total interest-bearing liabilities
|
1,099,413
|
|
|
13,217
|
|
|
1.20
|
|
|
1,113,739
|
|
|
9,217
|
|
|
0.83
|
|
|
1,159,410
|
|
|
6,089
|
|
|
0.53
|
|
Noninterest-bearing deposits
|
213,946
|
|
|
|
|
|
|
226,605
|
|
|
|
|
|
|
233,200
|
|
|
|
|
|
Noninterest-bearing liabilities
|
28,774
|
|
|
|
|
|
|
23,630
|
|
|
|
|
|
|
22,127
|
|
|
|
|
|
Total liabilities
|
1,342,133
|
|
|
|
|
|
|
1,363,974
|
|
|
|
|
|
|
1,414,737
|
|
|
|
|
|
Equity
|
177,486
|
|
|
|
|
|
|
195,061
|
|
|
|
|
|
|
202,679
|
|
|
|
|
|
Total liabilities and equity
|
$
|
1,519,619
|
|
|
|
|
|
|
$
|
1,559,035
|
|
|
|
|
|
|
$
|
1,617,416
|
|
|
|
|
|
Net interest income
|
|
|
$
|
52,191
|
|
|
|
|
|
|
$
|
52,070
|
|
|
|
|
|
|
$
|
50,090
|
|
|
|
Net interest rate spread (1)
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
3.15
|
%
|
Net interest-earning assets (2)
|
$
|
349,398
|
|
|
|
|
|
|
$
|
371,366
|
|
|
|
|
|
|
$
|
367,542
|
|
|
|
|
|
Net interest margin (3)
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
3.51
|
%
|
|
|
|
|
|
3.28
|
%
|
Ratio of interest-earning assets to interest-bearing liabilities
|
131.78
|
%
|
|
|
|
|
|
133.34
|
%
|
|
|
|
|
|
131.70
|
%
|
|
|
|
|
_________________
|
|
(1)
|
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
(2)
|
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
|
|
|
(3)
|
Net interest margin represents net interest income divided by average total interest-earning assets.
|
Comparison of Year 2019 to 2018. Net interest income increased by $121,000, or 0.2%, to $52.2 million for the year ended December 31, 2019, from $52.1 million for the year ended December 31, 2018. Our net interest rate spread increased one basis point to 3.31% for the year ended December 31, 2019, from 3.30% for 2018. Our net interest margin increased nine basis points to 3.60% for the year ended December 31, 2019, from 3.51% for 2018. The increase in net interest income was primarily attributable to an increase in the average yield on interest-earning assets, which was partially offset by an increase in the cost of interest-bearing liabilities and a decrease in total average interest-earning assets. The yield on interest-earning assets increased 38 basis points, or 9.2%, to 4.51% for the year ended December 31, 2019, from 4.13% for 2018. The cost of interest-bearing liabilities increased 37 basis points, or 44.6%, to 1.20% for the year ended December 31, 2019, from 0.83% for 2018. Total average interest-earning assets decreased $36.3 million to $1.449 billion for the year ended December 31, 2019, from $1.485 billion for 2018. Our average interest-bearing liabilities decreased $14.3 million to $1.099 billion for the year ended December 31, 2019, from $1.114 billion for 2018.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019 vs. 2018
|
|
2018 vs. 2017
|
|
Increase (Decrease) Due to
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
Rate
|
|
Total
Increase
|
|
Volume
|
|
Rate
|
|
Total
Increase
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
(1,425
|
)
|
|
$
|
4,941
|
|
|
$
|
3,516
|
|
|
$
|
(1,422
|
)
|
|
$
|
5,247
|
|
|
$
|
3,825
|
|
Securities
|
(607
|
)
|
|
460
|
|
|
(147
|
)
|
|
(10
|
)
|
|
765
|
|
|
755
|
|
Stock in FHLB and FRB
|
(28
|
)
|
|
(36
|
)
|
|
(64
|
)
|
|
(14
|
)
|
|
33
|
|
|
19
|
|
Other
|
468
|
|
|
348
|
|
|
816
|
|
|
(85
|
)
|
|
594
|
|
|
509
|
|
Total interest-earning assets
|
(1,592
|
)
|
|
5,713
|
|
|
4,121
|
|
|
(1,531
|
)
|
|
6,639
|
|
|
5,108
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
(9
|
)
|
|
147
|
|
|
138
|
|
|
(3
|
)
|
|
103
|
|
|
100
|
|
Money market accounts
|
(255
|
)
|
|
500
|
|
|
245
|
|
|
(112
|
)
|
|
893
|
|
|
781
|
|
NOW accounts
|
(31
|
)
|
|
325
|
|
|
294
|
|
|
10
|
|
|
309
|
|
|
319
|
|
Certificates of deposit
|
1,309
|
|
|
2,581
|
|
|
3,890
|
|
|
(120
|
)
|
|
2,043
|
|
|
1,923
|
|
Borrowings
|
(782
|
)
|
|
215
|
|
|
(567
|
)
|
|
(116
|
)
|
|
121
|
|
|
5
|
|
Total interest-bearing liabilities
|
232
|
|
|
3,768
|
|
|
4,000
|
|
|
(341
|
)
|
|
3,469
|
|
|
3,128
|
|
Change in net interest income
|
$
|
(1,824
|
)
|
|
$
|
1,945
|
|
|
$
|
121
|
|
|
$
|
(1,190
|
)
|
|
$
|
3,170
|
|
|
$
|
1,980
|
|
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.
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.
We recorded a provision for loan losses of $3.8 million for the year ended December 31, 2019, compared to $145,000 for the year ended December 31, 2018. The provision or recovery for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $811,000, or 9.6%, to $7.6 million at December 31, 2019 from $8.4 million at December 31, 2018. The primary cause of this decrease in the allowance for loan losses attributable to loans collectively evaluated for impairment is the $156.1 million decrease in the balance of loans collectively evaluated for impairment. Net charge-offs were $4.7 million for the year ended December 31, 2019, compared to net charge-offs of $41,000 for the year ended December 31, 2018. For further analysis and information on how we determine the appropriate level for the allowance for loan losses and analysis of credit quality, see “Critical Accounting Policies,” “Risk Classification of Loans” and “Allowance for Loan Losses.” There were no reserves established for loans individually evaluated for impairment at December 31, 2019 compared to $27,000 at December 31, 2018.
The increase in net charge-offs and a related $4.0 million provision for loan losses were primarily due to a $4.4 million loss recorded on the sale of a Chicago commercial credit exposure that experienced an unexpected deterioration in the second quarter of 2019. The sold loans were originated in 2016 to two affiliated wholesale fuel distributors. The loans were secured by accounts receivable and supplemental real estate collateral and were personally guaranteed by the borrowers’ principals. In the second quarter of 2019, we learned that one of the borrowers failed to make excise tax payments in violation of its agreements with the State of Illinois, that a tax performance bond that was a condition to the borrower’s continued ability to operate as a wholesale fuel distributor in the State of Illinois would not be renewed by the borrower’s insurer, and that the borrower had apparently altered its collection procedures and cash management practices in ways that appeared to make it necessary for us to institute litigation to gain control of and collect the proceeds of the accounts receivable collateral. We evaluated these and other factors, including the risks to the borrower’s ability to continue to operate as a going concern, and concluded that a sale of the loans at a discount was a superior alternative to initiating potentially costly and protracted litigation, the outcome of which could not be predicted with reasonable certainty.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
(Dollars in thousands)
|
Deposit service charges and fees
|
$
|
3,844
|
|
|
$
|
3,968
|
|
|
$
|
(124
|
)
|
Loan servicing fees
|
451
|
|
|
439
|
|
|
12
|
|
Mortgage brokerage and banking fees
|
149
|
|
|
257
|
|
|
(108
|
)
|
Gain on sale of equity securities
|
295
|
|
|
3,558
|
|
|
(3,263
|
)
|
Unrealized gains on equity securities
|
—
|
|
|
3,427
|
|
|
(3,427
|
)
|
Gain on sale of premises held-for-sale
|
—
|
|
|
93
|
|
|
(93
|
)
|
Loss on disposal of other assets
|
(44
|
)
|
|
—
|
|
|
(44
|
)
|
Trust and insurance commissions and annuities income
|
844
|
|
|
937
|
|
|
(93
|
)
|
Earnings on bank-owned life insurance
|
136
|
|
|
174
|
|
|
(38
|
)
|
Bank-owned life insurance death benefit
|
—
|
|
|
1,389
|
|
|
(1,389
|
)
|
Other
|
497
|
|
|
635
|
|
|
(138
|
)
|
Total noninterest income
|
$
|
6,172
|
|
|
$
|
14,877
|
|
|
$
|
(8,705
|
)
|
Comparison of Year 2019 to 2018. Our noninterest income decreased by $8.7 million to $6.2 million for the year ended December 31, 2019, from $14.9 million in 2018. In 2018 we recorded $7.0 million of realized and unrealized gains on sale of the Company’s Class B Visa common shares and a $1.4 million death benefit on a bank-owned life insurance policy as a result of the death of a retired Bank executive. Deposit service charges and fees decreased $124,000, or 3.1% We recorded $66,000 in commercial mortgage brokerage fees for the year ended December 31, 2019 as compensation for commercial loans that we placed with other institutions, compared to $138,000 for the same period in 2018. In 2018, the Bank sold its office building in Burr Ridge, Illinois and recorded a net gain of $93,000 in connection with the sale. Trust and insurance commissions and annuities income declined by $93,000, or 9.9%, to $844,000 for the year ended December 31, 2019, due to lower sales of annuity products and property and casualty insurance.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
(Dollars in thousands)
|
Compensation and benefits
|
$
|
21,266
|
|
|
$
|
22,987
|
|
|
$
|
(1,721
|
)
|
Office occupancy and equipment
|
7,069
|
|
|
6,817
|
|
|
252
|
|
Advertising and public relations
|
657
|
|
|
848
|
|
|
(191
|
)
|
Information technology
|
2,999
|
|
|
2,792
|
|
|
207
|
|
Professional fees
|
1,027
|
|
|
1,018
|
|
|
9
|
|
Supplies, telephone and postage
|
1,316
|
|
|
1,433
|
|
|
(117
|
)
|
Amortization of intangibles
|
61
|
|
|
184
|
|
|
(123
|
)
|
Nonperforming asset management
|
105
|
|
|
353
|
|
|
(248
|
)
|
Operations of other real estate owned
|
52
|
|
|
432
|
|
|
(380
|
)
|
FDIC insurance premiums
|
127
|
|
|
437
|
|
|
(310
|
)
|
Other
|
3,962
|
|
|
3,453
|
|
|
509
|
|
Total noninterest expense
|
$
|
38,641
|
|
|
$
|
40,754
|
|
|
$
|
(2,113
|
)
|
Comparison of Year 2019 to 2018. Noninterest expense decreased by $2.1 million, or 5.2%, to $38.6 million, for the year ended December 31, 2019, from $40.8 million, for the year ended December 31, 2018. Compensation and benefits expense decreased $1.7 million, or 7.5%, to $21.3 million for the year ended December 31, 2019, from $23.0 million in 2018. In 2018 we recorded an accrual of $1.1 million related to a certain employment contract termination and severance payments. Also, contributing to the decrease in compensation was a decrease in full-time employee equivalents; at December 31, 2019, we had 222 full-time employee equivalents, compared to 236 at 2018. Office occupancy expense increased by $252,000, or 3.7%, to $7.1 million for the year ended December 31, 2019 from $6.8 million in 2018, due in substantial part to an $80,000 increase in real estate taxes for Bank
properties and an increase of $137,000 of snow removal expenses in 2019, as well as cybersecurity prevention expenses. Nonperforming asset management expenses decreased $248,000, or 70.3%, to $105,000 for the year ended December 31, 2019, compared to $353,000 in 2018, due to fewer nonperforming properties and the recovery of previously expensed charges. OREO expenses for the year ended December 31, 2019 totaled $52,000, compared to $432,000 in 2018. We recorded $111,000 of net gains on sales of OREO properties for the year ended December 31, 2019, compared to $56,000 of net losses in 2018. In addition, legal, real estate tax expense, receiver fees and repairs and maintenance decreased a combined $336,000; this was partially offset by a $112,000 decrease in rental income. FDIC insurance expense decreased by $310,000, or 70.9%, to $127,000 for the year ended December 31, 2019, due to the receipt of the FDIC's small bank assessment credit in 2019. Other noninterest expense increased $509,000, or 14.7%, to $4.0 million for the year ended December 31, 2019, from $3.5 million for the year ended December 31, 2018, due in substantial part to increased recruiting expenses and cybersecurity prevention consulting expenses.
Income Taxes
Comparison of Year 2019 to 2018. For the year ended December 31, 2019 we recorded income tax expense of $4.2 million, compared to $6.7 million recorded in 2018. The effective tax rate for the year ended December 31, 2019 was 26.57%, compared to 25.74% for the same period in 2018.
Comparison of Financial Condition at December 31, 2019 and December 31, 2018
Total assets decreased $97.3 million, or 6.1%, to $1.488 billion at December 31, 2019, from $1.585 billion at December 31, 2018. The decrease in total assets was primarily due to decreases in loans receivable and securities, which were partially offset by an increase in cash and cash equivalents. Net loans decreased $155.8 million, or 11.8%, to $1.168 billion at December 31, 2019, from $1.324 billion at December 31, 2018. Securities decreased by $28.0 million, or 31.7%, to $60.2 million at December 31, 2019, from $88.2 million at December 31, 2018. Cash and cash equivalents increased $92.1 million, or 93.8%, to $190.3 million at December 31, 2019, from $98.2 million at December 31, 2018.
Our loan portfolio consists primarily of multi-family real estate, nonresidential real estate, construction and land loans, commercial loans and commercial leases, which together totaled 95.1% of gross loans at December 31, 2019. Net loans receivable decreased $155.8 million, or 11.8%, to $1.168 billion at December 31, 2019. Multi-family mortgage loans decreased by $56.1 million, or 9.1%; commercial loans decreased $41.7 million, or 22.2%; commercial leases decreased by $26.8 million, or 8.9%; nonresidential real estate loans decreased $17.8 million, or 11.7%; and one-to-four family residential mortgage loans decreased by $14.6 million, or 20.8%. The decrease in multi-family loans was primarily due to a significant amount of loan prepayments. The loan prepayments generated $568,000 of prepayment penalty income for the year ended December 31, 2019, compared to $392,000 of prepayment income for 2018.
Our allowance for loan losses decreased by $838,000, or 9.9%, to $7.6 million at December 31, 2019, from $8.5 million at December 31, 2018. The decrease reflected net charge-offs of $4.7 million in 2019, partially offset by a $3.8 million provision for loan losses.
Securities decreased $28.0 million, or 31.7%, to $60.2 million at December 31, 2019, from $88.2 million at December 31, 2018, due primarily to proceeds from maturities of $107.9 million and repayments of $3.1 million on residential mortgage-backed securities and collateralized mortgage obligations. These repayments were partially offset by investments in FDIC-insured certificates of deposit issued by other insured depository institutions of $83.1 million.
Total liabilities decreased $84.5 million, or 6.0%, to $1.314 billion at December 31, 2019, from $1.398 billion at December 31, 2018, primarily due to decreases in total deposits and borrowings. Total deposits decreased $67.7 million, or 5.0%, to $1.285 billion at December 31, 2019, from $1.352 billion at December 31, 2018. Retail certificates of deposit increased $4.8 million, or 1.5%, to $336.9 million at December 31, 2019, from $332.1 million at December 31, 2018. Wholesale certificates of deposit decreased $41.2 million, or 38.8%, to $65.1 million at December 31, 2019, from $106.3 million at December 31, 2018. Money market accounts decreased $10.3 million, or 4.0% to $245.6 million at December 31, 2019, from $256.0 million at December 31, 2018. Interest-bearing NOW accounts decreased $2.7 million, or 1.0%, to $273.2 million at December 31, 2019, from $275.8 million at December 31, 2018. Savings accounts increased $849,000, or 0.6%, to $153.2 million at December 31, 2019, from $152.3 million at December 31, 2018. Noninterest-bearing demand deposits decreased $19.3 million, or 8.4%, to $210.8 million at December 31, 2019, from $230.0 million at December 31, 2018. Core deposits (which consist of savings, money market, noninterest-bearing demand and NOW accounts) were 68.7% and 67.6% of total deposits at December 31, 2019 and 2018, respectively.
Total stockholders’ equity was $174.4 million at December 31, 2019, compared to $187.2 million at December 31, 2018. The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 1,203,050 shares of our
common stock at a total cost of $18.1 million, and our declaration and payment of cash dividends totaling $6.3 million, during the year ended December 31, 2019. These items were partially offset by net income of $11.7 million that we recorded for the year ended December 31, 2019.
Securities
Our investment policy is established by our Board of Directors. The policy emphasizes safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management strategy.
At December 31, 2019, our mortgage-backed securities and collateralized mortgage obligations (“CMOs”) reflected in the following table were issued by U.S. government-sponsored enterprises and agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the federal government has affirmed its commitment to support. All securities reflected in the table were classified as available-for-sale at December 31, 2019, 2018 and 2017.
The following table sets forth the composition, amortized cost and fair value of our securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
(In thousands)
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
$
|
48,666
|
|
|
$
|
48,666
|
|
|
$
|
73,507
|
|
|
$
|
73,507
|
|
|
$
|
75,916
|
|
|
$
|
75,916
|
|
Municipal securities
|
505
|
|
|
513
|
|
|
509
|
|
|
509
|
|
|
—
|
|
|
—
|
|
Equity mutual funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
500
|
|
|
499
|
|
SBA - guaranteed loan participation certificates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
10
|
|
Total
|
49,171
|
|
|
49,179
|
|
|
74,016
|
|
|
74,016
|
|
|
76,426
|
|
|
76,425
|
|
Mortgage-backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential
|
7,727
|
|
|
8,037
|
|
|
10,116
|
|
|
10,478
|
|
|
11,969
|
|
|
12,472
|
|
CMOs and REMICs - residential
|
2,986
|
|
|
2,977
|
|
|
3,676
|
|
|
3,685
|
|
|
4,481
|
|
|
4,486
|
|
Total mortgage-backed securities
|
10,713
|
|
|
11,014
|
|
|
13,792
|
|
|
14,163
|
|
|
16,450
|
|
|
16,958
|
|
|
$
|
59,884
|
|
|
$
|
60,193
|
|
|
$
|
87,808
|
|
|
$
|
88,179
|
|
|
$
|
92,876
|
|
|
$
|
93,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
(In thousands)
|
Equity Investments (1)
|
|
|
|
|
|
|
|
|
|
|
|
Visa Class B Shares
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Equity investments are included in Other Assets in the Consolidated Statements of Financial Condition.
|
The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security. If quoted market prices 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. 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. The fair value of a security is used to determine the amount of any unrealized gains or losses that must be reflected in our other comprehensive income and the net book value of our securities.
We evaluate 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 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.
Portfolio Maturities and Yields
The composition and maturities of the securities portfolio and the mortgage-backed securities portfolio at December 31, 2019 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Municipal securities yields have not been adjusted to a tax-equivalent basis, as the amount is immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
More than One Year
through Five Years
|
|
More than Five Years
through Ten Years
|
|
More than Ten Years
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
(Dollars in thousands)
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
48,666
|
|
|
2.10
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Municipal securities
|
101
|
|
|
4.00
|
|
|
404
|
|
|
4.00
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,767
|
|
|
2.10
|
|
|
404
|
|
|
4.00
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass-through securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
—
|
|
|
—
|
|
|
1
|
|
|
4.73
|
|
|
1,221
|
|
|
3.48
|
|
|
3,095
|
|
|
4.98
|
|
Freddie Mac
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
4.09
|
|
|
360
|
|
|
4.10
|
|
Ginnie Mae
|
—
|
|
|
—
|
|
|
19
|
|
|
3.25
|
|
|
—
|
|
|
—
|
|
|
3,020
|
|
|
3.94
|
|
CMOs and REMICs
|
—
|
|
|
—
|
|
|
268
|
|
|
3.45
|
|
|
—
|
|
|
—
|
|
|
2,718
|
|
|
2.05
|
|
|
—
|
|
|
—
|
|
|
288
|
|
|
3.44
|
|
|
1,232
|
|
|
3.48
|
|
|
9,193
|
|
|
3.74
|
|
Total securities
|
$
|
48,767
|
|
|
2.10
|
%
|
|
$
|
692
|
|
|
3.77
|
%
|
|
$
|
1,232
|
|
|
3.48
|
%
|
|
$
|
9,193
|
|
|
3.74
|
%
|
The Bank is a member of the Federal Reserve System as a result of its conversion to a national bank charter in 2016. The aggregate cost of our FRB common stock as of December 31, 2019 was $4.7 million based on its par value. The Bank is also a member of the FHLB System. Members of the FHLB System are required to hold a certain amount of common stock to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB’s advance program. The aggregate cost of our FHLB common stock as of December 31, 2019 was $2.8 million based on its par value. There is no market for FRB and FHLB common stock. We purchased 4,100 and 1.0 million shares of FHLB capital stock during 2019 and 2018, respectively. We redeemed no shares of FHLB capital stock in 2019 and 1.0 million shares of FHLB capital stock during 2018. We purchased no shares of FRB common stock in 2019 and 2018. We redeemed 540,000 shares and 284,800 shares of FRB common stock in 2019 and 2018, respectively. As a member of the FHLB, we are required to own a certain amount of stock based on the level of borrowings and other factors, at December 31, 2019, we did not own any excess shares of FHLB common stock.
The Bank, as a member of Visa USA, received 51,404 unrestricted shares of Visa, Inc. Class B common stock in connection with Visa, Inc.’s initial public offering in 2007 and a related retroactive responsibility plan. The retroactive responsibility plan obligates all former Visa USA members to indemnify Visa USA, in proportion to their equity interests in Visa USA, for certain litigation losses and expenses, including settlement expenses, for the lawsuits covered by the retrospective responsibility plan. Due to the restrictions that the retrospective responsibility plan imposes on the Company’s Visa, Inc. Class B shares, the Company had not recorded the Class B shares as an asset.
The Bank sold 25,702 shares of Visa Class B common stock in the fourth quarter of 2018 and recorded a gain of $3.6 million. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value to evaluate the observed transaction(s) and adjust the fair value of the equity investment. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 25,702 Visa Class B shares that the Company owned as of December 31,
2018 were recorded at $3.4 million in other assets with a corresponding gain. The Bank sold the remaining 25,702 shares of Visa Class B common stock in the first quarter of 2019 and recorded a gain of $295,000.
Loan Portfolio
We originate multi-family mortgage loans, nonresidential real estate loans, commercial loans, commercial leases and construction and land loans. In addition, we originate one-to-four family residential mortgage loans and consumer loans, and purchase and sell loan participations from time-to-time. Our principal loan products are discussed in Note 4 of the "Notes to Consolidated Financial Statements" in Item 8 of this Annual Report on Form 10-K.
The following table sets forth the composition of our loan portfolio by type of loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
(Dollars in thousands)
|
One-to-four family residential
|
$
|
55,750
|
|
|
4.75
|
%
|
|
$
|
70,371
|
|
|
5.29
|
%
|
|
$
|
97,814
|
|
|
7.40
|
%
|
|
$
|
135,218
|
|
|
10.25
|
%
|
|
$
|
159,501
|
|
|
12.86
|
%
|
Multi-family mortgage
|
563,750
|
|
|
47.99
|
|
|
619,870
|
|
|
46.56
|
|
|
588,383
|
|
|
44.52
|
|
|
542,887
|
|
|
41.15
|
|
|
506,026
|
|
|
40.80
|
|
Nonresidential real estate
|
134,674
|
|
|
11.46
|
|
|
152,442
|
|
|
11.45
|
|
|
169,971
|
|
|
12.86
|
|
|
182,152
|
|
|
13.81
|
|
|
226,735
|
|
|
18.28
|
|
Construction and land
|
—
|
|
|
—
|
|
|
172
|
|
|
0.01
|
|
|
1,358
|
|
|
0.10
|
|
|
1,302
|
|
|
0.09
|
|
|
1,313
|
|
|
0.10
|
|
Commercial loans
|
145,714
|
|
|
12.40
|
|
|
187,406
|
|
|
14.08
|
|
|
152,552
|
|
|
11.54
|
|
|
99,088
|
|
|
7.51
|
|
|
79,516
|
|
|
6.41
|
|
Commercial leases
|
272,629
|
|
|
23.21
|
|
|
299,394
|
|
|
22.49
|
|
|
310,076
|
|
|
23.46
|
|
|
356,514
|
|
|
27.02
|
|
|
265,405
|
|
|
21.40
|
|
Consumer
|
2,211
|
|
|
0.19
|
|
|
1,539
|
|
|
0.12
|
|
|
1,597
|
|
|
0.12
|
|
|
2,255
|
|
|
0.17
|
|
|
1,831
|
|
|
0.15
|
|
|
1,174,728
|
|
|
100.00
|
%
|
|
1,331,194
|
|
|
100.00
|
%
|
|
1,321,751
|
|
|
100.00
|
%
|
|
1,319,416
|
|
|
100.00
|
%
|
|
1,240,327
|
|
|
100.00
|
%
|
Net deferred loan origination costs
|
912
|
|
|
|
|
1,069
|
|
|
|
|
1,266
|
|
|
|
|
1,663
|
|
|
|
|
1,621
|
|
|
|
Allowance for loan losses
|
(7,632
|
)
|
|
|
|
(8,470
|
)
|
|
|
|
(8,366
|
)
|
|
|
|
(8,127
|
)
|
|
|
|
(9,691
|
)
|
|
|
Total loans, net
|
$
|
1,168,008
|
|
|
|
|
$
|
1,323,793
|
|
|
|
|
$
|
1,314,651
|
|
|
|
|
$
|
1,312,952
|
|
|
|
|
$
|
1,232,257
|
|
|
|
We engage in multi-family lending activities in the Chicago Metropolitan Statistical Areas and in other carefully selected Metropolitan Statistical Areas outside of our primary lending area and engage in healthcare lending and commercial leasing activities on a nationwide basis. At December 31, 2019, $242.2 million, or 43.0%, of our multi-family loans were in the Metropolitan Statistical Area for Chicago, Illinois, while $61.5 million, or 10.9%, were in the Metropolitan Statistical Area for Dallas, Texas, $56.7 million, or 10.0%, were in the Metropolitan Statistical Area for Denver, Colorado, $32.8 million, or 5.8%, were in the Metropolitan Statistical Area for Tampa, Florida, $29.0 million, or 5.1%, were in the Metropolitan Statistical Area for Greenville-Spartanburg, South Carolina; $22.2 million, or 4.0%, were in the Metropolitan Statistical Area for San Antonio, Texas, and $19.5 million, or 3.5%, were in the Metropolitan Statistical Area for Minneapolis, Minnesota.
Loan Portfolio Maturities
The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2019. Demand loans, loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
One Year
|
|
One Year
Through
Five Years
|
|
Beyond
Five Years
|
|
Total
|
|
(In thousands)
|
Scheduled Repayments of Loans:
|
|
|
|
|
|
|
|
One-to-four family residential
|
$
|
5,329
|
|
|
$
|
11,888
|
|
|
$
|
38,533
|
|
|
$
|
55,750
|
|
Multi-family mortgage
|
33,909
|
|
|
73,732
|
|
|
456,109
|
|
|
563,750
|
|
Nonresidential real estate
|
40,527
|
|
|
85,012
|
|
|
9,135
|
|
|
134,674
|
|
Commercial loans and leases
|
212,269
|
|
|
205,042
|
|
|
1,032
|
|
|
418,343
|
|
Consumer
|
411
|
|
|
1,072
|
|
|
728
|
|
|
2,211
|
|
|
$
|
292,445
|
|
|
$
|
376,746
|
|
|
$
|
505,537
|
|
|
$
|
1,174,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Loans Maturing After One Year:
|
|
|
|
|
|
|
|
Predetermined (fixed) interest rates
|
|
|
|
|
|
|
$
|
304,361
|
|
Adjustable interest rates
|
|
|
|
|
|
|
577,922
|
|
|
|
|
|
|
|
|
$
|
882,283
|
|
Nonperforming Loans and Assets
We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At December 31, 2019, we had one loan 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 complete a troubled debt restructuring (“TDR”) unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third-party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third-party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask-side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.
Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated
standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.
As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as-is,” “as-stabilized” or “as-improved” basis is most likely to produce the highest net realizable value. If we determine that the “as-stabilized” or “as-improved” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of December 31, 2019, 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 apply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs to sell the collateral. For OREO, we apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.
Nonperforming Assets Summary
The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollars in thousands)
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
$
|
512
|
|
|
$
|
1,247
|
|
|
$
|
2,024
|
|
|
$
|
2,855
|
|
|
$
|
2,458
|
|
Multi-family mortgage
|
—
|
|
|
—
|
|
|
371
|
|
|
187
|
|
|
828
|
|
Nonresidential real estate
|
288
|
|
|
270
|
|
|
—
|
|
|
260
|
|
|
295
|
|
|
800
|
|
|
1,517
|
|
|
2,395
|
|
|
3,302
|
|
|
3,581
|
|
Loans past due over 90 days, still accruing - commercial leases
|
47
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
186
|
|
|
875
|
|
|
827
|
|
|
1,565
|
|
|
2,621
|
|
Multi-family mortgage
|
—
|
|
|
276
|
|
|
—
|
|
|
370
|
|
|
951
|
|
Nonresidential real estate
|
—
|
|
|
74
|
|
|
1,520
|
|
|
1,066
|
|
|
1,747
|
|
Land
|
—
|
|
|
1
|
|
|
4
|
|
|
894
|
|
|
1,692
|
|
|
186
|
|
|
1,226
|
|
|
2,351
|
|
|
3,895
|
|
|
7,011
|
|
Total nonperforming assets
|
$
|
1,033
|
|
|
$
|
2,743
|
|
|
$
|
4,746
|
|
|
$
|
7,197
|
|
|
$
|
10,592
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
0.07
|
%
|
|
0.11
|
%
|
|
0.18
|
%
|
|
0.25
|
%
|
|
0.29
|
%
|
Nonperforming assets to total assets
|
0.07
|
|
|
0.17
|
|
|
0.29
|
|
|
0.44
|
|
|
0.70
|
|
Nonperforming Assets
Nonperforming assets decreased by $1.7 million in 2019, nonperforming assets totaled $1.0 million at December 31, 2019, and $2.7 million at December 31, 2018. The decrease in nonperforming assets for the year ended December 31, 2019 reflected the disposition of $1.2 million of OREO and other nonperforming asset resolutions.
Approximately $186,000 of nonaccrual residential mortgage loans were transferred to OREO during the year ended December 31, 2019. We continue to experience modest quantities of defaults on residential loans principally due either to the borrower’s personal financial condition or death, and/or deteriorated collateral value.
Loan Extensions and Modifications
Maturing loans are subject to our standard loan underwriting policies and practices. Due to the need to obtain updated borrower and guarantor financial information, collateral information or to prepare revised loan documentation, loans in the process of renewal may appear as past due because the information needed to underwrite a renewal of the loan is not available to us prior to the maturity date of the loan. At times, short-term administrative extensions, which are typically 90 days in duration, are granted to facilitate proper underwriting. In general, loan modifications are subject to a risk-adjusted pricing analysis.
When appropriate, we evaluate loan extensions or modifications in accordance with ASC 310-40 and related federal regulatory guidance concerning TDRs and the FFIEC workout guidance to determine the required treatment for nonaccrual status and risk classification purposes. In general, if we grant a loan modification or extension that involves either the absence of principal amortization (other than for revolving lines of credit which are customarily granted on interest-only terms), or if we grant a material extension of an existing loan amortization period in excess of our underwriting standards, the loan will be placed on nonaccrual status and impairment testing conducted to determine whether a specific valuation allowance or loss classification / charge-off is required. If the loan is well secured by an abundance of collateral and the collectability of both interest and principal is probable, the loan may remain on accrual status, but it will be classified as a TDR due to the concession made in the loan principal amortization payment component. A loan in full compliance with the payment requirements specified in a loan modification will not be considered as past due, but may nonetheless be placed on nonaccrual status or be classified as a TDR, as appropriate under the circumstances.
In accordance with the FFIEC workout guidance, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a nonperforming note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established.
Troubled Debt Restructurings
The Company had no TDRs at December 31, 2019 and $17,000 at December 31, 2018, with no specific valuation allowances allocated to those loans at December 31, 2018. At December 31, 2018, the Company had no outstanding commitments to borrowers whose loans are classified as TDRs.
Risk Classification of Loans
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets, or designated as special mention.
A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The risk-rating guidance published by the OCC clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated substandard. An asset classified as doubtful 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. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal regulations. 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.
Based on a review of our loans at December 31, 2019, classified loans consisted of $1.1 million of performing substandard loans and $800,000 of nonperforming loans. As of December 31, 2019, we had $9.8 million of loans designated as special mention.
Allowance 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, trends in nonaccrual loans, 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 the estimates as more information becomes available or events change.
We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable incurred credit losses. We review the loan portfolio on an ongoing basis and make provisions for loan losses on a quarterly basis to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The allowance for loan losses consists of two components:
|
|
•
|
specific allowances established for any impaired residential non-owner occupied mortgage, multi-family mortgage, nonresidential real estate, construction and land, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of the loan; and
|
|
|
•
|
general allowances for loan losses for each loan class based on historical loan loss experience; and adjustments to historical loss experience (general allowances), maintained to cover uncertainties that affect our estimate of probable incurred credit losses for each loan class.
|
The adjustments to historical loss experience are based on our evaluation of several factors, including levels of, and trends in, past due and classified loans; levels of, and trends in, charge-offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience, and ability of lending management and other relevant staff; and national and local economic trends and conditions.
We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses than would be the case without the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology generally results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
We review our loan portfolio on an ongoing basis to determine whether any loans require classification and impairment testing in accordance with applicable regulations and accounting principles. When we classify loans as either substandard or doubtful and in certain other cases, we review the collateral and future cash flow projections to determine if a specific reserve is necessary. The allowance for loan losses represents amounts that have been established to recognize incurred credit losses in the loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. When we classify problem loans as loss, we charge-off such amounts.
Our calculation of the general component of the allowance for loan losses includes the FASB disclosure requirement that each loan portfolio category must be segmented into specific loan classes (FASB Standards Update 2010-20 (ASU 210-20), “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”). Loan class segmentation tables are presented in Note 4 of the "Notes to Consolidated Financial Statements" in Item 8 of this Annual Report on Form 10-K. To maintain consistency, the loan class segmentation was also applied within the 12-quarter loss history that we use to calculate the general component of the allowance for loan losses, inherent risk factor weightings were adjusted based on our evaluation of their relevance to the new loan classes, and duplicative historical loss factors were eliminated from the loan class segmentation.
While we use the best information available to make evaluations, future adjustments to the allowance may become necessary if conditions differ substantially from the information that we used in making the evaluations. Our determinations as to the risk classification of our loans and the amount of our allowance for loan losses are subject to review by our regulatory agencies, which can require that we establish additional loss allowances.
Net Charge-offs and Recoveries
The following table sets forth activity in our allowance for loan losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
(Dollars in thousands)
|
Balance at beginning of year
|
$
|
8,470
|
|
|
$
|
8,366
|
|
|
$
|
8,127
|
|
|
$
|
9,691
|
|
|
$
|
11,990
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
(222
|
)
|
|
(231
|
)
|
|
(318
|
)
|
|
(539
|
)
|
|
(386
|
)
|
Multi-family mortgage
|
—
|
|
|
(35
|
)
|
|
(10
|
)
|
|
(79
|
)
|
|
(198
|
)
|
Nonresidential real estate
|
(83
|
)
|
|
(93
|
)
|
|
(165
|
)
|
|
(1,718
|
)
|
|
(391
|
)
|
Commercial loans
|
(4,443
|
)
|
|
(140
|
)
|
|
—
|
|
|
—
|
|
|
(152
|
)
|
Consumer
|
(31
|
)
|
|
(19
|
)
|
|
(10
|
)
|
|
(25
|
)
|
|
(16
|
)
|
|
(4,779
|
)
|
|
(518
|
)
|
|
(503
|
)
|
|
(2,361
|
)
|
|
(1,143
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
75
|
|
|
206
|
|
|
145
|
|
|
321
|
|
|
702
|
|
Multi-family mortgage
|
31
|
|
|
34
|
|
|
70
|
|
|
162
|
|
|
182
|
|
Nonresidential real estate
|
—
|
|
|
—
|
|
|
17
|
|
|
200
|
|
|
509
|
|
Construction and land
|
—
|
|
|
2
|
|
|
—
|
|
|
35
|
|
|
44
|
|
Commercial loans
|
10
|
|
|
229
|
|
|
594
|
|
|
309
|
|
|
611
|
|
Commercial leases
|
—
|
|
|
5
|
|
|
2
|
|
|
7
|
|
|
1
|
|
Consumer
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
116
|
|
|
477
|
|
|
829
|
|
|
1,036
|
|
|
2,050
|
|
Net (charge-offs) recoveries
|
(4,663
|
)
|
|
(41
|
)
|
|
326
|
|
|
(1,325
|
)
|
|
907
|
|
Provision for (recovery of) loan losses
|
3,825
|
|
|
145
|
|
|
(87
|
)
|
|
(239
|
)
|
|
(3,206
|
)
|
Balance at end of year
|
$
|
7,632
|
|
|
$
|
8,470
|
|
|
$
|
8,366
|
|
|
$
|
8,127
|
|
|
$
|
9,691
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average loans outstanding
|
(0.37
|
)%
|
|
—
|
%
|
|
0.03
|
%
|
|
(0.11
|
)%
|
|
0.08
|
%
|
Allowance for loan losses to nonperforming loans
|
901.06
|
|
|
558.34
|
|
|
349.31
|
|
|
246.12
|
|
|
270.62
|
|
Allowance for loan losses to total loans
|
0.65
|
|
|
0.64
|
|
|
0.63
|
|
|
0.62
|
|
|
0.78
|
|
We recorded a provision for loan losses of $3.8 million in 2019, compared to $145,000 in 2018. The increase in net charge-offs and a related $4.0 million provision for loan losses were primarily due to a $4.4 million loss recorded on the sale of a Chicago commercial credit exposure that experienced an unexpected deterioration in the second quarter of 2019. 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 $811,000, or 9.6%, to $7.6 million at December 31, 2019 from $8.4 million at December 31, 2018. The reserve established for loans individually evaluated for impairment decreased $27,000, to none at December 31, 2019, from $27,000 reserve at December 31, 2018. Net charge-offs were $4.7 million and $41,000 for the years ended December 31, 2019 and December 31, 2018, respectively, and we had $326,000 of net recoveries for the year ended December 31, 2017.
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.
Allocation of Allowance for Loan Losses
The following table sets forth our allowance for loan losses allocated by loan category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Allowance
for Loan
Losses
|
|
Loan
Balances by
Category
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
Allowance
for Loan
Losses
|
|
Loan
Balances by
Category
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
Allowance
for Loan
Losses
|
|
Loan
Balances by
Category
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
(Dollars in thousands)
|
One-to-four family residential
|
$
|
675
|
|
|
$
|
55,750
|
|
|
4.75
|
%
|
|
$
|
699
|
|
|
$
|
70,371
|
|
|
5.29
|
%
|
|
$
|
850
|
|
|
$
|
97,814
|
|
|
7.40
|
%
|
Multi-family mortgage
|
3,676
|
|
|
563,750
|
|
|
47.99
|
|
|
3,991
|
|
|
619,870
|
|
|
46.56
|
|
|
3,849
|
|
|
588,383
|
|
|
44.52
|
|
Nonresidential real estate
|
1,176
|
|
|
134,674
|
|
|
11.46
|
|
|
1,476
|
|
|
152,442
|
|
|
11.45
|
|
|
1,605
|
|
|
169,971
|
|
|
12.86
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
172
|
|
|
0.01
|
|
|
32
|
|
|
1,358
|
|
|
0.10
|
|
Commercial loans
|
1,308
|
|
|
145,714
|
|
|
12.40
|
|
|
1,517
|
|
|
187,406
|
|
|
14.08
|
|
|
1,357
|
|
|
152,552
|
|
|
11.54
|
|
Commercial leases
|
757
|
|
|
272,629
|
|
|
23.21
|
|
|
755
|
|
|
299,394
|
|
|
22.49
|
|
|
655
|
|
|
310,076
|
|
|
23.46
|
|
Consumer
|
40
|
|
|
2,211
|
|
|
0.19
|
|
|
28
|
|
|
1,539
|
|
|
0.12
|
|
|
18
|
|
|
1,597
|
|
|
0.12
|
|
|
$
|
7,632
|
|
|
$
|
1,174,728
|
|
|
100.00
|
%
|
|
$
|
8,470
|
|
|
$
|
1,331,194
|
|
|
100.00
|
%
|
|
$
|
8,366
|
|
|
$
|
1,321,751
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
2016
|
|
2015
|
|
Allowance for
Loan Losses
|
|
Loan Balances
by Category
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
Allowance for
Loan Losses
|
|
Loan Balances
by Category
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
(Dollars in thousands)
|
One-to-four family residential
|
$
|
1,168
|
|
|
$
|
135,218
|
|
|
10.25
|
%
|
|
$
|
1,704
|
|
|
$
|
159,501
|
|
|
12.86
|
%
|
Multi-family mortgage
|
3,647
|
|
|
542,887
|
|
|
41.15
|
|
|
3,610
|
|
|
506,026
|
|
|
40.80
|
|
Nonresidential real estate
|
1,794
|
|
|
182,152
|
|
|
13.81
|
|
|
2,582
|
|
|
226,735
|
|
|
18.28
|
|
Construction and land
|
32
|
|
|
1,302
|
|
|
0.09
|
|
|
43
|
|
|
1,313
|
|
|
0.10
|
|
Commercial loans
|
733
|
|
|
99,088
|
|
|
7.51
|
|
|
654
|
|
|
79,516
|
|
|
6.41
|
|
Commercial leases
|
714
|
|
|
356,514
|
|
|
27.02
|
|
|
1,073
|
|
|
265,405
|
|
|
21.40
|
|
Consumer
|
39
|
|
|
2,255
|
|
|
0.17
|
|
|
25
|
|
|
1,831
|
|
|
0.15
|
|
|
$
|
8,127
|
|
|
$
|
1,319,416
|
|
|
100.00
|
%
|
|
$
|
9,691
|
|
|
$
|
1,240,327
|
|
|
100.00
|
%
|
Sources of Funds
Deposits. At December 31, 2019, our deposits totaled $1.285 billion. Interest-bearing deposits totaled $1.074 billion and noninterest-bearing demand deposits totaled $210.8 million. NOW, savings and money market accounts totaled $672.0 million. At December 31, 2019, we had $402.0 million of certificates of deposit outstanding, of which $335.9 million had maturities of one year or less and $21.9 million were brokered deposits. Although a significant portion of our certificates of deposit are shorter-term certificates of deposit, we believe, based on historical experience and our current pricing strategy, that we will retain a significant portion of the non-brokered accounts upon maturity.
The following table sets forth the distribution of total deposit accounts, by account type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Average
Balance
|
|
Percent
|
|
Weighted
Average
Rate
|
|
Average
Balance
|
|
Percent
|
|
Weighted
Average
Rate
|
|
Average
Balance
|
|
Percent
|
|
Weighted
Average
Rate
|
|
(Dollars in thousands)
|
Noninterest-bearing demand:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
123,496
|
|
|
9.43
|
%
|
|
—
|
%
|
|
$
|
132,053
|
|
|
10.20
|
%
|
|
—
|
%
|
|
$
|
136,214
|
|
|
10.18
|
%
|
|
—
|
%
|
Commercial
|
90,450
|
|
|
6.91
|
|
|
—
|
|
|
94,552
|
|
|
7.30
|
|
|
—
|
|
|
96,986
|
|
|
7.25
|
|
|
—
|
|
Total noninterest-bearing demand
|
213,946
|
|
|
16.34
|
|
|
—
|
|
|
226,605
|
|
|
17.50
|
|
|
—
|
|
|
233,200
|
|
|
17.43
|
|
|
—
|
|
Savings deposits
|
152,567
|
|
|
11.66
|
|
|
0.28
|
|
|
157,350
|
|
|
12.16
|
|
|
0.18
|
|
|
160,266
|
|
|
11.98
|
|
|
0.12
|
|
Money market accounts
|
245,730
|
|
|
18.77
|
|
|
0.91
|
|
|
278,366
|
|
|
21.50
|
|
|
0.71
|
|
|
304,868
|
|
|
22.79
|
|
|
0.39
|
|
Interest-bearing NOW accounts
|
269,856
|
|
|
20.61
|
|
|
0.43
|
|
|
279,422
|
|
|
21.59
|
|
|
0.31
|
|
|
274,585
|
|
|
20.53
|
|
|
0.20
|
|
Certificates of deposit
|
427,044
|
|
|
32.62
|
|
|
2.18
|
|
|
352,731
|
|
|
27.25
|
|
|
1.54
|
|
|
364,792
|
|
|
27.27
|
|
|
0.96
|
|
|
$
|
1,309,143
|
|
|
100.00
|
%
|
|
|
|
$
|
1,294,474
|
|
|
100.00
|
%
|
|
|
|
$
|
1,337,711
|
|
|
100.00
|
%
|
|
|
The following table sets forth certificates of deposit by time remaining until maturity at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
3 Months or
Less
|
|
Over 3 to 6
Months
|
|
Over 6 to 12
Months
|
|
Over 12
Months
|
|
Total
|
|
(In thousands)
|
Certificates of deposit less than $100,000
|
$
|
51,427
|
|
|
$
|
31,067
|
|
|
$
|
72,074
|
|
|
$
|
36,024
|
|
|
$
|
190,592
|
|
Certificates of deposit of $100,000 or more
|
60,941
|
|
|
40,263
|
|
|
80,165
|
|
|
30,073
|
|
|
211,442
|
|
Total certificates of deposit
|
$
|
112,368
|
|
|
$
|
71,330
|
|
|
$
|
152,239
|
|
|
$
|
66,097
|
|
|
$
|
402,034
|
|
Borrowings. Our borrowings consist primarily of Federal Home Loan Bank advances and repurchase agreements. The following table sets forth information concerning balances and interest rates on our borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in thousands)
|
Balance at end of year
|
$
|
61
|
|
|
$
|
21,049
|
|
|
$
|
60,768
|
|
Average balance during year
|
4,216
|
|
|
45,870
|
|
|
54,899
|
|
Maximum outstanding at any month end
|
20,574
|
|
|
60,983
|
|
|
61,162
|
|
Weighted average interest rate at end of year
|
0.25
|
%
|
|
2.51
|
%
|
|
1.33
|
%
|
Average interest rate during year
|
2.11
|
|
|
1.43
|
|
|
1.19
|
|
At December 31, 2019, we had the capacity to borrow an additional $367.7 million under our credit facilities with the FHLB. Furthermore, we had unpledged securities that could be used to support in excess of $9.6 million of additional FHLB borrowings.
At December 31, 2019, we had a line of credit with the FRB. At December 31, 2019, there were no outstanding federal funds borrowings and there was no outstanding balance on the line of credit.
Impact of Inflation and Changing Prices
The Company’s consolidated financial statements and the related notes have been prepared in conformity with US GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation, if any, is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Management of Interest Rate 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 our entire 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 December 31, 2019, 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
|
$
|
(17,767
|
)
|
|
(8.01
|
)%
|
|
$
|
2,930
|
|
|
6.19
|
%
|
+300
|
(9,010
|
)
|
|
(4.06
|
)
|
|
2,441
|
|
|
5.16
|
|
+200
|
(2,930
|
)
|
|
(1.32
|
)
|
|
1,786
|
|
|
3.77
|
|
+100
|
(61
|
)
|
|
(0.03
|
)
|
|
966
|
|
|
2.04
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
-100
|
(3,153
|
)
|
|
(1.42
|
)
|
|
(1,646
|
)
|
|
(3.48
|
)
|
The table set forth above indicates that at December 31, 2019, in the event of an immediate 100 basis point decrease in interest rates, the Bank would be expected to experience a 1.42% decrease in NPV and a $1.6 million decrease in net interest income. In the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 1.32% decrease in NPV and a $1.8 million increase in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Liquidity Management
Liquidity Management – Bank. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortizations 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.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our Consolidated Financial Statements. Our primary investing activities are the origination for investment of multi-family mortgage loans, nonresidential real estate loans, commercial leases, and commercial loans and the purchase of investment securities and mortgage-backed securities. During the years ended December 31, 2019 and 2018, our loans
originated or purchased for investment totaled $793.7 million and $995.3 million, respectively. Purchases of securities totaled $83.1 million and $113.6 million for the years ended December 31, 2019 and 2018, respectively. These activities were funded primarily by principal repayments on loans and securities, and the sale of securities.
During the years ended December 31, 2019 and 2018, principal repayments on loans totaled $942.7 million and $984.2 million, respectively. During the years ended December 31, 2019 and 2018, principal repayments on securities totaled $3.1 million and $3.6 million, respectively. During the years ended December 31, 2019 and 2018, proceeds from maturities and sales of securities totaled $111.6 million and $118.6 million, respectively. There were no sales of loans during the year ended December 31, 2019 or 2018.
Loan origination commitments totaled $19.7 million at December 31, 2019, and consisted of $11.9 million of fixed-rate loans and $7.8 million of adjustable-rate loans. Unused lines of credit and standby letters of credit granted to customers totaled $149.8 million and $6.1 million, respectively, at December 31, 2019. At December 31, 2019, there were no commitments to sell mortgages.
Deposit flows are generally affected by the level of market interest rates, the interest rates and other terms and conditions on deposit products offered by our banking competitors, and other factors. We had net deposit decreases of $67.7 million for the year ended December 31, 2019 and net deposit increases of $12.4 million for the year ended December 31, 2018. Certificates of deposit that are scheduled to mature in one year or less at December 31, 2019 totaled $335.9 million.
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 may utilize additional sources of funds through FHLB advances, of which nothing was outstanding at December 31, 2019. At December 31, 2019 we had the ability to borrow an additional $367.7 million under our credit facilities with the FHLB. Furthermore, we have unpledged securities that could be used to support borrowings in excess of $9.6 million. Finally, at December 31, 2019, we had a line of credit available with the FRB. At December 31, 2019, there was no outstanding balance on this credit line.
Liquidity Management - Company. The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and stock repurchases. The primary sources of liquidity for the Company currently are $6.9 million of cash and cash equivalents and any cash dividends it may receive from the Bank.
During 2019, we paid $18.1 million to repurchase shares of our common stock and paid $6.3 million in cash dividends to stockholders, using the dividends received from the Bank.
As of December 31, 2019, 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 December 31, 2019, we had no other material commitments for capital expenditures.
Capital Management
Capital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory, and possibly additional discretionary, actions by the OCC that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
The prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Adequately capitalized institutions require regulatory approval to accept brokered deposits. If undercapitalized, a financial institution’s capital distributions, asset growth and expansion are limited, and the submission of a capital restoration is required.
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 7.5% and a total risk-based capital ratio of at least 10.5%. The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirements will be established if and as necessary. 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.
At December 31, 2019, actual and required capital ratios were:
|
|
|
|
|
|
|
|
|
|
|
|
|
BankFinancial NA
Actual Ratio
|
|
Required for Capital Adequacy Purposes
|
|
To be Well-Capitalized under Prompt Corrective Action Provisions
|
Total capital (to risk-weighted assets)
|
|
16.38
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
Tier 1 (core) capital (to risk-weighted assets)
|
|
15.63
|
|
|
6.00
|
|
|
8.00
|
|
Common Tier 1 (CET1)
|
|
15.63
|
|
|
4.50
|
|
|
6.50
|
|
Tier 1 (core) capital (to adjusted total assets)
|
|
10.89
|
|
|
4.00
|
|
|
5.00
|
|
As of December 31, 2019 the Bank was well-capitalized under the regulatory framework for prompt corrective action. 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 $174.4 million at December 31, 2019, compared to $187.2 million at December 31, 2018. The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 1,203,050 shares of our common stock at a total cost of $18.1 million, and our declaration and payment of cash dividends totaling $6.3 million, during the year ended December 31, 2019. These items were partially offset by net income of $11.7 million that we recorded for the year ended December 31, 2019.
Cash Dividends. Our Board of Directors declared four quarterly cash dividends totaling $6.3 million during 2019, consisting of a cash dividend of $0.10 per share for each quarter of 2019.
Stock Repurchase Program. On February 25, 2019, the Board extended the expiration date of the Company's share repurchase authorization from July 31, 2019 to March 31, 2020, and increased the total number of shares authorized for repurchase by 500,000 shares. On April 25, 2019, the Board increased the total number of shares authorized for repurchase by 750,000 shares. On January 30, 2020, the Board extended the expiration date of the Company's share repurchase authorization from March 31, 2020 to October 31, 2020. As of December 31, 2019, the Company had repurchased 5,267,792 shares of its common stock out of the 5,810,755 shares of common stock authorized under the above repurchase authorizations. Since its inception, the Company has repurchased 9,506,926 shares of its common stock.
Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit, unused lines of credit and commitments to sell loans. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process afforded to loans that we make. Although we consider commitments to extend credit in determining our allowance for loan losses, at December 31, 2019, we had made no provision for losses on commitments to extend credit, and had no specific or general allowance for losses on such commitments, as we have had no historical loss experience with commitments to extend credit and we believed that no probable and reasonably estimable losses were inherent in our portfolio as a result of our commitments to extend credit. At December 31, 2019 we recorded a $116,000 reserve on open commitments for two letters of credit, these were both undrawn at the time. For additional information, see Note 14 of the "Notes to Consolidated Financial Statements" in Item 8 of this Annual Report on Form 10-K.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.
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 as follows:
Allowance for Loan Losses. Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. Our allowance for loan losses provides for probable incurred losses based upon evaluations of known and inherent risks in the loan portfolio. We review the level of the allowance on a quarterly basis and establish the provision for loan losses based upon historical loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors to assess the adequacy of the allowance for loan losses. Among the material estimates that we must make to establish the allowance are loss exposure at default; the amount and timing of future cash flows on affected loans; the value of collateral; and a determination of loss factors to be applied to the various elements of the loan portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to us to establish the allowance for loan losses, future adjustments to the allowance may be necessary if borrower financial, collateral valuation or economic conditions differ substantially from the information and assumptions used in making the evaluation. In addition, as an integral part of their supervisory and/or examination process, our regulatory agencies periodically review the methodology and sufficiency of the allowance for loan losses. These agencies may require us to recognize additions to the allowance based on their inclusion, exclusion or modification of risk factors or differences in judgments of information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.
Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Under GAAP, a deferred tax asset valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is dependent upon judgments made following management’s evaluation of all available positive and negative evidence, including prior pre-tax losses and the events or conditions that caused them, forecasts of future taxable income, and current and future economic and business conditions.
Although we determined a valuation allowance was not required for any deferred tax assets at December 31, 2019 and 2018, there is no guarantee that a valuation allowance will not be required in the future.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of BankFinancial Corporation is responsible for establishing and maintaining effective internal control over financial reporting.
Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial information through a program of ongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the Company’s internal control over financial reporting as of December 31, 2019, as required by Section 404 of the Sarbanes-Oxley Act of 2002, based on the criteria for effective internal control over financial reporting described in the “2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.” Based on this assessment, management concludes that, as of December 31, 2019, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm has issued their report on the effectiveness of the Company’s internal control over financial reporting. That report follows under the heading, Report of Independent Registered Public Accounting Firm.
|
|
|
|
/s/ F. Morgan Gasior
|
|
/s/ Paul A. Cloutier
|
F. Morgan Gasior
|
|
Paul A. Cloutier
|
Chairman of the Board, Chief Executive Officer and President
|
|
Executive Vice President and Chief Financial Officer
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors BankFinancial Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial condition of BankFinancial Corporation and Subsidiary (the Company) as of December 31, 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 5, 2020, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinions
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM LLP
We have served as the Company's auditor since 2019
Chicago, Illinois
March 5, 2020
Report of Independent Registered Public Accounting Firm
Stockholders and the Board of Directors
BankFinancial Corporation
Burr Ridge, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of BankFinancial Corporation (the "Company") as of December 31, 2018, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Crowe LLP
We served as the Company's auditor from 1989 to 2019.
Oak Brook, Illinois
February 11, 2019
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Cash and due from other financial institutions
|
$
|
9,785
|
|
|
$
|
13,805
|
|
Interest-bearing deposits in other financial institutions
|
180,540
|
|
|
84,399
|
|
Cash and cash equivalents
|
190,325
|
|
|
98,204
|
|
Securities, at fair value
|
60,193
|
|
|
88,179
|
|
Loans receivable, net of allowance for loan losses:
December 31, 2019, $7,632 and December 31, 2018, $8,470
|
1,168,008
|
|
|
1,323,793
|
|
Other real estate owned, net
|
186
|
|
|
1,226
|
|
Stock in Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB"), at cost
|
7,490
|
|
|
8,026
|
|
Premises and equipment, net
|
24,346
|
|
|
25,205
|
|
Accrued interest receivable
|
4,563
|
|
|
4,952
|
|
Bank-owned life insurance
|
18,945
|
|
|
18,809
|
|
Deferred taxes
|
3,873
|
|
|
6,235
|
|
Other assets
|
10,086
|
|
|
10,696
|
|
Total assets
|
$
|
1,488,015
|
|
|
$
|
1,585,325
|
|
|
|
|
|
Liabilities
|
|
|
|
Deposits
|
|
|
|
Noninterest-bearing
|
$
|
210,762
|
|
|
$
|
230,041
|
|
Interest-bearing
|
1,073,995
|
|
|
1,122,443
|
|
Total deposits
|
1,284,757
|
|
|
1,352,484
|
|
Borrowings
|
61
|
|
|
21,049
|
|
Advance payments by borrowers for taxes and insurance
|
10,222
|
|
|
10,531
|
|
Accrued interest payable and other liabilities
|
18,603
|
|
|
14,111
|
|
Total liabilities
|
1,313,643
|
|
|
1,398,175
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
Preferred Stock, $0.01 par value, 25,000,000 shares authorized, none issued or outstanding
|
—
|
|
|
—
|
|
Common Stock, $0.01 par value, 100,000,000 shares authorized; 15,278,464 shares issued at December 31, 2019 and 16,481,514 shares issued at December 31, 2018
|
153
|
|
|
165
|
|
Additional paid-in capital
|
112,420
|
|
|
130,547
|
|
Retained earnings
|
61,573
|
|
|
56,167
|
|
Accumulated other comprehensive income
|
226
|
|
|
271
|
|
Total stockholders’ equity
|
174,372
|
|
|
187,150
|
|
Total liabilities and stockholders’ equity
|
$
|
1,488,015
|
|
|
$
|
1,585,325
|
|
See accompanying notes to the consolidated financial statements
44
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
|
2019
|
|
2018
|
Interest and dividend income
|
|
|
|
Loans, including fees
|
$
|
60,568
|
|
|
$
|
57,052
|
|
Securities
|
2,082
|
|
|
2,229
|
|
Other
|
2,758
|
|
|
2,006
|
|
Total interest income
|
65,408
|
|
|
61,287
|
|
Interest expense
|
|
|
|
Deposits
|
13,128
|
|
|
8,561
|
|
Borrowings
|
89
|
|
|
656
|
|
Total interest expense
|
13,217
|
|
|
9,217
|
|
Net interest income
|
52,191
|
|
|
52,070
|
|
Provision for loan losses
|
3,825
|
|
|
145
|
|
Net interest income after provision for loan losses
|
48,366
|
|
|
51,925
|
|
|
|
|
|
Noninterest income
|
|
|
|
Deposit service charges and fees
|
3,844
|
|
|
3,968
|
|
Loan servicing fees
|
451
|
|
|
439
|
|
Mortgage brokerage and banking fees
|
149
|
|
|
257
|
|
Gain on sale of equity securities
|
295
|
|
|
3,558
|
|
Unrealized gains on equity securities
|
—
|
|
|
3,427
|
|
Gain on sale of premises held-for-sale
|
—
|
|
|
93
|
|
Loss on disposal of other assets
|
(44
|
)
|
|
—
|
|
Trust and insurance commissions and annuities income
|
844
|
|
|
937
|
|
Earnings on bank-owned life insurance
|
136
|
|
|
174
|
|
Bank-owned life insurance death benefit
|
—
|
|
|
1,389
|
|
Other
|
497
|
|
|
635
|
|
Total noninterest income
|
6,172
|
|
|
14,877
|
|
|
|
|
|
Noninterest expense
|
|
|
|
Compensation and benefits
|
21,266
|
|
|
22,987
|
|
Office occupancy and equipment
|
7,069
|
|
|
6,817
|
|
Advertising and public relations
|
657
|
|
|
848
|
|
Information technology
|
2,999
|
|
|
2,792
|
|
Professional fees
|
1,027
|
|
|
1,018
|
|
Supplies, telephone, and postage
|
1,316
|
|
|
1,433
|
|
Amortization of intangibles
|
61
|
|
|
184
|
|
Nonperforming asset management
|
105
|
|
|
353
|
|
Operations of other real estate owned
|
52
|
|
|
432
|
|
FDIC insurance premiums
|
127
|
|
|
437
|
|
Other
|
3,962
|
|
|
3,453
|
|
Total noninterest expense
|
38,641
|
|
|
40,754
|
|
Income before income taxes
|
15,897
|
|
|
26,048
|
|
Income tax expense
|
4,225
|
|
|
6,706
|
|
Net income
|
$
|
11,672
|
|
|
$
|
19,342
|
|
Basic and diluted earnings per common share
|
$
|
0.75
|
|
|
$
|
1.11
|
|
Basic and diluted weighted average common shares outstanding
|
15,594,883
|
|
|
17,434,345
|
|
See accompanying notes to the consolidated financial statements
45
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
|
2019
|
|
2018
|
Net income
|
$
|
11,672
|
|
|
$
|
19,342
|
|
Unrealized holding loss on securities arising during the period
|
(62
|
)
|
|
(136
|
)
|
Tax effect
|
17
|
|
|
37
|
|
Comprehensive loss, net of tax
|
(45
|
)
|
|
(99
|
)
|
Comprehensive income
|
$
|
11,627
|
|
|
$
|
19,243
|
|
See accompanying notes to the consolidated financial statements
46
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehen-sive
Income
|
|
Total
|
Balance at January 1, 2018
|
$
|
179
|
|
|
$
|
153,811
|
|
|
$
|
43,274
|
|
|
$
|
370
|
|
|
$
|
197,634
|
|
Net income
|
—
|
|
|
—
|
|
|
19,342
|
|
|
—
|
|
|
19,342
|
|
Other comprehensive loss, net of tax effect
|
—
|
|
|
—
|
|
|
—
|
|
|
(99
|
)
|
|
(99
|
)
|
Repurchase and retirement of common stock (1,476,963 shares)
|
(14
|
)
|
|
(23,270
|
)
|
|
—
|
|
|
—
|
|
|
(23,284
|
)
|
Nonvested stock awards-stock-based compensation expense
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Cash dividends declared on common stock ($0.37 per share)
|
—
|
|
|
—
|
|
|
(6,449
|
)
|
|
—
|
|
|
(6,449
|
)
|
Balance at December 31, 2018
|
165
|
|
|
130,547
|
|
|
56,167
|
|
|
271
|
|
|
187,150
|
|
Net income
|
—
|
|
|
—
|
|
|
11,672
|
|
|
—
|
|
|
11,672
|
|
Other comprehensive loss, net of tax effect
|
—
|
|
|
—
|
|
|
—
|
|
|
(45
|
)
|
|
(45
|
)
|
Repurchase and retirement of common stock (1,203,050 shares)
|
(12
|
)
|
|
(18,127
|
)
|
|
—
|
|
|
—
|
|
|
(18,139
|
)
|
Cash dividends declared on common stock ($0.40 per share)
|
—
|
|
|
—
|
|
|
(6,266
|
)
|
|
—
|
|
|
(6,266
|
)
|
Balance at December 31, 2019
|
$
|
153
|
|
|
$
|
112,420
|
|
|
$
|
61,573
|
|
|
$
|
226
|
|
|
$
|
174,372
|
|
See accompanying notes to the consolidated financial statements
47
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
|
2019
|
|
2018
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
11,672
|
|
|
$
|
19,342
|
|
Adjustments to reconcile to net income to net cash from operating activities
|
|
|
|
Provision for loan losses
|
3,825
|
|
|
145
|
|
Stock–based compensation expense
|
—
|
|
|
6
|
|
Depreciation and amortization
|
1,613
|
|
|
1,535
|
|
Amortization of premiums and discounts on securities and loans
|
8
|
|
|
11
|
|
Amortization of intangibles
|
61
|
|
|
184
|
|
Amortization of servicing assets
|
85
|
|
|
94
|
|
Net change in net deferred loan origination costs
|
157
|
|
|
197
|
|
(Gain) loss on sale of other real estate owned
|
(111
|
)
|
|
56
|
|
Gain on sale of equity securities
|
(295
|
)
|
|
(3,558
|
)
|
Unrealized gain on equity securities
|
—
|
|
|
(3,427
|
)
|
Loss on disposal of other assets
|
44
|
|
|
—
|
|
Gain on sale of premises held-for-sale
|
—
|
|
|
(93
|
)
|
Other real estate owned valuation adjustments
|
38
|
|
|
27
|
|
Earnings on bank-owned life insurance
|
(136
|
)
|
|
(174
|
)
|
Net change in:
|
|
|
|
Deferred income tax
|
2,362
|
|
|
6,328
|
|
Accrued interest receivable
|
389
|
|
|
(333
|
)
|
Other assets
|
3,864
|
|
|
1,694
|
|
Accrued interest payable and other liabilities
|
(2,202
|
)
|
|
(1,349
|
)
|
Net cash from operating activities
|
21,374
|
|
|
20,685
|
|
Cash flows from investing activities
|
|
|
|
Securities
|
|
|
|
Proceeds from maturities
|
107,921
|
|
|
114,583
|
|
Proceeds from principal repayments
|
3,076
|
|
|
3,587
|
|
Proceeds from sale of equity securities
|
3,722
|
|
|
4,059
|
|
Purchases of securities
|
(83,081
|
)
|
|
(113,614
|
)
|
Net (increase) decrease in loans receivable
|
151,501
|
|
|
(11,091
|
)
|
Redemption of FHLB and FRB stock
|
540
|
|
|
1,312
|
|
Purchase of FHLB and FRB stock
|
(4
|
)
|
|
(1,048
|
)
|
Bank-owned life insurance death benefit
|
—
|
|
|
4,224
|
|
Proceeds from sale of premises held-for-sale
|
—
|
|
|
5,485
|
|
Proceeds from sale of other real estate owned
|
1,299
|
|
|
2,172
|
|
Purchase of premises and equipment, net
|
(798
|
)
|
|
(1,609
|
)
|
Net cash from investing activities
|
184,176
|
|
|
8,060
|
|
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
|
2019
|
|
2018
|
Cash flows from financing activities
|
|
|
|
Net change in:
|
|
|
|
Deposits
|
$
|
(67,727
|
)
|
|
$
|
12,433
|
|
Borrowings
|
(20,988
|
)
|
|
(39,719
|
)
|
Advance payments by borrowers for taxes and insurance
|
(309
|
)
|
|
(1,114
|
)
|
Repurchase and retirement of common stock
|
(18,139
|
)
|
|
(23,284
|
)
|
Cash dividends paid on common stock
|
(6,266
|
)
|
|
(6,449
|
)
|
Net cash used in financing activities
|
(113,429
|
)
|
|
(58,133
|
)
|
Net change in cash and cash equivalents
|
92,121
|
|
|
(29,388
|
)
|
Beginning cash and cash equivalents
|
98,204
|
|
|
127,592
|
|
Ending cash and cash equivalents
|
$
|
190,325
|
|
|
$
|
98,204
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
Interest paid
|
$
|
13,446
|
|
|
$
|
9,073
|
|
Income taxes paid
|
412
|
|
|
342
|
|
Income taxes refunded
|
18
|
|
|
—
|
|
Loans transferred to other real estate owned
|
186
|
|
|
1,482
|
|
Recording of right of use asset in exchange for lease obligations in other assets and other
liabilities
|
6,694
|
|
|
—
|
|
See accompanying notes to the consolidated financial statements
49
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, National Association (the “Bank”). BankFinancial Corporation is a registered Bank Holding Company and its wholly-owned bank subsidiary is operating as BankFinancial, National Association.
Principles of Consolidation: The 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 BFIN Asset Recovery Company, LLC (formerly BF Asset Recovery Corporation) (collectively, “the Company”) and have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). All significant intercompany accounts and transactions have been eliminated. The Company’s revenues, operating income, and assets are primarily from the banking industry. Loan origination customers are mainly located in the greater Chicago metropolitan area. To supplement loan originations, the Company purchases loans. The loan portfolio is concentrated in loans that are primarily secured by real estate.
Use of Estimates: The preparation of the consolidation financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual information, actual results could differ from those estimates.
Interest-bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions maturing in less than 90 days are carried at cost.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions maturing in less than 90 days, and daily federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, borrowings, and advance payments by borrowers for taxes and insurance.
Securities: Debt securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold. Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In determining if losses are other-than-temporary, management considers: (1) the length of time and extent that fair value has been less than cost or adjusted cost, as applicable, (2) the financial condition and near term prospects of the issuer, and (3) whether the Company has the intent to sell the debt security or it is more likely than not that the Company will be required to sell the debt security before the anticipated recovery.
Securities also include investments in certificates of deposit with maturities of greater than 90 days. These certificates of deposit are placed with insured institutions for varying maturities and amounts that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”).
Equity Securities: Equity securities are accounted for in accordance with ASC 321-10 Investments - Equity Securities. Our equity securities may be classified into two categories and accounted for as follows:
|
|
•
|
Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in earnings. Any dividends received are recorded in interest income.
|
|
|
•
|
Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer and their impact on fair value. Any dividends received are recorded in interest income.
|
The fair value of equity investments with readily determinable fair values is primarily obtained from third-party pricing services. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value to evaluate the observed transaction(s) and adjust the fair value of the equity investment.
ASC 321-10 also provides guidance related to accounting for impairment of equity securities without readily determinable fair values. The qualitative assessment to determine whether impairment exists requires the use of our judgment in certain circumstances. If, after completing the qualitative assessment we conclude an equity investment without a readily determinable fair value is
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)
impaired, a loss for the difference between the equity investment’s carrying value and its fair value may be recognized as a reduction to noninterest income in the Consolidated Statements of Operations.
Federal Home Loan Bank (“FHLB”) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Federal Reserve Bank (“FRB”) Stock: The Bank is a member of its regional Federal Reserve Bank. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans and Loan Income: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of the allowance for loan losses, premiums and discounts on loans purchased, and net deferred loan costs. Interest income on loans is recognized in income over the term of the loan based on the amount of principal outstanding.
Premiums and discounts associated with loans purchased are amortized over the contractual term of the loan using the level–yield method. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments.
Interest income is reported on the interest method. Interest income is generally discontinued at the earlier of a loan is 90 days past due or when we do not expect to receive full payment of interest or principal. Past due status is based on the contractual terms of the loan.
All interest accrued but not received for loans that have been placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash–basis or cost–recovery method until qualifying for return to accrual status. 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. Generally, the Company utilizes the “90 days delinquent, still accruing” category of loan classification when: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of payments actually received or the renewal of a loan has not occurred for administrative reasons.
Impaired Loans: Impaired loans principally consist of nonaccrual loans and troubled debt restructurings (“TDRs”). A loan is considered impaired when, based on current information and events, management believes that it is probable that we will be unable to collect all amounts due (both principal and interest) according to the original contractual terms of the loan agreement. Once a loan is determined to be impaired, the amount of impairment is measured based on the loan's observable fair value, the fair value of the underlying collateral less selling costs if the loan is collateral-dependent, or the present value of expected future cash flows discounted at the loan's effective interest rate. If the measurement of the impaired loan is less than the recorded investment in the loan, the bank's allowance for the impaired collateral dependent loan under ASC 310-10-35 is based on fair value (less costs to sell), but the charge-off (the confirmed “loss”) is based on the appraised value. The remaining recorded investment in the loan after the charge-off will have a loan loss allowance for the amount by which the estimated fair value of the collateral (less costs to sell) is less than its appraised value.
Impaired loans with specific reserves are reviewed quarterly for any changes that would affect the specific reserve. Any impaired loan for which a determination has been made that the economic value is permanently reduced is charged-off against the allowance for loan losses to reflect its current economic value in the period in which the determination has been made.
At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater than a year old, a new appraisal is obtained on the underlying collateral. Appraisals are updated with a new independent appraisal at least annually and are formally reviewed by our internal appraisal department upon receipt of a new appraisal. All impaired loans and their related reserves are reviewed and updated each quarter.
Troubled Debt Restructurings: A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses.
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)
In determining whether a debtor is experiencing financial difficulties, the Company considers if the debtor is in payment default or would be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtor has securities that have been or are in the process of being delisted, the debtor's entity-specific projected cash flows will not be sufficient to service any of its debt, or the debtor cannot obtain funds from sources other than the existing creditors at a market rate for debt with similar risk characteristics.
In determining whether the Company has granted a concession, the Company assesses, if it does not expect to collect all amounts due, whether the current value of the collateral will satisfy the amounts owed, whether additional collateral or guarantees from the debtor will serve as adequate compensation for other terms of the restructuring, and whether the debtor otherwise has access to funds at a market rate for debt with similar risk characteristics.
Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a nonperforming note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established.
Allowance for Loan Losses: The Company establishes provisions for loan losses, which are charged to the Company’s results of operations to maintain the allowance for loan losses to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, the Company considers past and current loss experience, trends in classified loans, 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 the estimates as more information becomes available or events change.
The Company provides for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable incurred credit losses. The Company reviews the loan portfolio on an ongoing basis and makes provisions for loan losses on a quarterly basis to maintain the allowance for loan losses in accordance with US GAAP. The allowance for loan losses consists of two components:
|
|
•
|
specific allowances established for any impaired residential non-owner occupied mortgage, multi-family mortgage, nonresidential real estate, construction and land, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of the loan; and
|
|
|
•
|
general allowances for loan losses for each loan class based on historical loan loss experience; and adjustments to historical loss experience (general allowances), maintained to cover uncertainties that affect our estimate of probable incurred credit losses for each loan class.
|
The adjustments to historical loss experience are based on our evaluation of several factors, including levels of, and trends in, past due and classified loans; levels of, and trends in, charge–offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience and ability of lending management and other relevant staff; and national and local economic trends and conditions.
The Company evaluates the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses than would be the case without the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology generally results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
The loss ratio used in computing the required general loan loss reserve allowance for a given class of loan consists of (i) the actual loss ratio (measured on a weighted, rolling twelve-quarter basis), (ii) the change in credit quality within the specific loan class during the period, (iii) the actual inherent risk factor assigned to the specific loan class and (iv) the actual concentration of risk factor assigned to the specific loan class (collectively, the “Specific Loan Class Risk Factors”). The Specific Loan Class Risk Factors are weighted equally in the calculation. In addition, two additional quantitative factors, the National Economic risk factor
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)
and the Local Economic risk factor, are also components of the computation but are given different weightings in their computation due to their relative applicability to the specific loan class in the context of the effect of national and local economic conditions on their risk profile and performance.
Mortgage Servicing Rights: Mortgage servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value and gains on sales of loans are recorded in the statement of operations. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with amortization and impairment of servicing assets on the statement of operations. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income that is reported on the statement of operations as loan servicing fees is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material.
First mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans were $63.4 million and $76.2 million at December 31, 2019 and 2018, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing activities were $2.2 million and $1.8 million at December 31, 2019 and 2018, respectively. Capitalized mortgage servicing rights are included in other assets in the accompanying consolidated statements of financial condition. Servicing rights were $335,000 and $420,000 at December 31, 2019 and 2018, respectively, with no valuation allowance at December 31, 2019 and 2018.
Other Real Estate Owned ("OREO"): Foreclosed assets are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when the legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at a lower of cost or fair value less estimated cost to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating expenses, gains and losses on disposition, and changes in the valuation allowance are reported in noninterest expense as operations of other real estate owned.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is included in noninterest expense and is computed on the straight-line method over the estimated useful lives of the assets. Useful lives are estimated to be 25 to 40 years for buildings and improvements that extend the life of the original building, ten to 20 years for routine building improvements, five to 15 years for furniture and equipment, two to five years for computer hardware and software and no greater than four years on automobiles. The cost of maintenance and repairs is charged to expense as incurred and significant repairs are capitalized.
On April 23, 2018, the Bank sold its office corporate office building in Burr Ridge, Illinois. A net gain of $93,000 was recorded in the second quarter of 2018 in connection with the sale.
Other Intangible Assets: Intangible assets acquired in a purchase business combination with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible assets (“CDI”), are recognized at the time of acquisition based on valuations prepared by independent third parties or other estimates of fair value. In preparing such valuations, variables such as deposit servicing costs, attrition rates, and market discount rates are considered. CDI assets are
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)
amortized to expense over their useful lives. CDI were $41,000 and $102,000 at December 31, 2019 and 2018, respectively, and are included in other assets in the accompanying consolidated statements of financial condition.
Bank-Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. The Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Long-Term Assets: Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Under US GAAP, a deferred tax asset valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future taxable income, applicable tax planning strategies, and assessments of current and future economic and business conditions. The Company considers both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Examples of positive evidence may include the existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated in future periods. Examples of negative evidence may include a cumulative loss in the current year and prior two years and negative general business and economic trends. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date.
This analysis is updated quarterly and adjusted as necessary. At December 31, 2019, the Company had a net deferred tax asset of $3.9 million.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, presuming that a tax examination will occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions and any annual discretionary contribution made at the discretion of the Company’s Board of Directors.
Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is net income divided by the weighted average number of common shares outstanding during the period plus the dilutive effect of restricted stock shares.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are such matters that will have a material effect on the financial statements as of December 31, 2019.
Restrictions on Cash: The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. As December 31, 2019 and 2018, the Bank has met the requirements.
The nature of the Company’s business requires that it maintain amounts with banks and federal funds sold which, at times, may exceed federally insured limits. Management monitors these correspondent relationships and the Company has not experienced any losses in such accounts.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market value information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
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)
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities, net of tax, which is also recognized as separate components of stockholders’ equity.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Operating Segments: While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications: Certain reclassifications have been made in the prior year’s financial statements to conform to the current year’s presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.
Lease Accounting: The Company adopted FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), including the adoption of the practical expedients, effective January 1, 2019. Lessees are required to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The Company recorded assets and liabilities of $6.7 million as a result of recording additional lease contracts where the Company is lessee. The Company did not restate comparative periods. The right of use assets are included in other assets and the lease obligations are included in other liabilities in the accompanying consolidated statements of financial condition.
Newly Issued Not Yet Effective Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers who are smaller reporting companies, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.
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 unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock.
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31,
|
|
2019
|
|
2018
|
Net income available to common stockholders
|
$
|
11,672
|
|
|
$
|
19,342
|
|
Average common shares outstanding
|
15,594,883
|
|
|
17,434,780
|
|
Less - Unvested restricted stock shares
|
—
|
|
|
(435
|
)
|
Basic and diluted weighted average common shares outstanding
|
15,594,883
|
|
|
17,434,345
|
|
Basic and diluted earnings per common share
|
$
|
0.75
|
|
|
$
|
1.11
|
|
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 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
December 31, 2019
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
48,666
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,666
|
|
Municipal securities
|
505
|
|
|
8
|
|
|
—
|
|
|
513
|
|
Mortgage-backed securities - residential
|
7,727
|
|
|
310
|
|
|
—
|
|
|
8,037
|
|
Collateralized mortgage obligations - residential
|
2,986
|
|
|
4
|
|
|
(13
|
)
|
|
2,977
|
|
|
$
|
59,884
|
|
|
$
|
322
|
|
|
$
|
(13
|
)
|
|
$
|
60,193
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
73,507
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,507
|
|
Municipal securities
|
509
|
|
|
—
|
|
|
—
|
|
|
509
|
|
Mortgage-backed securities - residential
|
10,116
|
|
|
400
|
|
|
(38
|
)
|
|
10,478
|
|
Collateralized mortgage obligations - residential
|
3,676
|
|
|
11
|
|
|
(2
|
)
|
|
3,685
|
|
|
$
|
87,808
|
|
|
$
|
411
|
|
|
$
|
(40
|
)
|
|
$
|
88,179
|
|