UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
fiscal year ended December 31,
2019
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
transition period
from
to
Commission
File Number 0-51331
BANKFINANCIAL
CORPORATION
(Exact Name
of Registrant as Specified Its Charter)
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Maryland
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75-3199276
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(State or
Other Jurisdiction
of
Incorporation)
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(I.R.S.
Employer
Identification
No.)
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60 North
Frontage Road, Burr Ridge, Illinois 60527
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(Address of
Principal Executive Offices)
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Registrant’s
telephone number, including area code:
(800) 894-6900
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Trading
Symbol(s)
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Name of each
exchange on which registered
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Common Stock, par value $0.01
per share
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BFIN
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The NASDAQ Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check
mark whether the issuer is a well-known seasoned issuer as defined
in Rule 405 of the Securities
Act. Yes ¨ No x.
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x.
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes x No ¨
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit such
files). Yes x No ¨
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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Smaller reporting company
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Emerging growth
company
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If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes ¨ No x.
The aggregate
market value of the registrant’s outstanding common stock held by
non-affiliates on June 30,
2019,
determined using a per share closing price on that date of $13.99,
as quoted on The Nasdaq Global Select Market, was $200.6
million.
At
March 3,
2020, there
were 15,206,787 shares of common stock, $0.01
par value, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Proxy
Statement for the 2020 Annual Meeting of Stockholders (Part
III)
BANKFINANCIAL
CORPORATION
Form 10-K Annual
Report
Table of
Contents
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Page
Number
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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Item 9A.
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Item 9B.
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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Item 15.
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Item 16.
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PART I
Forward
Looking Statements
This Annual
Report on Form 10-K contains, and other periodic and current
reports, press releases and other public stockholder communications
of BankFinancial Corporation may contain, forward-looking
statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, which involve significant risks
and uncertainties. Forward-looking statements may include
statements relating to our future plans, strategies and
expectations, as well as our future revenues, expenses, earnings,
losses, financial performance, financial condition, asset quality
metrics and future prospects. Forward looking statements are
generally identifiable by use of the words “believe,” “may,”
“will,” “should,” “could,” “continue,” “expect,” “estimate,”
“intend,” “anticipate,” “project,” “plan,” or similar expressions.
Forward looking statements are frequently based on assumptions that
may or may not materialize, and are subject to numerous
uncertainties that could cause actual results to differ materially
from those anticipated in the forward looking statements. We intend
all forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this
statement for the purpose of invoking these safe harbor
provisions.
Factors that
could cause actual results to differ materially from the results
anticipated or projected and which could materially and adversely
affect our operating results, financial condition or future
prospects include, but are not limited to: (i) less than
anticipated loan growth due to intense competition for loans and
leases, particularly in terms of pricing and credit underwriting;
(ii) the impact of re-pricing and competitors’ pricing initiatives
on loan and deposit products; (iii) interest rate movements and
their impact on the economy, customer behavior and our net interest
margin; (iv) adverse economic conditions in general or specific
events such as a pandemic or terrorism, and in the markets in which
we lend that could result in increased delinquencies in our loan
portfolio or a decline in the value of our investment securities
and the collateral for our loans; (v) declines in real estate
values that adversely impact the value of our loan collateral,
other real estate owned ("OREO"), asset dispositions and the level
of borrower equity in their investments; (vi) borrowers that
experience legal or financial difficulties that we do not currently
foresee; (vii) results of supervisory monitoring or examinations by
regulatory authorities, including the possibility that a regulatory
authority could, among other things, require us to increase our
allowance for loan losses or adversely change our loan
classifications, write-down assets, reduce credit concentrations or
maintain specific capital levels; (viii) changes, disruptions or
illiquidity in national or global financial markets; (ix) the
credit risks of lending activities, including risks that could
cause changes in the level and direction of loan delinquencies and
charge-offs or changes in estimates relating to the computation of
our allowance for loan losses; (x) monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and
the Federal Reserve Board; (xi) factors affecting our ability to
access deposits or cost-effective funding, and the impact of
competitors' pricing initiatives on our deposit products; (xii)
legislative or regulatory changes that have an adverse impact on
our products, services, operations and operating expenses; (xiii)
higher federal deposit insurance premiums; (xiv) higher than
expected overhead, infrastructure and compliance costs; (xv)
changes in accounting principles, policies or guidelines; (xvi) the
effects of any federal government shutdown; and (xvii) privacy and
cybersecurity risks, including the risks of business interruption
and the compromise of confidential customer information resulting
from intrusions.
These risks and
uncertainties, as well as the Risk Factors set forth in
Item 1A below, should be considered in evaluating
forward-looking statements and undue reliance should not be placed
on such statements. Forward looking statements speak only as of the
date they are made. We do not undertake any obligation to update
any forward-looking statement in the future, or to reflect
circumstances and events that occur after the date on which the
forward-looking statement was made.
BankFinancial
Corporation
BankFinancial
Corporation, a Maryland corporation headquartered in Burr Ridge,
Illinois (the “Company”), became the owner of all of the issued and
outstanding capital stock of BankFinancial, F.S.B. (the “Bank”) in
2005, when we consummated a plan of conversion and reorganization
that the Bank and its predecessor holding companies, BankFinancial
MHC, Inc. and BankFinancial Corporation, a federal corporation,
adopted on August 25, 2004. BankFinancial Corporation, the
Maryland corporation, was organized in 2004 to facilitate the
mutual-to-stock conversion and to become the holding company for
the Bank upon its completion.
Following the
approval of applications that the Company filed with the Board of
Governors of the Federal Reserve System and the Bank filed with the
Office of the Comptroller of the Currency (“OCC”), the Company
became a bank holding company and the Bank became a national bank
on November 30, 2016. As a result of the Bank’s conversion
from a federal savings bank charter to a national bank charter, the
Bank changed its name from BankFinancial, F.S.B. to BankFinancial,
National Association.
We manage our
operations as one unit, and thus do not have separate operating
segments. Our chief operating decision-makers use consolidated
results to make operating and strategic decisions.
BankFinancial,
National Association
The Bank is a
full-service, national bank principally engaged in the business of
commercial, family and personal banking. The Bank offers our
customers a broad range of loan, deposit, trust and other financial
products and services through 19 full-service Illinois based
banking offices located in Cook, DuPage, Lake and Will Counties,
and through our Internet Branch, www.bankfinancial.com.
The Bank’s
primary business is making loans and accepting deposits. The Bank
also offers our customers a variety of financial products and
services that are related or ancillary to loans and deposits,
including cash management, funds transfers, bill payment and other
online and mobile banking transactions, automated teller machines,
safe deposit boxes, trust services, wealth management, and general
insurance agency services.
The Bank’s
primary lending area consists of the counties where our branch
offices are located, and contiguous counties in the State of
Illinois. In 2019, we derived the most
significant portion of our revenues from these geographic areas.
However, we also engage in multi-family lending activities in
selected Metropolitan Statistical Areas outside our primary lending
area and engage in healthcare lending and commercial equipment
finance activities on a nationwide basis.
We originate
deposits predominantly from the areas where our branch offices are
located. We rely on our favorable locations, customer service,
competitive pricing, our Internet Branch and related deposit
services such as cash management to attract and retain these
deposits. While we accept certificates of deposit in excess of the
Federal Deposit Insurance Corporation (“FDIC”) deposit insurance
limits, we generally do not solicit such deposits because they are
more difficult to retain than core deposits and at times are more
costly than wholesale deposits.
Lending
Activities
Our loan
portfolio consists primarily of multi-family real estate,
nonresidential real estate, construction and land loans, commercial
loans and commercial leases, which represented $1.117
billion,
or 95.1%, of our gross loan portfolio
of $1.175
billion at December 31,
2019.
At December 31,
2019, $563.8
million,
or 48.0%, of our loan portfolio
consisted of multi-family mortgage loans; $134.7
million,
or 11.5%, of our loan portfolio
consisted of nonresidential real estate loans; $145.7
million,
or 12.4%, of our loan portfolio
consisted of commercial loans; and $272.6
million,
or 23.2%, of our loan portfolio
consisted of commercial leases. $55.8
million,
or 4.7%, of our loan portfolio
consisted of one-to-four family residential mortgage loans, of
which $10.8
million,
or 0.9%, were loans to investors
secured by non-owner occupied residential properties, including
home equity loans and lines of credit.
Deposit
Activities
Our deposit
accounts consist principally of savings accounts, NOW accounts,
checking accounts, money market accounts, certificates of deposit,
and IRAs and other retirement accounts. We provide commercial
checking accounts and related services such as cash management. We
also provide low-cost checking account services. We rely on our
favorable locations, customer service, competitive pricing, our
Internet Branch and related deposit services such as cash
management to attract and retain deposit accounts.
At
December 31,
2019, our
deposits totaled $1.285
billion.
Interest-bearing deposits totaled $1.074
billion,
or 83.6% of total deposits, and
noninterest-bearing demand deposits totaled $210.8
million,
or 16.4% of total deposits. Savings,
money market and NOW account deposits totaled $672.0
million,
or 52.3% of total deposits, and
certificates of deposit totaled $402.0
million,
or 31.3% of total deposits, of
which $335.9 million
had maturities of
one year or less.
Related
Products and Services
The Bank provides
trust and financial planning services through our Trust Department.
The Bank’s wholly-owned subsidiary, Financial Assurance Services,
Inc. (“Financial Assurance”), sells property and casualty insurance
and other insurance products on an agency basis. For the year
ended December 31,
2019,
Financial Assurance recorded a net loss of $89,000. At December 31,
2019,
Financial Assurance had two full-time employees. The
Bank’s other wholly-owned subsidiary, BFIN Asset Recovery Company,
LLC (formerly BF Asset Recovery Corporation), holds title to and
sells certain Bank-owned real estate acquired through foreclosure
and collection actions, and recorded a net loss of
$120,000
for the year
ended December 31,
2019.
Website and
Stockholder Information
The website for
the Company and the Bank is www.bankfinancial.com. Information
on this website does not constitute part of this Annual Report on
Form 10-K.
The Company makes
available, free of charge, its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K and
amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (“Exchange Act”), as soon as reasonably practicable
after such forms are filed with or furnished to the Securities and
Exchange Commission (“SEC”). Copies of these documents are
available to stockholders at the website for the Company and the
Bank, www.bankfinancial.com,
under “Investor Relations,” and through the EDGAR database on the
SEC’s website, www.sec.gov.
Competition
We face
significant competition in originating loans and attracting
deposits. The Chicago Metropolitan Statistical Area and the other
markets in which we operate generally have a high concentration of
financial institutions, many of which are significantly larger
institutions that have greater financial resources than we have,
and many of which are our competitors to varying degrees. Our
competition for loans and leases comes principally from commercial
banks, savings banks, mortgage banking companies, the U.S.
Government, credit unions, leasing companies, insurance companies,
real estate conduits and other companies that provide financial
services to businesses and individuals. Our most direct competition
for deposits has historically come from commercial banks, savings
banks and credit unions. We face additional competition for
deposits from online financial institutions and non-depository
competitors such as the mutual fund industry, securities and
brokerage firms and insurance companies.
We seek to meet
this competition by emphasizing personalized service and efficient
decision-making tailored to individual needs. We do not rely on any
individual, group or entity for a material portion of our loans or
our deposits.
Employees
At
December 31,
2019, the
Bank had 198 full-time employees
and 44 part-time employees. The
employees are not represented by a collective bargaining unit and
we consider our working relationship with our employees to be
good.
Supervision
and Regulation
General
In 2016, the Bank
converted from a federal savings bank charter to a national bank
charter. As a national bank, the Bank is regulated and supervised
primarily by the OCC. The Bank is also subject to regulation by the
FDIC in more limited circumstances because the Bank’s deposits are
insured by the FDIC. This regulatory and supervisory structure
establishes a comprehensive framework of the activities in which a
depository institution may engage, and is intended primarily for
the protection of the FDIC’s deposit insurance fund, depositors and
the banking system. Under this system of federal regulation,
depository institutions are periodically examined to ensure that
they satisfy applicable standards with respect to their capital
adequacy, assets, management, earnings, liquidity and sensitivity
to market interest rates. The OCC examines the Bank and prepares
reports for the consideration of its Board of Directors on any
identified deficiencies, if any. After completing an examination,
the OCC issues a report of examination and assigns a rating (known
as an institution’s CAMELS rating). Under federal law and
regulations, an institution may not disclose the contents of its
reports of examination or its CAMELS ratings to the
public.
The Bank is a
member of, and owns stock in, the Federal Home Loan Bank of Chicago
(“FHLB”) and the Federal Reserve Bank of Chicago. The Board of
Governors of the Federal Reserve System (“FRB”) has limited
regulatory jurisdiction over the Bank with regard to reserves it
must maintain against deposits, check processing and certain other
matters. The Bank’s relationship with its depositors and borrowers
also is regulated in some respects by both federal and state laws,
especially in matters concerning the ownership of deposit accounts,
and the form and content of the Bank’s consumer loan
documents.
The Company is a
bank holding company within the meaning of federal law. As such, it
is subject to supervision and examination by the FRB. The Company
was previously a savings and loan holding company but became a bank
holding company in connection with the Bank’s conversion to a
national bank charter in 2016.
There can be no
assurance that laws, rules and regulations, and regulatory policies
will not change in the future. Such changes could make compliance
more difficult or expensive or otherwise adversely affect our
business, financial condition, results of operations or prospects.
Any change in the laws or regulations, or in regulatory policy,
whether by the OCC, the FDIC, the FRB, the Consumer Financial
Protection Bureau (“CFPB”) or the United States ("U.S.") Congress
could have a material adverse impact on the Company, the Bank and
their respective operations.
The following
summary of laws and regulations applicable to the Bank and Company
is not intended to be exhaustive and is qualified in its entirety
by reference to the actual laws and regulations
involved.
Federal
Banking Regulation
Business Activities. As a national bank, the Bank
derives its lending and investment powers from the National Bank
Act, as amended, and the regulations of the OCC. Under these laws
and regulations, the Bank may invest in mortgage loans secured by
residential and nonresidential real estate, commercial business and
consumer loans and leases, certain types of securities and certain
other loans and assets. Unlike federal savings banks, national
banks are not generally subject to specified percentage of assets
on various types of lending. The Bank may also establish
subsidiaries that engage in activities permitted for the Bank as
well as certain other activities.
Capital Requirements. Federal regulations require
FDIC-insured depository institutions, including national banks, to
meet several minimum capital standards: a common equity Tier 1
capital to risk-based assets ratio of 4.5%, a Tier 1 capital to
risk-based assets ratio of 6.0%, a total capital to risk-based
assets of 8% and a 4% Tier 1 capital to total assets leverage
ratio. The existing capital requirements were effective January 1,
2015 and are the result of a final rule implementing regulatory
amendments based on recommendations of the Basel Committee on
Banking Supervision and certain requirements of the Dodd Frank Wall
Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank
Act”).
For purposes of
the regulatory capital requirements, common equity Tier 1
capital is generally defined as common stockholders’ equity and
retained earnings. Tier 1 capital is generally defined as common
equity Tier 1 and Additional Tier 1 capital. Additional Tier 1
capital generally includes certain noncumulative perpetual
preferred stock and related surplus and minority interests in
equity accounts of consolidated subsidiaries. Total capital
includes Tier 1 capital (common equity Tier 1 capital plus
Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is
comprised of capital instruments and related surplus meeting
specified requirements, and may include cumulative preferred stock
and long-term perpetual preferred stock, mandatory convertible
securities, intermediate preferred stock and subordinated debt.
Also included in Tier 2 capital is the allowance for loan and lease
losses limited to a maximum of 1.25% of risk-weighted assets and,
for institutions that have exercised an opt-out election regarding
the treatment of Accumulated Other Comprehensive Income (“AOCI”),
up to 45% of net unrealized gains on available-for-sale equity
securities with readily determinable fair market values.
Institutions that have not exercised the AOCI opt-out have AOCI
incorporated into common equity Tier 1 capital (including
unrealized gains and losses on available-for-sale securities).
Calculation of all types of regulatory capital is subject to
deductions and adjustments specified in the
regulations.
In determining
the amount of risk-weighted assets a bank has for purposes of
calculating risk-based capital ratios, assets, including certain
off-balance-sheet assets (e.g.,
recourse obligations, direct credit substitutes, residual
interests) are multiplied by a risk weight factor assigned by the
regulations based on the risks believed inherent in the type of
asset. Higher levels of capital are required for asset categories
believed to present greater risk. For example, a risk weight of 0%
is assigned to cash and U.S. government securities, a risk weight
of 50% is generally assigned to prudently underwritten first lien
one-to-four family residential mortgages and certain qualifying
multi-family mortgage loans, a risk weight of 100% is assigned to
commercial, commercial real estate and consumer loans, a risk
weight of 150% is assigned to certain past due loans and high
volatility commercial real estate loans, and a risk weight of
between 0% to 600% is assigned to permissible equity interests,
depending on certain specified factors.
In addition to
establishing the minimum regulatory capital requirements, the
regulations limit capital distributions and certain discretionary
bonus payments to management if the institution does not hold a
“capital conservation buffer” consisting of 2.5% of common equity
Tier 1 capital to risk-weighted assets above the amount necessary
to meet its minimum risk-based capital requirements. The capital
conservation buffer requirement was fully implemented at 2.5% on
January 1, 2019.
At
December 31,
2019, the
Bank’s capital exceeded all applicable regulatory requirements, the
Bank was considered well-capitalized and it had an appropriate
capital conservation buffer.
The Company and
the Bank each have adopted Regulatory Capital Plans that provide
that the Bank will maintain a Tier 1 leverage ratio of at least
7.5% and a total risk-based capital ratio of at least 10.5%. The
capital ratios set forth in the Regulatory Capital Plans will be
adjusted 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 capital levels. In addition, in accordance with its
Regulatory Capital Plan, the Company expects it 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.
Legislation
enacted in May 2018 required the federal banking agencies,
including the OCC, to establish a “community bank leverage ratio”
of between 8 to 10% of average total consolidated assets for
qualifying institutions with assets of less than $10 billion of
assets. The OCC has adopted a final rule that established 9% as the
community bank leverage ratio, effective
March 31,
2020.
Institutions with capital meeting the specified requirement and
electing to follow the alternative framework would be deemed to
comply with the applicable regulatory capital requirements,
including the risk-based requirements.
Loans-to-One-Borrower. A national bank generally may
not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and surplus. An
additional amount may be loaned, equal to 10% of unimpaired capital
and surplus, if the loan is secured by readily marketable
collateral, which generally does not include real estate. As
of December 31,
2019, the
Bank was in compliance with the loans-to-one-borrower
limitations.
Dividends. Federal law and OCC
regulations govern cash dividends by a national bank. A national
bank is authorized to pay such dividends from undivided profits but
must receive prior OCC approval if the total amount of dividends
(including the proposed dividend) exceeds its net income in that
year and the prior two years less dividends previously paid. A
national bank may not pay a dividend if it does not comply with
applicable regulatory capital requirements and may be further
limited in payment of cash dividends if it does not maintain the
capital conservation buffer described previously.
Community Reinvestment Act and Fair Lending Laws.
All national
banks have a responsibility under the Community Reinvestment Act
(“CRA”) and related federal regulations to help meet the credit
needs of their communities, including low- and moderate- income
neighborhoods. In connection with its examination of a national
bank, the OCC is required to evaluate and rate the bank’s record of
compliance with the CRA. In addition, the Equal Credit Opportunity
Act and the Fair Housing Act prohibit lenders from discriminating
in their lending practices based on the characteristics specified
in those statutes. A national bank’s failure to comply with the
provisions of the CRA could, at a minimum, result in regulatory
restrictions on certain of its activities such as branching or
mergers. The failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in enforcement actions by
the OCC, as well as other federal regulatory agencies and the
Department of Justice. The Bank’s CRA performance has been rated as
“Outstanding” by its primary federal regulatory agency since
1998.
Transactions with Related Parties. A national bank’s authority
to engage in transactions with its “affiliates” is limited by OCC
regulations and by Sections 23A and 23B of the Federal Reserve Act
and its implementing regulation, Regulation W. The term
“affiliates” for these purposes generally means any company that
controls or is under common control with an insured depository
institution, although operating subsidiaries of national banks are
generally not considered affiliates for the purposes of Sections
23A and 23B of the Federal Reserve Act. The Company is an affiliate
of the Bank. In general, transactions with affiliates must be on
terms that are at least as favorable to the national bank as
comparable transactions with non-affiliates. In addition, certain
types of these transactions are restricted to an aggregate
percentage of the bank’s capital. Collateral in specified amounts
must be provided by affiliates in order to receive loans or other
forms of credit from the bank.
The Bank’s
authority to extend credit to its directors, executive officers and
10% stockholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections
22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
FRB. These provisions require that extensions of credit to insiders
generally be made on terms that are substantially the same as, and
follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with
unaffiliated persons and not involve more than the normal risk of
repayment or present other unfavorable features (subject to an
exception for lending programs open to employees generally). In
addition, there are limitations on the amount of credit extended to
such persons, individually and in the aggregate based on a
percentage of the Bank’s capital. Extensions of credit in excess of
specified limits must receive the prior approval of the Bank’s
Board of Directors. Extensions of credit to executive officers are
subject to additional restrictions. The Bank does not extend new
credit to executive officers or members of the Board of
Directors.
Enforcement. The OCC has primary
enforcement responsibility over national banks. This includes
authority to bring enforcement actions against the Bank, its
directors, officers and employees and all “institution-affiliated
parties,” including stockholders, attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to the removal of officers
and/or directors, receivership, conservatorship or the termination
of deposit insurance. Civil monetary penalties cover a wide range
of violations and actions, and range up to $25,000 per day, unless
a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. The FDIC has authority to
recommend to the OCC that an enforcement action be taken with
respect to a particular insured bank. If action is not taken by the
OCC, the FDIC has authority to take action under specified
circumstances.
Standards for Safety and Soundness. Federal law requires each
federal banking agency to prescribe certain standards for insured
depository institutions under its jurisdiction. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for
Safety and Soundness to implement the safety and soundness
standards required under federal law. The guidelines set forth the
standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital
becomes impaired. The guidelines address matters such as internal
controls and information systems, internal audit systems,
credit
underwriting,
loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. A subsequent set of guidelines was
issued for information security. If the OCC determines that a
national bank fails to meet any standard prescribed by the
guidelines, it may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard and take
other appropriate action.
Prompt Corrective Action Regulations.
Federal law
requires that federal bank regulators take “prompt corrective
action” with respect to institutions that do not meet minimum
capital requirements. For this purpose, the law establishes five
capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. The applicable OCC regulations were amended to
incorporate the previously mentioned increased regulatory capital
standards that were effective January 1, 2015. Under the amended
regulations, an institution is deemed to be “well-capitalized” if
it has a total risk-based capital ratio of 10.0% or greater, a Tier
1 risk-based capital ratio of 8.0% or greater, a leverage ratio of
5.0% or greater and a common equity Tier 1 ratio of 6.5% or
greater. An institution is “adequately capitalized” if it has a
total risk-based capital ratio of 8.0% or greater, a Tier 1
risk-based capital ratio of 6.0% or greater, a leverage ratio of
4.0% or greater and a common equity Tier 1 ratio of 4.5% or
greater. An institution is “undercapitalized” if it has a total
risk-based capital ratio of less than 8.0%, a Tier 1 risk-based
capital ratio of less than 6.0%, a leverage ratio of less than 4.0%
or a common equity Tier 1 ratio of less than 4.5%. An institution
is deemed to be “significantly undercapitalized” if it has a total
risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 4.0%, a leverage ratio of less than 3.0%
or a common equity Tier 1 ratio of less than 3.0%. An institution
is considered to be “critically undercapitalized” if it has a ratio
of tangible equity (as defined in the regulations) to total assets
that is equal to or less than 2.0%.
The regulations
provide that a capital restoration plan must be filed with the OCC
within 45 days of the date a national bank receives notice that it
is “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.” Any holding company for the bank
required to submit a capital restoration plan must guarantee the
lesser of an amount equal to 5.0% of the bank’s assets at the time
it was notified or deemed to be undercapitalized by the OCC, or the
amount necessary to restore the bank to adequately capitalized
status. This guarantee remains in place until the OCC notifies the
bank that it has maintained adequately capitalized status for each
of four consecutive calendar quarters, and the OCC has the
authority to require payment and collect payment under the
guarantee. Various restrictions, including as to growth and capital
distributions, also apply to “undercapitalized” institutions. If an
“undercapitalized” institution fails to submit an acceptable
capital plan, it is treated as “significantly undercapitalized.”
“Significantly undercapitalized” institutions must comply with one
or more additional restrictions including, but not limited to, an
order by the OCC to sell sufficient voting stock to become
adequately capitalized, a requirement to reduce total assets, cease
receipt of deposits from correspondent banks or dismiss officers or
directors and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the
parent holding company. Critically undercapitalized institutions
are subject to the appointment of a receiver or conservator. The
OCC may also take any one of a number of discretionary supervisory
actions against undercapitalized institutions, including the
issuance of a capital directive.
At
December 31,
2019, the
Bank met the criteria for being considered “well-capitalized.” The
previously referenced final rule establishing an elective
“community bank leverage ratio” regulatory capital requirement
provides that a qualifying institution whose capital exceeds the
community bank leverage ratio and opts to use that framework will
be considered “well-capitalized” for purposes of prompt corrective
action.
Insurance of Deposit Accounts. The Bank’s deposits are
insured up to applicable limits by the Deposit Insurance Fund of
the FDIC. Deposit accounts in the Bank are insured up to $250,000
for each separately insured depositor.
The FDIC charges
insured depository institutions premiums to maintain the Deposit
Insurance Fund. Until July 1, 2016, insured depository institutions
were assigned a risk category based on supervisory evaluations,
regulatory capital levels and certain other factors. An
institution’s rate depended upon the risk category to which it is
assigned and certain adjustments specified by FDIC regulations.
Institutions deemed less risky pay lower FDIC assessments. The
Dodd-Frank Act required the FDIC to revise its procedures to base
its assessments upon each insured institution’s total assets less
tangible equity instead of deposits. The FDIC finalized a rule,
effective April 1, 2011, that set the assessment range at 2.5
to 45 basis points of total assets less tangible
equity.
Effective July 1,
2016, the FDIC adopted changes that eliminated the risk categories.
Assessments for most institutions are now based on financial
measures and supervisory ratings derived from statistical modeling
estimating the probability of failure within three years. In
conjunction with the Deposit Insurance Fund's reserve ratio
achieving 1.15%, the assessment range (inclusive of possible
adjustments) was reduced for insured institutions of less than $10
billion in total assets to a range of 1.5 basis points to 30 basis
points.
The Dodd-Frank
Act increased the minimum target Deposit Insurance Fund ratio from
1.15% of estimated insured deposits to 1.35% of estimated insured
deposits. The FDIC was required to seek to achieve the 1.35% ratio
by September 30, 2020. The FDIC indicated that the 1.35% ratio was
exceeded in November 2018. Insured institutions of less than $10
billion of assets are
receiving credits
for the portion of their assessments that contributed to the
reserve ratio between 1.15% and 1.35%. The Dodd-Frank Act
eliminated the 1.5% maximum fund ratio, instead leaving it to the
discretion of the FDIC, and the FDIC has exercised that discretion
by establishing a long-range fund ratio of 2%.
The FDIC has
authority to increase insurance assessments. A significant increase
in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. The Bank
cannot predict what its insurance assessment rates will be in the
future.
An insured
institution’s deposit insurance may be terminated by the FDIC upon
an administrative finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law,
regulation, rule, order or regulatory condition imposed in writing.
The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit
insurance.
Prohibitions Against Tying Arrangements.
National banks
are prohibited, subject to some exceptions, from extending credit
to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the
institution or its affiliates or not obtain services of a
competitor of the institution.
Federal Reserve System. The Bank is a member of the
Federal Reserve System, which consists of 12 regional Federal
Reserve Banks. As a member of the Federal Reserve System, the Bank
is required to acquire and hold shares of capital stock in its
regional Federal Reserve Bank, the Federal Reserve Bank of Chicago,
in specified amounts. The Bank is also required to maintain
noninterest-earning reserves against its transaction accounts, such
as negotiable order of withdrawal and regular checking accounts.
The balances maintained to meet the reserve requirements may be
used to satisfy liquidity requirements imposed by the OCC’s
regulations. As of December 31,
2019, the
Bank was in compliance with all of these requirements. The FRB also
provides a backup source of funding to depository institutions
through the regional Federal Reserve Banks pursuant to section 10B
of the Federal Reserve Act and Regulation A. In general, eligible
depository institutions have access to three types of discount
window credit-primary credit, secondary credit, and seasonal
credit. All discount window loans must be collateralized to the
satisfaction of the lending regional Federal Reserve
Bank.
Federal Home Loan Bank System. The Bank is a member of the
Federal Home Loan Bank System, which consists of 11 regional
Federal Home Loan Banks. The Federal Home Loan Bank System provides
a central credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares
of capital stock in the FHLB in specified amounts. As of
December 31,
2019, the
Bank was in compliance with this requirement.
The USA
PATRIOT Act and the Bank Secrecy Act
The USA PATRIOT
Act and the Bank Secrecy Act require financial institutions to
develop programs to detect and report money-laundering and
terrorist activities, as well as suspicious activities. The USA
PATRIOT Act also gives the federal government powers to address
terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and
broadened anti-money laundering requirements. The federal banking
agencies are required to take into consideration the effectiveness
of controls designed to combat money-laundering activities in
determining whether to approve a merger or other acquisition
application of a member institution. Accordingly, if we engage in a
merger or other acquisition, our controls designed to combat money
laundering would be considered as part of the application process.
In addition, non-compliance with these laws and regulations could
result in fines, penalties and other enforcement measures. We have
developed policies, procedures and systems designed to comply with
these laws and regulations.
Holding
Company Regulation
The Company, as a
company controlling a national bank, is a bank holding company
subject to regulation and supervision by, and reporting to, the
FRB. The FRB has enforcement authority over the Company and any
nonbank subsidiaries. Among other things, this authority permits
the FRB to restrict or prohibit activities that are determined to
be a risk to the Bank.
The Company's
activities are limited to the activities permissible for bank
holding companies, which generally include activities deemed by the
FRB to be closely related or a proper incident to banking or
managing or controlling banks. A bank holding company that meets
certain criteria may elect to be regulated as a financial holding
company and thereby engage in a broader array of financial
activities, such as underwriting equity securities and insurance.
The Company has not, up to now, elected to be regulated as a
financial holding company.
Federal law
prohibits a bank holding company from acquiring, directly or
indirectly, more than 5% of a class of voting securities of, or all
or substantially all of the assets of, another bank or bank holding
company, without prior written approval of the FRB. In evaluating
applications by bank holding companies to acquire banks, the FRB
considers, among other things, the financial and
managerial
resources and future prospects of the parties, the effect of the
acquisition on the risk to the Deposit Insurance Fund, the
convenience and needs of the community, competitive factors and
compliance with anti-money laundering laws.
Capital. Bank holding companies with
greater than $3 billion in total consolidated assets are subject to
consolidated regulatory capital requirements. The asset threshold
was previously $1 billion, which applied to the Company, but
federal legislation required the FRB to raise the threshold to $3
billion. That change became effective on August 30, 2018. As a
result, holding companies of less than $3 billion of assets are not
subject to consolidated capital requirements unless otherwise
advised by the FRB.
Source of Strength Doctrine. The “source of strength
doctrine” requires bank holding companies to provide assistance to
their subsidiary depository institutions in the event the
subsidiary depository institution experiences financial difficulty.
The FRB has issued regulations requiring that all bank holding
companies serve as a source of financial and managerial strength to
their subsidiary depository institutions. In that regard, the
Company has made certain commitments in a Regulatory Capital Plan,
as described earlier under "Federal Bank Regulation:
Capital
Requirements".
Capital Distributions. The FRB has issued a policy
statement regarding the payment of dividends by bank holding
companies. In general, the policy provides that dividends should be
paid only out of current earnings and only if the prospective rate
of earnings retention by the holding company appears consistent
with the organization’s capital needs, asset quality and overall
supervisory financial condition. Separate regulatory guidance
provides for prior consultation with Federal Reserve Bank
supervisory staff concerning dividends in certain circumstances,
such as where the company’s net income for the past four quarters,
net of dividends previously paid over that period, is insufficient
to fully fund the dividend or the company’s overall rate or
earnings retention is inconsistent with the company’s capital needs
and overall financial condition. The ability of a bank holding
company to pay dividends may be restricted if a subsidiary bank
becomes undercapitalized. FRB regulatory guidance also indicates
that a bank holding company should inform Federal Reserve Bank
staff prior to redeeming or repurchasing common stock or perpetual
preferred stock if the bank holding company is experiencing
financial weaknesses or the repurchase or redemption would result
in a net reduction, at the end of a quarter, in the amount of such
equity instruments outstanding compared with the beginning of the
quarter in which the redemption or repurchase occurred. FRB
regulations require prior approval for a bank holding company to
redeem equity securities if the gross consideration, when combined
with net consideration paid for all such redemptions during the
preceding 12 months, will equal 10% or more of the holding
company’s consolidated net worth. There is an exception for bank
holding companies that meet specified qualitative criteria. These
regulatory policies may affect the ability of the Company to pay
dividends, repurchase shares of its common stock or otherwise
engage in capital distributions.
Change in
Control Regulations
Under the Change
in Bank Control Act, no person may acquire control of a bank
holding company such as the Company unless the FRB has been given
60 days’ prior written notice and has not issued a notice
disapproving the proposed acquisition, taking into consideration
certain factors, including the financial and managerial resources
of the acquiror and the competitive effects of the acquisition.
Control, as defined under federal law, means ownership, control of
or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a
majority of the company’s directors, or a determination by the
regulator that the acquiror has the power to direct, or directly or
indirectly to exercise a controlling influence over, the management
or policies of the institution. Acquisition of more than 10% of any
class of a bank holding company’s voting stock constitutes a
rebuttable presumption of control under the regulations under
certain circumstances including where, as is the case with the
Company, the issuer has securities registered under Section 12
of the Exchange Act.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 was enacted in response to public
concerns regarding corporate accountability in connection with
certain accounting scandals. The stated goals of the Sarbanes-Oxley
Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at
publicly traded companies, and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The Sarbanes-Oxley Act generally applies to
all companies that file or are required to file periodic reports
with the SEC, under the Exchange Act.
The
Sarbanes-Oxley Act includes specific additional disclosure
requirements, requires the SEC and national securities exchanges to
adopt extensive additional disclosure, corporate governance and
other related rules, and mandates further studies of certain issues
by the SEC.
Federal
Securities Laws
The Company’s
common stock is registered with the SEC under the Exchange Act. The
Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the Exchange
Act.
ITEM
1A. RISK
FACTORS
An investment in
our securities is subject to risks inherent in our business and the
industry in which we operate. Before making an investment decision,
you should carefully consider the risks and uncertainties described
below and all other information included in this report. The risks
described below may adversely affect our business, financial
condition and operating results. In addition to these risks and the
other risks and uncertainties described in Item 1,
“Business–Forward Looking Statements,” and Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of
Operations,” there may be additional risks and uncertainties that
are not currently known to us or that we currently deem to be
immaterial that could materially and adversely affect our business,
financial condition or operating results. The value or market price
of our securities could decline due to any of these identified or
other risks. Past financial performance may not be a reliable
indicator of future performance, and historical trends should not
be used to anticipate results or trends in future
periods.
Our future
growth and success will depend on our ability to compete
effectively in a highly competitive environment
We face
substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success
will depend on our ability to compete effectively in this highly
competitive environment. To date, our competitive strategies have
focused on attracting deposits in our local markets, and growing
our loan and lease portfolio by emphasizing specific loan products
in which we have significant experience and expertise, identifying
and targeting markets in which we believe we can effectively
compete with larger institutions and other competitors, and
offering competitive pricing to commercial borrowers with
appropriate risk profiles. We compete for loans, leases, deposits
and other financial services with other commercial banks, thrifts,
credit unions, brokerage houses, mutual funds, insurance companies,
real estate conduits, mortgage brokers and specialized finance
companies. Many of our competitors offer products and services that
we do not offer, and some offer loan structures and have
underwriting standards that are not as restrictive as our required
loan structures and underwriting standards. Some larger competitors
have substantially greater resources and lending limits, name
recognition and market presence that benefits them in attracting
business. In addition, larger competitors may be able to price
loans, leases and deposits more aggressively than we do, and
because of their larger capital bases, their underwriting practices
for smaller loans may be subject to less regulatory scrutiny than
they would be for smaller banks. Newer competitors may be more
aggressive in pricing loans, leases and deposits in order to
increase their market share. Some of the financial institutions and
financial services organizations with which we compete are not
subject to the extensive regulations imposed on national banks and
their holding companies. As a result, these nonbank competitors
have certain advantages over us in accessing funding and in
providing various financial services.
Changes in
market interest rates could adversely affect our financial
condition and results of operations
Our financial
condition and results of operations are significantly affected by
changes in market interest rates because our assets, primarily
loans and leases, and our liabilities, primarily deposits, are
monetary in nature. Our results of operations depend substantially
on our net interest income, which is the difference between the
interest income that we earn on our interest-earning assets and the
interest expense that we pay on our interest-bearing liabilities.
Market interest rates are affected by many factors beyond our
control, including inflation, recession, unemployment, money
supply, domestic and international events, and changes in the U.S.
and other financial markets. Our net interest income is affected
not only by the level and direction of interest rates, but also by
the shape of the yield curve and relationships between interest
sensitive instruments and key driver rates, including credit risk
spreads, and by balance sheet growth, customer loan and deposit
preferences and the timing of changes in these variables which
themselves are impacted by changes in market interest rates. As a
result, changes in market interest rates can significantly affect
our net interest income as well as the fair market valuation of our
assets and liabilities, particularly if they occur more quickly or
to a greater extent than anticipated.
While we take
measures intended to manage the risks from changes in market
interest rates, we cannot control or accurately predict changes in
market rates of interest or deposit attrition due to those changes,
or be sure that our protective measures are adequate. If the
interest rates paid on deposits and other interest-bearing
liabilities increase at a faster rate than the interest rates
received on loans and other interest-earning assets, our net
interest income, and therefore earnings, could be adversely
affected. We would also incur a higher cost of funds to
retain our deposits in a rising interest rate environment. While
the higher payment amounts we would receive on adjustable-rate or
variable-rate loans in a rising interest rate environment may
increase our interest income, some borrowers may be unable to
afford the higher payment amounts, and this could result in a
higher rate of default. Rising interest rates also may reduce the
demand for loans and the value of fixed-rate investment
securities.
We are required to transition from the use of the LIBOR interest
rate index.
We have certain
loans indexed to LIBOR to calculate the loan interest rate. The
LIBOR index will be discontinued December 31, 2021. At this time,
no consensus exists as to what rate or rates may become acceptable
alternatives to LIBOR. The implementation of a substitute index or
indices for the calculation of interest rates under our loan
agreements with our borrowers may incur
significant
expenses in effecting the transition, may result in reduced loan
balances if borrowers do not accept the substitute index or
indices, and may result in disputes or litigation with customers
over the appropriateness or comparability to LIBOR of the
substitute index or indices, which could have an adverse effect on
our results of operations. Additionally, since alternative rates
are calculated differently, the transition may change our market
risk profile, requiring changes to risk and pricing
models.
Our
commercial real estate loans constitute a concentration of credit
and thus are subject to enhanced regulatory scrutiny and require us
to utilize enhanced risk management techniques
A substantial
portion of our loan portfolio is secured by real estate. Our
commercial real estate loan portfolio generally consists of
multi-family mortgage loans originated in selected geographic
markets and nonresidential real estate loans originated in the
Chicago market. At December 31,
2019, our
loan portfolio included $563.8 million
in multi-family
mortgage loans, or 48.0% of total loans, and
$105.1
million in
non-owner occupied nonresidential real estate loans, or
8.9%
of total loans.
These commercial real estate loans represented 393.3% of the Bank’s
$170.2
million total risk-based capital
at December 31,
2019, and
thus are considered a concentration of credit for regulatory
purposes. Concentrations of credit are pools of loans whose
collective performance has the potential to affect a bank
negatively even if each individual transaction within the pool is
soundly underwritten. When loans in a pool are sensitive to the
same economic, financial, or business development, that
sensitivity, if triggered, could cause the sum of the transactions
to perform as if it were a single, large exposure. As such,
concentrations of credit add a dimension of risk that compounds the
risk inherent in individual loans.
The OCC expects
banks to implement board-approved policies and procedures to
identify, measure, monitor, and control concentration risks, taking
into account the potential impact on earnings and capital under
stressed market conditions, economic downturns, and periods of
general market illiquidity as well as normal market conditions.
Enhanced risk management is required for commercial real estate
concentrations exceeding 300% of total risk-based capital. The Bank
has established board-approved policies and procedures to identify,
measure, monitor, control and stress test its concentrations of
credit. The Bank has taken other specific steps to mitigate
concentrations of credit risk, including the establishment of
concentrations of credit limits based on loan type and geography,
the maintenance of capital in excess of the minimum regulatory
requirements, the establishment of appropriate underwriting
standards for specific loan types and geographic markets, active
portfolio management and an emphasis on originating multi-family
loans that qualify for 50% risk-weighting under the regulatory
capital rules. At December 31,
2019, $336.3 million
of the Bank’s
multi-family loans, or 59.7% of the Bank’s total
multi-family loan portfolio, qualified for 50% risk-weighting under
the regulatory capital rules. The Bank’s earnings and capital could
be materially and adversely impacted if economic, financial, or
business developments were to occur that materially and adversely
impacted all or a material portion of the Bank’s commercial real
estate loans and caused them to perform as a single, large
exposure.
Adverse
changes in local economic conditions and adverse conditions in an
industry on which a local market in which we do business depends
could negatively affect our financial condition or results of
operations
Except for our
commercial equipment leasing and healthcare lending activities,
which we conduct on a nationwide basis, and our multi-family
lending activities, which we conduct in selected Metropolitan
Statistical Areas, including, but not limited to, the Metropolitan
Statistical Areas for Chicago, Illinois, Dallas and San Antonio,
Texas, Denver, Colorado, Tampa, Florida, Greenville-Spartanburg,
South Carolina and Minneapolis, Minnesota, our loan and deposit
activities are generally conducted in the Metropolitan Statistical
Area for Chicago, Illinois. Our loan and deposit activities are
directly affected by, and our financial success depends on,
economic conditions within the local markets in which we do
business, as well as conditions in the industries on which those
markets are economically dependent. A deterioration in local
economic conditions or in the condition of an industry on which a
local market depends could adversely affect such factors as
unemployment rates, business formations and expansions, housing
demand, apartment vacancy rates and real estate values in the local
market, and this could result in, among other things, a decline in
loan and lease demand, a reduction in the number of creditworthy
borrowers seeking loans, an increase in loan delinquencies,
defaults and foreclosures, an increase in classified and nonaccrual
loans, a decrease in the value of the collateral for our loans, and
a decline in the net worth and liquidity of our borrowers and
guarantors. Any of these factors could negatively affect our
financial condition or results of operations.
In addition, our
loan portfolio includes fixed- and adjustable-rate first mortgage
loans, home equity loans and home equity lines of credit secured by
one-to-four family residential properties primarily located in the
Chicago metropolitan area. Residential real estate lending is
sensitive to regional and local economic conditions that may
significantly impact the ability of borrowers to meet their loan
payment obligations, making loss levels difficult to predict.
Residential loans with high combined loan-to-value ratios generally
are more sensitive to declining property values than those with
lower combined loan-to-value ratios and therefore may experience a
higher incidence of default and severity of losses. In addition, if
the borrowers sell their homes, the borrowers may be unable to
repay their loans in full from the sale proceeds. As a result,
these loans may experience higher rates of delinquencies, defaults
and losses, which could in turn adversely affect our financial
condition and results of operations.
The City of
Chicago and the State of Illinois have experienced significant
financial difficulties, and this could adversely impact certain
borrowers and the economic vitality of the City and
State
The City of
Chicago and the State of Illinois are experiencing significant
financial difficulties, including material pension funding
shortfalls. These issues could impact the economic vitality of the
City of Chicago and the State of Illinois and the businesses
operating there, encourage businesses to leave the City of Chicago
or the State of Illinois, and discourage new employers from
starting or moving businesses to there. These issues could also
result in delays in the payment of accounts receivable owed to
borrowers that conduct business with the State of Illinois and
Medicaid payments to nursing homes and other healthcare providers
in Illinois, and impair their ability to repay their loans when
due.
Repayment of
our commercial and commercial real estate loans typically depends
on the cash flows of the borrower. If a borrower's cash flows
weaken or become uncertain, the loan may need to be classified, the
collateral securing the loan may decline in value and we may need
to increase our loan loss reserves or record a
charge-off
We underwrite our
commercial and commercial real estate loans primarily based on the
historical and expected cash flows of the borrower. Although we
consider collateral in the underwriting process, it is a secondary
consideration that generally relates to the risk of loss in the
event of a borrower default. We follow the OCC's published guidance
for assigning risk-ratings to loans, which emphasizes the strength
of the borrower's cash flow. The OCC's loan risk-rating guidance
provides that the primary consideration in assigning risk-ratings
to commercial and commercial real estate loans is the strength of
the primary source of repayment, which is defined as a sustainable
source of cash under the borrower's control that is reserved,
explicitly or implicitly, to cover the debt obligation. The OCC's
loan risk-rating guidance typically does not consider secondary
repayment sources until the strength of the primary repayment
source weakens, and collateral values typically do not have a
significant impact on a loan's risk rating until a loan is
classified. Consequently, if a borrower's cash flows weaken or
become uncertain, the loan may need to be classified, whether or
not the loan is performing or fully secured. In addition, real
estate appraisers typically place significant weight on the cash
flows generated by income-producing real estate and the reliability
of the cash flows in performing valuations. Thus, economic or
borrower-specific conditions that cause a decline in a borrower's
cash flows could cause our loan classifications to increase and the
appraised value of the collateral securing our loans to decline,
and require us to increase our loan loss reserves, record
charge-offs, or increase our capital levels.
Repayment of
our lease loans is typically dependent on the cash flows of the
lessee, which may be unpredictable, and the collateral securing
these loans may fluctuate in value
We lend money to
small and mid-sized independent leasing companies to finance the
debt portion of leases. A lease loan results when a leasing company
discounts the equipment rental revenue stream owed to the leasing
company by a lessee. Our lease loans entail many of the same types
of risks as our commercial loans. Lease loans generally are
non-recourse to the leasing company, and, consequently, our
recourse is limited to the lessee and the leased equipment. As with
commercial loans secured by equipment, the equipment securing our
lease loans may depreciate over time, may be difficult to appraise
and may fluctuate in value. We rely on the lessee’s continuing
financial stability, rather than the value of the leased equipment,
for the repayment of all required amounts under lease loans. In the
event of a default on a lease loan, the proceeds from the sale of
the leased equipment may not be sufficient to satisfy the
outstanding unpaid amounts under the terms of the loan.
At December 31,
2019, our
lease loans totaled $272.6
million,
or 23.2% of our total loan
portfolio.
Our loan
portfolio includes loans to healthcare providers, and the repayment
of these loans is largely dependent upon the receipt of direct or
indirect governmental reimbursements
At
December 31,
2019, we
had $145.1 million of loans and unused commitments to a variety of
healthcare providers, including lines of credit secured by
healthcare receivables. The repayment of these lines of credit is
largely dependent on the borrower's receipt of payments and
reimbursements under Medicaid, Medicare and in some cases private
insurance contracts for the services they have provided. The
ability of the borrowers to service loans we have made to them may
be adversely impacted by the financial ability of the federal
government or individual state governments to make direct
reimbursement payments, or, via managed care organizations
operating under agreements with the federal government or
individual states, to make indirect reimbursements for the services
provided. The failure of a direct or indirect payor to make
reimbursements owed to the operators of these facilities, or a
significant delay in the making of such reimbursements, could
adversely affect the ability of the operators of these facilities
to repay their obligations to us. In addition, changes to national
health care policy involving private health insurance policies may
also affect the business prospects and financial condition or
operations of commercial loan customers and commercial lessees
involved in health care-related businesses.
If our
allowance for loan losses is not sufficient to cover actual loan
losses, our earnings would be adversely impacted
In the event that
our loan customers do not repay their loans according to their
terms, and the collateral securing the repayment of these loans is
insufficient to cover any remaining loan balance, including
expenses of collecting the loan and managing and liquidating the
collateral, we could experience significant loan losses or increase
our provision for loan losses or both, which could have a material
adverse effect on our operating results. At December 31,
2019, our
allowance for loan losses was $7.6
million,
which represented 0.65% of total loans and
901.06%
of nonperforming
loans as of that date. In determining the amount of our allowance
for loan losses, we rely on internal and external loan reviews, our
historical experience and our evaluation of economic conditions,
among other factors. In addition, we make various estimates and
assumptions about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of
the real estate and other assets, if any, serving as collateral for
the repayment of our loans. We also make judgments concerning our
legal positions and the priority of our liens and interests in
contested legal or bankruptcy proceedings, and at times, we may
lack sufficient information to establish adequate specific reserves
for loans involved in such proceedings. We base these estimates,
assumptions and judgments on information that we consider reliable,
but if an estimate, assumption or judgment that we make ultimately
proves to be incorrect, additional provisions to our allowance for
loan losses may become necessary. In addition, as an integral part
of their supervisory and/or examination process, the OCC
periodically reviews the methodology for and the sufficiency of the
allowance for loan losses. The OCC has the authority to 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 new
accounting standard may require us to increase our allowance for
loan losses and may have a material adverse effect on our financial
condition and results of operations
The Financial
Accounting Standards Board has adopted a new accounting standard
that will be effective for the Company and the Bank for our first
fiscal year after December 15, 2022. This standard, referred
to as Current Expected Credit Loss, or CECL, will require financial
institutions to determine periodic estimates of lifetime expected
credit losses on loans, and recognize the expected credit losses as
allowances for loan losses. This will change the current
method of providing allowances for loan losses that are probable,
which may require us to increase our allowance for loan losses, and
to greatly increase the types of data we will need to collect and
review to determine the appropriate level of the allowance for loan
losses. Accordingly, regardless of any actual changes to the
composition or performance of our loan portfolio, the new
accounting standard may require an increase in our allowance for
loan losses or expenses incurred to determine the appropriate level
of the allowance for loan losses, and may therefore have a material
adverse effect on our financial condition and results of
operations.
We could
become subject to more stringent capital requirements, which could
adversely impact our return on equity, require us to raise
additional capital, or constrain us from paying dividends or
repurchasing shares
Minimum
risk-based capital and leverage ratios, which became effective for
us in 2015, are: (i) a new common equity Tier 1 capital ratio of
4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged
from current rules); and (iv) a Tier 1 leverage ratio of 4%. The
final rule also required unrealized gains and losses on certain
“available-for-sale” securities holdings to be included for
purposes of calculating regulatory capital requirements unless a
one-time opt-out was exercised. The Bank exercised this one-time
opt-out option. The final rule also established a “capital
conservation buffer” of 2.5%, and resulted in the following minimum
ratios: (i) a common equity Tier 1 capital ratio of 7%, (ii) a Tier
1 to risk-based assets capital ratio of 8.5%, and (iii) a total
capital ratio of 10.5%. The phase in of the new capital
conservation buffer requirement began in January 2016 at 0.625% of
risk-weighted assets and increased each year until fully
implemented in January 2019. An institution will be subject to
limitations on paying dividends, engaging in share repurchases, and
paying discretionary bonuses if its capital level falls below the
buffer amount. These limitations will establish a maximum
percentage of eligible retained income that can be utilized for
such actions.
At
December 31,
2019, the
Bank has met all of these requirements, including the full 2.5%
capital conservation buffer.
The application
of these more stringent capital requirements could, among other
things, result in lower returns on equity, require the raising of
additional capital, and result in regulatory actions if we were to
be unable to comply with such requirements. Furthermore, the
imposition of liquidity requirements in connection with the
implementation of Basel III could result in our having to lengthen
the term of our funding, restructure our business models, and/or
increase our holdings of liquid assets. Implementation of changes
to asset risk weightings for risk-based capital calculations, items
included or deducted in calculating regulatory capital and/or
additional capital conservation buffers could result in management
modifying its business strategy, and could limit our ability to
make distributions, including paying out dividends or buying back
shares. Specifically, the Bank’s ability to pay dividends will be
limited if it does not have the capital conservation buffer
required by the capital rules, which may limit our ability to pay
dividends to stockholders. See “Supervision and Regulation-Federal
Banking Regulation-Capital Requirements.”
We are
subject to security and operational risks relating to our use of
technology and our communications and information systems,
including the risk of cyber-attack or cyber-theft
Communications
and information systems are essential to the conduct of our
business, as we use such systems to manage our customer
relationships, general ledger and virtually all other aspects of
our business. We depend on the secure processing, storage and
transmission of confidential and other information in our data
processing systems, computers, networks and communications systems.
Although we take numerous protective measures and otherwise
endeavor to protect and maintain the privacy and security of
confidential data, these systems may be vulnerable to unauthorized
access, computer viruses, other malicious code, cyber-attacks,
cyber-theft and other events that could have a security impact. If
one or more of such events were to occur, this potentially could
jeopardize confidential and other information processed and stored
in, and transmitted through, our systems or otherwise cause
interruptions or malfunctions in our or our customers' operations.
We may be required to expend significant additional resources to
modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are not fully covered by our
insurance. Security breaches involving our network or Internet
banking systems could expose us to possible liability and deter
customers from using our systems. We rely on specific software and
hardware systems to provide the security and authentication
necessary to protect our network and Internet banking systems from
compromises or breaches of our security measures. These precautions
may not fully protect our systems from compromises or breaches of
our security measures that could result in damage to our reputation
and our business. Although we perform most data processing
functions internally, we outsource certain services to third
parties. If our third-party providers encounter operational
difficulties or security breaches, it could affect our ability to
adequately process and account for customer transactions, which
could significantly affect our business operations.
Our
operations rely on numerous external vendors
We rely on
numerous external vendors to provide us with products and services
necessary to maintain our day-to-day operations. Accordingly, our
operations are exposed to risk that these vendors will not perform
in accordance with the contracted arrangements under service level
agreements. The failure of an external vendor to perform in
accordance with the contracted arrangements under service level
agreements because of changes in the vendor's organizational
structure, financial condition, support for existing products and
services or strategic focus or for any other reason, could be
disruptive to our operations, which in turn could have a material
negative impact on our financial condition and results of
operations. We also could be adversely affected to the extent such
an agreement is not renewed by the third-party vendor or is renewed
on terms less favorable to us.
Our business
and operations could be significantly impacted if we or our
third-party vendors suffer failure or disruptions of information
processing systems, systems failures or security
breaches
We have become
increasingly dependent on communications, data processing and other
information technology systems to manage and conduct our business
and support our day-to-day banking, investment, and trust
activities, some of which are provided through third-parties. If we
or our third-party vendors encounter difficulties or become the
subject of a cyber-attack on or other breach of their operational
systems, data or infrastructure, or if we have difficulty
communicating with any such third-party system, our business and
operations could suffer. Any failure or disruption to our systems,
or those of a third-party vendor, could impede our transaction
processing, service delivery, customer relationship management,
data processing, financial reporting or risk management. Although
we take ongoing monitoring, detection, and prevention measures
and perform penetration testing and periodic risk assessments, our
computer systems, software and networks and those of our
third-party vendors may be or become vulnerable to unauthorized
access, loss or destruction of data (including confidential client
information), account takeovers, unavailability of service,
computer viruses, denial of service attacks, malicious social
engineering or other malicious code, or cyber-attacks beyond what
we can reasonably anticipate and such events could result in
material loss. If any of our financial, accounting or other data
processing systems fail or have other significant shortcomings, we
could be materially adversely affected. Security breaches in our
online banking systems could also have an adverse effect on our
reputation and could subject us to possible liability.
Additionally, we could suffer disruptions to our systems or damage
to our network infrastructure from events that are wholly or
partially beyond our control, such as electrical or
telecommunications outages, natural disasters, widespread health
emergencies or pandemics, or events arising from local or larger
scale political events, including terrorist acts. There can be no
assurance that our policies, procedures and protective measures
designed to prevent or limit the effect of a failure, interruption
or security breach, or the policies, procedures and protective
measures of our third-party vendors, will be effective. If
significant failure, interruption or security breaches do occur in
our processing systems or those of our third-party providers, we
could suffer damage to our reputation, a loss of customer business,
additional regulatory scrutiny, or exposure to civil litigation,
additional costs and possible financial liability. In addition, our
business is highly dependent on our ability to process, record and
monitor, on a continuous basis, a large number of transactions. To
do so, we are dependent on our employees and therefore, the
potential for operational risk exposure exists throughout our
organization, including losses resulting from human error. We could
be materially adversely affected if one or more of our employees
cause a significant operational breakdown or failure. If we fail to
maintain
adequate
infrastructure, systems, controls and personnel relative to our
size and products and services, our ability to effectively operate
our business may be impaired and our business could be adversely
affected.
Customer or
employee fraud subjects us to additional operational
risks
Employee errors
and employee and customer misconduct could subject us to financial
losses or regulatory sanctions and seriously harm our reputation.
Our loans to businesses and individuals and our deposit
relationships and related transactions are also subject to exposure
to the risk of loss due to fraud and other financial crimes.
Misconduct by our employees could include hiding unauthorized
activities from us, improper or unauthorized activities on behalf
of our customers or improper use of confidential information. It is
not always possible to prevent employee errors and misconduct, and
the precautions we take to prevent and detect this activity may not
be effective in all cases. Employee errors could also subject us to
financial claims for negligence. We have not experienced any
material financial losses from employee errors, misconduct or
fraud. However, if our internal controls fail to prevent or
promptly detect an occurrence, or if any resulting loss is not
insured or exceeds applicable insurance limits, it could have a
material adverse effect on our financial condition and results of
operations.
If our
enterprise risk management framework is not effective at mitigating
risk and loss to us, we could suffer unexpected losses and our
results of operations could be materially adversely
affected.
Our enterprise
risk management framework seeks to achieve an appropriate balance
between risk and return, which is critical to optimizing
stockholder value. We have established processes and procedures
intended to identify, measure, monitor, report and analyze the
types of risk to which we are subject, including credit, liquidity,
operational, regulatory compliance and reputational. However, as
with any risk management framework, there are inherent limitations
to our risk management strategies as there may exist, or develop in
the future, risks that we have not appropriately anticipated or
identified. If our risk management framework proves ineffective, we
could suffer unexpected losses and our business and results of
operations could be materially adversely affected.
We
continually encounter technological change, and may have fewer
resources than many of our larger competitors to continue to invest
in technological improvements
The financial
services industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to
reduce costs. Our future success will depend, in part, upon our
ability to address the needs of our customers by using technology
to provide products and services that will satisfy customer demands
for convenience, as well as to create additional efficiencies in
our operations. Many of our competitors have substantially greater
resources to invest in technological improvements. We also may not
be able to effectively implement new technology-driven products and
services or be successful in marketing these products and services
to our customers.
Consumers
and businesses are increasingly using non-banks to complete their
financial transactions, which could adversely affect our business
and results of operations
Technology and
other changes are allowing consumers and businesses to complete
financial transactions that historically have involved banks
through alternative methods. For example, the wide acceptance of
Internet-based commerce has resulted in a number of alternative
payment processing systems and lending platforms in which banks
play only minor roles. Customers can now maintain funds in prepaid
debit cards or digital currencies, and pay bills and transfer funds
directly without the direct assistance of banks. The diminishing
role of banks as financial intermediaries has resulted and could
continue to result in the loss of fee income, as well as the loss
of customer deposits and the related income generated from those
deposits. The loss of these revenue streams and the potential loss
of lower cost deposits as a source of funds could have a material
adverse effect on our business, financial condition and results of
operations.
New lines of
business or new products and services may subject us to additional
risks
From time to
time, we may seek to implement new lines of business or offer new
products and services within existing lines of business in our
current markets or new markets. There are substantial risks and
uncertainties associated with these efforts, particularly in
instances where the markets are not fully developed. In developing
and marketing new lines of business and/or new products and
services, we may invest significant time and resources. Initial
timetables for the introduction and development of new lines of
business and/or new products or services may not be achieved and
price and profitability targets may not prove feasible, which could
in turn have a material negative effect on our operating
results.
Our sources
of funds are limited because of our holding company
structure
The Company is a
separate legal entity from its subsidiaries and does not have
significant operations of its own. Dividends from the Bank provide
a significant source of cash for the Company. The availability of
dividends from the Bank is limited by various statutes and
regulations. Under these statutes and regulations, the Bank is not
permitted to pay dividends on its capital stock to the Company, its
sole stockholder, if the dividend would reduce the stockholders'
equity of the Bank below the amount of the liquidation account
established in connection with the mutual-to-stock conversion.
National banks may pay dividends without the approval of its
primary federal regulator only if they meet applicable regulatory
capital requirements before and after the payment of the dividends
and total dividends do not exceed net income to date over the
calendar year plus its retained net income over the preceding two
years. The Company has also reserved $5.0 million of its available
cash to maintain its ability to serve as a source of financial
strength to the Bank. If in the future, the Company utilizes its
available cash for other purposes and the Bank is unable to pay
dividends to the Company, the Company may not have sufficient funds
to pay dividends.
Trading
activity in the Company's common stock could result in material
price fluctuations
It is possible
that trading activity in the Company's common stock, including
short-selling or significant sales by our larger stockholders,
could result in material price fluctuations of the price per share
of the Company's common stock. In addition, such trading activity
and the resultant volatility could make it more difficult for the
Company to sell equity or equity-related securities in the future
at a time and price it deems appropriate, or to use its stock as
consideration for an acquisition.
Various
factors may make takeover attempts that you might want to succeed
more difficult to achieve, which may affect the value of shares of
our common stock
Provisions of our
articles of incorporation and bylaws, federal regulations, Maryland
law and various other factors may make it more difficult for
companies or persons to acquire control of the Company without the
consent of our board of directors. You may want a takeover attempt
to succeed because, for example, a potential acquirer could offer a
premium over the then prevailing price of our shares of common
stock. Provisions of our articles of incorporation and bylaws also
may make it difficult to remove our current board of directors or
management if our board of directors opposes the removal. We have
elected to be subject to the Maryland Business Combination Act,
which places restrictions on mergers and other business
combinations with large stockholders. In addition, our articles of
incorporation provide that certain mergers and other similar
transactions, as well as amendments to our articles of
incorporation, must be approved by stockholders owning at least
two-thirds of our shares of common stock entitled to vote on the
matter unless first approved by at least two-thirds of the number
of our authorized directors, assuming no vacancies. If approved by
at least two-thirds of the number of our authorized directors,
assuming no vacancies, the action must still be approved by a
majority of our shares entitled to vote on the matter. In addition,
a director can be removed from office, but only for cause, if such
removal is approved by stockholders owning at least two-thirds of
our shares of common stock entitled to vote on the matter. However,
if at least two-thirds of the number of our authorized directors,
assuming no vacancies, approves the removal of a director, the
removal may be with or without cause, but must still be approved by
a majority of our voting shares entitled to vote on the matter.
Additional provisions include limitations on the voting rights of
any beneficial owners of more than 10% of our common stock. Our
bylaws, which can only be amended by the board of directors, also
contain provisions regarding the timing, content and procedural
requirements for stockholder proposals and
nominations.
New or
changing tax, accounting, and regulatory rules and interpretations
could have a significant impact on our strategic initiatives,
results of operations, cash flows, and financial
condition
The banking
services industry is extensively regulated. In addition to
regulation by our banking regulators, we also are directly subject
to the requirements of entities that set and interpret the
accounting standards such as the Financial Accounting Standards
Board, and indirectly subject to the actions and interpretations of
the Public Company Accounting Oversight Board, which establishes
auditing and related professional practice standards for registered
public accounting firms and inspects registered firms to assess
their compliance with certain laws, rules, and professional
standards in public company audits. These regulations, along with
the currently existing tax, accounting, securities, insurance, and
monetary laws, regulations, rules, standards, policies and
interpretations, control the methods by which financial
institutions and their holding companies conduct business, engage
in strategic and tax planning and implement strategic initiatives,
and govern financial reporting and disclosures. These laws,
regulations, rules, standards, policies and interpretations are
constantly evolving and may change significantly over time,
particularly during periods in which the composition of the U.S.
Congress and the leadership of regulatory agencies and public
sector boards change due to the outcomes of national
elections.
Non-compliance
with USA PATRIOT Act, Bank Secrecy Act, or other laws and
regulations could result in fines or sanctions
Financial
institutions are required under the USA PATRIOT and Bank Secrecy
Acts to develop programs to prevent financial institutions from
being used for money-laundering and terrorist activities. Financial
institutions are also obligated to file suspicious
activity reports
with the U.S. Treasury Department's Office of Financial Crimes
Enforcement Network if such activities are detected. These rules
also require financial institutions to establish procedures for
identifying and verifying the identity of customers seeking to open
new financial accounts. Failure or the inability to comply with
these regulations could result in fines or penalties, curtailment
of expansion opportunities, intervention or sanctions by regulators
and costly litigation or expensive additional controls and systems.
During the last few years, several banking institutions have
received large fines for non-compliance with these laws and
regulations. In addition, the U.S. Government has previously
imposed laws and regulations relating to residential and consumer
lending activities that create significant new compliance burdens
and financial risks. We have developed policies and continue to
augment procedures and systems designed to assist in compliance
with these laws and regulations, but these policies may not be
effective to provide such compliance.
We are
subject to environmental liability risk associated with lending
activities
A significant
portion of our loan portfolio is secured by real estate, and we
could become subject to environmental liabilities with respect to
one or more of these properties. During the ordinary course of
business, we may foreclose on and take title to properties securing
defaulted loans. In doing so, there is a risk that hazardous or
toxic substances could be found on these properties. If so, we may
be liable for remediation costs, as well as for personal injury and
property damage, civil fines and criminal penalties regardless of
when the hazardous conditions or toxic substances first affected
any particular property. Environmental laws may require us to incur
substantial expenses to address unknown liabilities and may
materially reduce the affected property’s value or limit our
ability to use or sell the affected property. In addition, future
laws or more stringent interpretations or enforcement policies with
respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures to perform an
environmental review before initiating any foreclosure action on
nonresidential real property, these reviews may not be sufficient
to detect all potential environmental hazards. The remediation
costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on
us.
FDIC deposit
insurance could increase in the future
The Dodd-Frank
Act established 1.35% as the minimum Designated Reserve Ratio
(“DRR”) for the deposit insurance fund. The FDIC has determined
that the DRR should be 2.0% and has adopted a plan under which it
will meet the statutory minimum DRR of 1.35% by the statutory
deadline of September 30, 2020. The Dodd-Frank Act also required
the FDIC to base deposit insurance premiums on an institution's
total assets minus its tangible equity instead of its deposits. The
FDIC has adopted final regulations that base assessments on a
combination of financial ratios and regulatory ratings. The FDIC
also revised the assessment schedule and established adjustments
that increase assessments so that the range of assessments is now
1.5 basis points to 30 basis points of total assets less tangible
equity. If there are any changes in the Bank’s financial ratios and
regulatory ratings that require adjustments that increase its
assessment, or, if circumstances require the FDIC to impose
additional special assessments or further increase its quarterly
assessment rates, our results of operations could be adversely
impacted.
A protracted government shutdown may result in reduced loan
originations or recognition of noninterest income, and could
negatively affect our financial condition and results of
operations
Some of our loan
originations depend on approvals of certain government departments
or agencies. During any protracted federal government
shutdown, we may not be able to close certain loans or we may not
be able to recognize noninterest income on commercial mortgage
banking transactions. A federal government shutdown could also
result in greater loan delinquencies, increases in our
nonperforming, criticized or classified loans due to delayed
payments on commercial equipment leases to the federal government,
or delayed payments on other loans where the direct or indirect
source of repayment relies on government funding.
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ITEM
1B.
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UNRESOLVED STAFF COMMENTS
|
None.
We conduct our
business at 19 banking offices located in the Chicago metropolitan
area, and from a corporate office. We own our banking offices
other than our corporate office, and our Chicago-Lincoln Park and
Northbrook offices, which are leased. We also operate four
satellite loan and lease production offices, all of which are
leased. We believe that all of our properties and equipment are
well maintained, in good operating condition and adequate for all
of our present and anticipated needs.
In 2018, the Bank
sold its office building located at 60 North Frontage Road, Burr
Ridge, Illinois. A net gain of $93,000 was recorded in connection
with the sale. In 2018, we signed a five-year lease, expiring
November 2023, for a portion of the office space in the same Burr
Ridge building.
We believe our
facilities in the aggregate are suitable and adequate to operate
our banking and related business. Additional information with
respect to premises and equipment is presented in Note 6 of "Notes
to Consolidated Financial Statements" in Item 8 of this Annual
Report on Form 10-K.
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ITEM
3.
|
LEGAL PROCEEDINGS
|
The Company and
its subsidiaries are subject to various legal actions arising in
the normal course of business. In the opinion of management, based
on currently available information, the resolution of these legal
actions is not expected to have a material adverse effect on the
Company’s results of operations.
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ITEM
4.
|
MINE SAFETY DISCLOSURES
|
Not
applicable.
PART II
|
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ITEM
5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our shares of
common stock are traded on the NASDAQ Global Select Market under
the symbol “BFIN.” The approximate number of holders of record of
the Company’s common stock as of January 31, 2020 was 1,084.
Certain shares of the Company’s common stock are held in “nominee”
or “street” name, and accordingly, the number of beneficial owners
of such shares is not known or included in the foregoing
number.
Recent Sales
of Unregistered Securities
The Company had
no sales of unregistered stock during the year ended
December 31,
2019.
Repurchases
of Equity Securities
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 current
share repurchase authorization approved on March 30, 2015. Pursuant
to the share repurchase authorization, as of December 31,
2019,
there are 542,963 shares of common stock
remaining authorized for repurchase through October 31,
2020.
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|
|
|
Period
|
|
Total Number
of Shares Purchased
|
|
Average Price
Paid per Share
|
|
Total Number
of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Maximum
Number of Shares that May Yet be Purchased under the Plans or
Programs
|
|
October 1, 2019 through
October 31, 2019
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
638,463
|
|
|
November 1, 2019 through
November 30, 2019
|
|
45,000
|
|
|
13.49
|
|
|
45,000
|
|
|
593,463
|
|
|
December 1, 2019 through
December 31, 2019
|
|
50,500
|
|
|
13.62
|
|
|
50,500
|
|
|
542,963
|
|
|
|
|
95,500
|
|
|
|
|
95,500
|
|
|
|
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ITEM
6.
|
SELECTED FINANCIAL DATA
|
The following
information is derived from the audited consolidated financial
statements of the Company. For additional information, please refer
to Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the Consolidated
Financial Statements of the Company and related notes included
elsewhere in this Annual Report.
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|
At and For
the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
|
(Dollars in
thousands, except per share data)
|
|
Selected
Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,488,015
|
|
|
$
|
1,585,325
|
|
|
$
|
1,625,558
|
|
|
$
|
1,620,037
|
|
|
$
|
1,512,443
|
|
|
Loans, net
|
1,168,008
|
|
|
1,323,793
|
|
|
1,314,651
|
|
|
1,312,952
|
|
|
1,232,257
|
|
|
Securities, at fair
value
|
60,193
|
|
|
88,179
|
|
|
93,383
|
|
|
107,212
|
|
|
114,753
|
|
|
Deposits
|
1,284,757
|
|
|
1,352,484
|
|
|
1,340,051
|
|
|
1,339,390
|
|
|
1,212,919
|
|
|
Borrowings
|
61
|
|
|
21,049
|
|
|
60,768
|
|
|
51,069
|
|
|
64,318
|
|
|
Equity
|
174,372
|
|
|
187,150
|
|
|
197,634
|
|
|
204,780
|
|
|
212,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
65,408
|
|
|
$
|
61,287
|
|
|
$
|
56,179
|
|
|
$
|
50,928
|
|
|
$
|
48,962
|
|
|
Interest expense
|
13,217
|
|
|
9,217
|
|
|
6,089
|
|
|
3,970
|
|
|
2,814
|
|
|
Net interest
income
|
52,191
|
|
|
52,070
|
|
|
50,090
|
|
|
46,958
|
|
|
46,148
|
|
|
Provision for (recovery of)
loan losses
|
3,825
|
|
|
145
|
|
|
(87
|
)
|
|
(239
|
)
|
|
(3,206
|
)
|
|
Net interest
income after provision for (recovery of) loan losses
|
48,366
|
|
|
51,925
|
|
|
50,177
|
|
|
47,197
|
|
|
49,354
|
|
|
Noninterest
income
|
6,172
|
|
|
14,877
|
|
|
6,408
|
|
|
6,545
|
|
|
6,691
|
|
|
Noninterest
expense
|
38,641
|
|
|
40,754
|
|
|
40,391
|
|
|
41,542
|
|
|
41,945
|
|
|
Income before income
taxes
|
15,897
|
|
|
26,048
|
|
|
16,194
|
|
|
12,200
|
|
|
14,100
|
|
|
Income tax expense
(1)
|
4,225
|
|
|
6,706
|
|
|
7,190
|
|
|
4,698
|
|
|
5,425
|
|
|
Net income
|
$
|
11,672
|
|
|
$
|
19,342
|
|
|
$
|
9,004
|
|
|
$
|
7,502
|
|
|
$
|
8,675
|
|
|
Basic earnings per common
share
|
$
|
0.75
|
|
|
$
|
1.11
|
|
|
$
|
0.49
|
|
|
$
|
0.40
|
|
|
$
|
0.44
|
|
|
Diluted earnings per common
share
|
$
|
0.75
|
|
|
$
|
1.11
|
|
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
$
|
0.44
|
|
(footnotes
on following page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and For
the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
Selected
Financial Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
Return on assets
(ratio of net income to average total assets)
|
0.77
|
%
|
|
1.24
|
%
|
|
0.56
|
%
|
|
0.49
|
%
|
|
0.60
|
%
|
|
Return on equity
(ratio of net income to average equity)
|
6.58
|
|
|
9.92
|
|
|
4.44
|
|
|
3.60
|
|
|
4.03
|
|
|
Net interest rate
spread (2)
|
3.31
|
|
|
3.30
|
|
|
3.15
|
|
|
3.19
|
|
|
3.36
|
|
|
Net interest margin
(3)
|
3.60
|
|
|
3.51
|
|
|
3.28
|
|
|
3.28
|
|
|
3.43
|
|
|
Efficiency ratio
(4)
|
66.21
|
|
|
60.88
|
|
|
71.49
|
|
|
77.64
|
|
|
79.38
|
|
|
Noninterest expense to
average total assets
|
2.54
|
|
|
2.61
|
|
|
2.50
|
|
|
2.72
|
|
|
2.90
|
|
|
Average
interest-earning assets to average interest-bearing
liabilities
|
131.78
|
|
|
133.34
|
|
|
131.70
|
|
|
135.09
|
|
|
132.32
|
|
|
Dividends declared per
share
|
$
|
0.40
|
|
|
$
|
0.37
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
|
Dividend payout
ratio
|
53.69
|
%
|
|
33.34
|
%
|
|
57.23
|
%
|
|
55.07
|
%
|
|
47.80
|
%
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total
assets (5)
|
0.07
|
%
|
|
0.17
|
%
|
|
0.29
|
%
|
|
0.44
|
%
|
|
0.70
|
%
|
|
Nonperforming loans to total
loans
|
0.07
|
|
|
0.11
|
|
|
0.18
|
|
|
0.25
|
|
|
0.29
|
|
|
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
|
|
|
Net (charge-offs)
recoveries to average loans outstanding
|
(0.37
|
)
|
|
—
|
|
|
0.03
|
|
|
(0.11
|
)
|
|
0.08
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
Equity to total assets at end
of period
|
11.72
|
%
|
|
11.81
|
%
|
|
12.16
|
%
|
|
12.64
|
%
|
|
14.04
|
%
|
|
Average equity to average
assets
|
11.68
|
|
|
12.51
|
|
|
12.53
|
|
|
13.62
|
|
|
14.88
|
|
|
Tier 1 leverage ratio (Bank
only)
|
10.89
|
|
|
11.03
|
|
|
11.08
|
|
|
10.27
|
|
|
11.33
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
Number of full-service
offices
|
19
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
Employees (full-time
equivalents)
|
222
|
|
|
236
|
|
|
236
|
|
|
246
|
|
|
251
|
|
|
|
|
(1)
|
Income tax expense
(benefit) for the year ended December 31, 2017 includes a $2.5
million increase to expense related to the Tax Cuts and Job Act of
2017.
|
|
|
|
(2)
|
The net interest
rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities for the period.
|
|
|
|
(3)
|
The net interest
margin represents net interest income divided by average total
interest-earning assets for the period.
|
|
|
|
(4)
|
The efficiency
ratio represents noninterest expense divided by the sum of net
interest income and noninterest income.
|
|
|
|
(5)
|
Nonperforming
assets include nonperforming loans and other real estate
owned.
|
|
|
|
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
|