UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number 0 -51331
BANKFINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland Applied For
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15W060 North Frontage Road, Burr Ridge, Illinois 60527
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (630) 242-7700
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 No X .
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X .
Indicate the number of shares outstanding of each of the Issuer's class
of common stock as of the latest practicable date.
24,466,250 shares of Common Stock were issued and outstanding as of July 28,
2005.
BANKFINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents
PART I
Page
Number
Item 1. Financial Statements................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........26
Item 4. Controls and Procedures............................................27
PART II
Item 1. Legal Proceedings..................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........28
Item 3. Defaults Upon Senior Securities....................................28
Item 4. Submission of Matters to a Vote of Security Holders................28
Item 5. Other Information..................................................28
Item 6. Exhibits...........................................................28
Signatures .................................................................29
2
ITEM 1. FINANCIAL STATEMENTS
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands) - (Unaudited)
June 30, 2005 December 31, 2004
------------- -----------------
ASSETS
Cash and due from financial institutions $ 26,035 $ 27,867
Interest-bearing deposits in other financial institutions 87,720 1,431
----------- -----------
Cash and cash equivalents 113,755 29,298
Securities available-for-sale, at fair value 476,702 268,093
Loans held-for-sale 1,042 5,531
Loans receivable, net of allowance for loan losses:
June 30, 2005, $10,596; and December 31, 2004, $11,019 1,100,119 1,091,952
Stock in Federal Home Loan Bank, at cost 24,889 24,226
Premises and equipment, net 33,008 32,954
Accrued interest receivable 5,701 5,420
Goodwill 10,865 10,865
Core deposit intangible 9,063 9,882
Other assets 11,579 14,561
----------- -----------
Total assets $ 1,786,723 $ 1,492,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits 1,230,945 1,115,696
Borrowings 213,775 264,742
Advance payments by borrowers taxes and insurance 7,913 7,074
Accrued interest payable and other liabilities 11,910 10,382
----------- -----------
Total liabilities 1,464,543 1,397,894
Commitments and contingent liabilities
Stockholders' equity
Preferred Stock, $0.01 par value, 25,000,000 shares authorized,
none issued or outstanding -- --
Common Stock, $0.01 par value, 100,000,000 shares authorized, 24,466,250
shares issued and outstanding, at June 30, 2005, none issued and
outstanding at December 31, 2004 245 --
Additional paid-in capital 240,007 --
Retained earnings 100,912 96,455
Unearned Employee Stock Ownership Plan shares (19,573) --
Accumulated other comprehensive income (loss) 589 (1,567)
----------- -----------
Total stockholders' equity 322,180 94,888
----------- -----------
Total liabilities and stockholders' equity $ 1,786,723 $ 1,492,782
=========== ===========
3
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands) - (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------- -------- -------- --------
Interest and dividend income
Loans, including fees $ 15,877 $ 13,731 $ 31,281 $ 27,342
Securities 3,462 1,856 5,752 3,872
Other 716 363 1,064 766
-------- -------- -------- --------
Total interest income 20,055 15,950 38,097 31,980
Interest expense
Deposits 5,193 3,074 9,664 6,194
Borrowings 2,384 2,300 4,747 5,356
-------- -------- -------- --------
Total interest expense 7,577 5,374 14,411 11,550
-------- -------- -------- --------
Net interest income 12,478 10,576 23,686 20,430
Provision (credit) for loan losses (264) -- (340) --
-------- -------- -------- --------
Net interest income after
provision (credit) for loan losses 12,742 10,576 24,026 20,430
Noninterest income
Fees and service charges 1,489 1,307 2,770 2,578
Insurance commissions and annuities
income 229 190 341 380
Gain (loss) on sale of loans 46 (30) 129 158
Gain on sale of securities -- 161 -- 419
Loan servicing fees 262 218 525 459
Amortization and impairment of
servicing assets (328) 77 (453) (307)
Operations of real estate owned (3) 26 5 82
Other 340 216 570 543
-------- -------- -------- --------
Total noninterest income 2,035 2,165 3,887 4,312
Noninterest expense
Compensation and benefits 6,557 6,428 13,494 13,226
Office occupancy and equipment 1,191 1,313 2,406 2,593
Advertising and public relations 238 223 448 446
Data processing 710 711 1,376 1,415
Supplies, telephone, and postage 450 522 943 1,026
Amortization of intangibles 409 427 819 853
Other 1,021 939 1,819 1,814
-------- -------- -------- --------
Total noninterest expense 10,576 10,563 21,305 21,373
-------- -------- -------- --------
Income before income taxes 4,201 2,178 6,608 3,369
Income tax expense 1,380 671 2,151 962
-------- -------- -------- --------
Net income $ 2,821 $ 1,507 $ 4,457 $ 2,407
======== ======== ======== ========
4
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands) - (Unaudited)
Unearned Accumulated
Employee Other
Additional Stock Comprehensive Comprehensive
Common Paid-in Retained Ownership Income Income
Stock Capital Earnings Plan Shares (Loss) Total (Loss)
----- -------- -------- ----------- ------ ----- ------
Balance at December 31, 2003 $ -- $ -- $ 94,998 $ -- $ 1,689 $ 96,687
Comprehensive income
Net income -- -- 2,407 -- -- 2,407 $ 2,407
Change in other
comprehensive
income (loss), net
of tax effects -- -- -- -- (3,756) (3,756) (3,756)
------ -------- -------- ---------- -------- -------- --------
Total
comprehensive
income (loss) $ (1,349)
========
Balance at
June 30, 2004 $ -- $ -- $ 97,405 $ -- $ (2,067) $ 95,338
====== ======== ========= ========== ======== ========
Balance at December 31, 2004 $ -- $ -- $ 96,455 $ -- $ (1,567) $ 94,888
Comprehensive income
Net income -- -- 4,457 -- -- 4,457 $ 4,457
Change in other
comprehensive
income (loss), net
of tax effects -- -- -- -- 2,156 2,156 2,156
------ -------- -------- ---------- -------- -------- --------
Total
comprehensive
income $ 6,613
========
Net proceeds from
common stock
issued 245 240,007 -- (19,573) -- 220,679
------ -------- -------- ---------- -------- --------
Balance at
June 30, 2005 $ 245 $240,007 $ 100,912 $ (19,573) $ 589 $322,180
====== ======== ========= ========== ======== ========
5
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) - (Unaudited)
Six months Ended
June 30,
2005 2004
---- ----
Cash flows from operating activities
Net income $ 4,457 $ 2,407
Adjustments to reconcile to net income to net cash
from operating activities
Provision (credit) for loan losses (340) --
Depreciation and amortization 1,785 1,811
Net gain on sale of securities -- (419)
Amortization of premiums and discounts 72 149
Amortization of premium on early extinguishment of debt 349 2,070
Amortization of core deposit and other intangible assets 937 1,887
Amortization and impairment of servicing assets 453 307
Net change in net deferred loan origination costs (29) (91)
Net gain on sale of real estate owned -- (155)
Net gain on sale of loans (129) (158)
Loans originated for sale (7,768) (39,587)
Proceeds from sale of loans 12,386 34,209
Federal Home Loan Bank of Chicago stock dividends (663) (714)
Net change in:
Deferred income tax 50 962
Accrued interest receivable (281) 223
Other assets 514 1,319
Accrued interest payable and other liabilities 1,528 135
----------- -----------
Net cash from operating activities 13,321 3,062
Cash flows from investing activities
Securities available-for-sale
Proceeds from sales -- 10,232
Proceeds from maturities 5,887,443 345
Proceeds from principal repayments 18,859 23,005
Purchase of securities (6,087,162) --
Loans receivable
Principal payments on loans receivable 199,929 230,526
Purchases (31,051) (43,076)
Originated for investment (201,038) (217,486)
Proceeds from sale of real estate owned -- 942
Purchase of premises and equipment, net (1,295) (921)
----------- -----------
Net cash from investing activities (214,315) 3,567
(Continued)
6
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands) - (Unaudited)
Six months
Ended
June 30,
2005 2004
---- ----
Cash flows from financing activities
Net change in deposits 115,249 30,820
Net change in advance payments by borrowers for taxes
and insurance 839 764
Net change in borrowings (51,316) (21,132)
Net proceeds from sale of common stock 220,679 --
--------- ---------
Net cash from financing activities 285,451 10,452
--------- ---------
Net change in cash and cash equivalents 84,457 17,081
Beginning cash and cash equivalents 29,298 28,630
--------- ---------
Ending cash and cash equivalents $ 113,755 $ 45,711
========= =========
Supplemental disclosures:
Interest paid $ 13,958 $ 9,665
Income taxes paid 1,950 --
Loans transferred to other real estate -- 407
Loans securitized 24,213 29,260
Due from broker for sale of securities not settled -- 319
7
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands)
(unaudited)
Note 1 - Basis of Presentation.
BankFinancial Corporation, a Maryland corporation organized in 2004, became the
owner of all of the issued and outstanding capital stock of BankFinancial F.S.B.
(the "Bank") on June 23, 2005, upon the consummation of a plan of conversion and
reorganization adopted by the predecessor holding companies for the Bank,
BankFinancial MHC, Inc. ("BankFinancial MHC") and BankFinancial Corporation, a
federal corporation.
Pursuant to the plan of conversion and reorganization, BankFinancial MHC
converted from the mutual form of ownership to the stock form of ownership
through a series of transactions that terminated the separate corporate
existences of BankFinancial MHC and BankFinancial Corporation, the federal
corporation, and BankFinancial Corporation, the Maryland corporation, sold
24,466,250 shares of common stock in a subscription offering for $10.00 per
share and became the sole stockholder of the Bank. For a further discussion of
BankFinancial Corporation, the Maryland corporation, and the operations of
BankFinancial MHC, BankFinancial Corporation, the federal corporation, and the
Bank for certain periods prior to the consummation of the plan of conversion and
reorganization, see the Company's Prospectus as filed on April 29, 2005 with the
Securities and Exchange Commission pursuant to Rule 424(b)(3) of the Rules and
Regulations of the Securities Act of 1933 (File Number 333-119217).
BankFinancial Corporation, the Maryland corporation, did not engage in any
business prior to the consummation of the plan of conversion and reorganization
on June 23, 2005. Consequently, the accompanying 2005 unaudited consolidated
financial statements reflect the financial condition and operating results of
BankFinancial MHC, Inc., BankFinancial Corporation, the federal corporation, and
their subsidiaries until June 23, 2005, and of BankFinancial Corporation, the
Maryland corporation, and its subsidiaries thereafter. The words "Company," "we"
and "our" are therefore intended to refer to BankFinancial MHC, BankFinancial
Corporation, the federal corporation, and their subsidiaries, including the
Bank, with respect to matters and time periods occurring prior to the
consummation of the plan of conversion and reorganization and the subscription
offering, and to refer to BankFinancial Corporation, the Maryland Corporation,
and its subsidiaries, including the Bank, with respect to matters and time
periods occurring thereafter.
The accompanying interim unaudited consolidated financial statements include the
accounts of and transactions of BankFinancial MHC, Inc., BankFinancial
Corporation, the federal corporation, BankFinancial Corporation, the Maryland
Corporation, the Bank, and the Bank's wholly owned subsidiaries, Financial
Assurance Services, Inc., and BankFinancial Asset Recovery Corporation
(collectively, "the Company"). All significant intercompany accounts and
transactions have been eliminated.
The interim unaudited consolidated financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. The results of operations for the
three-month and six-month periods ended June 30, 2005 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 2005.
Certain information and note disclosures normally included in financial
statements and prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted, pursuant to the rules and regulations
of the Securities and Exchange Commission.
Certain prior period amounts have been reclassified to correspond with the
current period presentations.
8
To prepare financial statements in conformity with U.S. generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, loan servicing rights,
impairment of securities and the fair value of financial instruments are
particularly subject to change.
These unaudited consolidated financial statements should be read in conjunction
with the Company's Prospectus as filed on April 29, 2005 with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) of the Rules and Regulations of
the Securities Act of 1933 (File Number 333-119217).
Note 2 - Earnings per share
The conversion to a stock form of ownership occurred on June 23, 2005. Earnings
per share information is not presented as such amount for the period of June 23,
2005 through June 30, 2005 is not material.
Note 3 - Securities
The fair value of securities available-for-sale and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss) is
as follows:
Gross Gross
Unrealized Unrealized
Fair Value Gains Losses
---------- ----- ------
June 30, 2005
- -------------
U.S. Agency securities $ 199,984 $ -- $ --
State and municipal securities 3,194 3 (14)
Mortgage-backed securities 183,800 559 (1,786)
Collateralized mortgage obligations 1,669 28 -
SBA-guaranteed loan participation certificates 1,903 1 (6)
Equity securities 86,152 2,442 (250)
---------- ---------- ---------
$ 476,702 $ 3,033 $ (2,056)
=========== ========== =========
December 31, 2004
- -----------------
State and municipal securities $ 3,464 $ 7 $ (13)
Mortgage-backed securities 178,668 696 (1,660)
Collateralized mortgage obligations 1,700 27 --
SBA-guaranteed loan participation certificates 1,941 1 (18)
Equity securities 82,320 235 (1,875)
---------- ---------- ---------
$ 268,093 $ 966 $ (3,566)
=========== ========== =========
Mortgage-backed securities and collateralized mortgage obligations consist of
Freddie Mac, Fannie Mae and Ginnie Mae issues at June 30, 2005 and December 31,
2004. Equity securities consist primarily of Fannie Mae and Freddie Mac floating
rate preferred stocks.
Interest income on securities is recognized under the interest method and
includes amortization of purchase premium and discount. Gains and losses on
sales of securities are based on the amortized cost of the security sold.
Declines in the fair value of securities below their cost that are considered
other-
9
than-temporary impairments are reflected as realized losses. In determining if
unrealized losses constitute other-than-temporary impairments, management
considers all relevant factors, including: (1) the length of time and extent
that fair value has been less than cost or adjusted cost, as applicable, (2) the
projected value of the security in future periods, (3) the likelihood of a
recovery of the carrying value of the security, (4) the financial condition and
near term prospects of the issuer, and (5) the Company's ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value.
The Company evaluates its investment securities with significant declines in
fair value on a quarterly basis to determine whether they should be considered
temporarily or other-than-temporarily impaired.
We evaluated the unrealized losses on certain investments in state and municipal
bonds, mortgage-backed securities and SBA guaranteed loan participation
certificates, and concluded that they were attributable to increases in interest
rates rather than credit quality or other issuer-specific factors. Since the
Company has the ability and intent to hold these investments until a recovery
occurs or the securities mature, and the carrying cost is projected to recover
as market interest rates change, the unrealized losses on these investments were
not considered other-than-temporary impairments.
The Company's impairment testing methodology includes a specific methodology for
conducting impairment testing on marketable equity securities with dividends
that adjust periodically based on market interest rate indices, such as the
Fannie Mae and Freddie Mac floating rate preferred stocks included in equity
securities. We initially determine the severity of the impairment and the
continuous duration of the impairment (generally as well as the continuous
duration of any impairment exceeding 5%). Using a valuation model, we then
prepare a projection of the value of each security in future periods using
current data and mean and median historical data as inputs for the forward yield
curve and the volatility curve parameters, and for each security, its original,
current and mid-point spread over the applicable risk-free benchmark since time
of issuance. The projection results are used to assess the likelihood of a
recovery of the carrying value of the security, using evaluation criteria that
require greater evidence of a full recovery as the duration and, particularly,
the severity of an impairment increase, and consideration of other evidence that
is relevant to the issue of recovery. Acting on the premise that a write-down
may be required, we consider the model results together with other relevant
evidence and make a judgment as to whether the evidence favors a full recovery
and whether the Company has the intent and ability to hold the security for the
duration of the forecasted recovery period. In the absence of other relevant
evidence, the model results will generally be controlling. If other relevant
evidence exists, the model results will not necessarily be controlling and are
weighed with other relevant evidence.
Impairment testing conducted during the second quarters of 2005 and 2004
resulted in the conclusion that unrealized losses that existed on certain of the
floating rate preferred stocks did not constitute other-than-temporary
impairments. Therefore the Company did not record an impairment charge for the
six-month periods ended June 30, 2005 or 2004.
Note 4 - Loans Receivable
Loans that management has the intent and ability to hold until maturity or
payoff are reported at the principal balance outstanding, net of the allowance
for loan losses, premiums and discounts on loans purchased, and net deferred
loan costs. Interest income on loans is recognized into income over the term of
the loan based on the amount of principal outstanding.
Loans originated are identified as either held for sale or investment at or soon
after origination and accounted for accordingly. Loans that have been classified
as held for sale are recorded at the lower of aggregate cost or market value.
The Company sells a portion of its mortgage loan production in the
10
secondary market. The Company obtains sales commitments on certain of these
loans immediately prior to making the origination commitment. Net unrealized
losses are recognized by charges to income.
Premiums and discounts associated with loans purchased are amortized over the
expected life of the loan using the level-yield method.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the contractual loan term, adjusted for
prepayments. Interest income is discontinued at the time the loan is 90 days
delinquent unless the loan is well secured and in process of collection. In all
cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Loans receivable are as follows:
June 30, 2005 December 31, 2004
One- to four-family residential real estate $ 364,355 $ 363,097
Multi-family mortgage loans 235,338 240,607
Nonresidential real estate 257,532 269,581
Construction and land loans 76,705 59,784
Commercial loans 78,485 71,821
Commercial leases 87,427 86,362
Consumer loans 2,391 2,755
Other loans (including municipal) 5,754 6,044
------------- -------------
Total loans 1,107,987 1,100,051
Loans in process 604 824
Net deferred loan origination costs 2,124 2,096
Allowance for loan losses (10,596) (11,019)
------------- -------------
Loans, net $ 1,100,119 $ 1,091,952
============= =============
Activity in the allowance for loan losses is as follows:
Six months ended June 30,
2005 2004
---- ----
Beginning balance $ 11,019 $ 12,034
Provision (credit) for loan losses (340) --
Loans charged off (85) (1,321)
Recoveries 2 28
----------- -----------
Ending balance $ 10,596 $ 10,741
=========== ===========
11
Impaired loans are as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Loans with allocated allowance for loan losses $ 9,879 $ 9,491
Loans with no allocated allowance for loan losses 4,997 7,575
----------- -----------
Total $ 14,876 $ 17,066
=========== ===========
Amount of the allowance for loan losses allocated $ 1,687 $ 2,056
Interest income received on impaired loans was immaterial for the three- and
six-month periods ended June 30, 2005 and 2004.
Nonperforming loans are as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Loans past due over 90 days still on accrual $ -- $ --
Nonaccrual loans 6,873 6,524
Nonperforming loans includes both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations,
estimated collateral values, economic conditions, and other relevant factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
nonclassified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
Loan commitments are considered in determining the provision for loan losses.
The Company has not recorded any provision for losses on loan commitments since
no losses were probable and reasonably estimable.
12
Note 5 - Deposits
Deposits are as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Non-interest-bearing demand $ 281,227 $ 104,448
Interest-bearing NOW 222,759 232,968
Money market 210,251 205,933
Savings 130,761 132,009
Certificates of deposit 385,947 440,338
---------- ----------
$1,230,945 $1,115,696
Included in certificates of deposit are $12.4 million and $23.9 million of
brokered deposits at June 30, 2005 and December 31, 2004, respectively. All
brokered deposits are over $100,000.
Interest expense on deposit accounts is summarized as follows for the periods
indicated:
Six months ended June 30,
2005 2004
---- ----
Interest-bearing NOW $ 1,060 $ 506
Money market accounts 2,642 900
Savings 518 345
Certificates of deposit 5,444 4,443
----------- ----------
$ 9,664 $ 6,194
=========== ==========
Note 6 - Employee Benefit Plans
Employee Stock Ownership Plan (ESOP). The Bank established an ESOP for its
employees effective January 1, 2004. The ESOP covers all eligible employees of
the Bank and its subsidiaries. Employees are eligible to participate in the ESOP
after attainment of age 21 and completion of one year of service. In connection
with the conversion and reorganization, the ESOP borrowed $19.6 million from the
Company and used the proceeds of the loan to purchase 1,957,300 common shares
issued in the subscription offering at $10.00 per share. The Bank has committed
to make discretionary contributions to the ESOP sufficient to service the loan
over a period not to exceed 20 years. Expense related to the ESOP was $25,000
and $0 for the six months ended June 30, 2005 and 2004, respectively.
Note 7- Other Comprehensive Income (Loss)
Other comprehensive income (loss) components were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net Income $ 2,821 $ 1,507 $ 4,457 $ 2,407
Change in other comprehensive income
(loss) of tax effects (329) 496 2,156 (3,756)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ 2,492 $ 2,003 $ 6,613 $ (1,349)
========== ========== ========== =============
Note 8 - New Accounting Standards
The Financial Accounting Standards Board issued Statement 123R, "Share-Based
Payment," that would be effective for all employee awards granted, modified, or
settled after January 1, 2006 for calendar year-end companies. As of the
effective date, compensation expense related to the non-vested portion of awards
outstanding as of that date would be based on the grant-date fair value as
calculated under the original provisions of Statement 123. Adoption of this
standard could materially impact the amount of
13
compensation and benefits expense incurred for future financial statements
reporting if the Company has a stock award program in place after the proposed
statement becomes effective.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This report, in Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere contains, and other periodic
reports and press releases of the Company may contain, forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, that involve significant risks and uncertainties. The Company
intends such 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 is including this statement for purposes of
invoking these safe harbor provisions. These forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain and actual results
may differ from those predicted. The Company undertakes no obligation to update
these forward-looking statements in the future. Factors that could have a
material adverse effect on operations and could affect management's outlook or
future prospects of the Company and its subsidiaries include, but are not
limited to, higher than expected overhead, infrastructure and compliance costs,
changes in market interest rates or further flattening of the yield curve, less
than anticipated balance sheet growth, demand for loan products, unanticipated
changes in secondary mortgage market conditions, deposit flows, competition,
adverse federal or state legislative or regulatory developments, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and Federal Reserve Board, deteriorating economic conditions that could result
in increased delinquencies in the Company's loan portfolio, the quality or
composition of the Company's loan or investment portfolios, demand for financial
services and multi-family, commercial and residential real estate loans in the
Company's market area, the possible short-term dilutive effect of potential
acquisitions or de novo branches, if any, changes in accounting principles,
policies and guidelines, and future adverse developments concerning Freddie Mac
or Fannie Mae. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that the most critical accounting policies upon which our financial
condition and results of operation depend, and which involve the most complex
subjective decisions or assessments, are included in the discussion included in
the Company's Prospectus as filed on April 29, 2005 with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) of the Rules and Regulations of
the Securities Act of 1933 (File Number 333-119217).
Overview
Our mutual to stock conversion was consummated on June 23, 2005. The
net proceeds of the subscription offering totaled $220.7 million, excluding the
$19.6 million in stock purchased by our ESOP. We issued subscription order
refunds, including interest, totaling $192.5 million prior to June 30, 2005, of
which $167.1 million was refunded through the issuance of refund checks and
$25.4 million was refunded through releases of deposit account holds. The funds
needed to pay the subscription order refund checks were on deposit with the Bank
in a refund checking account at June 30, 2005.
Our results of operations depend primarily on our net interest income.
Net interest income is the difference between the interest income we earn on our
interest-earning assets, consisting primarily of
15
loans, investment securities and other interest-earning assets, and the interest
we pay on our interest-bearing liabilities, consisting primarily of savings
accounts, NOW accounts, money market accounts, time deposits and Federal Home
Loan Bank borrowings. Our results of operations also are affected by our
provisions for loan losses, non-interest income and non-interest expense.
Non-interest income consists primarily of fees and service charges, income from
the sale of annuities and insurance and miscellaneous other income. Non-interest
expense consists primarily of compensation and employee benefits, occupancy and
equipment, data processing, professional fees, advertising and other
administrative expenses. Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes
in market interest rates, governmental policies and actions of regulatory
authorities.
Net income increased $2.1 million, or 85.2%, to $4.5 million for the
six months ended June 30, 2005 from $2.4 million for the six-month period ended
June 30, 2004. Interest income increased $6.1 million, or 19.1%, to $38.1
million for the six months ended June 30, 2005, from $32.0 million for the six
months ended June 30, 2004. The increase in interest income resulted primarily
from a $3.9 million increase in interest income on loans. Interest expense
increased $2.9 million, or 24.8%, to $14.4 million for the six months ended June
30, 2005, from $11.6 million for the six months ended June 30, 2004. The
increase resulted from an increase in interest expense on deposit accounts.
Interest income and interest expense each reflected the transitory impact of
refundable subscription order receipts. Noninterest income decreased $425,000,
9.9%, to $3.9 million for the six months ended June 30, 2005, from $4.3 million
for the same period in 2004. Noninterest expense was $21.3 million for the six
months ended June 30, 2005, an improvement of $68,000, or 0.3%, compared to
noninterest expense of $21.4 million for the six months ended June 30, 2004.
The following tables summarize the major components of the changes in
our balance sheet and income statement at and for the six month periods ended
June 30, 2005 and 2004.
December 31, Percent
June 30, 2005 2004 Change
------------- ------------- -------------
(Dollars in thousands)
Selected Financial Condition Data:
Total assets......................... $ 1,786,723 $ 1,492,782 19.7%
Loans receivable, net................ 1,100,119 1,091,952 0.7%
Deposits............................. 1,230,945 1,115,696 10.3%
Stockholder's equity................. 322,180 94,888 239.5%
16
For the six months
ended June 30,
------------------ Percent
2005 2004 Change
---- ---- ------
(Dollars in thousands)
Selected Operating Data:
Interest income .................. $ 38,097 $ 31,980 19.1%
Interest expense ................. 14,411 11,550 24.8%
-------- --------
Net interest income ........... 23,686 20,430 15.9%
Provision (credit) for loan losses (340) -- 100.0%
-------- --------
Net interest income after
provision for loan losses ...... 24,026 20,430 17.6%
Noninterest income ............... 3,887 4,312 (9.9%)
Noninterest expense .............. 21,305 21,373 (0.3%)
-------- --------
Income before income taxes ....... 6,608 3,369 96.1%
Provision for income taxes ....... 2,151 962 123.6%
-------- --------
Net income .................... $ 4,457 $ 2,407 85.2%
======== ========
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Selected Financial Highlights
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Selected Financial Ratios and Other
Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets) (1) 0.68% 0.41% 0.57% 0.33%
Return on equity (ratio of net income
to average equity) (1) 9.12 6.46 8.16 5.15
Net interest rate spread (1) (2) 2.96 2.92 2.98 2.81
Net interest margin (1)(3) 3.18 3.09 3.19 2.98
Average equity to average assets 7.45 6.42 6.93 6.42
Efficiency ratio (4) 72.87 82.91 77.27 86.38
Noninterest expense to average total
assets (1) 2.55 2.90 2.70 2.93
Average interest-earning assets to
average interest-bearing
liabilities 111.42 110.80 110.87 110.31
At December 31,
At June 30,2005 2004
--------------- ---------------
Selected Financial Ratios and Other Data:
Asset Quality Ratios:
Nonperforming assets to total assets 0.38% 0.44%
Nonperforming loans to total loans 0.61 0.59
Allowance for loan losses to nonperforming
loans 154.17 168.90
Allowance for loan losses to total loans 0.96 1.00
Capital Ratios:
Equity to total assets at end of period 18.03% 6.36%
Tier 1 leverage ratio (Bank only) 12.05 7.12
Other Data:
Number of full service offices 16 16
(1) Ratios are annualized.
(2) The net interest rate spread represents the difference between the
yield on average interest-earning assets and the cost of average
interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income divided by
average total interest-earning assets for the period.
(4) The efficiency ratio represents noninterest expense divided by the sum
of net interest income and noninterest income.
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Comparison of Financial Condition at June 30, 2005 and December 31, 2004
Total assets increased $293.9 million, or 19.7%, to $1.787 billion at
June 30, 2005, from $1.493 billion at December 31, 2004. Cash and cash
equivalents and securities available for sale increased $86.3 million and $208.6
million, respectively, to $87.7 million and $476.7 million at June 30, 2005,
from $1.4 million and $268.1 million at December 31, 2004, respectively. These
increases were primarily the result of payments that were submitted with
subscription orders for the 24,466,250 shares of common stock that we sold in
the subscription offering. We received subscription orders for 43.6 million
shares, totaling $436.8 million. Of this amount, $72.9 million represented holds
placed on existing deposit accounts, and $344.3 million represented the proceeds
of checks and other subscription order payments. Because the subscription
offering was over-subscribed, we issued subscription order refunds, including
interest, totaling $192.5 million prior to June 30, 2005, of which $167.1
million was refunded through the issuance of refund checks and $25.4 million was
refunded through releases of deposit account holds. The subscription order
proceeds were maintained in an interest bearing account at the Bank until the
completion of the subscription offering. Thereafter, funds representing the
payment of subscription orders that were filled were paid to the Company, and
the funds due to subscribers for unfilled subscription orders were placed in a
refund checking account at the Bank upon which refund checks were drawn. At June
30, 2005, the refund checking account had a balance of $167.1 million, all of
which represented issued but unpaid refund checks.
Net loans receivable increased by $8.2 million, or 0.7%, to $1.100
billion at June 30, 2005, from $1.092 billion at December 31, 2004. Multi-family
mortgage loans and non-residential real estate loans decreased $17.3 million, or
3.4%, primarily as a result of $39.3 million in loan principal pay-offs received
during the first half of 2005. Construction loans increased $16.9 million during
the first half of 2005, or 28.3%, due to increased originations and seasonal
factors. Commercial loans and commercial leases increased $7.7 million in the
aggregate, or 4.9%, reflecting our continued emphasis on originating commercial
loans and leases and increasing line of credit usage by commercial borrowers.
Securities available for sale increased $208.6 million, or 77.8%, to
$476.7 million at June 30, 2005, from $268.1 million at December 31, 2004. The
increase was primarily due to the investment of subscription order receipts in
short-term U.S. government agency notes. Investments in short-term U.S.
government agency notes totaled $200.0 million at June 30, 2005. During the
first six months of 2005, we securitized $24.2 million of adjustable-rate, one-
to four-family residential real estate loans. This increase in securities
available for sale was partially offset by $18.9 million of principal repayments
received on mortgage-backed securities. The fair value of our portfolio of
Fannie Mae and Freddie Mac floating rate preferred stocks increased $3.8 million
in the aggregate, or 4.9%, to $81.3 million at June 30, 2005, from $77.5 million
at December 31, 2004, due to increases in the quoted market prices for certain
of these securities.
Cash and cash equivalents increased $84.5 million to $113.8 million at
June 30, 2005, from $29.3 million at December 31, 2004. The increase was
primarily due to proceeds of the subscription offering and funds that remained
on deposit in the subscription order refund account at June 30, 2005.
Other assets decreased by $3.0 million, or 20.5%, to $11.6 million at
June 30, 2005, from $14.6 million at December 31, 2004. The decrease in other
assets was partially due to a $1.4 million decrease in deferred tax assets that
relates to the increase in the fair value of our portfolio of Fannie Mae and
Freddie Mac floating rate preferred stocks, and the elimination of approximately
$800,000 in deferred expenses relating to the subscription offering through the
netting of these expenses against the gross proceeds of the subscription
offering.
Deposits increased $115.2 million, or 10.3%, to $1.231 billion at June
30, 2005, from $1.116 billion at December 31, 2004. Deposits at June 30, 2005,
included $167.1 million in funds on deposit in the subscription order refund
account. We anticipate that the balance in this account will be immaterial by
the end of the third quarter of 2005. Core deposits (savings, money market,
noninterest bearing demand
19
and NOW accounts), represented 68.7% of total deposits at June 30, 2005,
compared to 60.5% of total deposits at December 31, 2004. Core deposits included
$167.1 million funds on deposit in the subscription order refund account at June
30, 2005. Certificates of deposit decreased $54.4 million, or 12.4%, to $385.9
million at June 30, 2005, from $440.3 million at December 31, 2004, primarily
due to maturing municipal, wholesale and brokered certificates of deposits that
were not renewed. The decreases totaled $19.8 million, $6.1 million and $11.5
million, respectively, at June 30, 2005.
Borrowings decreased $51.0 million, or 19.3%, to $213.8 million at June
30, 2005, from $264.7 million at December 31, 2004. We used $30 million of the
net proceeds of the subscription offering to repay the indebtedness that we
incurred when we acquired Success Bancshares in 2001 and subsequently redeemed
$15 million in trust preferred securities that an affiliate of Success
Bancshares had issued. The additional decrease in borrowings resulted from our
repayment of maturing Federal Home Loan Bank borrowings with subscription
offering proceeds.
Total stockholders' equity increased $227.3 million to $322.2 million,
compared to members' equity of $94.9 million at December 31, 2004. We completed
our conversion from the mutual to the stock form of ownership on June 23, 2005.
The net proceeds of the subscription offering totaled $240.3 million and are
reflected as common stock and additional paid-in capital. Our ESOP borrowed
$19.6 million from the Company and used the proceeds of the loan to purchase
1,957,300 shares issued in the subscription offering. The ESOP's unallocated
shares are reflected as a reduction to equity at June 30, 2005. Retained
earnings increased $4.5 million due to the Company's net income for the six
months ended June 30, 2005. Total stockholders' equity at June 30, 2005,
reflected an unrealized gain on securities available for sale of $589,000, net
of tax, compared to an unrealized loss on securities available for sale of $1.6
million, net of tax, at December 31, 2004.
Comparison of Operating Results for the Three Months Ended June 30, 2005 and
June 30, 2004
Net Income. We had net income of $2.8 million for the three months
ended June 30, 2005, compared to net income of $1.5 million for the three months
ended June 30, 2004. The increase in net income was primarily attributable to a
$1.9 million, or 18.0%, increase in our net interest income.
Interest Income. Interest income increased $4.1 million, or 25.7%, to
$20.1 million for the three months ended June 30, 2005, from $16.0 million for
the three months ended June 30, 2004. The increase in interest income reflected
a 45 basis point improvement in the average yield on interest-earning assets to
5.11% from 4.66%, and a $199.7 million, or 14.6%, increase in total average
interest-earning assets. The increase in average interest earning-assets
reflected the investment of subscription order payments that we received
throughout the quarter in short-term U.S. government agency notes. These
short-term investments are also reflected in the average balances of securities
available for sale during the second quarter of 2005, and subscription order
receipts are also reflected in the average balances of interest-bearing deposits
and demand deposits for the same period.
Interest income from loans, the most significant portion of interest
income, increased $2.1 million, or 15.6%, to $15.9 million for the three months
ended June 30, 2005, from $13.7 million for the same period in 2004. The
increase reflected earnings on a $10.9 million, or 1.0%, increase in the average
balance of net loans receivable to $1.104 billion for the three months ended
June 30, 2005, from $1.093 billion for the same period in 2004, and a 73 basis
point increase in the average yield on loans to 5.75% for the three months ended
June 30, 2005, from 5.02% for the three months ended June 30, 2004. The interest
rates on construction and home equity loans are predominantly indexed to the
prime rate. The quarterly yields on construction and home equity loans improved
more than 100 basis points from June 2004 to June 2005 due to increases in the
prime rate. Interest income from one- to four-family residential real estate
loans increased $571,000, or 12.6%, to $5.1 million for the three months ended
June 30, 2005, from $4.5 million for the three months ended June 30, 2004.
Interest income from commercial loans and leases increased $514,000, or 25.5%,
to $2.5 million for the three months ended June 30, 2005, from $2.0 million for
the same period in 2004.
20
Interest income from securities available for sale increased $1.6
million, or 86.5%, to $3.5 million for the three months ended June 30, 2005,
from $1.9 million for the three months ended June 30, 2004. The average yield on
securities available for sale increased 53 basis points to 3.58% from 3.05%, and
the average outstanding balance of securities available for sale increased
$143.0 million, or 58.7%, to $386.7 million, from $243.7 million for the three
months ended June 30, 2004. The average outstanding balance of securities
available for sale included the investment of subscription order receipts in
short-term U.S. government agency notes.
Interest income from interest-bearing deposits totaled $385,000 for the
quarter ended June 30, 2005, compared to $20,000 the quarter ended June 30,
2004. The increase reflects a $44.5 million increase in the average outstanding
balance of interest-bearing deposits, from $8.7 million for the second quarter
of 2004 to $53.2 million for the second quarter of 2005. The current-year
average balance of interest-bearing deposits and related interest income
included subscription order receipts.
Interest Expense. Interest expense increased $2.2 million, or 41.0%, to
$7.6 million for the three months ended June 30, 2005, from $5.4 million for the
three months ended June 30, 2004. The increase in the interest rate paid on
average interest-bearing liabilities reflected an increase in the deposit
interest rates paid to customers, and an increase in the average interest rates
that we paid on our borrowings. The increase in interest expense reflected an
overall increase of 41 basis points in the cost of average interest-bearing
liabilities to 2.15% for the three months ended June 30, 2005, from 1.74% for
the three months ended June 30, 2004.
Interest expense on deposits increased $2.1 million, or 68.9%, to $5.2
million for the three months ended June 30, 2005, from $3.1 million for the same
period in 2004. The increase in interest expense on deposits reflected a $185.4
million, or 19.0%, increase in average interest-bearing deposits to $1.161
billion for the three months ended June 30, 2005, from $975.7 million for the
same period in 2004, due primarily to the deposit of subscription order receipts
in money market and NOW accounts. The increase in interest expense on deposits
also reflected a 53 basis point increase in the average rate paid on deposits to
1.79% for the three months ended June 30, 2005, from 1.26% for the three months
ended June 30, 2004. Interest expense increased for all categories of our
deposits due to increased average balances and increases in the interest rates
paid to depositors. Interest expense on money market accounts increased $1.1
million, or 247.8%, reflecting an increase of $54.5 million in the average
balance of money market account deposits to $217.5 million for the three months
ended June 30, 2005, from $163.0 million for the three months ended June 30,
2004, and a 183 basis point increase in the rate paid on these accounts to 2.96%
from 1.13%. We had $124.0 million in indexed money market accounts at June 30,
2005. The interest rates on indexed money market accounts increased due to
increases in short-term market interest rates. The interest rates paid on
certain NOW accounts, savings accounts and money market accounts were increased
beginning in the third quarter of 2004 in response to increasing short-term
market interest rates and anticipated increases in rates paid by our
competitors. Rates on other selected money market products and certificates of
deposit were also increased for competitive reasons.
Interest expense on certificates of deposit increased $558,000, or
25.6%, reflecting an increase of 65 basis points to 2.65% for the three months
ended June 30, 2005 from 2.00% for the same period in 2004. This increase was
partially offset by a $23.2 million decrease in the average balance of
certificates of deposit to $413.8 million for the three months ended June 30,
2005, from $437.1 million for the three months ended June 30, 2004 due primarily
to maturing municipal, wholesale and brokered certificates of deposit that were
not renewed.
Interest expense on borrowings increased by $84,000, or 3.7%, to $2.4
million for the three months ended June 30, 2005, from $2.3 million for the same
period in 2004. Interest expense for the quarter included a yield adjustment
amortization expense of $175,000, pre-tax, relating to our restructuring of $170
million of Federal Home Loan Bank borrowings in July 2003. The yield adjustment
amortization expense totaled $667,000, pre-tax, for the three months ended June
30, 2004. The amortization of the yield adjustment expense relating to the
restructuring will be completed in July 2005.
21
Interest expense on borrowings also included interest on the $30 million of term
debt we incurred in connection with our acquisition of Success Bancshares in
2001 and our subsequent redemption of $15 million in trust preferred securities
that an affiliate of Success Bancshares had issued. Interest expense on our term
debt totaled $361,000 for the three months ended June 30, 2005, which
represented a $125,000, or 53.0%, increase over the $236,000 in interest expense
on term debt for the same period in 2004. We repaid the term debt in full on
June 24, 2005.
Net Interest Income. Net interest income increased by $1.9 million, or
18.0%, to $12.5 million for the three months ended June 30, 2005, from $10.6
million for the three months ended June 30, 2004. The increase in net interest
income reflected an improvement in our net interest rate spread to 2.96% for the
three months ended June 30, 2005, from 2.92% for the three months ended June 30,
2004. Our net interest margin improved to 3.18% for the three months ended June
30, 2005, from 3.09% for the three months ended June 30, 2004. Net interest
income for the three months ended June 30, 2005 included interest earned on the
investment of subscription order receipts of including approximately $300,000 of
net interest rate spread earned on $167.1 million in subscription order receipts
that were being refunded to subscribers.
Provision for Loan Losses. We establish provisions for loan losses,
which are charged to operations in order to maintain our allowance for loan
losses at a level we consider necessary to absorb probable credit losses
incurred in the loan portfolio. In determining the level of the allowance for
loan losses, we consider past and current loss experience, evaluations of
collateral, current economic conditions, volume and type of lending, adverse
situations that may affect a borrower's ability to repay a loan, the levels of
nonperforming and other classified loans, and other relevant factors. The amount
of the allowance is based on estimates and the ultimate losses may vary from
such estimates as more information becomes available, or later events occur or
circumstances change. We evaluate the allowance for loan losses on a quarterly
basis and make provisions for loan losses in order to maintain the allowance.
Based on our evaluation of the above factors, we recorded a credit for
loan losses of $264,000 for the three months ended June 30, 2005. We recorded no
provision for loan losses for the three months ended June 30, 2004. The portion
of the allowance for loan losses allocated to impaired loans decreased $234,000
to $1.7 million at June 30, 2005, compared to $1.9 million at March 31, 2005.
Recoveries of specific reserves totaled $311,000 due to the full repayment of
three loans, increases in the value of existing collateral and the receipt of
supplemental collateral securing certain other classified loans. The additional
collateral included marketable securities, home equity and other personal
assets. Because the collateral for certain classified loans includes marketable
securities, fluctuations in the specific reserves attributable to these loans
should be expected to occur in the future due to possible changes in the market
value of these securities, and declines in market value could result future
provisions for additional specific reserves. The recoveries of specific reserves
were partially offset by a $57,000 increase in the specific reserve on a loan to
a nursing home operator. Non-performing loans increased $697,000 to $6.9 million
at June 30, 2005 from $6.2 million at March 31, 2005. The largest addition to
non-performing loans was a $2.0 million loan secured by real estate that is
currently leased to the operator of a nursing home facility. A restructuring of
this loan is presently being negotiated. If the negotiations are successfully
concluded, the borrower would sell the facility to an unrelated entity that is
currently managing the facility, and the unrelated entity would execute a new
note in favor of the Bank for the principal amount of the existing note. There
can be no assurance that the restructuring will be consummated. We placed this
loan on non-accrual status during the second quarter of 2005 pending the outcome
of the restructuring; we had previously established an appropriate specific loan
loss reserve for this loan in prior periods pursuant to FASB Statement No. 114.
Our allowance for loan losses totaled $10.6 million, or 0.96%, of total loans at
June 30, 2005, compared to $10.9 million, or 1.00%, of total loans at March 31,
2005. We used the same general methodology in evaluating the allowance for loan
losses at both dates. Our allowance for loan losses represented 154.17% of
non-performing loans at June 30, 2005, and 177.15% of non-performing loans at
March 31, 2005.
22
To the best of our knowledge, we have recorded all losses that are both
probable and reasonable to estimate for each reporting period.
Noninterest Income. Our noninterest income decreased $130,000, or 6.0%,
to $2.0 million for the three months ended June 30, 2005, from $2.2 million for
the same period in 2004. The decrease was attributable to several factors,
including the absence of gains on the sale of securities during the current year
and a mortgage servicing rights impairment charge. These decreases were
partially offset by a $182,000, or 13.9%, improvement in noninterest income from
fees and service charges, primarily due to fees and service charges relating to
overdraft activity on deposit accounts. We recorded a $160,000 mortgage
servicing rights impairment charge during the current quarter, compared to a
recovery of mortgage servicing rights valuation reserve in the amount of
$359,000 for the quarter ended June 30, 2004. We had no gain on the sale of
securities for the quarter ended June 30, 2005, compared to a gain of $161,000
for the quarter ended June 30, 2004. Our gain on the sale of loans was $46,000
for the quarter ended June 30, 2005, compared to a loss of $30,000 for the same
period in 2004. Current quarter loan sales reflect $4.6 million of loan sale
proceeds, compared to $18.3 million of loan sale proceeds for the same period in
2004.
Noninterest Expense. Our noninterest expense remained constant at $10.6
million for the three months ended June 30, 2005, and June 30, 2004. Total
non-interest expense included $6.6 million in compensation and benefits expense
for the quarter ended June 30, 2005, compared to $6.4 million in compensation
and benefits expense for the same period in 2004. Current quarter compensation
expense included a $25,000 expense relating to the ESOP.
Income Tax Expense. We recorded income tax expense of $1.4 million for
the three months ended June 30, 2005, compared to $671,000 for the three months
ended June 30, 2004. The effective tax rates for the three-month periods ended
June 30, 2005 and 2004 were 32.9% and 30.8%, respectively.
Comparison of Operating Results for the Six Months Ended June 30, 2005 and June
30, 2004
Net Income. We had net income of $4.5 million for the six months ended
June 30, 2005, compared to net income of $2.4 million for the six months ended
June 30, 2004. The increase in net income was primarily attributable to a $3.3
million, or 15.9%, increase in our net interest income.
Interest Income. Interest income increased $6.1 million, or 19.1%, to
$38.1 million for the six months ended June 30, 2005, from $32.0 million for the
six months ended June 30, 2004. The increase in interest income reflected a 46
basis point improvement in the average yield on interest-earning assets to 5.12%
from 4.67%, and a $115.8 million, or 8.5%, increase in total average
interest-earning assets. The increase in average interest earning assets
reflected the investment of subscription order payments that we received
throughout the quarter into short-term U.S. government agency notes. These
short-term investments are reflected in the average balances of securities
available for sale, and subscription order receipts are also reflected in the
average balances of interest-bearing deposits and demand deposits during the six
month periods ended June 30, 2005 and 2004.
Interest income from loans increased $3.9 million, or 14.4%, to $31.3
million for the six months ended June 30, 2005, from $27.3 million for the same
period in 2004. The increase reflected a $16.8 million, or 1.5%, increase in the
average balance of net loans receivable to $1.104 billion for the six months
ended June 30, 2005, from $1.088 billion for the same period in 2004, and a 64
basis point increase in the average yield on loans to 5.66% for the six months
ended June 30, 2005, compared to 5.03% for the six months ended June 30, 2004.
Interest income from one- to four-family residential real estate increased $1.1
million, or 11.8%, to $10.0 million for the six months ended June 30, 2005, from
$9.0 million for the six months ended June 30, 2004. Interest income from
commercial loans and leases increased $1.2 million, or 29.5%, to $5.1 million
for the six months ended June 30, 2005, from $3.9 million for the same period in
2004.
23
Interest income from securities available for sale increased $1.9
million, or 48.6%, to $5.8 million for the six months ended June 30, 2005,
compared to $3.9 million for the six months ended June 30, 2004. The average
yield on securities available for sale increased 38 basis points to 3.49% from
3.11%, and the average outstanding balance of securities available for sale
increased $80.4 million, or 32.3%, to $329.4 million for the six months ended
June 30, 2005, from $248.9 million for the six months ended June 30, 2004. The
average outstanding balance of securities available for sale included the
investment of subscription order receipts in short-term U.S. government agency
notes.
Interest income from interest-bearing deposits totaled $401,000 for the
six months ended June 30, 2005, compared to $52,000 the six months ended June
30, 2004. The increase reflects the increase in the average outstanding balance
of $17.3 million, to $28.4 million for the first six months of 2005, compared to
$11.2 million for the 2004 period. The current-year average balance of
interest-bearing deposits and related interest income includes subscription
order receipts.
Interest Expense. Interest expense increased $2.9 million, or 24.8%, to
$14.4 million for the six months ended June 30, 2005, from $11.6 million for the
six months ended June 30, 2004. The increase in the interest rate paid on
average interest-bearing liabilities reflected an increase in the deposit rates
paid to depositors, which was offset by a decrease in the average interest rates
that we paid on our borrowings. The increase in interest expense reflected a 29
basis point increase in the rate paid on average interest-bearing liabilities to
2.15% for the six months ended June 30, 2005, from 1.86% for the six months
ended June 30, 2004.
Interest expense on deposits increased $3.5 million, or 56.0%, to $9.7
million for the six months ended June 30, 2005, from $6.2 million for the same
period in 2004. The increase in interest expense on deposits reflected a $102.1
million, or 10.4%, increase in average interest-bearing deposits to $1.081
billion for the six months ended June 30, 2005, from $979.3 million for the same
period in 2004, due primarily to the deposit of subscription order receipts
maintained on deposit with the Bank. The increase in interest expense on
deposits also reflected a 52 basis point increase in the average rate paid on
deposits to 1.79% for the six months ended June 30, 2005, from 1.27% for the six
months ended June 30, 2004. Average NOW account deposits of $310.0 million for
the six months ended June 30, 2005 included subscription order receipts.
Interest expense increased for all categories of our deposits. Interest
expense on money market accounts increased $1.7 million, reflecting an increase
of $48.7 million in the average balance of money market accounts deposits to
$211.5 million for the six months ended June 30, 2005, from $162.8 million for
the six months ended June 30, 2004, and a 139 basis point increase in the
interest rate paid on these accounts to 2.50% from 1.11%. Interest expense on
certificates of deposit increased $999,000, or 22.5%, reflecting a 55 basis
point increase in the interest rate paid on these accounts to 2.56% from 2.00%.
This increase was partially offset by an $18.0 million decrease in the average
balance of certificates of deposit to $425.3 million for the six months ended
June 30, 2005, from $443.3 million for the six months ended June 30, 2004,
primarily due to maturing municipal, wholesale and brokered certificates of
deposits that were not renewed.
Interest expense on borrowings decreased by $609,000, or 11.4%, to $4.7
million for the six months ended June 30, 2005, from $5.4 million for the same
period in 2004. The decrease in interest expense on borrowings was due in part
to a lower yield adjustment amortization expense relating to our restructuring
of $170 million in Federal Home Loan Bank borrowings in July 2003. The yield
adjustment amortization expense totaled $349,000, pre-tax, for the six months
ended June 30, 2005, compared to $2.1 million, pre-tax, for the six months ended
June 30, 2004. The amortization of the yield adjustment expense relating to the
restructuring will be completed in July 2005. In addition to the decreased yield
adjustment amortization expense, average borrowings decreased $3.9 million, or
1.5%. These factors were partially offset by an increase in interest expense on
the $30 million of term debt we incurred in connection with our acquisition of
Success Bancshares, Inc. in 2001 and the subsequent redemption of $15 million in
trust preferred securities that an affiliate of Success Bancshares had issued.
Interest
24
expense on our term debt totaled $703,000 for the six months ended June 30,
2005, a $218,000, or 45.0%, increase over the $475,000 in interest expense on
term debt for the same period in 2004. We repaid the term debt in full on June
24, 2005.
Net Interest Income. Net interest income increased by $3.3 million, or
15.9% to $23.7 million for the six months ended June 30, 2005, from $20.4
million for the six months ended June 30, 2004. The increase in net interest
income reflected an improvement in our net interest rate spread to 2.98% for the
six months ended June 30, 2005, from 2.81% for the six months ended June 30,
2004. Our net interest margin improved to 3.19% for the six months ended June
30, 2005, from 2.98% for the six months ended June 30, 2004. Net interest income
for the six months ended June 30, 2005 included interest earned on the
investment of subscription order receipts, including approximately $300,000 of
net interest rate spread earned on $167.1 million in subscription orders
receipts that are in the process of being refunded to subscribers.
Provision for Loan Losses We recorded a credit for loan losses of
$340,000 for the six months ended June 30, 2005. We recorded no provision for
loan losses for the six months ended June 30, 2004. The portion of the allowance
for loan losses allocated to impaired loans decreased $369,000 to $1.7 million
at June 30, 2005, compared to $2.1 million at December 31, 2004. Recoveries of
the specific reserves totaled $457,000 due to the full repayment of three loans,
principal reductions on several loans, increases in the value of existing
collateral and the receipt of supplemental collateral securing certain other
classified loans. The additional collateral included marketable securities, home
equity and other personal assets. The recoveries of specific reserves were
partially offset by a $57,000 increase in the specific reserve on a loan to a
nursing home operator. Non-performing loans increased $349,000 to $6.9 million
at June 30, 2005, from $6.5 million at December 31, 2004. The most notable
addition to non-performing loans was a $2.0 million loan secured by real estate
that is currently leased to the operator of a nursing home facility. A
restructuring of this loan is presently being negotiated. If the negotiations
are successfully concluded, the borrower would sell the facility to an unrelated
entity that is currently managing the facility, and the unrelated entity would
execute a new note in favor of the Bank for the principal amount of the existing
note. There can be no assurance that the restructuring will be consummated. We
placed this loan on non-accrual status during the second quarter of 2005 pending
the outcome of the restructuring; we had previously established an appropriate
specific loan loss reserve for this loan in prior periods pursuant to FASB
Statement No. 114. Our allowance for loan losses totaled $10.6 million, or
0.96%, of total loans at June 30, 2005, compared to $11.0 million, or 1.00%, of
total loans at December 31, 2004. We used the same general methodology in
evaluating the allowance at both dates. Our allowance for loan losses
represented 154.17% of our non-performing loans at June 30, 2005, and 168.90% of
our non-performing loans at December 31, 2004.
To the best of our knowledge, we have recorded all losses that are both
probable and reasonable to estimate for each reporting period.
Noninterest Income. Our noninterest income decreased $425,000, 9.9%, to
$3.9 million for the six months ended June 30, 2005, from $4.3 million for the
same period in 2004. The decrease is attributed to several factors, including
decreases in commissions from insurance and annuities sales, decreased gains on
loan and investment sales, and reduced income from real estate owned operations.
These decreases were partially offset by a $192,000, or 7.4%, improvement in fee
income, primarily due to fees and service charges relating to overdraft activity
on deposit accounts, which increased $249,000, or 67.0%, to $622,000 for the six
months ended June 30, 2005, compared to $372,000 for the same period 2004. Our
gain on sales of loans decreased $29,000, or 18.4%, to $129,000 for the six
months ended June 30, 2005, from $158,000 for the same period in 2004. Current
year-to-date loan sales reflect $12.4 million of loan sale proceeds, compared to
$34.2 million of loan sale proceeds for the six months ended June 30, 2004. We
had no gains on the sale of securities for the first six months of 2005,
compared to a gain of $419,000 for the same period in 2004. Amortization of
mortgage servicing rights decreased $180,000, or 34.9% to $335,000 for the six
months ended June 30, 2005, compared to $515,000 for the same six-month period
in 2004. The improvement in mortgage servicing rights
25
amortization expense was offset by a mortgage servicing rights impairment charge
of $118,000 taken for the six months ended June 30, 2005, compared to a mortgage
servicing rights valuation reserve recovery of $208,000 recorded for the six
months ended June 2004. Declining medium-term interest rates in the first half
of 2005 led to rising prepayment rates, which resulted in the decline in the
valuation of our mortgage servicing rights.
Noninterest Expense. Our noninterest expense was $21.3 million for the
six months ended June 30, 2005, an improvement of $68,000, or 0.3%, compared to
noninterest expense of $21.4 million for the six months ended June 30, 2004.
Improvements in expenses for office occupancy, information technology, supplies,
telephone, and postage were partially offset by a $268,000, or 2.0%, increase in
compensation expense. Total compensation and benefits expense totaled $13.5
million for the six-month period ended June 30, 2005, compared to $13.2 million
in compensation and benefits expense for the same period in 2004.
Income Tax Expense. We recorded income tax expense of $2.2 million for
the six months ended June 30, 2005, compared to $962,000 for the six months
ended June 30, 2004. The effective tax rates for the six-month periods ended
June 30, 2005 and 2004 were 32.6% and 28.6%, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Analysis. The table below sets forth, as of June 30, 2005, the
estimated changes in the Bank's NPV and net interest income that would result
from the designated instantaneous changes in the U.S. Treasury yield curve.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Given the historically low level of market
interest rates, we did not estimate changes in NPV or net interest income for an
interest rate decrease of greater than 200 basis points.
NPV Net Interest Income
-------------------------------------------- ------------------------------------------
Increase (Decrease) in
Change in Estimated Increase Estimated Net Interest
Interest Rates (Decrease) in NPV Estimated Income
(basis Estimated ------------------------------ Net Interest -----------------------------
points) NPV Amount Percent Income Amount Percent
------- ----------- ------------ ------------ ------------ ----------- -----------
(Dollars in thousands)
+300 $ 271,707 $ (2,060) (0.8)% $ 55,633 $ 2,627 5.0%
+200 274,375 608 0.2 55,353 2,347 4.4
+100 275,599 1,832 0.7 54,603 1,597 3.0
0 273,767 -- -- 53,006 -- --
-100 272,708 (1,059) (0.4) 50,987 (2,019) (3.8)
-200 267,325 (6,442) (2.4) 48,660 (4,346) (8.2)
The table set forth above indicates that at June 30, 2005, in the event of an
immediate 100 basis point decrease in interest rates, we would be expected to
experience a 0.39% decrease in NPV and a $2.0 million decrease in net interest
income. In the event of an immediate 200 basis point increase in interest rates,
we would be expected to experience a 0.22% increase in NPV and a $2.3 million
increase in net interest income. This data reflects the transitory impact of
refundable subscription order receipts, or any actions that we may undertake in
response to changes in interest rates, such as changes in rates paid on certain
deposit accounts based on local competitive factors, which could reduce the
actual impact on NPV and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV and net interest income requires
that we make certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates.
26
The NPV and
net interest income table presented above assumes that the composition of our
interest-rate sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and, accordingly, the
data does not reflect any actions that we may undertake in response to changes
in interest rates, such as changes in rates paid on certain deposit accounts
based on local competitive factors. The data reflects the transitory impact of
refundable subscription order receipts. The table also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or the repricing characteristics of
specific assets and liabilities. Accordingly, although the NPV and net interest
income table provides an indication of our sensitivity to interest rate changes
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chairman and Chief Executive Officer and
the President and Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of June 30, 2005. Based on that evaluation, the Company's
management, including the Chairman and Chief Executive Officer and the President
and Chief Financial Officer, concluded that the Company's disclosure controls
and procedures were effective. That evaluation did not identify any changes in
the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
other than ordinary course, routine litigation incidental to their respective
businesses.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the plan of conversion and reorganization, the Company
registered for offer and sale 24,466,250 shares of common stock, par value $0.01
per share, on a Registration Statement on Form S-1 (File Number 333-119217). The
registration statement was declared effective on April 15, 2005. In accordance
with the plan of conversion and reorganization and pursuant to the registration
statement, the shares of common stock were offered to eligible depositors and
borrowers of the Bank, the Bank's employee stock ownership plan and members of
the general public. Sandler O'Neill & Partners, L.P., was engaged to assist in
the marketing of the common stock. For their services, Sandler O'Neill &
Partners, L.P. received a fee of 0.90% of the dollar amount of shares of common
stock sold in the offering, other than shares purchased by our tax-qualified
employee benefit plans and officers, directors and employees or their immediate
families, for which no fee was paid. In addition, Sandler O'Neill & Partners,
L.P. was reimbursed for expenses, including attorney fees.
The stock offering, which commenced on April 25, 2005, was completed on June 23,
2005. The stock offering resulted in gross proceeds of $244.7 million, with the
sale of 24,466,250 shares at a price of $10.00 per share. Expenses related to
the offering were approximately $4.4 million, including the expenses paid to
Sandler O'Neill & Partners, L.P. No underwriting discounts, commissions or
finders fees were paid in connection with the offering. Net proceeds of the
offering were approximately $220.7 million.
$119.6 million of the net proceeds of the offering were retained by the Company
and $120.6 million were contributed to the Bank. The Company used $30.0 million
of its portion of the net proceeds to repay term debt, and lent $19.6 million to
the Bank's Employee Stock Ownership Plan to enable it to purchase 1,957,300
shares of common stock in the offering. The remainder of the net proceeds have
been invested in U.S. government agency securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form
10-Q and are listed on the "Index to Exhibits" immediately following the
Signatures.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKFINANCIAL CORPORATION
(Registrant)
Date: August 5, 2005
/s/ F. Morgan Gasior
------------------------------------------------
F. Morgan Gasior
Chairman of the Board, Chief Executive Officer
and President (Principal Executive Officer)
/s/ Paul A. Cloutier
------------------------------------------------
Paul A. Cloutier
Executive Vice President and Chief Financial
Officer (Principal Financial Accounting Officer)
29
INDEX TO EXHIBITS
Exhibit
Number Description
31.1 Certification of F. Morgan Gasior, Chairman of the Board, Chief
Executive Officer and President, Pursuant to Rule 13a-14(a) and Rule
15d-14(a).
31.2 Certification of Paul A. Cloutier, Executive Vice President and Chief
Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of F. Morgan Gasior, Chairman of the Board, Chief
Executive Officer and President, Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Paul A. Cloutier, Executive Vice President and Chief
Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.