BankFinancial CORP - FORM 10-Q - April 30, 2018

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EX-32 - EXHIBIT 32 - BankFinancial CORPbfin-2018033110qxex32.htm
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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 March 31, 2018
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 Charter)
 
Maryland
75-3199276
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification No.)
 
 
15W060 North Frontage Road, Burr Ridge, Illinois 60527
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (800) 894-6900
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
  
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨

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.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. At April 27, 2018, there were 17,739,054 shares of Common Stock, $0.01 par value, outstanding.


BANKFINANCIAL CORPORATION
Form 10-Q
March 31, 2018
Table of Contents
 
 
 
 
 
 


BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data) - Unaudited


 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from other financial institutions
$
10,613

 
$
13,572

Interest-bearing deposits in other financial institutions
81,963

 
114,020

Cash and cash equivalents
92,576

 
127,592

Securities, at fair value
102,170

 
93,383

Equity securities, at fair value
491

 
—

Loans receivable, net of allowance for loan losses:
March 31, 2018, $8,341 and December 31, 2017, $8,366
1,277,553

 
1,314,651

Other real estate owned, net
1,802

 
2,351

Stock in Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB"), at cost
8,290

 
8,290

Premises held-for-sale
5,581

 
5,667

Premises and equipment, net
24,628

 
24,856

Accrued interest receivable
4,900

 
4,619

Core deposit intangible
164

 
286

Bank owned life insurance
22,925

 
22,859

Deferred taxes
11,363

 
12,563

Other assets
7,486

 
8,441

Total assets
$
1,559,929

 
$
1,625,558

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
232,593

 
$
234,354

Interest-bearing
1,045,414

 
1,105,697

Total deposits
1,278,007

 
1,340,051

Borrowings
60,983

 
60,768

Advance payments by borrowers for taxes and insurance
9,558

 
11,645

Accrued interest payable and other liabilities
13,029

 
15,460

Total liabilities
1,361,577

 
1,427,924

 


 


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; 17,877,223 shares issued at March 31, 2018 and 17,958,723 issued at December 31, 2017
178

 
179

Additional paid-in capital
152,489

 
153,811

Retained earnings
45,397

 
43,274

Accumulated other comprehensive income
288

 
370

Total stockholders’ equity
198,352

 
197,634

Total liabilities and stockholders’ equity
$
1,559,929

 
$
1,625,558


See accompanying notes to the consolidated financial statements.

1

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data) - Unaudited

 
Three Months Ended
March 31,
 
2018
 
2017
Interest and dividend income
 
 
 
Loans, including fees
$
13,820

 
$
12,760

Securities
464

 
349

Other
464

 
253

Total interest income
14,748

 
13,362

Interest expense
 
 
 
Deposits
1,525

 
1,180

Borrowings
202

 
96

Total interest expense
1,727

 
1,276

Net interest income
13,021

 
12,086

Provision for (recovery of) loan losses
(258
)
 
161

Net interest income after provision for (recovery of) loan losses
13,279

 
11,925

Noninterest income
 
 
 
Deposit service charges and fees
978

 
950

Loan fee income
70

 
60

Commercial mortgage brokerage fees
41

 
—

Residential mortgage banking fees
30

 
44

Trust and insurance commissions and annuities income
213

 
249

Earnings on bank owned life insurance
66

 
63

Other
141

 
178

Total noninterest income
1,539

 
1,544

Noninterest expense
 
 
 
Compensation and benefits
5,322

 
6,352

Office occupancy and equipment
1,731

 
1,622

Advertising and public relations
143

 
381

Information technology
641

 
753

Supplies, telephone, and postage
333

 
332

Amortization of intangibles
122

 
129

Nonperforming asset management
202

 
104

Operations of other real estate owned
161

 
213

FDIC insurance premiums
119

 
187

Other
1,185

 
1,193

Total noninterest expense
9,959

 
11,266

Income before income taxes
4,859

 
2,203

Income tax expense
1,300

 
322

Net income
$
3,559

 
$
1,881

Basic earnings per common share
$
0.20

 
$
0.10

Diluted earnings per common share
$
0.20

 
$
0.10

Weighted average common shares outstanding
17,930,639

 
18,642,054

Diluted weighted average common shares outstanding
17,931,100

 
18,647,516


See accompanying notes to the consolidated financial statements.

2

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) - Unaudited

 
Three Months Ended
March 31,
 
2018
 
2017
Net income
$
3,559

 
$
1,881

Unrealized holding loss arising during the period
(104
)
 
(20
)
Tax effect
22

 
7

Net of tax
(82
)
 
(13
)
Comprehensive income
$
3,477

 
$
1,868


See accompanying notes to the consolidated financial statements.

3

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except per share data) - Unaudited


 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Unearned
Employee
Stock
Ownership
Plan
Shares
 
Accumulated
Other
Comprehen-sive
Income
 
Total
Balance at January 1, 2017
$
192

 
$
173,047

 
$
39,483

 
$
(8,318
)
 
$
376

 
$
204,780

Net income
—

 
—

 
1,881

 
—

 
—

 
1,881

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(13
)
 
(13
)
Net exercise of stock options (192,215 shares)
2

 
(1,220
)
 
—

 
—

 
—

 
(1,218
)
Prepayment of ESOP Share Acquisition Loan
(8
)
 
(7,185
)
 
 
 
8,318

 
—

 
1,125

Repurchase and retirement of common stock (232,045 shares)
(2
)
 
(3,377
)
 
—

 
—

 
—

 
(3,379
)
Cash dividends declared on common stock ($0.06 per share)
—

 
—

 
(1,155
)
 
—

 
—

 
(1,155
)
Balance at March 31, 2017
$
184

 
$
161,265

 
$
40,209

 
$
—

 
$
363

 
$
202,021

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
179

 
$
153,811

 
$
43,274

 
$
—

 
$
370

 
$
197,634

Net income
—

 
—

 
3,559

 
—

 
—

 
3,559

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(82
)
 
(82
)
Repurchase and retirement of common stock (81,500 shares)
(1
)
 
(1,322
)
 
—

 
—

 
—

 
(1,323
)
Cash dividends declared on common stock ($0.08 per share)
—

 
—

 
(1,436
)
 
—

 
—

 
(1,436
)
Balance at March 31, 2018
$
178

 
$
152,489

 
$
45,397

 
$
—

 
$
288

 
$
198,352


See accompanying notes to the consolidated financial statements.

4

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) - Unaudited

 
Three Months Ended
March 31,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
3,559

 
$
1,881

Adjustments to reconcile to net income to net cash from operating activities
 
 
 
Provision for (recovery of) loan losses
(258
)
 
161

Prepayment of ESOP Share Acquisition Loan
—

 
1,125

Depreciation and amortization
916

 
958

Amortization of premiums and discounts on securities and loans
3

 
(65
)
Amortization of core deposit intangible
122

 
129

Amortization of servicing assets
27

 
31

Net change in net deferred loan origination costs
36

 
129

Loss on sale of other real estate owned
21

 
16

Net gain on sale of loans
—

 
(7
)
Loans originated for sale
—

 
(239
)
Proceeds from sale of loans
—

 
246

Other real estate owned valuation adjustments
25

 
20

Net change in:
 
 
 
Accrued interest receivable
(281
)
 
(97
)
Earnings on bank owned life insurance
(66
)
 
(63
)
Other assets
2,037

 
1,834

Accrued interest payable and other liabilities
(2,431
)
 
(2,701
)
Net cash from operating activities
3,710

 
3,358

Cash flows from investing activities
 
 
 
Securities
 
 
 
Proceeds from maturities
27,499

 
13,623

Proceeds from principal repayments
1,030

 
637

Purchases of securities
(37,923
)
 
(17,302
)
Loans receivable
 
 
 
Loan participations sold
—

 
1,615

Principal payments on loans receivable
226,439

 
136,090

Purchase of loans
—

 
(20,406
)
Originated for investment
(189,659
)
 
(125,813
)
Proceeds of redemption of FHLB stock
—

 
3,514

Purchase of FHLB and FRB stock
—

 
(11
)
Proceeds from sale of other real estate owned
713

 
494

Purchase of premises and equipment, net
(150
)
 
(179
)
Net cash from (used in) investing activities
27,949

 
(7,738
)

Continued

5

BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) - Unaudited

 
Three Months Ended
March 31,
 
2018
 
2017
Cash flows from financing activities
 
 
 
Net change in deposits
$
(62,044
)
 
$
(10,108
)
Net change in borrowings
215

 
977

Net change in advance payments by borrowers for taxes and insurance
(2,087
)
 
(1,973
)
Repurchase and retirement of common stock
(1,323
)
 
(3,379
)
Cash dividends paid on common stock
(1,436
)
 
(1,155
)
Shares retired for tax liability
—

 
(1,200
)
Net cash used in financing activities
(66,675
)
 
(16,838
)
Net change in cash and cash equivalents
(35,016
)
 
(21,218
)
Beginning cash and cash equivalents
127,592

 
96,684

Ending cash and cash equivalents
$
92,576

 
$
75,466

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
1,694

 
$
1,243

Income taxes paid
43

 
1

Loans transferred to other real estate owned
562

 
1,936


See accompanying notes to the consolidated financial statements.

6
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois (the “Company”), is the owner of all of the issued and outstanding capital stock of BankFinancial, NA (the “Bank”). The interim unaudited consolidated financial statements include the accounts and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BFIN Asset Recovery Company, LLC (collectively, “the Company”), and 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. Such adjustments are the only adjustments reflected in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three-month period ended March 31, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018 or for any other period.
Certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
Use of Estimates: To prepare financial statements in conformity with GAAP, 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.
Reclassifications: Certain reclassifications have been made in the prior period’s financial statements to conform them to the current period’s presentation.
These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We have evaluated the impact of adopting the update and have concluded that it does not have a significant impact to our consolidated financial statements. The Company’s revenue streams that are in-scope from the update include: financed OREO sales; deposit fees, including ATM fees, overdraft fees, maintenance fees and dormancy fees; debit card fees, and trust fees. For the in-scope revenue streams, our current revenue recognition is not different than our prior revenue recognition under the update. The Company has infrequently financed an OREO sale. Our customer contracts generally do not have performance obligations and fees are assessed and collected as the transaction occurs. The Company’s fee income is not material for any individual income streams. The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue stream; as such, no cumulative effect adjustment was recorded. Refer to Note 8 - Revenue for Contracts with Customers for further discussion on the Company's accounting policies for revenue sources within the scope of ASC 606.
In January 2016, the FASB issued an update (ASU No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities). The new guidance is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for non-public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is to be required to be disclosed for financial instruments measured at amortized



7

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance became effective for public business entities for fiscal years beginning after December 15, 2017. The new pronouncement does not have a significant impact on our Statement of Operations, as we only have one equity security that was valued at $491,000 and $499,000 at March 31, 2018 and December 31, 2017, respectively. The equity security is reported separately on the Statement of Condition as a result the adoption of this pronouncement.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements. Our preliminary finding is that the new pronouncement will not have a significant impact on our consolidated financial statements as the projected minimum lease payments under existing leases subject to the new pronouncement are less than one percent of our current total assets.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”).  These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements. Our initial review indicates that we have maintained sufficient historical loan data to support the requirements of this pronouncement. In addition, we have begun tracking the average life of the various segments of our loan portfolio. We are currently evaluating various loss methodologies to determine their correlation to our various loan categories' historical performance.
In March of 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date (with an explicit, noncontingent call feature that is callable at a fixed price and on a preset dates), rather than contractual maturity date as currently required under GAAP. The ASU does not impact instruments without preset call dates such as mortgage-backed securities.  For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the ASU.  ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted.  Effective January 2017, we early adopted the pronouncement. Adoption of the new pronouncement was immaterial to the consolidated financial statements.



8

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 2 - EARNINGS PER SHARE

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned BankFinancial, NA Employee Stock Ownership Plan (the "ESOP") shares in 2017 and unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock.
 
Three Months Ended
March 31,
 
2018
 
2017
Net income available to common stockholders
$
3,559

 
$
1,881

Average common shares outstanding
17,931,579

 
19,243,941

Less:
 
 
 
Unearned ESOP shares
—

 
(600,947
)
Unvested restricted stock shares
(940
)
 
(940
)
Weighted average common shares outstanding
17,930,639

 
18,642,054

Add - Net effect of dilutive unvested restricted stock
461

 
5,462

Diluted weighted average common shares outstanding
17,931,100

 
18,647,516

Basic earnings per common share
$
0.20

 
$
0.10

Diluted earnings per common share
$
0.20

 
$
0.10

 
NOTE 3 - SECURITIES
The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income are shown below.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
March 31, 2018
 
 
 
 
 
 
 
Certificates of deposit
$
86,340

 
$
—

 
$
—

 
$
86,340

Mortgage-backed securities - residential
11,146

 
441

 
(43
)
 
11,544

Collateralized mortgage obligations - residential
4,272

 
16

 
(11
)
 
4,277

SBA-guaranteed loan participation certificates
9

 
—

 
—

 
9

 
$
101,767

 
$
457

 
$
(54
)
 
$
102,170

December 31, 2017
 
 
 
 
 
 
 
Certificates of deposit
$
75,916

 
$
—

 
$
—

 
$
75,916

Equity mutual fund
500

 
—

 
(1
)
 
499

Mortgage-backed securities - residential
11,969

 
520

 
(17
)
 
12,472

Collateralized mortgage obligations - residential
4,481

 
16

 
(11
)
 
4,486

SBA-guaranteed loan participation certificates
10

 
—

 
—

 
10

 
$
92,876

 
$
536

 
$
(29
)
 
$
93,383




9

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 3 - SECURITIES (continued)

The mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities or agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support. All securities reflected in the preceding table were classified as available-for-sale at March 31, 2018 and December 31, 2017.
The amortized cost and fair values of securities by contractual maturity are shown below. Securities not due at a single maturity date are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
March 31, 2018
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
86,340

 
$
86,340

Mortgage-backed securities - residential
11,146

 
11,544

Collateralized mortgage obligations - residential
4,272

 
4,277

SBA-guaranteed loan participation certificates
9

 
9

 
$
101,767

 
$
102,170

There were no sales of securities for the periods ended March 31, 2018 and 2017.
 
 
 
 
 
 
 
 
Securities with unrealized losses not recognized in income are as follows:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - residential
$
—

 
$
—

 
$
1,111

 
$
(43
)
 
$
1,111

 
$
(43
)
Collateralized mortgage obligations - residential
—

 
—

 
1,983

 
(11
)
 
1,983

 
(11
)
 
$
—

 
$
—

 
$
3,094

 
$
(54
)
 
$
3,094

 
$
(54
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Equity mutual fund
$
499

 
$
(1
)
 
$
—

 
$
—

 
$
499

 
$
(1
)
Mortgage-backed securities - residential
—

 
—

 
1,149

 
(17
)
 
1,149

 
(17
)
Collateralized mortgage obligations - residential
—

 
—

 
2,083

 
(11
)
 
2,083

 
(11
)
 
$
499

 
$
(1
)
 
$
3,232

 
$
(28
)
 
$
3,731

 
$
(29
)
The Company evaluates 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 marketable 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.
Certain mortgage-backed securities and collateralized mortgage obligations that the Company holds in its investment portfolio were in an unrealized loss position at March 31, 2018, but the unrealized losses were not considered significant under the Company’s impairment testing methodology. In addition, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell these securities before their anticipated recovery occurs.



10

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE

Loans receivable are as follows:
 
March 31, 2018
 
December 31, 2017
One-to-four family residential real estate
$
92,056

 
$
97,814

Multi-family mortgage
578,144

 
588,383

Nonresidential real estate
163,856

 
169,971

Construction and land
1,328

 
1,358

Commercial loans
162,564

 
152,552

Commercial leases
285,222

 
310,076

Consumer
1,494

 
1,597

 
1,284,664

 
1,321,751

Net deferred loan origination costs
1,230

 
1,266

Allowance for loan losses
(8,341
)
 
(8,366
)
Loans, net
$
1,277,553

 
$
1,314,651

The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method:
 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
—

 
$
765

 
$
765

 
$
3,576

 
$
88,480

 
$
92,056

Multi-family mortgage
—

 
3,866

 
3,866

 
947

 
577,197

 
578,144

Nonresidential real estate
—

 
1,577

 
1,577

 
—

 
163,856

 
163,856

Construction and land
—

 
32

 
32

 
—

 
1,328

 
1,328

Commercial loans
—

 
1,441

 
1,441

 
—

 
162,564

 
162,564

Commercial leases
—

 
650

 
650

 
—

 
285,222

 
285,222

Consumer
—

 
10

 
10

 
—

 
1,494

 
1,494

 
$
—

 
$
8,341

 
$
8,341

 
$
4,523

 
$
1,280,141

 
1,284,664

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
1,230

Allowance for loan losses
 
 
 
 
 
 
 
 
 
(8,341
)
Loans, net
 
 
 
 
 
 
 
 
 
 
$
1,277,553




11

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
—

 
$
850

 
$
850

 
$
4,265

 
$
93,549

 
$
97,814

Multi-family mortgage
—

 
3,849

 
3,849

 
949

 
587,434

 
588,383

Nonresidential real estate
—

 
1,605

 
1,605

 
—

 
169,971

 
169,971

Construction and land
—

 
32

 
32

 
—

 
1,358

 
1,358

Commercial loans
—

 
1,357

 
1,357

 
—

 
152,552

 
152,552

Commercial leases
—

 
655

 
655

 
—

 
310,076

 
310,076

Consumer
—

 
18

 
18

 
—

 
1,597

 
1,597

 
$
—

 
$
8,366

 
$
8,366

 
$
5,214

 
$
1,316,537

 
1,321,751

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
1,266

Allowance for loan losses
 
 
 
 
 
 
 
 
 
(8,366
)
Loans, net
 
 
 
 
 
 
 
 
 
 
$
1,314,651

Activity in the allowance for loan losses is as follows:
 
Three Months Ended
March 31,
 
2018
 
2017
Beginning balance
$
8,366

 
$
8,127

Loans charged off:
 
 
 
One-to-four family residential real estate
(97
)
 
(171
)
Multi-family mortgage
—

 
(3
)
Nonresidential real estate
—

 
(165
)
 
(97
)
 
(339
)
Recoveries:
 
 
 
One-to-four family residential real estate
99

 
6

Multi-family mortgage
8

 
11

Commercial loans
223

 
5

 
330

 
22

Net recoveries (charge-offs)
233

 
(317
)
Provision for (recovery of) loan losses
(258
)
 
161

Ending balance
$
8,341

 
$
7,971




12

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

Impaired loans
Several of the following disclosures are presented by “recorded investment,” which the FASB defines as “the amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.” The following represents the components of recorded investment:
Loan principal balance
Less unapplied payments
Plus negative unapplied balance
Less escrow balance
Plus negative escrow balance
Plus unamortized net deferred loan costs
Less unamortized net deferred loan fees
Plus unamortized premium
Less unamortized discount
Less previous charge-offs
Plus recorded accrued interest
Less reserve for uncollected interest
= Recorded investment
The following tables present loans individually evaluated for impairment by class of loans:
 
 
 
 
 
 
 
 
 
Three months ended
March 31, 2018
 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
4,211

 
$
3,556

 
$
651

 
$
—

 
$
4,002

 
$
15

Multi-family mortgage - Illinois
952

 
950

 
—

 
—

 
952

 
11

 
$
5,163

 
$
4,506

 
$
651

 
$
—

 
$
4,954

 
$
26

 
 
 
 
 
 
 
 
 
Year ended
December 31, 2017
 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
5,049

 
$
4,248

 
$
806

 
$
—

 
$
4,212

 
$
197

Multi-family mortgage - Illinois
958

 
948

 
—

 
—

 
847

 
41

 
$
6,007

 
$
5,196

 
$
806

 
$
—

 
$
5,059

 
$
238




13

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

Nonaccrual Loans
The following tables present the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans:
 
Loan Balance
 
Recorded
Investment
 
Loans Past
Due Over 90
Days, Still
Accruing
March 31, 2018
 
 
 
 
 
One-to-four family residential real estate
$
1,675

 
$
1,543

 
$
—

One-to-four family residential real estate – non-owner occupied
86

 
46

 
—

Multi-family mortgage - Illinois
375

 
369

 
—

 
$
2,136

 
$
1,958

 
$
—

December 31, 2017
 
 
 
 
 
One-to-four family residential real estate
$
3,413

 
$
1,918

 
$
—

One-to-four family residential real estate – non-owner occupied
308

 
109

 
—

Multi-family mortgage - Illinois
376

 
363

 
—

 
$
4,097

 
$
2,390

 
$
—

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some loans may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The Company’s reserve for uncollected loan interest was $76,000 and $103,000 at March 31, 2018 and December 31, 2017, respectively. When a loan is on nonaccrual status and the ultimate collectability of the total principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.



14

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

Past Due Loans
The following tables present the aging of the recorded investment of loans at March 31, 2018 by class of loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
One-to-four family residential real estate loans
$
1,875

 
$
58

 
$
1,398

 
$
3,331

 
$
68,216

 
$
71,547

One-to-four family residential real estate loans – non-owner occupied
368

 
10

 
46

 
424

 
19,676

 
20,100

Multi-family mortgage - Illinois
268

 
—

 
271

 
539

 
273,950

 
274,489

Multi-family mortgage - Other
—

 
—

 
—

 
—

 
299,725

 
299,725

Nonresidential real estate
940

 
—

 
—

 
940

 
161,265

 
162,205

Construction
—

 
—

 
—

 
—

 
1,096

 
1,096

Land
—

 
—

 
—

 
—

 
234

 
234

Commercial loans:
 
 
 
 
 
 

 
 
 

Regional commercial banking
—

 
—

 
—

 
—

 
48,160

 
48,160

Health care
—

 
—

 
—

 
—

 
69,980

 
69,980

Direct commercial lessor
—

 
—

 
—

 
—

 
44,939

 
44,939

Commercial leases:
 
 
 
 
 
 


 
 
 


Investment rated commercial leases
1,727

 
152

 
—

 
1,879

 
185,386

 
187,265

Other commercial leases
572

 
255

 
—

 
827

 
98,900

 
99,727

Consumer
—

 
22

 
—

 
22

 
1,481

 
1,503

 
$
5,750

 
$
497

 
$
1,715

 
$
7,962

 
$
1,273,008

 
$
1,280,970




15

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

The following tables present the aging of the recorded investment of loans at December 31, 2017 by class of loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
One-to-four family residential real estate loans
$
86

 
$
99

 
$
1,801

 
$
1,986

 
$
74,216

 
$
76,202

One-to-four family residential real estate loans – non-owner occupied
10

 
3

 
86

 
99

 
20,944

 
21,043

Multi-family mortgage - Illinois
172

 
—

 
364

 
536

 
287,171

 
287,707

Multi-family mortgage - Other
—

 
—

 
—

 
—

 
296,440

 
296,440

Nonresidential real estate
608

 
—

 
—

 
608

 
166,071

 
166,679

Construction
—

 
—

 
—

 
—

 
1,103

 
1,103

Land
—

 
—

 
—

 
—

 
259

 
259

Commercial loans:
 
 
 
 
 
 

 
 
 

Regional commercial banking
—

 
—

 
—

 
—

 
40,935

 
40,935

Health care
—

 
—

 
—

 
—

 
71,738

 
71,738

Direct commercial lessor
—

 
—

 
—

 
—

 
40,237

 
40,237

Commercial leases:
 
 
 
 
 
 


 
 
 


Investment rated commercial leases
934

 
—

 
—

 
934

 
207,747

 
208,681

Other commercial leases
288

 
—

 
—

 
288

 
102,873

 
103,161

Consumer
—

 
—

 
—

 
—

 
1,605

 
1,605

 
$
2,098

 
$
102

 
$
2,251

 
$
4,451

 
$
1,311,339

 
$
1,315,790

Troubled Debt Restructurings
The Company evaluates loan extensions or modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a Troubled Debt Restructuring ("TDR"). In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.
The Company had $17,000 of TDRs at March 31, 2018 and December 31, 2017. No specific valuation reserves were allocated to those loans at March 31, 2018 and December 31, 2017. The Company had no outstanding commitments to borrowers whose loans were classified as TDRs at either date.
The following table presents loans classified as TDRs:
 
March 31, 2018
 
December 31, 2017
One-to-four family residential real estate - nonaccrual
$
17

 
$
17

During the three months ended March 31, 2018 and 2017, there were no loans modified and classified as TDRs.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A TDR is considered to be in payment default once it is 90 days contractually past due under the modified terms.
There were no payment defaults on TDRs during the three months ended March 31, 2018 and 2017 within twelve months following the modification.
 
 
 
 
 
 
 
 



16

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

There were no loan modifications during the three months ended March 31, 2018. There were certain loan modifications during the three months ended March 31, 2017 that did not meet the definition of a TDR. These loans had a total recorded investment of $133,000 at March 31, 2017. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans categorized as Substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time. The risk rating guidance published by the Office of the Comptroller of the Currency clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated Substandard.
Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans.



17

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE (continued)

As of March 31, 2018, based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard
 
Nonaccrual
 
Total
One-to-four family residential real estate loans
$
70,004

 
$
—

 
$
323

 
$
1,539

 
$
71,866

One-to-four family residential real estate loans – non-owner occupied
20,105

 
—

 
39

 
46

 
20,190

Multi-family mortgage loans - Illinois
275,552

 
—

 
222

 
370

 
276,144

Multi-family mortgage loans - Other
302,000

 
—

 
—

 
—

 
302,000

Nonresidential real estate loans
163,707

 
—

 
149

 
—

 
163,856

Construction loans
1,093

 
—

 
—

 
—

 
1,093

Land loans
235

 
—

 
—

 
—

 
235

Commercial loans:
 
 
 
 
 
 
 
 

Regional commercial banking
43,467

 
4,644

 
—

 
—

 
48,111

Health care
67,669

 
—

 
2,258

 
—

 
69,927

Direct commercial lessor
44,526

 
—

 
—

 
—

 
44,526

Commercial leases:
 
 
 
 
 
 
 
 


Investment rated commercial leases
186,052

 
—

 
—

 
—

 
186,052

Other commercial leases
99,170

 
—

 
—

 
—

 
99,170

Consumer
1,494

 
—

 
—

 
—

 
1,494


$
1,275,074

 
$
4,644

 
$
2,991

 
$
1,955

 
$
1,284,664

 
As of December 31, 2017, the risk categories of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard
 
Nonaccrual
 
Total
One-to-four family residential real estate loans
$
74,437

 
$
—

 
$
255

 
$
1,914

 
$
76,606

One-to-four family residential real estate loans – non-owner occupied
21,059

 
—

 
40

 
109

 
21,208

Multi-family mortgage loans - Illinois
290,765

 
—

 
225

 
368

 
291,358

Multi-family mortgage loans - Other
297,025

 
—

 
—

 
—

 
297,025

Nonresidential real estate loans
169,817

 
—

 
154

 
—

 
169,971

Construction loans
1,099

 
—

 
—

 
—

 
1,099

Land loans
259

 
—

 
—

 
—

 
259

Commercial loans:
 
 
 
 
 
 
 
 

Regional commercial banking
36,373

 
4,528

 
—

 
—

 
40,901

Health care
69,480

 
—

 
2,248

 
—

 
71,728

Direct commercial lessor
39,923

 
—

 
—

 
—

 
39,923

Commercial leases:
 
 
 
 
 
 
 
 


Investment rated commercial leases
207,460

 
—

 
—

 
—

 
207,460

Other commercial leases
102,616

 
—

 
—

 
—

 
102,616

Consumer
1,597

 
—

 
—

 
—

 
1,597

 
$
1,311,910

 
$
4,528

 
$
2,922

 
$
2,391

 
$
1,321,751





18

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 5 - OTHER REAL ESTATE OWNED


Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as other real estate owned ("OREO") until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.
 
March 31, 2018
 
December 31, 2017
 
Balance
 
Valuation Allowance
 
Net OREO Balance
 
Balance
 
Valuation Allowance
 
Net OREO Balance
One–to–four family residential
$
935

 
$
—

 
$
935

 
$
836

 
$
(9
)
 
$
827

Nonresidential real estate
1,140

 
(277
)
 
863

 
1,772

 
(252
)
 
1,520

Land
48

 
(44
)
 
4

 
48

 
(44
)
 
4

 
$
2,123

 
$
(321
)
 
$
1,802

 
$
2,656

 
$
(305
)
 
$
2,351

The following represents the roll forward of OREO and the composition of OREO properties:
 
For the Three Months Ended March 31,
 
2018
 
2017
Beginning balance
$
2,351

 
$
3,895

New foreclosed properties
562

 
1,936

Valuation adjustments
(25
)
 
(20
)
Sales and payments
(1,086
)
 
(510
)
Ending balance
$
1,802

 
$
5,301

Activity in the valuation allowance is as follows:
 
For the Three Months Ended March 31,
 
2018
 
2017
Beginning balance
$
305

 
$
449

Additions charged to expense
25

 
20

Reductions from sales of OREO
(9
)
 
(59
)
Ending balance
$
321

 
$
410

At March 31, 2018, the balance of OREO included no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title. At December 31, 2017 the balance of OREO included $352,000 foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title. At March 31, 2018 and December 31, 2017, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $1.3 million and $1.5 million, respectively.




19

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE


Securities sold under agreements to repurchase, included with borrowings on the consolidated balance sheet, are shown below.
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater Than 90 days
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
Repurchase agreements and repurchase-to-maturity transactions
 
$
983

 
$
—

 
$
—

 
$
—

 
$
983

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition
 
$
983

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Repurchase agreements and repurchase-to-maturity transactions
 
$
768

 
$
—

 
$
—

 
$
—

 
$
768

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition
 
 
 
$
768

Securities sold under agreements to repurchase were secured by mortgage-backed securities with a carrying amount of $3.3 million and $3.7 million at March 31, 2018 and December 31, 2017, respectively. Also included in total borrowings were advances from the FHLB of $60.0 million at March 31, 2018 and December 31, 2017.
Because security values fluctuate due to market conditions, the Company has no control over the market value of securities sold under agreements to repurchase.  The Company is contractually obligated to promptly transfer additional securities to the counterparty if the market value of the securities falls below the repurchase price.
NOTE 7 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
•
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security (Level 1). If Level 1 measurement inputs 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 (Level 2). 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 (Level 2).
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.



20

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 7 - FAIR VALUE (continued)

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2018
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$
—

 
$
86,340

 
$
—

 
$
86,340

Equity mutual fund
491

 
—

 
—

 
491

Mortgage-backed securities – residential
—

 
11,544

 
—

 
11,544

Collateralized mortgage obligations – residential
—

 
4,277

 
—

 
4,277

SBA-guaranteed loan participation certificates
—

 
9

 
—

 
9

 
$
491

 
$
102,170

 
$
—

 
$
102,661

December 31, 2017
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$
—

 
$
75,916

 
$
—

 
$
75,916

Equity mutual fund
499

 
—

 
—

 
499

Mortgage-backed securities - residential
—

 
12,472

 
—

 
12,472

Collateralized mortgage obligations – residential
—

 
4,486

 
—

 
4,486

SBA-guaranteed loan participation certificates
—

 
10

 
—

 
10

 
$
499

 
$
92,884

 
$
—

 
$
93,383




21

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 7 - FAIR VALUE (continued)

The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:
 
Fair Value Measurement Using
 
 
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2018
 
 
 
 
 
 
 
Other real estate owned - nonresidential real estate
$
—

 
$
—

 
$
409

 
$
409

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate
$
—

 
$
—

 
$
102

 
$
102

Nonresidential real estate
—

 
—

 
814

 
814

 
$
—

 
$
—

 
$
916

 
$
916

At March 31, 2018 and December 31, 2017 there were no impaired loans that were measured for impairment using the fair value of the collateral for collateral–dependent loans and which had specific valuation allowances.
OREO, which is carried at the lower of cost or fair value less costs to sell, had a carrying value of $494,000 less a valuation allowance of $85,000, or $409,000, at March 31, 2018, compared to a carrying value of $1.2 million less a valuation allowance of $261,000, or $916,000, at December 31, 2017. There were $25,000 and $20,000 of valuation adjustments of OREO recorded for the three months ended March 31, 2018 and 2017, respectively.
The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:
 
Fair Value
 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
March 31, 2018
 
 
 
 
 
 
 
Other real estate owned - nonresidential real estate loans
$
409

 
Sales comparison
 
Comparison between sales and income approaches
 
12.70% to 26.77%
(13.7%)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Other real estate owned
 
 
 
 
 
 
 
One-to-four family residential real estate
$
102

 
Sales comparison
 
Discount applied to valuation
 
5.6%
Nonresidential real estate
814

 
Sales comparison
 
Comparison between sales and income approaches
 
-3.66% to 15.22%
(11.0%)
 
$
916

 
 
 
 
 
 



22

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 7 - FAIR VALUE (continued)

The carrying amount and estimated fair value of financial instruments are as follows:
 
 
 
Fair Value Measurements at
March 31, 2018 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
92,576

 
$
10,613

 
$
81,963

 
$
—

 
$
92,576

Securities
102,661

 
491

 
102,170

 
—

 
102,661

Loans receivable, net of allowance for loan losses
1,277,553

 
—

 
—

 
1,276,635

 
1,276,635

FHLB and FRB stock
8,290

 
—

 
—

 
—

 
N/A

Accrued interest receivable
4,900

 
—

 
4,900

 
—

 
4,900

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
232,593

 
$
—

 
$
232,593

 
$
—

 
$
232,593

NOW and money market accounts
573,886

 
—

 
573,886

 
—

 
573,886

Savings deposits
160,093

 
—

 
160,093

 
—

 
160,093

Certificates of deposit
311,435

 
—

 
308,904

 
—

 
308,904

Borrowings
60,983

 
—

 
60,832

 
—

 
60,832

Accrued interest payable
180

 
—

 
180

 
—

 
180

 
 
 
Fair Value Measurements at
 December 31, 2017 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
127,592

 
$
13,572

 
$
114,020

 
$
—

 
$
127,592

Securities
93,383

 
499

 
92,884

 
—

 
93,383

Loans receivable, net of allowance for loan losses
1,314,651

 
—

 
1,323,139

 
—

 
1,323,139

FHLB and FRB stock
8,290

 
—

 
—

 
—

 
N/A

Accrued interest receivable
4,619

 
—

 
4,619

 
—

 
4,619

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
234,354

 
$
—

 
$
234,354

 
$
—

 
$
234,354

NOW and money market accounts
589,238

 
—

 
589,238

 
—

 
589,238

Savings deposits
160,501

 
—

 
160,501

 
—

 
160,501

Certificates of deposit
355,958

 
—

 
353,969

 
—

 
353,969

Borrowings
60,768

 
—

 
60,627

 
—

 
60,627

Accrued interest payable
147

 
—

 
147

 
—

 
147

For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents: The estimated fair values for cash and cash equivalents are based on their carrying value due to the short-term nature of these assets.
Loans: At March 31, 2018, the exit price observations are obtained from an independent third-party using its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The valuation is based on the probability of default, loss given default, recovery delay, prepayment, and discount rate assumptions. The new methodology is a result of the adoption of ASU 2016-01.



23

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 7 - FAIR VALUE (continued)

At December 31, 2017, the estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.
FHLB and FRB Stock: It is not practicable to determine the fair value of FHLB and FRB stock due to the restrictions placed on their transferability.
Deposit Liabilities: The estimated fair value for certificates of deposit has been determined by calculating the present value of future cash flows based on estimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of noninterest-bearing demand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level that approximates the local market area. Additionally, these deposits can be withdrawn on demand.
Borrowings: The estimated fair values of advances from the FHLB and notes payable are based on current market rates for similar financing. The estimated fair value of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.
Accrued Interest: The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of unfunded loan commitments, standby letters of credit, and unused lines of credit. The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.
While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.
NOTE 8 – REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Company's sources of noninterest income for the three months ended March 31, 2018 and 2017. Items outside of the scope of the ASC 606 are noted as such.
 
Three Months Ended
March 31,
 
2018
 
2017
Deposit service charges and fees
$
978

 
$
950

Loan fee income (1)
70

 
60

Commercial mortgage brokerage fees (1)
41

 
—

Residential mortgage banking fees (1)
30

 
44

Trust and insurance commissions and annuities income
213

 
249

Earnings on bank owned life insurance (1)
66

 
63

Other (1)
141

 
178

Total noninterest income
$
1,539

 
$
1,544

(1)    Not within the scope of ASC 606
A description of the Company's revenue streams accounted for under ASC 606 follows:
Deposit service charges and fees: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills



24

BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 8 – REVENUE FROM CONTRACTS WITH CUSTOMERS (continued)


the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.
Interchange Income: The Company earns interchange fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income for the three months ended March 31, 2018 and 2017 were $361,000 and $350,000, respectively. These are included in deposit service charges and fees.
Trust and insurance commissions and annuities income: The Company earns trust, insurance commissions and annuities income from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided include fees the Company earns, which are based on a fixed fee schedule, are recognized when the services are rendered.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. OREO sales for the three months ended March 31, 2018 and March 31, 2017 were not financed by the Bank.
NOTE 9 - SUBSEQUENT EVENTS
In April 2018, the Bank recorded income from a death benefit on BOLI of $1.4 million related to the death of a former Bank executive.
On April 23, 2018, the Bank sold its office building located at 15W060 North Frontage Road, Burr Ridge, Illinois, for a purchase price of $6 million.  A net gain in the approximate amount $100,000will be recorded in the second quarter of 2018 in connection with the sale.  Concurrently with the sale, the Bank entered into a six-month lease of the office building with the purchaser, and intends to lease space in a different building following the expiration of the lease with the purchaser.  The Company shares space with the Bank in the office building pursuant to an expense allocation agreement.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Forward Looking Statements
This Quarterly Report on Form 10-Q contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “expect,” “estimate,” “intend,” “anticipate,” “preliminary,” “project,” “plan,” or similar expressions. Forward looking statements speak only as of the date made. They are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.
Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) less than anticipated loan growth due to intense competition for high quality loans and leases, particularly in terms of pricing and credit underwriting,



25


or a dearth of borrowers who meet our underwriting standards; (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, in the Chicago metropolitan area in particular and in other market areas where we operate 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, 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) the impact of new legislation or regulatory changes, including the Dodd-Frank Act and Basel III, 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; and (xvi) privacy and cybersecurity risks, including the risks of business interruption and the compromise of confidential customer information resulting from intrusions.
These risks and uncertainties, together with the Risk Factors and other information set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and this Quarterly Report on Form 10-Q, as well as other filings we make with the SEC, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled “Critical Accounting Policies” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC.
Overview
Results of operations improved in the first quarter of 2018 due to a more favorable mix of loans and deposits, combined with a continuing focus on risk allocation within loan portfolio segments. Total loans declined as strong originations in commercial and industrial loans and modest originations of multi-family loans and commercial leases were offset by elevated repayments of lower-yielding commercial leases and multi-family loans. Total commercial and industrial loans increased by 7% on a linked-quarter basis despite significant volatility in line usage during the quarter. We expect continued growth in commercial and industrial loan originations and a resumption of growth in multi-family loans and commercial lease originations in the second quarter of 2018 and during the remainder of the year.
We recorded a slight decrease to our allowance for loan losses in the first quarter of 2018 due to recoveries on previously charged-off loans. Based on the current loan portfolio composition and activity, we expect net interest margin to be within a range of 3.40% to 3.60% depending on loan growth and balance composition, and deposit portfolio composition and growth.
Noninterest income decreased modestly due to seasonal factors in deposit-account related fee income, and lower loan fee income related to loan originations activity. Additional growth in commercial and industrial lending, together with new product development within commercial leasing, multi-family/commercial real estate and trust operations, may contribute to growth in non-interest income in future quarters.
Noninterest expense increased due to higher compensation related to base compensation and annual performance reviews, and increased expenses relating to collection litigation and the final resolution of OREO properties. Other non-interest expenses remained well-contained.



26


Our ratio of nonperforming loans to total loans was 0.15% and our ratio of non-performing assets to total assets was 0.24% at March 31, 2018. We expect continued reductions of the OREO balance and scheduled pending resolutions may further improve our asset quality.



27


SELECTED FINANCIAL DATA
The following summary information is derived from the consolidated financial statements of the Company. For additional information, reference is made to the Consolidated Financial Statements of the Company and related notes included elsewhere in this Quarterly Report.
 
March 31, 2018
 
December 31, 2017
 
Change
 
(Dollars in thousands)
Selected Financial Condition Data:
 
 
 
 
 
Total assets
$
1,559,929

 
$
1,625,558

 
$
(65,629
)
Loans, net
1,277,553

 
1,314,651

 
(37,098
)
Securities, at fair value
102,661

 
93,383

 
9,278

Other real estate owned, net
1,802

 
2,351

 
(549
)
Deposits
1,278,007

 
1,340,051

 
(62,044
)
Borrowings
60,983

 
60,768

 
215

Equity
198,352

 
197,634

 
718


 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Selected Operating Data:
 
 
 
 
 
Interest income
$
14,748

 
$
13,362

 
$
1,386

Interest expense
1,727

 
1,276

 
451

Net interest income
13,021

 
12,086

 
935

Provision for (recovery of) loan losses
(258
)
 
161

 
(419
)
Net interest income after provision for (recovery of) loan losses
13,279

 
11,925

 
1,354

Noninterest income
1,539

 
1,544

 
(5
)
Noninterest expense
9,959

 
11,266

 
(1,307
)
Income before income tax expense
4,859

 
2,203

 
2,656

Income tax expense
1,300

 
322

 
978

Net income
$
3,559

 
$
1,881

 
$
1,678




28


 
Three Months Ended
March 31,
 
2018
 
2017
Selected Financial Ratios and Other Data:
 
 
 
Performance Ratios:
 
 
 
Return on assets (ratio of net income to average total assets) (1)
0.90
%
 
0.47
%
Return on equity (ratio of net income to average equity) (1)
7.13

 
3.66

Average equity to average assets
12.62

 
12.87

Net interest rate spread (1) (2)
3.38

 
3.15

Net interest margin (1) (3)
3.53

 
3.26

Efficiency ratio (4)
68.40

 
82.66

Noninterest expense to average total assets (1)
2.52

 
2.82

Average interest-earning assets to average interest-bearing liabilities
132.29

 
132.57

Dividends declared per share
$
0.08

 
$
0.06

Dividend payout ratio
40.35
%
 
61.42
%
 
At March 31, 2018
 
At December 31, 2017
Asset Quality Ratios:
 
 
 
Nonperforming assets to total assets (5)
0.24
%
 
0.29
%
Nonperforming loans to total loans
0.15

 
0.18

Allowance for loan losses to nonperforming loans
426.00

 
350.04

Allowance for loan losses to total loans
0.65

 
0.63

Capital Ratios:
 
 
 
Equity to total assets at end of period
12.72
%
 
12.16
%
Tier 1 leverage ratio (Bank only)
11.60
%
 
11.08
%
Other Data:
 
 
 
Number of full-service offices
19

 
19

Employees (full-time equivalents)
237

 
236

(1)
Ratios annualized.
(2)
The net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the period.
(3)
The net interest margin represents net interest income divided by average total interest-earning assets for the period.
(4)
The efficiency ratio represents noninterest expense, divided by the sum of net interest income and noninterest income.
(5)
Nonperforming assets include nonperforming loans and other real estate owned.
Comparison of Financial Condition at March 31, 2018 and December 31, 2017
Total assets decreased $65.6 million, or 4.0%, to $1.560 billion at March 31, 2018, from $1.626 billion at December 31, 2017. The decrease in total assets was primarily due to decreases in cash and cash equivalents and loans. Cash and cash equivalents decreased $35.0 million, or 27.4%, to $92.6 million at March 31, 2018, from $127.6 million at December 31, 2017. Loans decreased $37.1 million, or 2.8%, to $1.278 billion at March 31, 2018, from $1.315 billion at December 31, 2017. Partially offsetting the decreases in cash and cash equivalents and loans was an increase in securities of $9.3 million, or 9.9%, to $102.7 million at March 31, 2018, from $93.4 million at December 31, 2017.
Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, commercial, construction and land loans, and commercial leases), which together totaled 92.7% of gross loans at March 31, 2018. Commercial loans increased by $10.0 million during the three months ended March 31, 2018. Multi-family mortgage loans, nonresidential real estate loans, and commercial leases each decreased during the three months ended March 31, 2018. Multi-family mortgage loans decreased $10.2 million, or 1.7%; nonresidential real estate loans decreased $6.1 million, or 3.6%; and commercial leases decreased $24.9 million, or 8.0%. Our primary lending area consists of the counties in the State of Illinois where our branch offices are located, and contiguous counties. We derive the most significant portion of our revenues from these geographic areas. We also



29


engage in multi-family mortgage lending activities in carefully selected metropolitan areas outside our primary lending area, and engage in certain types of commercial lending and leasing activities on a nationwide basis. At March 31, 2018, $268.6 million, or 46.5%, of our multi-family mortgage loans were in the Metropolitan Statistical Area for Chicago, Illinois; $72.8 million, or 12.6%, were in the Metropolitan Statistical Area for Dallas, Texas; $56.8 million, or 9.8%, were in the Metropolitan Statistical Area for Denver, Colorado; $33.3 million, or 5.8%, were in the Metropolitan Statistical Area for Tampa, Florida; and $17.1 million, or 3.0%, were in the Metropolitan Statistical Area for Minneapolis, Minnesota. This information reflects the location of the collateral, but does not necessarily reflect the location of the borrower.
Total liabilities decreased $66.3 million, or 4.6%, to $1.362 billion at March 31, 2018, from $1.428 billion at December 31, 2017, primarily due to decreases in deposits, due in part to planned non-renewals of maturing wholesale certificates of deposits. Total deposits decreased $62.0 million, or 4.6%, to $1.278 billion at March 31, 2018, from $1.340 billion at December 31, 2017. Certificates of deposit decreased $44.5 million, or 12.5%, to $311.4 million at March 31, 2018, from $356.0 million at December 31, 2017, primarily due to a $53.0 million decrease in wholesale certificates of deposit. Money market accounts decreased $9.0 million, or 3.0%, to $290.6 million at March 31, 2018, from $299.6 million at December 31, 2017. Interest-bearing NOW accounts decreased $6.3 million, or 2.2%, to $283.3 million at March 31, 2018, from $289.7 million at December 31, 2017. Noninterest-bearing demand deposits decreased $1.8 million, or 0.8%, to $232.6 million at March 31, 2018, from $234.4 million at December 31, 2017 and savings accounts decreased $408,000, or 0.3%, to $160.1 million at March 31, 2018, from $160.5 million at December 31, 2017. Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) were 75.6% and 73.4% of total deposits at March 31, 2018 and December 31, 2017, respectively.
Total stockholders’ equity was $198.4 million at March 31, 2018, compared to $197.6 million at December 31, 2017. The increase in total stockholders’ equity was due to net income of $3.6 million that we recorded for the three months ended March 31, 2018, partially offset by our repurchase of 81,500 shares of our common stock during the three months ended 2018 at a total cost of $1.3 million and our declaration and payment of cash dividends totaling $1.4 million during the same period.
Operating Results for the Three Months Ended March 31, 2018 and 2017
Net Income. Net income was $3.6 million for the three months ended March 31, 2018, compared to net income of $1.9 million for the three months ended March 31, 2017. Earnings per basic and fully diluted share of common stock was $0.20 for the three months ended March 31, 2018, compared to $0.10 for the three months ended March 31, 2017.
Net Interest Income. Net interest income was $13.0 million for the three months ended March 31, 2018, compared to $12.1 million for the three months ended March 31, 2017. The increase in net interest income reflected a $1.4 million, or 10.4%, increase in interest income, which was partially offset by a $451,000, or 35.3%, increase in interest expense.
The increase in interest income was primarily attributable to an increase in the average yield on interest-earning assets. The yield on interest-earning assets increased 39 basis points to 4.00% for the three months ended March 31, 2018, from 3.61% for the same period in 2017. The cost of interest-bearing liabilities increased 16 basis points to 0.62% for the three months ended March 31, 2018, from 0.46% for the same period in 2017. Total average interest-earning assets decreased $5.5 million, or 0.4%, to $1.497 billion for the three months ended March 31, 2018, from $1.502 billion for the same period in 2017. The average yield on commercial loans and leases originated in the first quarter of 2018 increased to 5.61%, from 5.12% for commercial loans and leases originated in the fourth quarter of 2017. Our net interest rate spread increased by 23 basis points to 3.38% for the three months ended March 31, 2018, from 3.15% for the same period in 2017. Our net interest margin increased by 27 basis points to 3.53% for the three months ended March 31, 2018, from 3.26% for the same period in 2017.



30


Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses, discounts and premiums and purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
For the Three Months Ended March 31,
 
2018
 
2017
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,294,387

 
$
13,820

 
4.33
%
 
$
1,313,299

 
$
12,760

 
3.94
%
Securities
103,928

 
464

 
1.81

 
113,756

 
349

 
1.24

Stock in FHLB and FRB
8,289

 
105

 
5.14

 
9,158

 
99

 
4.38

Other
90,078

 
359

 
1.62

 
65,933

 
154

 
0.95

Total interest-earning assets
1,496,682

 
14,748

 
4.00

 
1,502,146

 
13,362

 
3.61

Noninterest-earning assets
85,151

 
 
 
 
 
93,045

 
 
 
 
Total assets
$
1,581,833

 
 
 
 
 
$
1,595,191

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
160,148

 
47

 
0.12

 
$
160,456

 
43

 
0.11

Money market accounts
294,504

 
379

 
0.52

 
307,121

 
273

 
0.36

NOW accounts
282,005

 
140

 
0.20

 
263,286

 
121

 
0.19

Certificates of deposit
333,978

 
959

 
1.16

 
352,929

 
743

 
0.85

Total deposits
1,070,635

 
1,525

 
0.58

 
1,083,792

 
1,180

 
0.44

Borrowings
60,737

 
202

 
1.35

 
49,306

 
96

 
0.79

Total interest-bearing liabilities
1,131,372

 
1,727

 
0.62

 
1,133,098

 
1,276

 
0.46

Noninterest-bearing deposits
226,936

 
 
 
 
 
235,167

 
 
 
 
Noninterest-bearing liabilities
23,853

 
 
 
 
 
21,547

 
 
 
 
Total liabilities
1,382,161

 
 
 
 
 
1,389,812

 
 
 
 
Equity
199,672

 
 
 
 
 
205,379

 
 
 
 
Total liabilities and equity
$
1,581,833

 
 
 
 
 
$
1,595,191

 
 
 
 
Net interest income
 
 
$
13,021

 
 
 
 
 
$
12,086

 
 
Net interest rate spread (2)
 
 
 
 
3.38
%
 
 
 
 
 
3.15
%
Net interest-earning assets (3)
$
365,310

 
 
 
 
 
$
369,048

 
 
 
 
Net interest margin (4)
 
 
 
 
3.53
%
 
 
 
 
 
3.26
%
Ratio of interest-earning assets to interest-bearing liabilities
132.29
%
 
 
 
 
 
132.57
%
 
 
 
 
(1)
Annualized.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.



31


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 recovery of loan losses of $258,000 for the three months ended March 31, 2018, compared to a provision for loan losses of $161,000 for the same period in 2017. The provision for or recovery of loan losses is a function of the allowance for loan loss methodology that we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $25,000, or 0.3%, to $8.3 million at March 31, 2018, from $8.4 million at December 31, 2017. There was no reserve established for loans individually evaluated for impairment for the three months ended March 31, 2018 or for the three months ended December 31, 2017. Net recoveries were $233,000 for the three months ended March 31, 2018.
The allowance for loan losses as a percentage of nonperforming loans was 426.00% at March 31, 2018, compared to 350.04% at December 31, 2017.
Noninterest Income
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
978

 
$
950

 
$
28

Loan fee income
70

 
60

 
10

Commercial mortgage brokerage fees
41

 
—

 
41

Residential mortgage banking fees
30

 
44

 
(14
)
Trust and insurance commissions and annuities income
213

 
249

 
(36
)
Earnings on bank owned life insurance
66

 
63

 
3

Other
141

 
178

 
(37
)
Total noninterest income
$
1,539

 
$
1,544

 
$
(5
)
Noninterest income was $1.5 million for each of the three month periods ended March 31, 2018 and 2017. Deposit service charges and fees increased $28,000, or 2.9% to $978,000 for the three months ended March 31, 2018, compared to $950,000 for the three months ended March 31, 2017. We recorded $41,000 in commercial mortgage brokerage fees associated with commercial loans placed with other institutions for the three months ended March 31, 2018, while residential mortgage banking fees decreased $14,000 to $30,000 for the three months ended March 31, 2018. The majority of the loans the Company originates are commercial-related loans, such as multi-family, nonresidential real estate, commercial, construction and land loans, and commercial leases. The Company no longer originates one-to-four family residential mortgage loans. Trust and insurance commissions and annuities income declined by $36,000, or 14.5%, to $213,000 for the three months ended March 31, 2018, due to lower sales of annuity products and property and casualty insurance, related in part to the consolidation of our Wealth Management Department into our Trust Department. Other income decreased $37,000, or 20.8%, to $141,000 for the three months ended March 31, 2018, compared to $178,000 for the three months ended March 31, 2017.



32


Noninterest Expense
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
5,322

 
$
6,352

 
$
(1,030
)
Office occupancy and equipment
1,731

 
1,622

 
109

Advertising and public relations
143

 
381

 
(238
)
Information technology
641

 
753

 
(112
)
Supplies, telephone and postage
333

 
332

 
1

Amortization of intangibles
122

 
129

 
(7
)
Nonperforming asset management
202

 
104

 
98

Loss on sale other real estate owned
21

 
16

 
5

Valuation adjustments of other real estate owned
25

 
20

 
5

Operations of other real estate owned
115

 
177

 
(62
)
FDIC insurance premiums
119

 
187

 
(68
)
Other
1,185

 
1,193

 
(8
)
Total noninterest expense
$
9,959

 
$
11,266

 
$
(1,307
)
Noninterest expense decreased by $1.3 million, or 11.6%, to $10.0 million for the three months ended March 31, 2018, from $11.3 million for the same period in 2017. Compensation and benefits expense decreased $1.0 million, primarily due to our recording of a one-time, non-cash, non-tax deductible equity compensation expense of $1.1 million in 2017 related to the termination of the ESOP and the repayment of the ESOP’s Share Acquisition Loan. Office occupancy and equipment expense increased $109,000, or 6.7%, to $1.7 million for the three months ended March 31, 2018, from $1.6 million for the same period in 2017, primarily due to $122,000 increase in snow removal expense. Advertising and public relations expense decreased $238,000, or 62.5%, to $143,000 for the three months ended March 31, 2018, from $381,000 for the same period in 2017. Our advertising and public relations expense for the three months ended March 31, 2017 included $251,000 of expense for direct mail marketing, website, outdoor advertising and magazine/newspaper print advertising, compared to $39,400 for the three months ended March 31, 2018. Information technology expense decreased $112,000, or 14.9%, to $641,000 for the three months ended March 31, 2018, from $753,000 for the same period in 2017. Nonperforming asset management expense increased $98,000, or 94.2%, to $202,000 for the three months ended March 31, 2018, from $104,000 for the same period in 2017, primarily due to an increase of $90,000 in legal expense related to collection activities. Valuation adjustments for OREO totaled $25,000 for the three months ended March 31, 2018, compared to $20,000 for the same period in 2017. Operations of OREO decreased $62,000, or 35.0%, to $115,000 for the three months ended March 31, 2018, primarily due to decreased real estate taxes and increased rental income.
Income Taxes
For the three months ended March 31, 2018, we recorded income tax expense of $1.3 million, due to an increase in pre-tax income compared to $322,000 for the three months ended March 31, 2017. Our combined state and federal effective tax rate for the three months ended March 31, 2018 was 26.8% versus a normalized effective tax rate of 38.8% for fourth quarter of 2017 before the enactment of the Tax Cuts and Jobs Act of 2017.
.



33


Nonperforming Loans and Assets
We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we place loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six consecutive months of contractual payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At March 31, 2018, we had no loans in this category.
We typically obtain new third–party appraisals or collateral valuations when we place a loan on nonaccrual status, conduct impairment testing or conduct a TDR analysis unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.
Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.
As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as–is”, “as–stabilized” or “as–completed” basis is most likely to produce the highest net realizable value. If we determine that the “as–stabilized” or “as–completed” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of March 31, 2018, substantially all impaired real estate loan collateral and OREO were valued on an “as–is basis.”
Estimates of the net realizable value of real estate collateral also include a deduction for the expected costs to sell the collateral or such other deductions from the cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, we generally apply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs to sell the collateral. For OREO, we generally apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.



34


Nonperforming Assets Summary
The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets.
 
March 31, 2018
 
December 31, 2017
 
Quarter Change
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
One-to-four family residential real estate
$
1,589

 
$
2,027

 
$
(438
)
Multi-family mortgage
369

 
363

 
6

 
1,958

 
2,390

 
(432
)
Other real estate owned:
 
 
 
 
 
One-to-four family residential
935

 
827

 
108

Nonresidential real estate
863

 
1,520

 
(657
)
Land
4

 
4

 
—

 
1,802

 
2,351

 
(549
)
Total nonperforming assets
$
3,760

 
$
4,741

 
$
(981
)
Ratios:
 
 
 
 
 
Nonperforming loans to total loans
0.15
%
 
0.18
%
 
 
Nonperforming assets to total assets
0.24

 
0.29

 
 
Nonperforming Assets
Nonperforming assets decreased $1.0 million to $3.8 million at March 31, 2018 from $4.7 million at December 31, 2017. Although we experience occasional isolated instances of new nonaccrual loans, we believe that we will maintain the trends favoring strong asset quality.
Two residential loans with an aggregate book balance of $562,000 were transferred from nonaccrual loans to OREO during the three months ended March 31, 2018. We continue to experience modest quantities of defaults on residential real estate loans principally due either to the borrower’s personal financial condition or deteriorated collateral value.
Liquidity and Capital Resources
Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities and lease payments. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize FHLB advances as an additional sources of funds. We had $60.0 million of FHLB advances at March 31, 2018 and December 31, 2017.
BankFinancial Corporation is a separate legal entity from BankFinancial NA. The Company must provide for its own liquidity to pay any dividends to its shareholders and to repurchase shares of its common stock, and for other corporate purposes. Its primary source of liquidly is dividend payments it receives from the Bank. The Bank's ability to pay dividends to the Company is subject to regulatory limitations. At March 31, 2018, the Company (on an unconsolidated, stand-alone basis) has liquid assets of $6.4 million.
As of March 31, 2018, we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on our liquidity. As of March 31, 2018, we had no other material commitments for capital expenditures.



35


Capital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain sufficient capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
The Bank and the Company are subject to regulatory capital requirements administered by the federal banking agencies. The capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve the quantitative measurement of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. The failure to meet minimum capital requirements can result in regulatory actions. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of March 31, 2018 and December 31, 2017, the OCC categorized the Bank as well–capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since those notifications that management believes have changed the institution’s well–capitalized status.
The minimum capital ratios set forth in the Regulatory Capital Plans will be increased or decreased and other minimum capital requirements will be established if and as necessary. In accordance with the Regulatory Capital Plans, neither the Company nor the Bank will pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels or the capital levels required for capital adequacy plus the Capital Conservation Buffer ("CCB"). The minimum CCB at March 31, 2018 is 1.875% and will increase 0.625% through 2019 to 2.5%. In addition, the Company intends to 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. As of March 31, 2018, the Bank and the Company were well-capitalized, with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.
The Bank is subject to regulatory restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval, and to regulatory notification requirements for dividends that do not require prior regulatory approval.



36


Actual and required capital amounts and ratios were:
 
Actual
 
Required for Capital Adequacy Purposes
 
To be Well-Capitalized under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
197,493

 
17.72
%
 
$
89,139

 
8.00
%
 
N/A
 
N/A
BankFinancial, NA
190,805

 
17.13

 
89,115

 
8.00

 
$
111,394

 
10.00
%
Tier 1 (core) capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
Consolidated
189,152

 
16.98

 
66,854

 
6.00

 
N/A
 
N/A
BankFinancial, NA
182,464

 
16.38

 
66,836

 
6.00

 
89,115

 
8.00

Common Tier 1 (CET1)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
189,152

 
16.98

 
50,141

 
4.50

 
N/A
 
N/A
BankFinancial, NA
182,464

 
16.38

 
50,127

 
4.50

 
72,406

 
6.50

Tier 1 (core) capital (to adjusted average total assets):
 
 
 
 
 
 
 
 
Consolidated
189,152

 
12.03

 
62,918

 
4.00

 
N/A
 
N/A
BankFinancial, NA
182,464

 
11.60

 
62,911

 
4.00

 
78,639

 
5.00

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
195,371

 
17.06
%
 
$
91,590

 
8.00
%
 
N/A
 
N/A
BankFinancial, NA
188,582

 
16.48

 
91,572

 
8.00

 
$
114,466

 
10.00
%
Tier 1 (core) capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
Consolidated
187,005

 
16.33

 
68,692

 
6.00

 
N/A
 
N/A
BankFinancial, NA
180,216

 
15.74

 
68,679

 
6.00

 
91,572

 
8.00

Common Tier 1 (CET1)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
187,005

 
16.33

 
51,519

 
4.50

 
N/A
 
N/A
BankFinancial, NA
180,216

 
15.74

 
51,509

 
4.50

 
74,403

 
6.50

Tier 1 (core) capital (to adjusted average total assets):
 
 
 
 
 
 
 
 
Consolidated
187,005

 
11.49

 
65,085

 
4.00

 
N/A
 
N/A
BankFinancial, NA
180,216

 
11.08

 
65,045

 
4.00

 
81,307

 
5.00

Capital Management - Company. Total stockholders’ equity was $198.4 million at March 31, 2018, compared to $197.6 million at December 31, 2017. The increase in total stockholders’ equity was due to net income of $3.6 million that we recorded for the three months ended March 31, 2018, partially offset by our repurchase of 81,500 shares of our common stock during the three months ended 2018 at a total cost of $1.3 million and our declaration and payment of cash dividends totaling $1.4 million during the same period.
Quarterly Cash Dividends. The Company declared cash dividends of $0.08 and $0.06 per share for the three months ended March 31, 2018 and March 31, 2017, respectively.
Stock Repurchase Program. During the quarter ended March 31, 2018, the Company repurchased 81,500 shares of its common stock. On March 28, 2018, the Board extended the expiration date of the Company's share repurchase authorization from June 30, 2018 to April 30, 2019, and increased the total number of shares authorized for repurchase by 500,000 shares. As of March 31, 2018, the Company had repurchased 2,669,279 shares of its common stock out of the 3,330,755 shares of common stock authorized under the share repurchase authorizations. Pursuant to the share repurchase authorization, there are 661,476 shares of common stock authorized for repurchase through April 30, 2019.



37


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. A significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.
The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investment portfolio as available-for-sale so as to provide flexibility in liquidity management.
We utilize a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes.
Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the U.S. Treasury yield curve as of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.
Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.



38


Quantitative Analysis. The following table sets forth, as of March 31, 2018, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
 
Estimated Decrease
in NPV
 
Increase (Decrease) in Estimated
Net Interest Income
Change in Interest Rates (basis points)
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
+400
$
(40,663
)
 
(14.98
)%
 
$
(999
)
 
(1.91
)%
+300
(26,165
)
 
(9.64
)
 
(608
)
 
(1.16
)
+200
(14,758
)
 
(5.44
)
 
(270
)
 
(0.52
)
+100
(5,669
)
 
(2.09
)
 
21

 
0.04

0
 
 
 
 
 
 
 
-100
(16,356
)
 
(6.02
)
 
(3,454
)
 
(6.60
)
The table set forth above indicates that at March 31, 2018, in the event of an immediate 100 basis point decrease in interest rates, the Bank would be expected to experience a 6.02% decrease in NPV and a $3.5 million decrease in net interest income. In the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 5.44% decrease in NPV and a $270,000 decrease in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Because of the shortcomings mentioned above, management considers many additional factors such as projected changes in loan and deposit balances and various projected forward interest rate scenarios when evaluating strategies for managing interest rate risk. 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, Chief Executive Officer and President and the Executive Vice 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 March 31, 2018. Based on that evaluation, the Company’s management, including the Chairman, Chief Executive Officer, and President and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended March 31, 2018, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



39


PART II
ITEM 1.
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.
ITEM 1A.
RISK FACTORS
There have been no material changes to the risk factors previously disclosed in the Company's filings with the Securities and Exchange Commission.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Unregistered Sale of Equity Securities. Not applicable.
(b)
Use of Proceeds. Not applicable.
(c)
Repurchases of Equity Securities.
The following table sets forth information in connection with purchases of our common stock made by, or, on behalf of us, during the first quarter of 2018:
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 (1)
January 1, 2018 through January 31, 2018
 
—
 
$
—

 
—
 
242,976

February 1, 2018 through February 28, 2018
 
39,500
 
15.81

 
39,500
 
203,476

March 1, 2018 through March 31, 2018
 
42,000
 
16.52

 
42,000
 
661,476

 
 
81,500
 
 
 
81,500
 
 
(1) 
On March 28, 2018, the Board extended the expiration date of the Company's share repurchase authorization from June 30, 2018 to April 30, 2019, and increased the total number of shares authorized for repurchase by 500,000 shares. As of March 31, 2018, the Company had repurchased 2,669,279 shares of its common stock out of the 3,330,755 shares of common stock authorized under the share repurchase authorizations. Pursuant to the share repurchase authorization, there are 661,476 shares of common stock authorized for repurchase through April 30, 2019.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 3.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 4.
OTHER INFORMATION
None.
ITEM 5.
EXHIBITS



40


Exhibit Number
 
Description
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101
 
The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statement of conditions, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows and (iv) the notes to consolidated financial statements.

*
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



41


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
 
 
 
 
 
 
 
Dated:
April 30, 2018
 
By:
/s/ F. Morgan Gasior
 
 
 
 
 
F. Morgan Gasior
 
 
 
 
 
Chairman of the Board, Chief Executive Officer and President
 
 
 
 
 
 
 
 
 
 
/s/ Paul A. Cloutier
 
 
 
 
 
Paul A. Cloutier
 
 
 
 
 
Executive Vice President and Chief Financial Officer




42

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