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 SeptemberJune 30, 2017

2020

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)

Maryland75-3199276
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification No.)
  
15W060

Maryland

75-3199276

(State or Other Jurisdiction

of Incorporation)

(I.R.S. Employer

Identification No.)

60 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

BFIN

The NASDAQ Stock Market LLC

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“large accelerated filer”filer”, “accelerated filer”“accelerated filer”, “smaller“smaller reporting company”company”, and “emerging“emerging growth company”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 October 23, 2017,July 27, 2020 there were 18,049,42314,847,128 shares of Common Stock, $0.01 par value, outstanding.



BANKFINANCIAL CORPORATION
Form 10-Q
September 30, 2017
Table of Contents

BANKFINANCIAL CORPORATION

Form 10-Q

June 30, 2020

Table of Contents

Page

Number

Page
Number

PART I

   

Item 1.

Financial Statements

1

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

2720

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

4333

Item 4.
Controls and Procedures
44

   

Item 4.

Controls and Procedures

34

PART II

 

Item 1.

Legal Proceedings

4535

Item 1A.

Risk Factors

4535

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

4536

Item 3.
Defaults Upon Senior Securities
45
Item 4.
Mine Safety Disclosures
45
Item 5.
Other Information
45
Item 6.
Exhibits
45

   

SignaturesItem 3.

47Defaults Upon Senior Securities

36

   

Item 4.

Mine Safety Disclosures

36

   

Item 5.

Other Information

36

Item 6.

Exhibits

37

Signatures

38


Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share and per share data) - Unaudited

  

June 30, 2020

  

December 31, 2019

 

Assets

        

Cash and due from other financial institutions

 $13,826  $9,785 

Interest-bearing deposits in other financial institutions

  370,939   180,540 

Cash and cash equivalents

  384,765   190,325 

Securities, at fair value

  59,437   60,193 

Loans receivable, net of allowance for loan losses: June 30, 2020, $8,156 and December 31, 2019, $7,632

  1,081,798   1,168,008 

Other real estate owned, net

  143   186 

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

  7,490   7,490 

Premises and equipment, net

  24,323   24,346 

Accrued interest receivable

  4,447   4,563 

Bank-owned life insurance

  18,986   18,945 

Deferred taxes

  3,615   3,873 

Other assets

  8,125   10,086 

Total assets

 $1,593,129  $1,488,015 
         

Liabilities

        

Deposits

        

Noninterest-bearing

 $305,096  $210,762 

Interest-bearing

  1,083,059   1,073,995 

Total deposits

  1,388,155   1,284,757 

Borrowings

  4,000   61 

Advance payments by borrowers for taxes and insurance

  12,356   10,222 

Accrued interest payable and other liabilities

  16,164   18,603 

Total liabilities

  1,420,675   1,313,643 
         

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; 14,890,628 shares issued at June 30, 2020 and 15,278,464 issued at December 31, 2019

  149   153 

Additional paid-in capital

  108,748   112,420 

Retained earnings

  63,322   61,573 

Accumulated other comprehensive income

  235   226 

Total stockholders’ equity

  172,454   174,372 

Total liabilities and stockholders’ equity

 $1,593,129  $1,488,015 


 September 30, 2017 December 31, 2016
Assets   
Cash and due from other financial institutions$10,620
 $13,053
Interest-bearing deposits in other financial institutions115,041
 83,631
Cash and cash equivalents125,661
 96,684
Securities, at fair value98,787
 107,212
Loans receivable, net of allowance for loan losses:
September 30, 2017, $8,374 and December 31, 2016, $8,127		1,335,631
 1,312,952
Other real estate owned, net3,569
 3,895
Stock in Federal Home Loan Bank and Federal Reserve Bank, at cost

8,290
 11,650
Premises and equipment, net30,774
 31,413
Accrued interest receivable4,569
 4,381
Core deposit intangible408
 782
Bank owned life insurance22,790
 22,594
Deferred taxes20,214
 22,411
Other assets3,576
 6,063
Total assets$1,654,269
 $1,620,037
    
Liabilities   
Deposits   
Noninterest-bearing$231,049
 $249,539
Interest-bearing1,140,040
 1,089,851
Total deposits1,371,089
 1,339,390
Borrowings60,928
 51,069
Advance payments by borrowers for taxes and insurance10,683
 11,041
Accrued interest payable and other liabilities11,791
 13,757
Total liabilities1,454,491
 1,415,257
 

 

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; 18,063,623 shares issued at September 30, 2017 and 19,233,760 issued at December 31, 2016180
 192
Additional paid-in capital155,481
 173,047
Retained earnings43,786
 39,483
Unearned Employee Stock Ownership Plan shares—
 (8,318)
Accumulated other comprehensive income331
 376
Total stockholders’ equity199,778
 204,780
Total liabilities and stockholders’ equity$1,654,269
 $1,620,037

See accompanying notes to the consolidated financial statements.


1
Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data) - Unaudited

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Interest and dividend income

                

Loans, including fees

 $12,669  $15,389  $26,280  $30,741 

Securities

  271   602   575   1,204 

Other

  254   531   992   1,103 

Total interest income

  13,194   16,522   27,847   33,048 

Interest expense

                

Deposits

  1,869   3,417   4,553   6,638 

Borrowings

  —   2   —   88 

Total interest expense

  1,869   3,419   4,553   6,726 

Net interest income

  11,325   13,103   23,294   26,322 

Provision for loan losses

  42   3,957   513   3,870 

Net interest income after provision for loan losses

  11,283   9,146   22,781   22,452 

Noninterest income

                

Deposit service charges and fees

  736   974   1,623   1,904 

Loan servicing fees

  82   56   145   79 

Mortgage brokerage and banking fees

  11   21   40   49 

Gain on sale of equity securities

  —   —   —   295 

Loss on disposal of other assets

  —   —   (2)  (19)

Trust and insurance commissions and annuities income

  224   224   506   429 

Earnings on bank-owned life insurance

  9   38   41   68 

Other

  101   113   208   245 

Total noninterest income

  1,163   1,426   2,561   3,050 

Noninterest expense

                

Compensation and benefits

  5,168   5,207   10,686   10,910 

Office occupancy and equipment

  1,723   1,624   3,523   3,469 

Advertising and public relations

  118   145   270   306 

Information technology

  808   753   1,672   1,459 

Professional fees

  289   237   524   544 

Supplies, telephone, and postage

  284   322   587   725 

Amortization of intangibles

  7   14   21   34 

Nonperforming asset management

  57   58   97   112 

Operations of other real estate owned, net

  7   47   (10)  3 

FDIC insurance premiums

  102   146   136   254 

Other

  686   919   1,371   1,754 

Total noninterest expense

  9,249   9,472   18,877   19,570 

Income before income taxes

  3,197   1,100   6,465   5,932 

Income tax expense

  845   293   1,695   1,574 

Net income

 $2,352  $807  $4,770  $4,358 

Basic and diluted earnings per common share

 $0.16  $0.05  $0.32  $0.28 

Basic and diluted weighted average common shares outstanding

  14,978,757   15,472,618   15,092,244   15,835,445 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Interest and dividend income       
Loans, including fees$13,345
 $12,388
 $39,061
 $36,834
Securities389
 306
 1,095
 927
Other387
 151
 976
 424
Total interest income14,121
 12,845
 41,132
 38,185
Interest expense       
Deposits1,419
 1,012
 3,903
 2,749
Borrowings196
 2
 444
 73
Total interest expense1,615
 1,014
 4,347
 2,822
Net interest income12,506
 11,831
 36,785
 35,363
Provision for (recovery of) loan losses(225) (525) (15) 300
Net interest income after provision for (recovery of) loan losses12,731
 12,356
 36,800
 35,063
Noninterest income       
Deposit service charges and fees584
 583
 1,682
 1,691
Other fee income523
 478
 1,494
 1,478
Insurance commissions and annuities income41
 53
 170
 180
Gain on sale of loans, net10
 38
 70
 59
Gain on sale of securities (includes $46 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities for the nine months ended September 30, 2016)—
 —
 —
 46
Loan servicing fees58
 66
 188
 214
Amortization and impairment of servicing assets(27) (28) (86) (96)
Earnings on bank owned life insurance67
 54
 196
 151
Trust income169
 167
 534
 492
Other198
 226
 526
 553
Total noninterest income1,623
 1,637
 4,774
 4,768
Noninterest expense       
Compensation and benefits5,330
 5,315
 16,792
 17,021
Office occupancy and equipment1,693
 1,487
 4,914
 4,769
Advertising and public relations167
 144
 807
 618
Information technology638
 707
 2,070
 2,130
Supplies, telephone, and postage337
 345
 1,027
 1,018
Amortization of intangibles123
 129
 374
 394
Nonperforming asset management84
 89
 215
 300
Operations of other real estate owned403
 243
 861
 768
FDIC insurance premiums150
 238
 462
 691
Other1,275
 1,215
 3,551
 3,639
Total noninterest expense10,200
 9,912
 31,073
 31,348
Income before income taxes4,154
 4,081
 10,501
 8,483
Income tax expense594
 1,573
 2,488
 3,240
Net income$3,560
 $2,508
 $8,013
 $5,243
Basic earnings per common share$0.20
 $0.13
 $0.44
 $0.27
Diluted earnings per common share$0.20
 $0.13
 $0.44
 $0.27
Weighted average common shares outstanding18,139,659
 18,788,731
 18,368,742
 19,114,603
Diluted weighted average common shares outstanding18,140,109
 18,789,054
 18,369,170
 19,114,918

See accompanying notes to the consolidated financial statements.


2
Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) - Unaudited

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income

 $2,352  $807  $4,770  $4,358 

Unrealized holding gain arising during the period

  108   19   11   25 

Tax effect

  (28)  (6)  (2)  (7)

Net of tax

  80   13   9   18 

Comprehensive income

 $2,432  $820  $4,779  $4,376 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Net income$3,560
 $2,508
 $8,013
 $5,243
Unrealized holding gain (loss) arising during the period16
 (13) (67) (75)
Tax effect(9) 5
 22
 29
Net of tax7
 (8) (45) (46)
Reclassification adjustment for gain included in net income—
 —
 —
 (46)
Tax effect, included in income tax expense—
 —
 —
 18
Reclassification adjustment for gain included in net income, net of tax—
 —
 —
 (28)
Other comprehensive income (loss)7
 (8) (45) (74)
Comprehensive income$3,567
 $2,500
 $7,968
 $5,169

See accompanying notes to the consolidated financial statements.


3
Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except per share data) - Unaudited

              

Accumulated

     
      

Additional

      

Other

     
  

Common

  

Paid-in

  

Retained

  

Comprehensive

     
  

Stock

  

Capital

  

Earnings

  

Income

  

Total

 

For the three months ended

                    
                     

Balance at April, 1 2019

 $157  $117,715  $58,072  $276  $176,220 

Net income

  —   —   807   —   807 

Other comprehensive income, net of tax

  —   —   —   13   13 

Repurchase and retirement of common stock (270,535 shares)

  (3)  (3,998)  —   —   (4,001)

Cash dividends declared on common stock ($0.10 per share)

  —   —   (1,548)  —   (1,548)

Balance at June 30, 2019

 $154  $113,717  $57,331  $289  $171,491 
                     

Balance at April, 1 2020

 $151  $110,220  $62,469  $155  $172,995 

Net income

  —   —   2,352   —   2,352 

Other comprehensive income, net of tax

  —   —   —   80   80 

Repurchase and retirement of common stock (181,640 shares)

  (2)  (1,472)  —   —   (1,474)

Cash dividends declared on common stock ($0.10 per share)

  —   —   (1,499)  —   (1,499)

Balance at June 30, 2020

 $149  $108,748  $63,322  $235  $172,454 
                     

For the six months ended

                    
                     

Balance at January 1, 2019

 $165  $130,547  $56,167  $271  $187,150 

Net income

  —   —   4,358   —   4,358 

Other comprehensive income, net of tax

  —   —   —   18   18 

Repurchase and retirement of common stock (1,107,550 shares)

  (11)  (16,830)  —   —   (16,841)

Cash dividends declared on common stock ($0.20 per share)

  —   —   (3,194)  —   (3,194)

Balance at June 30, 2019

 $154  $113,717  $57,331  $289  $171,491 
                     

Balance at January 1, 2020

 $153  $112,420  $61,573  $226  $174,372 

Net income

  —   —   4,770   —   4,770 

Other comprehensive income, net of tax

  —   —   —   9   9 

Repurchase and retirement of common stock (387,836 shares)

  (4)  (3,672)  —   —   (3,676)

Cash dividends declared on common stock ($0.20 per share)

  —   —   (3,021)  —   (3,021)

Balance at June 30, 2020

 $149  $108,748  $63,322  $235  $172,454 


 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Unearned
Employee
Stock
Ownership
Plan
Shares
 
Accumulated
Other
Comprehen-sive
Income
 Total
Balance at January 1, 2016$203
 $184,797
 $36,114
 $(9,297) $547
 $212,364
Net income—
 —
 5,243
 —
 —
 5,243
Other comprehensive loss, net of tax—
 —
 —
 —
 (74) (74)
Repurchase and retirement of common stock (1,026,106 shares)(10) (12,685) —
 —
 —
 (12,695)
Nonvested stock awards-stock-based compensation expense—
 875
 —
 —
 —
 875
Cash dividends declared on common stock ($0.15 per share)—
 —
 (2,977) —
 —
 (2,977)
ESOP shares earned—
 198
 —
 733
 —
 931
Balance at September 30, 2016$193
 $173,185
 $38,380
 $(8,564) $473
 $203,667
            
Balance at January 1, 2017$192
 $173,047
 $39,483
 $(8,318) $376
 $204,780
Net income—
 —
 8,013
 —
 —
 8,013
Other comprehensive loss, net of tax—
 —
 —
 —
 (45) (45)
Net exercise of stock options (198,026 shares)2
 (1,239) —
 —
 —
 (1,237)
Prepayment of ESOP Share Acquisition Loan

(8) (7,185) —
 8,318
 —
 1,125
Repurchase and retirement of common stock (614,673 shares)(6) (9,142) —
 —
 —
 (9,148)
Cash dividends declared on common stock ($0.20 per share)—
 —
 (3,710) —
 —
 (3,710)
Balance at September 30 , 2017$180
 $155,481
 $43,786
 $—
 $331
 $199,778

See accompanying notes to the consolidated financial statements.


4
Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited

  

Six Months Ended

 
  

June 30,

 
  

2020

  

2019

 

Cash flows from operating activities

        

Net income

 $4,770  $4,358 

Adjustments to reconcile to net income to net cash from operating activities

        

Provision for loan losses

  513   3,870 

Depreciation

  816   794 

Amortization of premiums and discounts on securities

  3   3 

Amortization of intangibles

  21   34 

Amortization of servicing assets

  37   43 

Net change in net deferred loan origination costs

  454   91 

Gain on sale of other real estate owned

  (30)  (91)

Gain on sale of equity securities

  —   (295)

Loss on disposal of other assets

  2   19 

Other real estate owned valuation adjustments

  —   21 

Earnings on bank-owned life insurance

  (41)  (68)

Net change in:

        

Accrued interest receivable

  116   (465)

Other assets

  2,316   1,580 

Accrued interest payable and other liabilities

  (2,539)  (2,905)

Net cash from operating activities

  6,438   6,989 

Cash flows from investing activities

        

Securities

        

Proceeds from maturities

  35,318   51,006 

Proceeds from principal repayments

  1,386   1,138 

Proceeds from sale of equity securities

  —   3,722 

Purchases of securities

  (35,940)  (51,023)

Net decrease in loans receivable

  85,164   52,289 

Purchase of FHLB and FRB stock

  —   (4)

Redemption of FHLB and FRB stock

  —   540 

Proceeds from sale of other real estate owned

  95   845 

Purchase of premises and equipment, net

  (795)  (531)

Net cash from investing activities

  85,228   57,982 
Cash flows from financing activities        
Net change in:        
Deposits  103,398   (22,277)
Borrowings  3,939   (20,251)
Advance payments by borrowers for taxes and insurance  2,134   2,995 
Repurchase and retirement of common stock  (3,676)  (16,841)
Cash dividends paid on common stock  (3,021)  (3,194)
Net cash from (used in) financing activities  102,774   (59,568)
Net change in cash and cash equivalents  194,440   5,403 
Beginning cash and cash equivalents  190,325   98,204 
Ending cash and cash equivalents $384,765  $103,607 
         
Supplemental disclosures of cash flow information:        
Interest paid $4,564  $6,863 
Income taxes paid  226   400 
Income taxes refunded  8   — 
Loans transferred to other real estate owned  33   46 
Recording of right of use asset in exchange for lease obligations in other assets and other liabilities  111   6,694 

 Nine Months Ended
September 30,
 2017 2016
Cash flows from operating activities   
Net income$8,013
 $5,243
Adjustments to reconcile to net income to net cash from operating activities   
Provision for (recovery of) loan losses(15) 300
Prepayment of ESOP Share Acquisition Loan

1,125
 —
ESOP shares earned—
 931
Stock–based compensation expense—
 875
Depreciation and amortization2,846
 2,815
Amortization of premiums and discounts on securities and loans(72) (104)
Amortization of core deposit intangible374
 394
Amortization of servicing assets86
 96
Net change in net deferred loan origination costs343
 (36)
Net gain (loss) on sale of other real estate owned100
 (15)
Net gain on sale of loans(70) (59)
Net gain on sale of securities—
 (46)
Loans originated for sale(1,291) (1,097)
Proceeds from sale of loans1,361
 1,156
Other real estate owned valuation adjustments301
 244
Net change in:   
Accrued interest receivable(188) 70
Earnings on bank owned life insurance(196) (151)
Other assets4,027
 3,515
Accrued interest payable and other liabilities(1,966) (1,279)
Net cash from operating activities14,778
 12,852
Cash flows from investing activities   
Securities   
Proceeds from maturities49,695
 58,577
Proceeds from principal repayments2,461
 3,545
Proceeds from sales of securities—
 46
Purchases of securities(43,808) (47,423)
Loans receivable   
Loan participations sold3,615
 3,023
Principal payments on loans receivable459,706
 366,784
Purchase of loans(23,451) —
Proceeds of loan sale—
 14,746
Originated for investment(465,562) (395,087)
Proceeds of redemption of Federal Home Loan Bank of Chicago stock3,514
 —
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock(154) —
Proceeds from sale of other real estate owned1,966
 2,616
Purchase of premises and equipment, net(906) (660)
Net cash from (used in) investing activities(12,924) 6,167

Continued

5
Table of Contents

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

 Nine Months Ended
September 30,
 2017 2016
Cash flows from financing activities   
Net change in deposits$31,699
 $103,776
Net change in borrowings9,859
 (62,912)
Net change in advance payments by borrowers for taxes and insurance(358) (3,058)
Repurchase and retirement of common stock(9,148) (12,695)
Cash dividends paid on common stock(3,710) (2,977)
Shares retired for tax liability(1,219) —
Net cash from financing activities27,123
 22,134
Net change in cash and cash equivalents28,977
 41,153
Beginning cash and cash equivalents96,684
 59,377
Ending cash and cash equivalents$125,661
 $100,530
    
Supplemental disclosures of cash flow information:   
Interest paid$4,269
 $2,704
Income taxes paid198
 182
Loans transferred to other real estate owned2,041
 215

See accompanying notes to the consolidated financial statements.


6
5
Table of Contents

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, National AssociationNA (the “Bank”). The interim unaudited consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BFBFIN Asset Recovery CorporationCompany, 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-three and nine-monthsix month periods ended SeptemberJune 30, 20172020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.

2020 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 (“US GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

Commission (“SEC”).

Use of Estimates: To prepareThe preparation of the consolidated financial statements in conformity with US GAAP requires management makesto make estimates and assumptions based on available information. These estimates and assumptionsthat affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the disclosures provided, and futurebest available information, actual information, actual results could differ.

differ from those estimates.

COVID-19: The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impact is unknown at this time.

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-K10-K for the year ended December 31, 2016,2019, as filed with the Securities and Exchange Commission.

Recent

Newly Issued Not Yet Effective Accounting Pronouncements

Standards

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 become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We have evaluated the impact of adopting the new guidance on the consolidated financial statements. Our finding is that the new pronouncement will not have a significant impact on the consolidated financial statements as the majority of our business transactions will not be subject to this pronouncement.

In JanuaryJune 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 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 is effective for public business entities for fiscal years beginning after December 15, 2017. We have evaluated the impact of adopting the new guidance on the consolidated financial statements. Our finding is that the new pronouncement will not have a significant impact on our Statement of Operations.
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



7

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

NOTE 1 2016- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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 March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective January 1, 2017. This new pronouncement affects the effective tax rate reported as existing vested stock options are exercised. The amount of the impact on the effective tax rate is determined by the number of stock options exercised and the stock price of the Company when the stock options are exercised. Excess tax benefits and deficiencies are recorded in the tax expense.
In June 2016, the FASB issued ASU No. 2016-13,13, “Financial Instruments - Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”2016-13”). These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers who are smaller reporting companies, ASU 2016-132016-13 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.2022.

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

Table of Contents
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, exclusiveperiod.

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income available to common stockholders

 $2,352  $807  $4,770  $4,358 

Basic and diluted weighted average common shares outstanding

  14,978,757   15,472,618   15,092,244   15,835,445 

Basic and diluted earnings per common share

 $0.16  $0.05  $0.32  $0.28 

6
Table of unearned BankFinancial, NA Employee Stock Ownership Plan (the "ESOP") sharesContents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share 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.data)

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Net income available to common stockholders$3,560
 $2,508
 $8,013
 $5,243
Average common shares outstanding18,140,599
 19,460,022
 18,567,796
 19,813,088
Less:       
Unearned ESOP shares—
 (670,351) (198,114) (694,655)
Unvested restricted stock shares(940) (940) (940) (3,830)
Weighted average common shares outstanding18,139,659
 18,788,731
 18,368,742
 19,114,603
Add - Net effect of dilutive unvested restricted stock450
 323
 428
 315
Diluted weighted average common shares outstanding18,140,109
 18,789,054
 18,369,170
 19,114,918
Basic earnings per common share$0.20
 $0.13
 $0.44
 $0.27
Diluted earnings per common share$0.20
 $0.13
 $0.44
 $0.27
Number of antidilutive stock options excluded from the diluted earnings per share calculation—
 536,459
 —
 536,459
Weighted average exercise price of anti-dilutive option shares$—
 $12.99
 $—
 $12.99

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
September 30, 2017       
Certificates of deposit$80,360
 $—
 $—
 $80,360
Equity mutual fund500
 2
 —
 502
Mortgage-backed securities - residential12,645
 553
 (10) 13,188
Collateralized mortgage obligations - residential4,728
 14
 (17) 4,725
SBA-guaranteed loan participation certificates12
 —
 —
 12
 $98,245
 $569
 $(27) $98,787
December 31, 2016       
Certificates of deposit$85,938
 $—
 $—
 $85,938
Equity mutual fund500
 —
 (1) 499
Mortgage-backed securities - residential14,561
 644
 (21) 15,184
Collateralized mortgage obligations - residential5,587
 15
 (28) 5,574
SBA-guaranteed loan participation certificates17
 —
 —
 17
 $106,603
 $659
 $(50) $107,212



9

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

NOTE 3 - SECURITIES (continued)

is as follows:

  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

Available-for-Sale Securities

                

June 30, 2020

                

Certificates of deposit

 $49,288  $—  $—  $49,288 

Municipal securities

  504   10   —   514 

Mortgage-backed securities - residential

  6,668   315   —   6,983 

Collateralized mortgage obligations - residential

  2,657   3   (8)  2,652 
  $59,117  $328  $(8) $59,437 

December 31, 2019

                

Certificates of deposit

 $48,666  $—  $—  $48,666 

Municipal securities

  505   8   —   513 

Mortgage-backed securities - residential

  7,727   310   —   8,037 

Collateralized mortgage obligations - residential

  2,986   4   (13)  2,977 
  $59,884  $322  $(13) $60,193 

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 September 30, 2017 and December 31, 2016.

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.

  

June 30, 2020

 
  

Amortized Cost

  

Fair Value

 

Due in one year or less

 $49,388  $49,389 

Due after one year through five years

  404   413 
   49,792   49,802 

Mortgage-backed securities - residential

  6,668   6,983 

Collateralized mortgage obligations - residential

  2,657   2,652 
  $59,117  $59,437 

Investment securities available-for-sale with carrying values of $1.3 million and $2.0 million at June 30, 2020 and December 31, 2019, respectively, were pledged as collateral on customer repurchase agreements and for other purposes as required or permitted by law.

7
 September 30, 2017
 
Amortized
Cost
 
Fair
Value
Due in one year or less$80,360
 $80,360
Equity mutual fund500
 502
Mortgage-backed securities - residential12,645
 13,188
Collateralized mortgage obligations - residential4,728
 4,725
SBA-guaranteed loan participation certificates12
 12
 $98,245
 $98,787
Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 3 - SECURITIES (continued)

Sales of equity securities were as follows:

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Proceeds$—
 $—
 $—
 $46
Gross gains—
 —
 —
 46

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Proceeds

 $—  $—  $—  $3,722 

Gross gains

  —   —   —   295 

Gross losses

  —   —   —   — 

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
September 30, 2017           
Mortgage-backed securities - residential$1,182
 $(10) $—
 $—
 $1,182
 $(10)
Collateralized mortgage obligations - residential—
 —
 3,270
 (17) 3,270
 (17)
 $1,182
 $(10) $3,270
 $(17) $4,452
 $(27)
            
December 31, 2016           
Equity Mutual Fund$499
 $(1) $—
 $—
 $499
 $(1)
Mortgage-backed securities - residential1,187
 (21) —
 —
 1,187
 (21)
Collateralized mortgage obligations - residential3,691
 (18) 1,028
 (10) 4,719
 (28)
 $5,377
 $(40) $1,028
 $(10) $6,405
 $(50)

      

Less than 12 Months

      

12 Months or More

      

Total

 
  

Count

  

Fair Value

  

Unrealized Loss

  

Count

  

Fair Value

  

Unrealized Loss

  

Count

  

Fair Value

  

Unrealized Loss

 

June 30, 2020

                                    
Collateralized mortgage obligations - residential  —  $—  $—   3  $1,853  $(8)  3  $1,853  $(8)
                                     

December 31, 2019

                                    

Collateralized mortgage obligations - residential

  3  $1,566  $(10)  1  $937  $(3)  4  $2,503  $(13)

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




10

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

NOTE 3 - SECURITIES (continued)

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 SeptemberJune 30, 2017,2020, 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.

The Bank, as a member of Visa USA, received 51,404 unrestricted shares of Visa, Inc. Class B common stock in connection with Visa, Inc.’s initial public offering in 2007 and a related retroactive responsibility plan. The retroactive responsibility plan obligates all former Visa USA members to indemnify Visa USA, in proportion to their equity interests in Visa USA, for certain litigation losses and expenses, including settlement expenses, for the lawsuits covered by the retrospective responsibility plan. Due to the restrictions that the retrospective responsibility plan imposes on the Company’s Visa, Inc. Class B shares, the Company had not recorded the Class B shares as an asset.

The Bank sold 25,702 shares of Visa Class B common stock in the fourth quarter of 2018 and the remaining 25,702 shares of Visa Class B common stock in the first quarter of 2019 and recorded a gain of $295,000.

8
Table of Contents

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:

 September 30, 2017 December 31, 2016
One-to-four family residential real estate$105,186
 $135,218
Multi-family mortgage576,425
 542,887
Nonresidential real estate176,301
 182,152
Construction and land2,827
 1,302
Commercial loans147,079
 103,063
Commercial leases333,120
 352,539
Consumer1,747
 2,255
 1,342,685
 1,319,416
Net deferred loan origination costs1,320
 1,663
Allowance for loan losses(8,374) (8,127)
Loans, net$1,335,631
 $1,312,952

  

June 30, 2020

  

December 31, 2019

 

One-to-four family residential real estate

 $48,928  $55,750 

Multi-family mortgage

  536,619   563,750 

Nonresidential real estate

  127,560   134,674 

Commercial loans

  126,609   145,714 

Commercial leases

  247,997   272,629 

Consumer

  1,783   2,211 
   1,089,496   1,174,728 

Net deferred loan origination costs

  458   912 

Allowance for loan losses

  (8,156)  (7,632)

Loans, net

 $1,081,798  $1,168,008 

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

 

June 30, 2020

                        

One-to-four family residential real estate

 $—  $665  $665  $1,768  $47,160  $48,928 

Multi-family mortgage

  —   4,185   4,185   604   536,015   536,619 

Nonresidential real estate

  —   1,602   1,602   288   127,272   127,560 

Commercial loans

  —   856   856   —   126,609   126,609 

Commercial leases

  —   802   802   833   247,164   247,997 

Consumer

  —   46   46   —   1,783   1,783 
  $—  $8,156  $8,156  $3,493  $1,086,003   1,089,496 

Net deferred loan origination costs

                      458 

Allowance for loan losses

                      (8,156)

Loans, net

                     $1,081,798 

  

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, 2019

                        

One-to-four family residential real estate

 $—  $675  $675  $1,835  $53,915  $55,750 

Multi-family mortgage

  —   3,676   3,676   620   563,130   563,750 

Nonresidential real estate

  —   1,176   1,176   288   134,386   134,674 

Commercial loans

  —   1,308   1,308   —   145,714   145,714 

Commercial leases

  —   757   757   —   272,629   272,629 

Consumer

  —   40   40   —   2,211   2,211 
  $—  $7,632  $7,632  $2,743  $1,171,985   1,174,728 

Net deferred loan origination costs

                      912 

Allowance for loan losses

                      (7,632)

Loans, net

                     $1,168,008 

 Allowance for loan losses Loan Balances
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 Total 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 Total
September 30, 2017           
One-to-four family residential real estate$—
 $812
 $812
 $4,616
 $100,570
 $105,186
Multi-family mortgage—
 3,872
 3,872
 959
 575,466
 576,425
Nonresidential real estate—
 1,590
 1,590
 —
 176,301
 176,301
Construction and land—
 68
 68
 —
 2,827
 2,827
Commercial loans—
 1,241
 1,241
 —
 147,079
 147,079
Commercial leases—
 769
 769
 —
 333,120
 333,120
Consumer—
 22
 22
 —
 1,747
 1,747
 $—
 $8,374
 $8,374
 $5,575
 $1,337,110
 1,342,685
Net deferred loan origination costs         1,320
Allowance for loan losses         (8,374)
Loans, net          $1,335,631


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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, 2016           
One-to-four family residential real estate$—
 $1,168
 $1,168
 $4,962
 $130,256
 $135,218
Multi-family mortgage—
 3,647
 3,647
 787
 542,100
 542,887
Nonresidential real estate26
 1,768
 1,794
 260
 181,892
 182,152
Construction and land—
 32
 32
 —
 1,302
 1,302
Commercial loans—
 733
 733
 —
 103,063
 103,063
Commercial leases—
 714
 714
 —
 352,539
 352,539
Consumer—
 39
 39
 —
 2,255
 2,255
 $26
 $8,101
 $8,127
 $6,009
 $1,313,407
 1,319,416
Net deferred loan origination costs         1,663
Allowance for loan losses         (8,127)
Loans, net          $1,312,952
Activity

The following table represents the activity in the allowance for loan losses is as follows:by portfolio segment:

  

One-to-four family residential real estate

  

Multi-family mortgage

  

Non-residential real estate

  

Construction and land

  

Commercial loans

  

Commercial leases

  

Consumer

  

Total

 
For the three months ended                                
                                 

June 30, 2020

                                

Allowance for loan losses:

                                

Beginning balance

 $682  $3,869  $1,460  $—  $1,275  $780  $46  $8,112 

Provision for (recovery of) loan losses

  (20)  301   142   —   (420)  22   17   42 

Loans charged off

  —   —   —   —   —   —   (17)  (17)

Recoveries

  3   15   —   —   1   —   —   19 

Total ending allowance balance

 $665  $4,185  $1,602  $—  $856  $802  $46  $8,156 
                                 

June 30, 2019

                                

Allowance for loan losses:

                                

Beginning balance

 $649  $4,079  $1,487  $3  $1,422  $690  $24  $8,354 

Provision for (recovery of) loan losses

  (42)  (99)  (292)  —   4,313   60   17   3,957 

Loans charged off

  (50)  —   —   —   (4,443)  —   (10)  (4,503)

Recoveries

  6   8   —   —   2   —   —   16 

Total ending allowance balance

 $563  $3,988  $1,195  $3  $1,294  $750  $31  $7,824 

For the six months ended                                
                                 

June 30, 2020

                                

Allowance for loan losses:

                                

Beginning balance

 $675  $3,676  $1,176  $—  $1,308  $757  $40  $7,632 

Provision for (recovery of) loan losses

  (21)  482   426   —   (455)  45   36   513 

Loans charged off

  (5)  —   —   —   —   —   (30)  (35)

Recoveries

  16   27   —   —   3   —   —   46 

Total ending allowance balance

 $665  $4,185  $1,602  $—  $856  $802  $46  $8,156 
                                 

June 30, 2019

                                

Allowance for loan losses:

                                

Beginning balance

 $699  $3,991  $1,476  $4  $1,517  $755  $28  $8,470 

Provision for (recovery of) loan losses

  (86)  (19)  (253)  (1)  4,216   (5)  18   3,870 

Loans charged off

  (73)  —   (28)  —   (4,443)  —   (15)  (4,559)

Recoveries

  23   16   —   —   4   —   —   43 

Total ending allowance balance

 $563  $3,988  $1,195  $3  $1,294  $750  $31  $7,824 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Beginning balance$8,122
 $8,915
 $8,127
 $9,691
Loans charged off:       
One-to-four family residential real estate(89) (102) (282) (509)
Multi-family mortgage(7) —
 (10) (51)
Nonresidential real estate—
 (55) (165) (1,715)
Consumer(7) (6) (7) (24)
 (103) (163) (464) (2,299)
Recoveries:       
One-to-four family residential real estate15
 5
 100
 92
Multi-family mortgage11
 10
 62
 156
Nonresidential real estate10
 39
 10
 200
Construction and land—
 —
 —
 35
Commercial loans542
 45
 552
 150
Commercial leases2
 7
 2
 7
Consumer—
 1
 —
 2
 580
 107
 726
 642
Net recoveries (charge-offs)477
 (56) 262
 (1,657)
Provision for (recovery of) loan losses(225) (525) (15) 300
Ending balance$8,374
 $8,334
 $8,374
 $8,334


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Table of Contents

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
September 30, 2017		 Nine months ended
September 30, 2017
 
Loan
Balance
 
Recorded
Investment
 Partial Charge-off 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
September 30, 2017               
With no related allowance recorded:               
One-to-four family residential real estate$4,980
 $4,031
 $966
 $—
 $4,100
 $14
 $4,251
 $51
One-to-four family residential real estate - non-owner occupied571
 576
 19
 —
 557
 —
 594
 —
Multi-family mortgage - Illinois965
 961
 —
 —
 965
 10
 815
 31
 $6,516
 $5,568
 $985
 $—
 $5,622
 $24
 $5,660
 $82
         
Year ended
December 31, 2016
 
Loan
Balance
 
Recorded
Investment
 Partial Charge-off 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
December 31, 2016           
With no related allowance recorded:           
One-to-four family residential real estate$5,379
 $4,548
 $886
 $—
 $2,947
 $70
One-to-four family residential real estate - non-owner occupied503
 386
 119
 —
 251
 9
Multi-family mortgage - Illinois787
 787
 —
 —
 980
 41
 6,669
 5,721
 1,005
 —
 4,178
 120
With an allowance recorded:           
Nonresidential real estate262
 260
 21
 26
 164
 —
 262
 260
 21
 26
 164
 —
 $6,931
 $5,981
 $1,026
 $26
 $4,342
 $120



13

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

NOTE 4 - LOANS RECEIVABLE (continued)

                  

Three Months Ended

  

Six Months Ended

 
                  

June 30, 2020

  

June 30, 2020

 
  

Loan Balance

  

Recorded Investment

  Partial Charge off  

Allowance for Loan Losses Allocated

  

Average Investment in Impaired Loans

  

Interest Income Recognized

  

Average Investment in Impaired Loans

  

Interest Income Recognized

 

June 30, 2020

                                

With no related allowance recorded:

                                

One-to-four family residential real estate

 $2,113  $1,768  $353  $—  $1,789  $11  $1,816  $24 

Multi-family mortgage - Illinois

  604   604   —   —   609   9   612   18 

Nonresidential real estate

  280   288   —   —   288   —   288   — 

Other commercial leases

  843   833   —   —   350   —   216   2 
  $3,840  $3,493  $353  $—  $3,036  $20  $2,932  $44 

                  

Year ended

 
                  

December 31, 2019

 
  

Loan Balance

  

Recorded Investment

  

Partial Charge-off

  

Allowance for Loan Losses Allocated

  

Average Investment in Impaired Loans

  

Interest Income Recognized

 

December 31, 2019

                        

With no related allowance recorded:

                        

One-to-four family residential real estate

 $2,168  $1,835  $339  $—  $2,208  $51 

Multi-family mortgage - Illinois

  620   620   —   —   637   37 

Nonresidential real estate

  280   288   —   —   589   2 
  $3,068  $2,743  $339  $—  $3,434  $90 

Nonaccrual Loans

The following tables present the recorded investment in nonaccrual loans and loans 90 days or more past due over 90 days still on accrual by class of loans:

 Loan Balance 
Recorded
Investment
 
Loans Past
Due Over 90
Days, Still
Accruing
September 30, 2017     
One-to-four family residential real estate$3,392
 $1,658
 $—
One-to-four family residential real estate – non-owner occupied751
 576
 —
Multi-family mortgage - Illinois378
 371
 —
 $4,521
 $2,605
 $—
December 31, 2016     
One-to-four family residential real estate$2,861
 $2,483
 $—
One-to-four family residential real estate – non-owner occupied428
 368
 —
Multi-family mortgage - Illinois187
 185
 —
Nonresidential real estate262
 260
 —
 $3,738
 $3,296
 $—

  

Loan Balance

  

Recorded Investment

  

Loans Past Due Over 90 Days, Still Accruing

 

June 30, 2020

            

One-to-four family residential real estate

 $686  $662  $— 

Nonresidential real estate

  280   288   — 

Other commercial leases

  843   833   — 
  $1,809  $1,783  $— 

December 31, 2019

            

One-to-four family residential real estate

 $598  $512  $— 

Nonresidential real estate

  280   288   — 

Investment-rated commercial leases

  47   —   47 
  $925  $800  $47 

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 $250,000$123,000 and $199,000$81,000 at SeptemberJune 30, 20172020 and December 31, 2016,2019, 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-accrualnonaccrual 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.



11

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Table of Contents

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 September 30, 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

 
June 30, 2020                        

One-to-four family residential real estate loans:

                        

Owner occupied

 $—  $21  $658  $679  $38,931  $39,610 

Non-owner occupied

  3   187   —  $190   9,128   9,318 

Multi-family mortgage:

                        

Illinois

  —   —   —   —   230,913   230,913 

Other

  —   —   —   —   305,706   305,706 

Nonresidential real estate

  —   —   288   288   127,272   127,560 

Commercial loans:

                        

Regional commercial banking

  —   —   —   —   32,388   32,388 

Health care

  —   —   —   —   12,554   12,554 

Direct commercial lessor

  —   —   —   —   81,667   81,667 

Commercial leases:

                        

Investment-rated commercial leases

  —   509   —   509   114,123   114,632 

Other commercial leases

  1,936   136   833   2,905   130,460   133,365 

Consumer

  6   1   —   7   1,776   1,783 
  $1,945  $854  $1,779  $4,578  $1,084,918  $1,089,496 

  

30-59 Days Past Due

  

60-89 Days Past Due

  

90 Days or Greater Past Due

  

Total Past Due

  

Loans Not Past Due

  

Total

 

December 31, 2019

                        

One-to-four family residential real estate loans:

                        

Owner occupied

 $777  $340  $507  $1,624  $43,365  $44,989 

Non-owner occupied

  280   15   —   295   10,466   10,761 

Multi-family mortgage:

                        

Illinois

  981   302   —   1,283   246,680   247,963 

Other

  —   —   —   —   315,787   315,787 

Nonresidential real estate

  —   —   288   288   134,386   134,674 

Commercial loans:

                        

Regional commercial banking

  —   —   —   —   24,853   24,853 

Health care

  —   —   —   —   70,430   70,430 

Direct commercial lessor

  —   —   —   —   50,431   50,431 

Commercial leases:

                        

Investment-rated commercial leases

  826   —   47   873   132,966   133,839 

Other commercial leases

  543   136   —   679   138,111   138,790 

Consumer

  24   37   —   61   2,150   2,211 
  $3,431  $830  $842  $5,103  $1,169,625  $1,174,728 

 
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$94
 $749
 $1,655
 $2,498
 $79,800
 $82,298
One-to-four family residential real estate loans – non-owner occupied12
 3
 577
 592
 22,321
 22,913
Multi-family mortgage - Illinois—
 —
 371
 371
 288,508
 288,879
Multi-family mortgage - Other—
 —
 —
 —
 281,887
 281,887
Nonresidential real estate—
 —
 —
 —
 174,724
 174,724
Construction—
 —
 —
 —
 2,548
 2,548
Land—
 —
 —
 —
 281
 281
Commercial loans:      
   
Regional commercial banking—
 —
 —
 —
 40,315
 40,315
Health care—
 —
 —
 —
 72,685
 72,685
Direct commercial lessor275
 369
 —
 644
 33,787
 34,431
Commercial leases:      

   

Investment rated commercial leases—
 2,225
 —
 2,225
 230,009
 232,234
Other commercial leases—
 —
 —
 —
 102,698
 102,698
Consumer—
 —
 —
 —
 1,754
 1,754
 $381
 $3,346
 $2,603
 $6,330
 $1,331,317
 $1,337,647


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Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)


NOTE 4 - LOANS RECEIVABLE (continued)

U.S. Small Business Administration Paycheck Protection Program ("PPP")

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was passed by Congress and signed into law on March 27, 2020.  The CARES Act established the Paycheck Protection Program loan, designed to provide a direct incentive for small businesses to keep their workers on the payroll.  Under the most recently published guidance, the U.S. Small Business Administration ("SBA") will forgive PPP loans if all employee retention criteria are met, and the funds are used for eligible expenses.  In the first half of 2020, we allocated approximately $11 million to the PPP based on the expected 100% guaranty of the SBA.

The following tables presenttable presents the agingPPP activity:

  

Number of loans

  

Originated

  

Balance

 
For the Six Months Ended June 30, 2020            
Paycheck protection program loan originations  305  $11,024     
             

June 30, 2020

            

Paycheck protection program loans

  300     $10,907 

COVID-19 Loan Forbearance Programs

Section 4013 of the recorded investmentCoronavirus Aid, Relief and Economic Security Act ("CARES Act") provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to US GAAP.  In addition, the Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (“OCC Bulletin 2020-50”) provides more limited circumstances in which a loan modification is not subject to classification as a TDR and also defined the circumstances where the borrower’s loan is reported as current on loan payments. Pursuant to these new capabilities, we developed several loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19.

Our Apartment and Commercial Real Estate COVID-19 Qualified Limited Forbearance Agreement permitted borrowers who qualified under Section 4013 of the CARES Act to make an election to pay scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and pay all deferred principal payments by December 2020.

Our Small Investment Property COVID-19 Qualified Limited Forbearance Agreement permitted borrowers with loan balances under $750,000 who qualified under Section 4013 of the CARES Act to make an election to pay scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and pay all deferred principal payments by December 2020.   In addition, the borrower could elect to defer the May 2020 loan payment entirely, with all deferred interest amounts due by December 2020 and all deferred principal amounts due by June 30, 2021.


CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements are available to qualified commercial loan and commercial finance borrowers, and to commercial equipment lessees. 


For residential mortgage and consumer loans, relief under CARES Act Section 4013 or OCC Bulletin 2020-35 forbearance agreements are available to qualified borrowers with terms consistent with secondary residential mortgage market standards established by Fannie Mae.

The following table summarizes the loan forbearance modifications at December 31, 2016 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$984
 $335
 $2,235
 $3,554
 $92,665
 $96,219
One-to-four family residential real estate loans – non-owner occupied664
 114
 368
 1,146
 37,179
 38,325
Multi-family mortgage - Illinois605
 439
 184
 1,228
 294,223
 295,451
Multi-family mortgage - Other—
 —
 —
 —
 243,944
 243,944
Nonresidential real estate—
 —
 260
 260
 178,644
 178,904
Construction—
 —
 —
 —
 950
 950
Land—
 —
 —
 —
 349
 349
Commercial loans:      
   
Regional commercial banking—
 —
 —
 —
 26,480
 26,480
Health care—
 —
 —
 —
 41,086
 41,086
Direct commercial lessor—
 —
 —
 —
 31,847
 31,847
Commercial leases:      

   

Investment rated commercial leases51
 —
 —
 51
 273,405
 273,456
Other commercial leases—
 —
 —
 —
 84,988
 84,988
Consumer—
 —
 —
 —
 2,263
 2,263
 $2,304
 $888
 $3,047
 $6,239
 $1,308,023
 $1,314,262
June 30, 2020:

  

Number of loans

  

Principal Balance

  

Principal Amount Deferred

 
             

Small Investment Property COVID-19 Forbearance Agreement

            

Multi-family mortgage

  23  $7,143  $45 

Nonresidential real estate

  18   7,183   89 

Qualified Limited Forbearance Program

            

Multi-family mortgage

  66   50,959   244 

Nonresidential real estate

  34   42,968   373 

Commercial leases

  18   5,853   579 

One-to-four family residential real estate

  10   1,312   8 
             
   169  $115,418  $1,338 

Troubled Debt Restructurings

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under OCC Bulletin 2020-35in accordance with FASB ASC 310–40340-10 with respect to the classification of the loan as a Troubled Debt Restructuring ("TDR"). In general,TDR.

Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties 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 September 30, 2017, compared to $341,000 at December 31, 2016. No specific valuation reserves were allocated to those loans at September 30, 2017 and December 31, 2016. The Company had no outstanding commitments to borrowers whose loans were classified as TDRs at either date.
The following table presents loans classified as TDRs:
 September 30, 2017 December 31, 2016
One-to-four family residential real estate$—
 $205
Troubled debt restructured loans – accrual loans—
 205
One-to-four family residential real estate17
 136
Troubled debt restructured loans – nonaccrual loans17
 136
Total troubled debt restructured loans$17
 $341
During the nine months ended September 30, 2017, there were no loans modified and classified as TDRs. During the nine months ended September 30, 2016, the terms of certain loans were modified and classified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity


13

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Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)


NOTE 4 - LOANS RECEIVABLE (continued)


date

The Company had 0 TDRs at a stated rate of interest lower thanJune 30, 2020 and December 31, 2019. During the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

The following tables present TDR activity:
 For the Nine Months Ended September 30,
 2017 2016
 
Number
of loans
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
 
Number
of loans
 
Pre-
Modification
outstanding
recorded
investment
 
Post-
Modification
outstanding
recorded
investment
One-to-four family residential real estate—
 $—
 $—
 1
 $63
 $63
 Due to
reduction in
interest rate		 Due to
extension of
maturity date		 Due to
permanent
reduction in
recorded
investment		 Total
        
For the Nine Months Ended September 30, 2016       
One-to-four family residential real estate$—
 $63
 $—
 $63
The TDRs described above had no impact on interest income, resulted in no change to the allowance for loan losses allocated and resulted in no charge-offs for the ninesix months ended SeptemberJune 30, 2016.
The following table presents TDRs for which2020 and 2019, there was a payment default duringwere 0 loans modified and classified as TDRs. During the ninethree and six months ended SeptemberJune 30, 2017 2020 and 20162019, there were 0 TDR loans that subsequently defaulted within twelve months following theof their modification.
 2017 2016
 
Number
of loans
 
Recorded
investment
 
Number
of loans
 
Recorded
investment
One-to-four family residential real estate1
 $17
 2
 $87

A TDRloan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The TDRs for which there was a payment default resulted in no change to the allowance for loan losses allocated and resulted in no charge-offs during the nine months ended September 30, 2017 and 2016.
There were certain other loan modifications during the three and nine months ended September 30, 2017 and 2016 that did not meet the definition of a TDR. These loans had a total recorded investment of $149,000 and $615,000 at September 30, 2017 and 2016, respectively. 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

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




17

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

NOTE 4 - LOANS RECEIVABLE (continued)

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. The loans were placed on nonaccrual status.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans.

As of September 30, 2017, based

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

 
June 30, 2020                    

One-to-four family residential real estate loans:

                    

Owner occupied

 $38,402  $79  $467  $662  $39,610 

Non-owner occupied

  9,255   29   34   —   9,318 

Multi-family mortgage:

                    

Illinois

  230,913   —   —   —   230,913 

Other

  305,706   —   —   —   305,706 

Nonresidential real estate

  124,322   160   2,790   288   127,560 

Commercial loans:

                    

Regional commercial banking

  32,388   —   —   —   32,388 

Health care

  12,117   437   —   —   12,554 

Direct commercial lessor

  81,667   —   —   —   81,667 

Commercial leases:

                    

Investment-rated commercial leases

  114,632   —   —   —   114,632 

Other commercial leases

  131,271   —   1,261   833   133,365 

Consumer

  1,770   2   11   —   1,783 
  $1,082,443  $707  $4,563  $1,783  $1,089,496 

 Pass 
Special
Mention
 Substandard Nonaccrual Total
One-to-four family residential real estate loans$80,401
 $—
 $257
 $1,653
 $82,311
One-to-four family residential real estate loans – non-owner occupied22,258
 —
 40
 577
 22,875
Multi-family mortgage loans - Illinois289,175
 —
 480
 372
 290,027
Multi-family mortgage loans - Other286,398
 —
 —
 —
 286,398
Nonresidential real estate loans176,139
 —
 162
 —
 176,301
Construction loans2,543
 —
 —
 —
 2,543
Land loans284
 —
 —
 —
 284
Commercial loans:        
Regional commercial banking40,251
 —
 —
 —
 40,251
Health care71,633
 —
 982
 —
 72,615
Direct commercial lessor34,213
 —
 —
 —
 34,213
Commercial leases:        

Investment rated commercial leases230,931
 —
 —
 —
 230,931
Other commercial leases102,189
 —
 —
 —
 102,189
Consumer1,747
 —
 —
 —
 1,747

$1,338,162
 $—
 $1,921
 $2,602
 $1,342,685


14

18

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)


NOTE 4 - LOANS RECEIVABLE (continued)

  

Pass

  

Special Mention

  

Substandard

  

Nonaccrual

  

Total

 
December 31, 2019                    

One-to-four family residential real estate loans:

                    

Owner occupied

 $43,908  $36  $533  $512  $44,989 

Non-owner occupied

  10,696   30   35   —   10,761 

Multi-family mortgage:

                    

Illinois

  247,757   —   206   —   247,963 

Other

  315,787   —   —   —   315,787 

Nonresidential real estate

  134,134   162   90   288   134,674 

Commercial loans:

                    

Regional commercial banking

  24,853   —   —   —   24,853 

Health care

  62,084   8,346   —   —   70,430 

Direct commercial lessor

  50,431   —   —   —   50,431 

Commercial leases:

                    

Investment-rated commercial leases

  133,332   507   —   —   133,839 

Other commercial leases

  137,893   761   136   —   138,790 

Consumer

  2,153   5   53   —   2,211 
  $1,163,028  $9,847  $1,053  $800  $1,174,728 


As of December 31, 2016, 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$93,514
 $—
 $629
 $2,486
 $96,629
One-to-four family residential real estate loans – non-owner occupied38,179
 —
 41
 369
 38,589
Multi-family mortgage loans - Illinois297,826
 122
 1,048
 187
 299,183
Multi-family mortgage loans - Other243,704
 —
 —
 —
 243,704
Nonresidential real estate loans180,047
 —
 1,845
 260
 182,152
Construction loans946
 —
 —
 —
 946
Land loans356
 —
 —
 —
 356
Commercial loans:        
Regional commercial banking26,365
 —
 66
 —
 26,431
Health care41,001
 —
 —
 —
 41,001
Direct commercial lessor30,881
 800
 —
 —
 31,681
Commercial leases:        

Investment rated commercial leases271,972
 —
 —
 —
 271,972
Other commercial leases84,356
 161
 —
 —
 84,517
Consumer2,255
 —
 —
 —
 2,255
 $1,311,402
 $1,083
 $3,629
 $3,302
 $1,319,416

NOTE 5 - OTHER REAL ESTATE OWNED

Real

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.

 September 30, 2017 December 31, 2016
 Balance Valuation Allowance Net OREO Balance Balance Valuation Allowance Net OREO Balance
One–to–four family residential$1,955
 $(207) $1,748
 $1,702
 $(137) $1,565
Multi-family mortgage—
 —
 —
 370
 —
 370
Nonresidential real estate1,772
 (221) 1,551
 1,171
 (105) 1,066
Land314
 (44) 270
 1,101
 (207) 894
 $4,041
 $(472) $3,569
 $4,344
 $(449) $3,895



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

NOTE 5 - OTHER REAL ESTATE OWNED (continued)


  

June 30, 2020

  

December 31, 2019

 
  

Balance

  

Valuation Allowance

  

Net OREO Balance

  

Balance

  

Valuation Allowance

  

Net OREO Balance

 

One–to–four family residential

 $143  $-  $143  $186  $—  $186 

The following represents the roll forward of OREO and the composition of OREO properties:

 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 2017 2016
Beginning balance$4,896
 $5,373
 $3,895
 $7,011
New foreclosed properties105
 94
 2,041
 215
Valuation adjustments(227) (115) (301) (244)
Sales and Payments(1,205) (971) (2,066) (2,601)
Ending balance$3,569
 $4,381
 $3,569
 $4,381

  

For the Three Months Ended

  

For the Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Beginning balance

 $110  $921  $186  $1,226 

New foreclosed properties

  33   —   33   46 

Valuation adjustments

  —   (21)  —   (21)

Sales and other reductions

  —   (403)  (76)  (754)

Ending balance

 $143  $497  $143  $497 

Activity in the valuation allowance is as follows:

 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 2017 2016
Beginning balance$308
 $664
 $449
 $1,042
Additions charged to expense227
 115
 301
 244
Reductions from sales of other real estate owned(63) (170) (278) (677)
Ending balance$472
 $609
 $472
 $609

  

For the Three Months Ended

  

For the Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Beginning balance

 $—  $—  $—  $23 

Additions charged to expense

  —   21   —   21 

Reductions from sales of OREO

  —   —   —   (23)

Ending balance

 $—  $21  $—  $21 

At SeptemberJune 30, 20172020 and December 31, 2016,2019, the balance of OREO included no0 foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title. At SeptemberJune 30, 20172020 and December 31, 2016,2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedsproceedings were in process was $1.4 million$207,000 and $1.6 million,$237,000, respectively.

15
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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 6 - SECURITIES SOLD UNDER AGREEMENTSLEASES

The Company enters into operating leases in the normal course of business primarily for several of its branch and corporate locations. Leases (Topic 842) establishes a right of use model that requires a lessee to record a right of use (“ROU”) asset and a lease liability for all leases with terms longer than 12 months. Currently the Company is obligated under four non-cancellable operating lease agreements for three branch properties and its corporate office. The leases have varying terms, the longest of which will end in 2032. The Company's lease agreements include options to renew at the Company's discretion. The extensions are not reasonably certain to be exercised; therefore, they were not considered in the calculation of the ROU asset and lease liability. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company's Statement of Financial Condition.

The following table represents the classification of the Company's right of use and lease liabilities:

  

Statement of Financial Condition Location

 

June 30, 2020

  

December 31, 2019

 

Operating Lease Right of Use Asset:

          

Gross carrying amount

   $6,694  $— 
New lease obligation    111   6,694 

Accumulated amortization

    (1,288)  (848)

Net carrying value

 

Other assets

 $5,517  $5,846 
           

Operating Lease Liabilities:

          

Right of use lease obligations

 

Other liabilities

 $5,517  $5,846 

Amortization expense was $221,000 and $212,000 for the three months ended June 30, 2020 and 2019, respectively, and $439,000 and $424,000 for the six months ended  June 30, 2020 and 2019.  At June 30, 2020, the weighted-average remaining lease term for the operating leases was 8.5 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.13%. The Company utilized the FHLB fixed rate advance rate for the term most closely aligning with the remaining lease term.

  

For the Three Months Ended

  

For the Six Months Ended

 
  

June 30,

  

June 30,

 

Lease cost:

 

2020

  

2019

  

2020

  

2019

 

Operating lease cost

 $221  $212  $439  $424 

Short-term lease cost

  41   29   71   60 

Sublease income

  (20)  (9)  (38)  (15)

Total lease cost

 $242  $232  $472  $469 
                 

Other information:

                

Cash paid for amounts included in the measurement of lease liabilities:

                

Operating cash flows from operating leases

 $238  $225  $471  $449 

Future minimum payments under non-cancellable operating leases with terms longer than 12 months, are as follows at June 30, 2020:

Twelve months ended June 30,

    

2021

 $952 

2022

  979 

2023

  1,007 

2024

  705 

2025

  504 

Thereafter

  2,470 

Total future minimum operating lease payments

  6,617 

Amounts representing interest

  (1,100)

Present value of net future minimum operating lease payments

 $5,517 

16
Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO REPURCHASECONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 7 - BORROWINGS

Advances from the FHLB were as follows:

  

June 30, 2020

  

December 31, 2019

 
  

Contractual

      

Contractual

     
  

Rate

  

Amount

  

Rate

  

Amount

 

Fixed-rate advance from FHLB, due within 1 year

  —% $4,000   —% $— 

Securities sold under agreements to repurchase, which are 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
September 30, 2017          
Repurchase agreements and repurchase-to-maturity transactions $928
 $—
 $—
 $—
 $928
Gross amount of recognized liabilities for repurchase agreements in Statement of Condition $928
           
December 31, 2016          
Repurchase agreements and repurchase-to-maturity transactions $1,069
 $—
 $—
 $—
 $1,069
Gross amount of recognized liabilities for repurchase agreements in Statement of Condition   $1,069

  

Overnight and Continuous

  

Up to 30 days

  

30 - 90 days

  

Greater Than 90 days

  

Total

 

December 31, 2019

                    

Repurchase agreements and repurchase-to-maturity transactions

 $61  $—  $—  $—  $61 

Gross amount of recognized liabilities for repurchase agreements in Consolidated Statements of Financial Condition

                 $61 

There were no repurchase agreements and repurchase-to-maturity transactions at June 30, 2020.

Securities sold under agreements to repurchase were secured by a mortgage-backed securitiessecurity with a carrying amount of $4.0 million and $4.7$2.0 million at September 30, 2017 and December 31, 2016, respectively. Also included in total borrowings were advances from2019,  As the FHLBC of $60.0 million at September 30, 2017 and $50.0 million at December 31, 2016, respectively.

Because security values fluctuatesecurity's value fluctuates due to market conditions, the Company has no control over the market value of securities sold under agreements to repurchase.value.   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.



20

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

NOTE 7 – EMPLOYEE BENEFIT PLAN

Employee Stock Ownership Plan.the agreement.

On March 29, 2017, the ESOP was terminated and the ESOP repaid all amounts owing under the ESOP’s Term Loan Agreement with April 1, 2020, the Company (the “Share Acquisition Loan”)established a $5.0 million unsecured line of credit with a correspondent.  Interest is payable at a rate of Prime rate minus 0.75%.  The ESOP repaid the Share Acquisition Loan by transferring 753,490 unallocated sharesline of the Company’s common stock to the Company in exchange for the full satisfactioncredit will mature on April 1, 2021.  The line of the Share Acquisition Loan, using the valuation method provided for in the ESOP. A total of 78,362 unallocated shares remained in the ESOP after the Share Acquisition Loan was repaid, and these shares were released and will be allocated to the accounts of eligible ESOP participants who were actively employed by the Bank as of March 29, 2017, based on their account balances, subject to the receipt of a favorable IRS determination letter. These transactions resulted in the recording of one-time, non-cash, non-tax deductible equity compensation expense of $1.1 million in the first quarter of 2017. The Share Acquisition Loancredit had no0 outstanding principal balance at SeptemberJune 30, 2017 and an outstanding principal balance of $10.8 million at December 31, 2016.2020.

The Company made the Share Acquisition Loan to the ESOP in the original principal amount of $19.6 million in connection with the Company’s mutual to stock conversion in June of 2005. The proceeds of the Share Acquisition Loan were used by the ESOP to purchase 1,957,300 shares of the Company’s common stock issued in the subscription offering at a price of $10.00 per share. The Share Acquisition Loan was secured by a pledge of the acquired shares and the ESOP made annual loan payments with funds it received from the Bank’s discretionary contributions to the ESOP in subsequent years and dividends it received on unallocated shares. As loan payments were made, the Company recorded compensation expense based on the allocation of shares released.
ESOP benefit expense was recorded based upon the fair value of the awarded shares, net of dividends and interest received on unallocated ESOP shares. ESOP benefit expense totaled $1.3 million for the year ended December 31, 2016.
Shares held by the ESOP were as follows:
 September 30, 2017 December 31, 2016
Allocated to participants1,203,810
 1,125,448
Distributed to participants(317,914) (313,223)
Unearned—
 831,852
Total ESOP shares885,896
 1,644,077
Fair value of unearned shares$—
 $12,328

NOTE 8 – EQUITY INCENTIVE PLAN

On June 27, 2006, the Company’s stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan, which authorized the Human Resources Committee of the Board of Directors of the Company to grant a variety of cash- and equity-based incentive awards, including stock options, stock appreciation rights, restricted stock, performance shares and other incentive awards, to employees and directors aggregating up to 3,425,275 shares of the Company’s common stock. The Plan provides that no awards may be granted under the Plan after the ten-year anniversary of the Effective Date. Consequently, no further awards will be granted under this Plan.



21

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

NOTE 8 – EQUITY INCENTIVE PLAN (continued)

As of December 31, 2016, there were 1,752,156 stock options outstanding. The Company recognized $979,000 of equity-based compensation expense relating to the granting of stock options for the year ended December 31, 2016. There was no equity-based compensation expense for the nine months ended September 30, 2017. A summary of the activity in the stock option plan for 2017 and 2016 follows:
Stock Options 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value (1)
Stock options outstanding at December 31, 2015 1,752,156
 $12.30
 1.48 $778
Stock options granted —
 —
    
Stock options exercised —
 —
    
Stock options outstanding at December 31, 2016 1,752,156
 $12.30
 0.48 $4,422
Stock options granted —
 —
    
Stock options exercised (1,752,156) 12.30
    
Stock options outstanding at September 30, 2017 —
 $—
 0 $—
(1)Stock option aggregate intrinsic value represents the number of shares subject to options multiplied by the difference (if positive) in the closing market price of the common stock underlying the options on the date shown and the weighted average exercise price.
During the nine months ended September 30, 2017, 1,752,156 stock options were exercised. All stock options were exercised on a net settlement basis, using a portion of the shares obtained upon exercise to pay the exercise price of the stock option. The net settlements resulted in the issuance of 280,554 shares of the Company's common stock. Certain employees also chose to use a portion of the net shares received upon the exercise to pay required tax withholdings. This reduced the net shares issued by 82,528 shares to 198,026 shares.
NOTE 9 – 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.

•

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)2).

Impaired Loans: 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




22

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

NOTE 9 - FAIR VALUE (continued)

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.

Other Real Estate Owned: 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.

17
Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 8 - FAIR VALUE (continued)

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
September 30, 2017       
Securities:       
Certificates of deposit$—
 $80,360
 $—
 $80,360
Equity mutual fund502
 —
 —
 502
Mortgage-backed securities – residential—
 13,188
 —
 13,188
Collateralized mortgage obligations – residential—
 4,725
 —
 4,725
SBA-guaranteed loan participation certificates—
 12
 —
 12
 $502
 $98,285
 $—
 $98,787
December 31, 2016       
Securities:       
Certificates of deposit$—
 $85,938
 $—
 $85,938
Equity mutual fund499
 —
 —
 499
Mortgage-backed securities - residential—
 15,184
 —
 15,184
Collateralized mortgage obligations – residential—
 5,574
 —
 5,574
SBA-guaranteed loan participation certificates—
 17
 —
 17
 $499
 $106,713
 $—
 $107,212



23

Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share

  

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

 

June 30, 2020

                

Securities:

                

Certificates of deposit

 $—  $49,288  $—  $49,288 

Municipal securities

  —   514   —   514 

Mortgage-backed securities – residential

  —   6,983   —   6,983 

Collateralized mortgage obligations – residential

  —   2,652   —   2,652 
  $—  $59,437  $—  $59,437 

December 31, 2019

                

Securities:

                

Certificates of deposit

 $—  $48,666  $—  $48,666 

Municipal securities

  —   513   —   513 

Mortgage-backed securities - residential

  —   8,037   —   8,037 

Collateralized mortgage obligations – residential

  —   2,977   —   2,977 
  $—  $60,193  $—  $60,193 

At June 30, 2020 and per share data)


NOTE 9 - 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
September 30, 2017       
Other real estate owned:       
One-to-four family residential real estate$—
 $—
 $1,421
 $1,421
Nonresidential real estate—
 —
 844
 844
 $—
 $—
 $2,265
 $2,265
        
December 31, 2016       
Impaired loans:       
Nonresidential real estate—
 —
 234
 234
 $—
 $—
 $234
 $234
Other real estate owned:       
One-to-four family residential real estate$—
 $—
 $1,282
 $1,282
Nonresidential real estate—
 —
 553
 553
Land—
 —
 47
 47
 $—
 $—
 $1,882
 $1,882
At September 30, 2017December 31, 2019 there were no0 impaired loans that were measured for impairment using the fair value of the collateral for collateral–dependent loans and which had specific valuation allowances, compared to one impaired loan with a carrying amount of $260,000allowances.

At June 30, 2020 and having specific valuation allowance of $26,000 at December 31, 2016. The decrease in the2019 there were 0 OREO properties with valuation allowance resulted in a decrease in the provision for loan losses of $26,000 for the nine months ended September 30, 2017. There was a decrease in the provision for loan losses of $5,000 for the nine months ended September 30, 2016.

OREO, which is carried at the lower of cost or fair value less costs to sell, had a carrying value of $2.7 million less a valuation allowance of $429,000, or $2.3 million, at September 30, 2017, compared to a carrying value of $2.3 million less a valuation allowance of $434,000, or $1.9 million, at December 31, 2016. There were $301,000 of valuation adjustments of OREO recorded for the nine months ended September 30, 2017. There were $244,000 of valuation adjustments of OREO recorded for the nine months ended September 30, 2016.



24

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

NOTE 9 - FAIR VALUE (continued)

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 at September 30, 2017:
 Fair Value 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
Other real estate owned:       
One-to-four family residential real estate$1,421
 Sales comparison Discount applied to valuation 
5.6% - 6.6%
(6.5%)
Nonresidential real estate loans$844
 Sales comparison Comparison between sales and income approaches -3.66% - 15.22%
(10.9%)
Other real estate owned$2,265
      
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 at December 31, 2016:
 Fair Value 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans       
Nonresidential real estate$234
 Sales comparison Comparison between sales and income approaches -10.2%
   Income approach Cap Rate 8.5%
 $234
      
Other real estate owned       
One-to-four family residential real estate$1,282
 Sales comparison Discount applied to valuation 
8.62% to 20.04%
(11.9%)
Nonresidential real estate553
 Sales comparison Comparison between sales and income approaches 
-3.22% to
4.58%
(3.7%)
Land47
 Sales comparison Discount applied to valuation 
5.74% to 31.60%
(25.2%)
 $1,882
      



25

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

NOTE 9 - FAIR VALUE (continued)

allowances.

The carrying amount and estimated fair value of financial instruments are as follows:

   
Fair Value Measurements at
September 30, 2017 Using:
  
 
Carrying
Amount
 Level 1 Level 2 Level 3 Total
Financial assets         
Cash and cash equivalents$125,661
 $10,620
 $115,041
 $—
 $125,661
Securities98,787
 502
 98,285
 —
 98,787
Loans receivable, net of allowance for loan losses1,335,631
 —
 1,340,957
 —
 1,340,957
FHLBC and FRB stock8,290
 —
 —
 —
 N/A
Accrued interest receivable4,569
 —
 4,569
 —
 4,569
Financial liabilities        
Noninterest-bearing demand deposits$231,049
 $—
 $231,049
 $—
 $231,049
Savings deposits158,696
 —
 158,696
 —
 158,696
NOW and money market accounts585,316
 —
 585,316
 —
 585,316
Certificates of deposit396,028
 —
 394,888
 —
 394,888
Borrowings60,928
 —
 60,932
 —
 60,932
Accrued interest payable180
 —
 180
 —
 180
   
Fair Value Measurements at
 December 31, 2016 Using:
  
 
Carrying
Amount
 Level 1 Level 2 Level 3 Total
Financial assets         
Cash and cash equivalents$96,684
 $13,053
 $83,631
 $—
 $96,684
Securities107,212
 499
 106,713
 —
 107,212
Loans receivable, net of allowance for loan losses1,312,952
 —
 1,322,713
 234
 1,322,947
FHLBC and FRB stock11,650
 —
 —
 —
 N/A
Accrued interest receivable4,381
 —
 4,381
 —
 4,381
Financial liabilities        
Noninterest-bearing demand deposits$249,539
 $—
 $249,539
 $—
 $249,539
Savings deposits160,002
 —
 160,002
 —
 160,002
NOW and money market accounts578,237
 —
 578,237
 —
 578,237
Certificates of deposit351,612
 —
 350,593
 —
 350,593
Borrowings51,069
 —
 50,015
 —
 50,015
Accrued interest payable102
 —
 102
 —
 102
For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents

      

Fair Value Measurements at June 30, 2020 Using:

     
  

Carrying Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 

Financial assets

                    

Cash and cash equivalents

 $384,765  $13,826  $370,939  $—  $384,765 

Securities

  59,437   —   59,437   —   59,437 

Loans receivable, net of allowance for loan losses

  1,081,798   —   —   1,089,464   1,089,464 

FHLB and FRB stock

  7,490   —   —   —   N /A 

Accrued interest receivable

  4,447   —   102   4,345   4,447 

Financial liabilities

                    

Certificates of deposit

  340,717   —   343,032   —   343,032 

Borrowings

  4,000   —   3,994   —   3,994 

      

Fair Value Measurements at December 31, 2019 Using:

     
  

Carrying Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 

Financial assets

                    

Cash and cash equivalents

 $190,325  $9,785  $180,540  $—  $190,325 

Securities

  60,193   —   60,193   —   60,193 

Loans receivable, net of allowance for loan losses

  1,168,008   —   —   1,177,459   1,177,459 

FHLB and FRB stock

  7,490   —   —   —   N /A 
Accrued interest receivable  4,563   —   252   4,311   4,563 

Financial liabilities

                    

Certificates of deposit

  402,034   —   402,914   —   402,914 

Borrowings

  61   —   61   —   61 

Loans: The estimated fair values for cashexit price observations are obtained from an independent third-party using its proprietary valuation model and cash equivalents are based on their carrying value due to the short-term nature of these assets.

Loans:methodology and may not reflect actual or prospective market valuations. The estimated fair value for loans has been determined by calculating the present value of future cash flowsvaluation is based on the currentprobability of default, loss given default, recovery delay, prepayment, and discount 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.



26

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

NOTE 9 - FAIR VALUE (continued)

FHLBC and FRB Stock: It is not practicable to determine the fair value of FHLBC 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 FHLBC 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.
assumptions.

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.

18
Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 9 – REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. The following table presents the Company's sources of noninterest income. Items outside of the scope of the ASC 606 are noted as such.

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Deposit service charges and fees

 $736  $974  $1,623  $1,904 

Loan servicing fees (1)

  82   56   145   79 

Mortgage brokerage and banking fees (1)

  11   21   40   49 

Gain on sale of equity securities (1)

  —   —   —   295 

Loss on disposal of other assets

  —   —   (2)  (19)

Trust and insurance commissions and annuities income

  224   224   506   429 

Earnings on bank-owned life insurance (1)

  9   38   41   68 

Other (1)

  101   113   208   245 

Total noninterest income

 $1,163  $1,426  $2,561  $3,050 

(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 based on specific types of transactions, 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 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 is included in deposit service charges and fees. Interchange income was $ 343,000 and $ 401,000 for the three months ended June 30, 2020 and 2019.  Interchange income was $ 694,000 and $ 762,000 for the six months ended June 30, 2020 and 2019.

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 and other assets: The Company records a gain or loss from the sale of OREO and other assets 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 and  six months ended June 30, 2020 and 2019 were not financed by the Bank.

19
Table of Contents

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, 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, or specific events such as a pandemic or terrorism, and in the Chicago metropolitan areamarkets in particular and in other market areas wherewhich we operatelend 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,




27


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 legislationlegislative or regulatory changes, including the Dodd-Frank Act and Basel III,that have an adverse impact on our products, services, operations and operating expenses; (xiii) higher federal deposit insurance premiums; (xiv) higher than expected overhead, infrastructure and compliance costs; (xv) changes in accounting or tax principles, policies or guidelines; (xvi) the effects of any federal government shutdown; and (xvi)(xvii) privacy and cybersecurity risks, including the risks of business interruption and the compromise of confidential customer information resulting from intrusions.

These risks and uncertainties, 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, 2016 and2019, as well as Part II, Items 1A of this Quarterly Report on Form 10-Q, as well asand 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. Forward looking statements speak only as of the date they are made. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.

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, 2016, and all amendments thereto,2019, as filed with the SEC.

Overview

Total loans remained stable

At June 30, 2020, the Company continued to be in the third quartera strong financial and operational condition. The Company had a Tier 1 leverage ratio of 2017 as strong originations in commercial and industrial loans and multi-family real estate loans were offset by higher than expected payoffs in commercial leases and investor one-to-four family residential loans. Total commercial and industrial loans increased by 14% on a linked-quarter basis consistent with our recent conversion to a national bank charter. We expect continued growth in commercial and industrial loan originations and multi-family lending consistent with previous quarters11.06% and a resumptionTier 1 risk-based capital ratio of growth in commercial lease originations in the last quarter of 2017.

We recorded a decrease to our provision for loan losses in the third quarter of 2017, as recoveries on previously-charged off loans exceeded the additional loan loss provision required due to growth in commercial-related loan balances. Based on the current loan portfolio composition and activity, we expect net interest margin to trend towards 3.30% during the fourth quarter of 2017, without regard to any further Federal Reserve rate increases.
Non-interest income increased modestly due primarily to higher deposit-account related fee income, loan fee income and other income. 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 further increases in non-interest income in future quarters.
Non-interest expense increased due to increased incentive compensation related to loan originations, and increased occupancy expenses primarily related to real estate tax expenses. The growth within multi-family lending, healthcare lending and direct commercial lessor finance required us to file additional state franchise tax returns; however, we expect to gain the benefit of lower state income tax rates from certain new markets in future periods. We also recognized additional advance disposition costs as we further accelerated the reduction of our remaining Other Real Estate Owned balances during the third quarter of 2017, with a goal to reduce the balance at December 31, 2017 by 40% or more of the September 30, 2017 balance. Other non-interest expenses remained well-contained.
17.03%. Our ratio of nonperforming loans to total loans was 0.19%, for commercial related loans0.16% and the ratio was 0.03%, and our ratio of non-performingnonperforming assets to total assets was 0.37%0.12%. The Company’s subsidiary, BankFinancial NA, had 26.7% of total assets in cash deposited at September 30, 2017. Our classified assets-to-Tier 1 Capital+ALLL ratio was 4.40%.the Federal Reserve Bank and other insured depository institutions. We expect continued reductionsbelieve the Company is appropriately positioned for the foreseeable economic and social consequences of the OREO balanceCOVID-19 global pandemic.

Pandemic Operational Status

On March 24, 2020, we limited branch lobby service to appointment-only, and scheduled pending resolutions will further improveimplemented new capabilities to execute lobby transactions electronically or via our asset quality.


drive-in facilities. Due to continued declines in customer traffic, we temporarily closed three branch offices on April 13, 2020 and consolidated service into reasonably proximate larger branch offices. All business functions continue to be operational. 

During the second quarter of 2020, we deployed new technological capabilities for branch transaction processing; we are now capable of executing branch transactions on a contactless basis except for cash and check cashing transactions, and safe deposit box access. 

Beginning in late July 2020, we expect to restore walk-in branch service hours for limited periods and modestly expand drive-in hours for certain branch offices to accommodate customer service needs at peak periods. We implemented enhanced health safety protocols in all branch facilities for which we expect to restore walk-in branch services.



28

20
Table of Contents

Loan Composition & Activity

Our loan portfolio continues to benefit from its inherent diversity of credit exposures and geographic distribution. Consistent with our long-standing asset allocation principles, we have no material exposure to the hospitality (hotels or restaurants/franchises), oil and gas production, or travel/leisure industries. We have no exposure to direct construction lending or leveraged loans. We have limited exposure to residential mortgage and consumer loans. Our principle of lending based on “essential-use” assets and industries, such as affordable multi-family housing, health care and within a broadly-diversified range of large corporations and governments, has so far resulted in a loan portfolio that could prove to be resilient in terms of asset quality performance.

In the second quarter of 2020, total loans declined by $65.4 million (5.7%) compared to the first quarter of 2020. Commercial loan and finance balances decreased by $31.4 million (19.9%) primarily due to a $42.2 million (77.1%) reduction in line of credit usage by health-care providers, partially offset by seasonal growth in regional commercial lending and line of credit usage by equipment lessors.  Health-care providers received substantial additional liquidity from Medicare reimbursement advances and other sources, and some borrowers chose to pay down credit exposures to the maximum extent possible. Multi-family mortgage loans decreased by $5.8 million (1.1%) primarily due to scheduled principal amortization. Nonresidential real estate mortgage loans declined by $5.9 million (4.4%) primarily due to prepayment activity related to project sales and external refinance activity.  Our commercial equipment lease and commercial finance portfolio declined by $18.1 million (6.8%) primarily due to reduced origination volumes related to COVID-19 impacts on equipment delivery and installations to lessees.

U.S. Small Business Administration Paycheck Protection Program (PPP)

We originated 305 loans for $11 million pursuant to the U.S. Small Business Administration Paycheck Protection Program (PPP) in the second quarter of 2020; of these, we had 300 loans with $10.9 million in outstanding principal balance as of June 30, 2020. The Bank focused its PPP loan origination capabilities on new and existing small business deposit customers, resulting in an average loan origination amount of $36,144.

Due to the uncertainties concerning the PPP, borrower demand for PPP loans declined each month during the second quarter of 2020, with 229 loans originated in May 2020 and 25 loans originated in June 2020. In anticipation of further extensions and enhancements to the PPP, we implemented a technology solution to automate the processing of PPP loans.  We also implemented a technology solution to automate the processing of requests for forgiveness of PPP loans not forgiven by operation of law.   

COVID-19 Loan Forbearance Programs

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to US GAAP. In addition, OCC Bulletin 2020-35 provides more limited circumstances in which a loan modification is not subject to classification as a Troubled Debt Restructuring. Pursuant to these new capabilities, we developed several loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19.

Our Apartment and Commercial Real Estate Qualified Limited Forbearance Program permitted borrowers who qualify under Section 4013 of the CARES Act to make an election to pay scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and pay all deferred principal payments by December 2020. As of June 30, 2020, 100 borrowers with $94.0 million in outstanding loan principal balances executed a Qualified Limited Forbearance Program agreement. At June 30, 2020, all but two borrowers were current on all required forbearance payments; those borrowers made the required payments shortly after the end of the second quarter of 2020. 

For small investment property owners with loan balances under $750,000, borrowers were also able to defer the May 2020 loan payment entirely, with all deferred interest amounts due by December 2020 and all deferred principal amounts due by June 30, 2021. As of June 30, 2020, 41 borrowers with $14.3 million in outstanding principal balances executed a Small Investment Property Limited Forbearance Program agreement. At June 30, 2020, all but one borrower was current on all required forbearance payments; the remaining borrower made the required payment shortly after the end of the second quarter of 2020. 

Relief under CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements may be available to qualified commercial loan and commercial finance borrowers, and to commercial equipment lessees. As of June 30, 2020, we had no commercial loan borrowers subject to any form of forbearance agreement. As of June 30, 2020, there were seven commercial equipment lessees with $5.9 million in outstanding principal balances subject to a forbearance agreement.  As of June 30, 2020, all but one of the lessees were current on all required payments; the remaining lessee made the required payments shortly after the end of the second quarter of 2020.  One lessee with $449,000 in outstanding principal balance was subject to a forbearance agreement other than our standard Qualified Limited Forbearance Agreement. 

For residential mortgage and consumer loans, relief under CARES Act Section 4013 or OCC Bulletin 2020-35 forbearance agreements is available to qualified borrowers. As of June 30, 2020, we had 10 borrowers with $1.3 million in outstanding principal balances subject to a forbearance agreement with terms consistent with secondary residential mortgage market standards established by Fannie Mae.  Due to the continuing widespread impact of COVID-19 in the State of Illinois, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements in and after the third quarter of 2020.

Asset Quality

Our non-performing loans to total loans ratio was 0.16% as of June 30, 2020.  Due in part to disruptions in payment processing related to COVID-19, we placed three lessees with a total exposure of $833,000 on non-accrual status in the second quarter of 2020; of these, we received payments subsequent to June 30, 2020 from two with a total exposure of $526,000 sufficient to repay the exposures in full or restore the lessee to current payment status.  Past due loan balances, including payments due on any loan or leases subject to a forbearance agreement, continued to remain nominal; however, these trends could change based on the pace of economic recovery from the COVID-19 pandemic and based on any further fiscal stimulus, if any, from the U.S. Government in future quarters. 


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Allowance for Losses on Loans and Leases Reserve

Our allowance for losses on loans and leases reserve increased by $44,000, as increases in reserve ratios for multi-family residential real estate loans and commercial real estate loans were more than offset by the recovery of reserves from the overall reduction in outstanding loan principal balance during the second quarter of 2020.  The $31.4 million decline in commercial loans and finance balances during the second quarter of 2020 resulted in a $213,000 reduction in required reserve at June 30, 2020.  We estimate that if our loan portfolio balances and composition remained constant during the second quarter of 2020 from the first quarter of 2020, a $455,000 additional provision for loan loss reserve would have been indicated for the second quarter of 2020.  As of June 30, 2020, the required reserve ratios for multi-family residential real estate loans and commercial real estate loans increased by 19.6%, and 43.8%, respectively, compared to December 31, 2019.

If our loan balances increase as business and liquidity conditions normalize for our health care borrowers, and if equipment finance and commercial loan and finance originations return to their expected levels, we expect that we will experience additional increases to the allowance for loans and leases reserve.  Additionally, should economic conditions worsen due to the broad impacts of the COVID-19 pandemic, further increases in required reserve ratios for certain loan types may also require an increase in the allowance for loans and leases reserve.

Deposit Portfolio Composition & Activity

Our deposit portfolio composition consists almost entirely of core transaction accounts, with local retail and business money market deposit accounts, and local retail certificates of deposit accounts. In the second quarter of 2020, total deposits increased by $134.4 million (10.7%), net of a $16.3 million reduction in wholesale deposit balances, primarily due to the impacts of multiple COVID-19 U.S. Government fiscal stimulus programs. We also note that the delays enacted for federal and state tax reporting and remittances also deferred seasonal deposit withdrawal activity typical for the second quarter of each calendar year. For the remainder of 2020, we expect greater volatility in deposit balances, as various forms of government stimulus provide additional liquidity to depositors, but in most cases this liquidity may also be consumed to pay current or past due obligations. Given our substantial liquidity, we will maintain a moderate competitive posture for interest-bearing deposits, with pricing flexibility reserved for our most valuable overall deposit relationships.

Net Interest Income and Noninterest Income

The abrupt decline in interest rates during the first quarter of 2020 not only reduced interest income on floating-rate commercial loans and liquidity assets, but it also reduced competitive pressures and depositor expectations concerning deposit interest rates. Because of the need to maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, some further compression of our net interest margin is foreseeable in the next two quarters, but a sustained recovery in business conditions should enable us to deploy our additional asset generation resources and thus reallocate some of our excess liquidity.

The average yield on our loan and lease portfolio for the quarter ended June 30, 2020 was 4.57%, compared to an average loan and lease portfolio yield of 4.72% for the quarter ended March 31, 2020. The average cost of retail and commercial deposits decreased to 0.63% for the quarter ended June 30, 2020, compared to an average cost of 0.93% for the quarter ended March 31, 2020. The average cost of wholesale deposits and borrowings declined to 2.35% for the quarter ended June 30, 2020. Our net interest margin decreased to 3.09% for the quarter ended June 30, 2020, compared to 3.44% for the quarter ended March 31, 2020.

Noninterest income declined in the second quarter of 2020 due to the impact of “Stay-At-Home” orders on the use of card-based payments for retail sales and on commercial mortgage brokerage activity.  Changes in the market return of trust assets caused a modest reduction in wealth management and trust income.   The abrupt change in market interest rates reduced income on our Bank-Owned Life Insurance portfolio.  For the second quarter of 2020, noninterest income was $1.2 million, compared to $1.4 million in the first quarter of 2020. 

The substantial changes in commercial real estate market expectations will diminish transaction activity and credit availability for higher-leverage transactions typically financed by capital markets sources. The extreme volatility of equity markets similarly induces caution on the part of wealth management and trust customers, who became far more risk-averse as the scope and severity of the COVID-19 global pandemic expanded during the second quarter of 2020. We expect to see gradual improvement in these market-based opportunities commensurate with the reduction of uncertainties in commercial real estate and corporate earnings and asset valuations.

Noninterest Expense

Current market conditions favor a focus on expense reductions where feasible; however, our Business Plan requires investment in personnel and marketing resources to achieve our growth objectives in our loan and lease portfolios, and noninterest income for Commercial Mortgage Banking and Trust Services. Accordingly, we will seek to leverage cost savings from improved efficiencies in customer service delivery and reduction of legacy card-based transaction assets such as ATM/Debit cards and machines to help offset declines in interest income, and preserve our ability to realize our business generation priorities.

Noninterest expense declined to $9.2 million for the quarter ended June 30, 2020.  Compensation and benefits declined by $350,000, net of a $100,000 accrual for special performance compensation related to COVID-19 risk management and customer service activities.  Information technology expenses increased modestly due to improvements in our information security and network capacities; we expect some of these expenses to decline as we terminate existing parallel service agreements upon full implementation of new capabilities.   Despite increased expenses for health safety and other COVID-19 protections and responses, other expenses remained well-contained, as we curtailed marketing expenses and other discretionary expenses to improve efficiencies.

Capital Management

The sharp reduction in the Company’s share price to below tangible book value should create an opportunity to enhance shareholder value through highly accretive share repurchases, absent the imposition of regulatory limitations or the existence of higher priority- capital needs. We also intend to continue to consider potential acquisition opportunities that meet our established parameters, if executable under current market conditions.

We repurchased 181,640 shares of the Company's common stock at an average cost of $8.12 per share during the second quarter of 2020. Our tangible book value increased to $11.58 from $11.48 as of June 30, 2020.  At June 30, 2020, we had 155,127 shares available for repurchase under the Board's current share repurchase program.

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SELECTED FINANCIAL DATA

The following summary information is derived from the consolidated financial statements of the Company. For additional information, reference is made to the Consolidated Financial Statements of the Company and related notes included elsewhere in this Quarterly Report.

  

June 30, 2020

  

December 31, 2019

  

Change

 
  

(In thousands)

 

Selected Financial Condition Data:

            

Total assets

 $1,593,129  $1,488,015  $105,114 

Loans, net

  1,081,798   1,168,008   (86,210)

Securities, at fair value

  59,437   60,193   (756)

Other real estate owned, net

  143   186   (43)

Deposits

  1,388,155   1,284,757   103,398 

Borrowings

  4,000   61   3,939 

Equity

  172,454   174,372   (1,918)

  

Three Months Ended

      

Six Months Ended

     
  

June 30,

      

June 30,

     
  

2020

  

2019

  

Change

  

2020

  

2019

  

Change

 
  

(In thousands)

 

Selected Operating Data:

                        

Interest income

 $13,194  $16,522  $(3,328) $27,847  $33,048  $(5,201)

Interest expense

  1,869   3,419   (1,550)  4,553   6,726   (2,173)

Net interest income

  11,325   13,103   (1,778)  23,294   26,322   (3,028)

Provision for loan losses

  42   3,957   (3,915)  513   3,870   (3,357)

Net interest income after provision for loan losses

  11,283   9,146   2,137   22,781   22,452   329 

Noninterest income

  1,163   1,426   (263)  2,561   3,050   (489)

Noninterest expense

  9,249   9,472   (223)  18,877   19,570   (693)

Income before income tax expense

  3,197   1,100   2,097   6,465   5,932   533 

Income tax expense

  845   293   552   1,695   1,574   121 

Net income

 $2,352  $807  $1,545  $4,770  $4,358  $412 

23
 September 30, 2017 December 31, 2016 Change
 (Dollars in thousands)
Selected Financial Condition Data:     
Total assets$1,654,269
 $1,620,037
 $34,232
Loans, net1,335,631
 1,312,952
 22,679
Securities, at fair value98,787
 107,212
 (8,425)
Other real estate owned, net3,569
 3,895
 (326)
Deposits1,371,089
 1,339,390
 31,699
Borrowings60,928
 51,069
 9,859
Equity199,778
 204,780
 (5,002)

 Three Months Ended
September 30,		   Nine Months Ended
September 30,		  
 2017 2016 Change 2017 2016 Change
 (Dollars in thousands)
Selected Operating Data:           
Interest income$14,121
 $12,845
 $1,276
 $41,132
 $38,185
 $2,947
Interest expense1,615
 1,014
 601
 4,347
 2,822
 1,525
Net interest income12,506
 11,831
 675
 36,785
 35,363
 1,422
Provision for (recovery of) loan losses(225) (525) 300
 (15) 300
 (315)
Net interest income after provision for (recovery of) loan losses12,731
 12,356
 375
 36,800
 35,063
 1,737
Noninterest income1,623
 1,637
 (14) 4,774
 4,768
 6
Noninterest expense10,200
 9,912
 288
 31,073
 31,348
 (275)
Income before income tax expense4,154
 4,081
 73
 10,501
 8,483
 2,018
Income tax expense594
 1,573
 (979) 2,488
 3,240
 (752)
Net income$3,560
 $2,508
 $1,052
 $8,013
 $5,243
 $2,770



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 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017 2016 2017 2016
Selected Financial Ratios and Other Data:       
Performance Ratios:       
Return on assets (ratio of net income to average total assets) (1)
0.88% 0.66% 0.66% 0.46%
Return on equity (ratio of net income to average equity) (1)
7.07
 4.86
 5.26
 3.34
Average equity to average assets12.40
 13.64
 12.61
 13.84
Net interest rate spread (1) (2)
3.10
 3.23
 3.12
 3.25
Net interest margin (1) (3)
3.23
 3.33
 3.24
 3.34
Efficiency ratio (4)
72.19
 73.60
 74.77
 78.11
Noninterest expense to average total assets (1)
2.51
 2.62
 2.57
 2.76
Average interest-earning assets to average interest-bearing liabilities131.23
 134.36
 131.69
 135.58
Dividends declared per share$0.07
 $0.05
 $0.20
 $0.15
Dividend payout ratio35.69% 38.82% 46.30% 56.79%
 At September 30, 2017 At December 31, 2016
Asset Quality Ratios:   
Nonperforming assets to total assets (5)
0.37% 0.44%
Nonperforming loans to total loans0.19
 0.25
Allowance for loan losses to nonperforming loans321.46
 246.57
Allowance for loan losses to total loans0.62
 0.62
Capital Ratios:   
Equity to total assets at end of period12.08% 12.64%
Tier 1 leverage ratio (Bank only)10.94% 10.27%
Other Data:   
Number of full-service offices19
 19
Employees (full-time equivalents)238
 246

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Selected Financial Ratios and Other Data:

                

Performance Ratios:

                

Return on assets (ratio of net income to average total assets) (1)

  0.61%  0.21%  0.63%  0.57%

Return on equity (ratio of net income to average equity) (1)

  5.42   1.84   5.47   4.84 

Average equity to average assets

  11.27   11.47   11.60   11.69 

Net interest rate spread (1) (2)

  2.90   3.30   3.04   3.32 

Net interest margin (1) (3)

  3.09   3.60   3.26   3.62 

Efficiency ratio (4)

  74.06   65.19   73.01   66.63 

Noninterest expense to average total assets (1)

  2.40   2.48   2.51   2.54 

Average interest-earning assets to average interest-bearing liabilities

  138.21   131.66   135.41   131.77 

Dividends declared per share

 $0.10  $0.10  $0.20  $0.20 

Dividend payout ratio

  63.73%  191.78%  63.33%  73.28%

  

At June 30, 2020

  

At December 31, 2019

 

Asset Quality Ratios:

        

Nonperforming assets to total assets (5)

  0.12%  0.07%

Nonperforming loans to total loans

  0.16   0.07 

Allowance for loan losses to nonperforming loans

  457.43   901.06 

Allowance for loan losses to total loans

  0.75   0.65 

Capital Ratios:

        

Equity to total assets at end of period

  10.82%  11.72%

Tier 1 leverage ratio (Bank only)

  10.54%  10.89%

Other Data:

        

Number of full-service offices

  19   19 

Employees (full-time equivalents)

  199   222 

(1)

(1)

Ratios annualized.

(2)

(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)

(3)

The net interest margin represents net interest income divided by average total interest-earning assets for the period.

(4)

(4)

The efficiency ratio represents noninterest expense, divided by the sum of net interest income and noninterest income.

(5)

(5)

Nonperforming assets include nonperforming loans and other real estate owned.

Comparison of Financial Condition at SeptemberJune 30, 20172020 and December 31, 2016

2019

Total assets increased $34.2$ 105.1 million, or 2.1%7.1%, to $1.654 1.593 billion at SeptemberJune 30, 2017,2020, from $1.620$ 1.488 billion at December 31, 2016.2019. The increase in total assets was primarily due to increasesan increase in cash and cash equivalents, and loans.which was partially offset by a decrease in loans receivable.  Cash and cash equivalents increased $29.0$ 194.4 million, or 30.0%102.2%, to $125.7$ 384.8 million at SeptemberJune 30, 2017,2020, from $96.7$ 190.3 million at December 31, 2016.2019. Loans increased $22.7decreased $ 86.2 million, or 1.7%7.4%, to $1.336$ 1.082 billion at SeptemberJune 30, 2017,2020, from $1.313$ 1.168 billion at December 31, 2016. Partially offsetting the increases in cash and cash equivalents and loans was a decrease in securities of $8.4 million, or 7.9%, to $98.8 million at September 30, 2017, from $107.2 million at December 31, 2016.

2019.

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 92.0%95.3% of gross loans at SeptemberJune 30, 2017. Commercial2020. During the six months ended June 30, 2020, multi-family loans increaseddecreased by $44.0$ 27.1 million, or 42.7% and multi-family mortgage4.8%; commercial loans increaseddecreased by $33.5$ 19.1 million, or 6.2%, during the nine months ended September 30, 2017. Commercial13.1%; commercial leases decreased $19.4$ 24.6 million, or 5.5%9.0%; and nonresidential real estate loans decreased $ 7.1 million, or 5.3%. The decrease in multi-family loans was primarily due to a significant amount of loan prepayments.

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Table of Contents

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 engage in multi-family mortgage lending activities in carefully




30


selected metropolitan areas outside our primary lending area and engage in certain types of commercial lending and leasing activities on a nationwide basis. At SeptemberJune 30, 2017, $281.42020, $228.7 million, or 48.8%42.6%, of our multi-family mortgage loans were in the Metropolitan Statistical Area for Chicago, Illinois; $73.4$71.2 million, or 12.7%13.3%, were in the Metropolitan Statistical Area for Dallas, Texas; $52.6$44.6 million, or 9.1%8.3%, were in the Metropolitan Statistical Area for Denver, Colorado; $29.6$30.1 million, or 5.1%5.6%, were in the Metropolitan Statistical Area for Tampa, Florida and $17.9Florida; $29.1 million, or 3.1%5.4%, were in the Metropolitan Statistical Area for Greenville-Spartanburg, South Carolina; $21.5 million, or 4.0%, were in the Metropolitan Statistical Area for San Antonio, Texas; and $19.2 million, or 3.6%, were in the Metropolitan Statistical Area for Minneapolis, Minnesota. This information reflects the location of the collateral butand does not necessarily reflect the location of the borrower.

Total liabilities increased $39.2 107.0 million,, or 2.8%8.1%, to $1.454 1.421 billion at SeptemberJune 30, 2017,2020, from $1.415 billion at December 31, 2016, primarily due to increases in interest-bearing NOW accounts and certificates of deposit. The increases were partially offset by decreases in noninterest-bearing accounts and money market accounts. Total deposits increased $31.7 million, or 2.4%, to $1.371 billion at September 30, 2017, from $1.339 1.314 billion at December 31, 2016. Certificates of deposit2019, primarily due to an increase in total deposits.  Total deposits increased $44.4$ 103.4 million, or 12.6%8.0%, to $396.0$ 1.388 billion at June 30, 2020, from $ 1.285 billion at December 31, 2019.  Noninterest-bearing demand deposits increased $94.3 million, or 44.8%, to $ 305.1 million at SeptemberJune 30, 2017,2020, from $351.6$ 210.8 million at December 31, 2016. Interest-bearing2019 and interest-bearing NOW accounts increased $16.4$33.5 million, or 6.1%12.2%, to $283.4$ 306.6 million at SeptemberJune 30, 2017,2020, from $267.1$ 273.2 million at December 31, 2016. Savings2019.  Money market accounts decreased $1.3increased $22.5 million, or 0.8%9.2%, to $158.7$ 268.1 million at SeptemberJune 30, 2017,2020, from $160.0$ 245.6 million at December 31, 2016. Noninterest-bearing demand deposits decreased $18.52019.  Savings accounts increased $14.4 million,, or 7.4%9.4%, to $231.0 million at September 30, 2017, from $249.5 million at December 31, 2016. Money market accounts decreased $9.3 million, or 3.0%, to $301.9 167.6 million at SeptemberJune 30, 2017,2020, from $311.2$ 153.2 million at December 31, 2016.2019.  Retail certificates of deposit decreased $33.0 million, or 9.8%, to $ 304.0 million at June 30, 2020, from $ 336.9 million at December 31, 2019. Wholesale certificates of deposit decreased $28.3 million, or 43.5%, to $ 36.7 million at June 30, 2020, from $ 65.1 million at December 31, 2019. Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) were 71.1% and 73.7%represented 75.5% of total deposits at SeptemberJune 30, 2017 and2020, compared to 68.7% at December 31, 2016, respectively.

2019.  Borrowings increased $3.9 million in May 2020, the Bank borrowed $4.0 million from the FHLB at zero percent interest rate for a one year term.

Total stockholders’ equity was $199.8 172.5 million at SeptemberJune 30, 2017,2020, compared to $204.8 174.4 million at December 31, 2016.2019. The decrease in total stockholders’ equity during the nine months ended September 30, 2017 was primarily due to the combined impact of our repurchase of 614,673387,836 shares of our common stock during the six months ended June 30, 2020 at a total cost of $9.1$ 3.7 million and our declaration and payment of cash dividends totaling $3.7$ 3.0 million andduring the $1.2 million net impact of stock option exercises.same period. These itemsreductions in total stockholders’ equity were partially offset by the net income of $8.0 4.8 million that wethe Company recorded for the ninesix months ended SeptemberJune 30, 2017 and the $1.1 million impact of the ESOP loan repayment that was made on March 29, 2017.2020.

Operating Results for the Three Months Ended SeptemberJune 30, 20172020 and 2016

2019

Net Income.We had net Net income of $3.6 million for the three months ended September 30, 2017, compared to $2.5was $2.4 million for the three months ended SeptemberJune 30, 2016.2020, compared to $807,000 for the three months ended June 30, 2019. Earnings per basic and fully diluted share of common stock was $0.20were $0.16 for the three months ended SeptemberJune 30, 2017,2020, compared to $0.13$0.05 for the three months ended SeptemberJune 30, 2016.

2019.

Net Interest Income. Net interest income was $12.5$11.3 million for the three months ended SeptemberJune 30, 2017,2020, compared to $11.8$13.1 million for the same period in 2016.three months ended June 30, 2019. The increasedecrease in net interest income reflected a $1.3$3.3 million, or 20.1%, or 9.9%, increasedecrease in interest income, partially offset by a $1.6 million decrease in interest expense.

The decrease in interest income was due in substantial part to a decrease in the average yield on interest-earning assets, which was partially offset by a $601,000, or 59.3%, increase in interest expense.

The increase in interest income was primarily attributable to an increasedecrease in the cost of interest-bearing liabilities and a decrease in total average balanceinterest-bearing liabilities. The yield on interest-earning assets decreased 94 basis points to 3.60% for the three months ended June 30, 2020, from 4.54% for the three months ended June 30, 2019. The cost of interest-earning assets.interest-bearing liabilities decreased 54 basis points to 0.70% for the three months ended June 30, 2020, from 1.24% for the same period in 2019. Total average interest-earning assets increased $121.1$17.7 million, or 8.6%1.2%, to $1.536$1.476 billion for the three months ended SeptemberJune 30, 2017,2020, from $1.415$1.458 billion for the same period in 2016.2019.  Total average interest-bearing liabilities decreased $39.7 million, or 3.6%, to $1.068 billion for the three months ended June 30, 2020, from $1.108 billion for the same period in 2019.  Our net interest rate spread decreased by 1340 basis pointspoint to 3.10%2.90% for the three months ended SeptemberJune 30, 2017,2020, from 3.23%3.30% for the same period in 2016.2019. Our net interest margin decreased by ten51 basis points to 3.23%3.09% for the three months ended SeptemberJune 30, 2017,2020, from 3.33%3.60% for the same period in 2016. However, the average yield on commercial loans and leases originated in the third quarter of 2017 was 4.46%, compared to 3.73% for commercial loans and leases originated in the third quarter of 2016. The yield on interest-earning assets increased four basis points to 3.65% for the three months ended September 30, 2017, from 3.61% for the same period in 2016, and the cost of interest-bearing liabilities increased 17 basis points to 0.55% for the three months ended September 30, 2017, from 0.38% for the same period in 2016.

2019.



31

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Average Balance Sheets

The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses and discounts and premiums and purchase accounting adjustments that are amortized or accreted to interest income or expense.

 For the Three Months Ended September 30,
 2017 2016
 
Average
Outstanding
Balance
 Interest 
Yield/Rate (1)
 
Average
Outstanding
Balance
 Interest 
Yield/Rate (1)
 (Dollars in thousands)
Interest-earning assets:           
Loans$1,331,302
 $13,345
 3.98% $1,225,480
 $12,388
 4.02%
Securities108,050
 389
 1.43
 106,904
 306
 1.14
Stock in FHLBC and FRB8,290
 101
 4.83
 6,257
 10
 0.64
Other88,201
 286
 1.29
 76,095
 141
 0.74
Total interest-earning assets1,535,843
 14,121
 3.65
 1,414,736
 12,845
 3.61
Noninterest-earning assets88,594
     96,739
    
Total assets$1,624,437
     $1,511,475
    
Interest-bearing liabilities:           
Savings deposits$159,464
 48
 0.12
 $157,036
 43
 0.11
Money market accounts304,553
 307
 0.40
 313,270
 243
 0.31
NOW accounts278,389
 139
 0.20
 257,553
 95
 0.15
Certificates of deposit369,804
 925
 0.99
 323,076
 631
 0.78
Total deposits1,112,210
 1,419
 0.51
 1,050,935
 1,012
 0.38
Borrowings58,112
 196
 1.34
 1,981
 2
 0.40
Total interest-bearing liabilities1,170,322
 1,615
 0.55
 1,052,916
 1,014
 0.38
Noninterest-bearing deposits232,464
     233,914
    
Noninterest-bearing liabilities20,231
     18,408
    
Total liabilities1,423,017
     1,305,238
    
Equity201,420
     206,237
    
Total liabilities and equity$1,624,437
     $1,511,475
    
Net interest income  $12,506
     $11,831
  
Net interest rate spread (2)
    3.10%     3.23%
Net interest-earning assets (3)
$365,521
     $361,820
    
Net interest margin (4)
    3.23%     3.33%
Ratio of interest-earning assets to interest-bearing liabilities131.23%     134.36%    

  

For the Three Months Ended June 30,

 
  

2020

  

2019

 
  

Average Outstanding Balance

  

Interest

  

Yield/Rate (1)

  

Average Outstanding Balance

  

Interest

  

Yield/Rate (1)

 
  

(Dollars in thousands)

 

Interest-earning assets:

                        

Loans

 $1,116,067  $12,669   4.57% $1,297,548  $15,389   4.76%

Securities

  66,750   271   1.63   86,144   602   2.80 

Stock in FHLB and FRB

  7,490   86   4.62   7,629   92   4.84 

Other

  285,594   168   0.24   66,859   439   2.63 

Total interest-earning assets

  1,475,901   13,194   3.60   1,458,180   16,522   4.54 

Noninterest-earning assets

  65,451           70,853         

Total assets

 $1,541,352          $1,529,033         

Interest-bearing liabilities:

                        

Savings deposits

 $163,238   27   0.07  $154,822   117   0.30 

Money market accounts

  258,000   202   0.31   247,997   573   0.93 

NOW accounts

  285,838   128   0.18   267,185   309   0.46 

Certificates of deposit

  358,404   1,512   1.70   436,435   2,418   2.22 

Total deposits

  1,065,480   1,869   0.71   1,106,439   3,417   1.24 

Borrowings

  2,374   —   —   1,101   2   0.73 

Total interest-bearing liabilities

  1,067,854   1,869   0.70   1,107,540   3,419   1.24 

Noninterest-bearing deposits

  273,523           216,199         

Noninterest-bearing liabilities

  26,298           29,842         

Total liabilities

  1,367,675           1,353,581         

Equity

  173,677           175,452         

Total liabilities and equity

 $1,541,352          $1,529,033         

Net interest income

     $11,325          $13,103     

Net interest rate spread (2)

          2.90%          3.30%

Net interest-earning assets (3)

 $408,047          $350,640         

Net interest margin (4)

          3.09%          3.60%

Ratio of interest-earning assets to interest-bearing liabilities

  138.21%          131.66%        

(1)

Annualized.

(1)

(2)

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)

(3)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4)

(4)

Net interest margin represents net interest income divided by average total interest-earning assets.




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Provision for Loan Losses

We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

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 ofprovision for loan losses of $225,000$42,000 for the three months ended SeptemberJune 30, 2017,2020, compared to $525,000a provision of $4.0 million for the same period in 2016.2019. The provision for, or recovery of, loan losses is a function of the allowance for loan loss methodology that we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses that is attributable to loans collectively evaluated for impairment increased $252,000,$44,000, or 3.1%0.5%, to $8.4$8.2 million at SeptemberJune 30, 2017,2020 from $8.1 million at  June 30, 2017.March 31, 2020. There waswere no reservereserves established for loans individually evaluated for impairment for the three months ended SeptemberJune 30, 2017 or2020 and 2019. Net recoveries were $2,000 for the three months ended June 30, 2017. Net recoveries were $477,0002020, compared to net charge-offs of $4.5 million for the three months ended SeptemberJune 30, 2017.

2019.

The decrease in net charge-offs and provision for loan losses were primarily due to the fact that our operating results for the three months ending June 30, 2019 included a $4.4 million loss on the sale of a Chicago commercial credit exposure that experienced an unexpected deterioration in the second quarter of 2019. The sold loans were originated in 2016 to two affiliated wholesale fuel distributors. The loans were secured by accounts receivable and supplemental real estate collateral and were personally guaranteed by the borrowers’ principals. In the second quarter of 2019, we learned that one of the borrowers failed to make excise tax payments in violation of its agreements with the State of Illinois, that a tax performance bond that was a condition to the borrower’s continued ability to operate as a wholesale fuel distributor in the State of Illinois would not be renewed by the borrower’s insurer, and that the borrower had apparently altered its collection procedures and cash management practices in ways that appeared to make it necessary for us to institute litigation to gain control of and collect the proceeds of the accounts receivable collateral. We evaluated these and other factors, including the risks to the borrower’s ability to continue to operate as a going concern, and concluded that a sale of the loans at a discount was a superior alternative to initiating potentially costly and protracted litigation, the outcome of which could not be predicted with reasonable certainty.

The allowance for loan losses as a percentage of nonperforming loans was 321.46% at September 30, 2017, compared to 274.76%457.43 at June 30, 2017.

2020, compared to 1061.78 at March 31, 2020 and 901.06 at December 31, 2019.

Noninterest Income

 Three Months Ended
September 30,		  
 2017 2016 Change
 (Dollars in thousands)
Deposit service charges and fees$584
 $583
 $1
Other fee income523
 478
 45
Insurance commissions and annuities income41
 53
 (12)
Gain on sale of loans, net10
 38
 (28)
Loan servicing fees58
 66
 (8)
Amortization of servicing assets(27) (28) 1
Earnings on bank owned life insurance67
 54
 13
Trust income169
 167
 2
Other198
 226
 (28)
Total noninterest income$1,623
 $1,637
 $(14)

  

Three Months Ended

     
  

June 30,

     
  

2020

  

2019

  

Change

 
  

(Dollars in thousands)

 

Deposit service charges and fees

 $736  $974  $(238)

Loan servicing fees

  82   56   26 

Mortgage brokerage and banking fees

  11   21   (10)

Trust and insurance commissions and annuities income

  224   224   — 

Earnings on bank-owned life insurance

  9   38   (29)

Other

  101   113   (12)

Total noninterest income

 $1,163  $1,426  $(263)

Noninterest income was decreased $1.6 million for each of the three month periods ended September 30, 2017 and 2016. Deposit service charges and fees also remained stable at $584,000 for the three months ended September 30, 2017, compared to $583,000 for the three months ended September 30, 2016. Other fee income increased $45,000, 263,000, or 9.4%, to $523,000 for the three months ended September 30, 2017, from $478,000 for the three months ended September 30, 2016, primarily due to increased debit card fees and other loan fees. Noninterest income for the three months ended September 30, 2017 included a $10,000 gain on sale of loans. Earnings on bank owned life insurance increased $13,000, or 24.1%, and trust income increased $2,000, or 1.2%18.4%, for the three months ended SeptemberJune 30, 2017. Other income2020 to $ 1.2 million, compared to $ 1.4 million for the same period in 2019.  Deposit service charges decreased $28,000,$238,000, or 12.4%24.4%, primarily due to $198,000reduced NSF returns charges, Visa fees and negative balance fees. Loan servicing fees increased $26,000 for the three months ended SeptemberJune 30, 2017,2020, compared to $226,000the three months ended June 30, 2019. Earnings on bank-owned life insurance decreased by $29,000 to $9,000 for the three months ended SeptemberJune 30, 2016.


2020, due to lower interest rates. Other income decreased $12,000, or 10.6%, to $101,000 for the three months ended June 30, 2020, compared to $113,000 for the three months ended June 30, 2019. 



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Noninterest Expense

 Three Months Ended
September 30,		  
 2017 2016 Change
 (Dollars in thousands)
Compensation and benefits$5,330
 $5,315
 $15
Office occupancy and equipment1,693
 1,487
 206
Advertising and public relations167
 144
 23
Information technology638
 707
 (69)
Supplies, telephone and postage337
 345
 (8)
Amortization of intangibles123
 129
 (6)
Nonperforming asset management84
 89
 (5)
Loss (gain) on sale other real estate owned69
 (15) 84
Valuation adjustments of other real estate owned227
 115
 112
Operations of other real estate owned107
 143
 (36)
FDIC insurance premiums150
 238
 (88)
Other1,275
 1,215
 60
Total noninterest expense$10,200
 $9,912
 $288

  

Three Months Ended

     
  

June 30,

     
  

2020

  

2019

  

Change

 
  

(Dollars in thousands)

 

Compensation and benefits

 $5,168  $5,207  $(39)

Office occupancy and equipment

  1,723   1,624   99 

Advertising and public relations

  118   145   (27)

Information technology

  808   753   55 
Professional fees  289   237   52 

Supplies, telephone and postage

  284   322   (38)

Amortization of intangibles

  7   14   (7)

Nonperforming asset management

  57   58   (1)

Operations of other real estate owned, net

  7   47   (40)

FDIC insurance premiums

  102   146   (44)

Other

  686   919   (233)

Total noninterest expense

 $9,249  $9,472  $(223)

Noninterest expense increaseddecreased by $288,000,$223,000, or 2.9%2.4%, to $10.2 9.2 million for the three months ended SeptemberJune 30, 2017,2020, from $9.9 9.5 million for the same period in 2016. Compensation and benefits expense increased $15,000, primarily due to increased accruals for loan origination and business plan performance incentives.2019.  Office occupancy and equipment expense increased $206,000,$99,000, or 13.9%6.1%, to $1.7 million for the three months ended SeptemberJune 30, 2017,2020, from $1.5$1.6 million for the same period in 2016, primarily2019, due in substantial part to an $82,000 increase in real estate taxes of $115,000. Advertising and public relationsincreases in office building expense, rent expense and technology equipment upgrade expenses. Information technology expense increased $23,000,$55,000, or 16.0%7.3%, to $167,000$808,000 for the three months ended SeptemberJune 30, 2017,2020, from $144,000$753,000 for the same period in 2016. Information technology expense decreased $69,000,2019, primarily due to system upgrades and cybersecurity prevention expenses.  Professional fees increased $52,000, or 9.8%21.9%, to $638,000$289,000 for the three months ended SeptemberJune 30, 2017,2020, from $707,000$237,000 for the same period in 2016. Nonperforming asset2019, due in substantial part to a $52,000 increase in trust consulting fees for investment management expenseservices.  FDIC insurance premiums decreased $5,000,$44,000, or 5.6%30.1%, to $84,000$102,000 for the three months ended SeptemberJune 30, 2017, from $89,0002020, compared to $146,000 for the same period in 2016, primarily2019, due to a $39,000 reductionthe receipt of the FDIC's small bank assessment credit in legal expenses. Valuation adjustments for OREO totaled $227,000third quarter 2019. Other expenses decreased $233,000, or 25.4%, to $686,000 for the three months ended SeptemberJune 30, 2017, compared to $115,0002020, from $919,000 for the same period in 2016,2019, due in substantial part to initiativesthe reversal of a $116,000 reserve established for the open letters of credit related to a loan charge-off that we undertookwas recorded in the second quarter of 2019.  Supplies and office occupancy expense included $104,000 in expenses related to accelerate OREO dispositions. Other expenses increased $60,000, or 4.9%, to $1.3 millioncivil unrest and COVID-19 for additional cleaning and sanitation costs that were incurred for infection control and prevention.

Income Taxes

We recorded income tax expense of $845,000 for the three months ended SeptemberJune 30, 2017, from $1.2 million for the same period in 2016, primarily due to increased state tax audit and planning and state franchise tax payments.

Income Taxes
For the three months ended September 30, 2017, we recorded income tax expense of $594,000,2020, compared to $1.6 million$293,000 for the three months ended SeptemberJune 30, 2016.2019. Our income tax expense was reduced by $879,000 for the quarter due to an increase in the deferred tax asset related to our Illinois net operating loss carryforward. Effective in July 2017, our Illinois income tax rate increased from 7.75% to 9.5%. Ourcombined state and federal effective tax rate for the three months ended SeptemberJune 30, 20172020 was 14.3%, compared to 38.5%26.4% versus an effective tax rate of 26.6% for the same period in 2016.three months ended June 30, 2019.




34


Operating Results for the NineSix Months EndedSeptember June 30, 20172020 and 2016

2019

Net Income.We had net income of $8.0$4.8 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $5.2$4.4 million for the ninesix months ended SeptemberJune 30, 2016. The increase in net income reflects an increase in interest income of $2.9 million in 2017 and the fact that our 2016 operating results were adversely impacted by a pre-tax charge off of $1.6 million resulting from our decision to sell three performing loans to a single borrower with a total carrying value of $16.2 million. Our earnings2019. Earnings per basic and fully diluted share of common stock were $0.44$0.32 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $0.27$0.28 per basic and fully diluted share for the same period in 2016.

2019.

Net Interest Income. Net interest income was $36.8$23.3 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $35.4$26.3 million for the same period in 2016.2019. The increase$3.0 million decrease in net interest income reflected a $2.9$5.2 million, increaseor 15.7%, decrease in interest income, which was partially offset by a $1.5$2.2 million increasedecrease in interest expense.

The increasedecrease in net interest income was primarily attributable to an increasea decrease in the average balance ofyield on interest-earning assets, which increased $105.3was partially offset by a decrease in the cost of interest-bearing liabilities and a decrease in total average interest-earning assets. The yield on interest-earning assets decreased 64 basis points, or 14.1%, to 3.90% for the six months ended June 30, 2020, from 4.54% for the six months ended June 30, 2019. The cost of interest-bearing liabilities decreased 36 basis points to 0.86% for the six months ended June 30, 2020, from 1.22% for the same period in 2019. Total average interest-earning assets decreased $30.6 million, or 7.4%2.1%, to $1.519$1.438 billion for the ninesix months ended SeptemberJune 30, 2017,2020, from $1.414$1.468 billion for the same period in 2016.2019. Our net interest rate spread decreased by 1328 basis points to 3.12%3.04% for the ninesix months ended SeptemberJune 30, 2017, compared to 3.25%2020, from 3.32% for the same period in 2016.2019. Our net interest margin decreased by ten36 basis pointpoints to 3.24%3.26% for the ninesix months ended SeptemberJune 30, 2017, compared to 3.34%2020, from 3.62% for the same period in 2016. However the average yield on commercial loans and leases originated in the nine months of 2017 was 4.34%, compared to 3.69% for commercial loans and leases originated in the nine months of 2016. The yield on interest-earning assets increased one basis points to 3.62% for the nine months ended September 30, 2017, from 3.61% for the same period in 2016, and the cost of interest-bearing liabilities increased 14 basis points to 0.50% for the nine months ended September 30, 2017, from 0.36% for the same period in 2016.


2019.



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Average Balance Sheets

The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses and discounts and premiums purchase accounting adjustments that are amortized or accreted to interest income or expense.

 For the Nine Months Ended September 30,
 2017 2016
 
Average
Outstanding
Balance
 Interest 
Yield/Rate (1)
 
Average
Outstanding
Balance
 Interest 
Yield/Rate (1)
 (Dollars in thousands)
Interest-earning assets:           
Loans$1,321,051
 $39,061
 3.95% $1,224,779
 $36,834
 4.02%
Securities110,399
 1,095
 1.33
 111,399
 927
 1.11
Stock in FHLBC and FRB8,563
 301
 4.70
 6,257
 53
 1.13
Other79,258
 675
 1.14
 71,516
 371
 0.69
Total interest-earning assets1,519,271
 41,132
 3.62
 1,413,951
 38,185
 3.61
Noninterest-earning assets91,438
     97,803
    
Total assets$1,610,709
     $1,511,754
    
Interest-bearing liabilities:           
Savings deposits$160,460
 138
 0.11
 $158,671
 128
 0.11
Money market accounts305,776
 886
 0.39
 319,299
 738
 0.31
NOW accounts272,149
 395
 0.19
 251,423
 278
 0.15
Certificates of deposit362,346
 2,484
 0.92
 287,074
 1,605
 0.75
Total deposits1,100,731
 3,903
 0.47
 1,016,467
 2,749
 0.36
Borrowings52,898
 444
 1.12
 26,398
 73
 0.37
Total interest-bearing liabilities1,153,629
 4,347
 0.50
 1,042,865
 2,822
 0.36
Noninterest-bearing deposits232,662
     238,827
    
Noninterest-bearing liabilities21,379
     20,822
    
Total liabilities1,407,670
     1,302,514
    
Equity203,039
     209,240
    
Total liabilities and equity$1,610,709
     $1,511,754
    
Net interest income  $36,785
     $35,363
  
Net interest rate spread (2)
    3.12%     3.25%
Net interest-earning assets (3)
$365,642
     $371,086
    
Net interest margin (4)
    3.24%     3.34%
Ratio of interest-earning assets to interest-bearing liabilities131.69%     135.58%    

  

For the Six Months Ended June 30,

 
  

2020

  

2019

 
  

Average Outstanding Balance

  

Interest

  

Yield/Rate (1)

  

Average Outstanding Balance

  

Interest

  

Yield/Rate (1)

 
  

(Dollars in thousands)

 

Interest-earning assets:

                        

Loans

 $1,138,010  $26,280   4.64% $1,300,948  $30,741   4.77%

Securities

  64,845   575   1.78   88,670   1,204   2.74 

Stock in FHLB and FRB

  7,490   172   4.62   7,826   192   4.95 

Other

  227,299   820   0.73   70,775   911   2.60 

Total interest-earning assets

  1,437,644   27,847   3.90   1,468,219   33,048   4.54 

Noninterest-earning assets

  65,864           72,994         

Total assets

 $1,503,508          $1,541,213         

Interest-bearing liabilities:

                        

Savings deposits

 $158,695   91   0.12  $154,145   231   0.30 

Money market accounts

  253,277   666   0.53   249,775   1,141   0.92 

NOW accounts

  276,017   351   0.26   268,690   602   0.45 

Certificates of deposit

  372,546   3,445   1.86   433,905   4,664   2.17 

Total deposits

  1,060,535   4,553   0.86   1,106,515   6,638   1.21 

Borrowings

  1,201   —   —   7,701   88   2.30 

Total interest-bearing liabilities

  1,061,736   4,553   0.86   1,114,216   6,726   1.22 

Noninterest-bearing deposits

  241,001           217,680         

Noninterest-bearing liabilities

  26,403           29,140         

Total liabilities

  1,329,140           1,361,036         

Equity

  174,368           180,177         

Total liabilities and equity

 $1,503,508          $1,541,213         

Net interest income

     $23,294          $26,322     

Net interest rate spread (2)

          3.04%          3.32%

Net interest-earning assets (3)

 $375,908          $354,003         

Net interest margin (4)

          3.26%          3.62%

Ratio of interest-earning assets to interest-bearing liabilities

  135.41%          131.77%        

(1)

Annualized

(1)

(2)

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)

(3)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4)

(4)

Net interest margin represents net interest income divided by average total interest-earning assets.




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Provision for Loan Losses

We recorded a recovery ofprovision for loan losses of $15,000$513,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to a provision for loan losses of $300,000$3.9 million for the same period in 2016.2019. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment increased $273,000,$524,000, or 3.4%6.9%, to $8.4$8.2 million at SeptemberJune 30, 2017. The reserve2020, from $7.6 million at December 31, 2019. There were no reserves established for loans individually evaluated for impairment decreased $26,000 to zero at Septemberfor the six months ended June 30, 2017.

2020 and 2019. Net recoveries were $262,000$11,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to net charge-offs of $1.7$4.5 million for the same period in 2016. Net2019.  The decrease in net charge-offs in 2016and provision for loan losses were primarily due to the fact that our operating results for the six months ending June 30, 2019 included a $1.6$4.4 million charge-off resulting fromloss on the sale of three performing loans to a single borrower with a total carrying value of $16.2 millionChicago commercial credit exposure that experienced an unexpected deterioration in the second quarter of 2016. Although the loans were well-secured and supported by adequate cash flow, the Company concluded that possible future events could increase the risk of a default and subject the Company to significant legal expenses and an extended resolution period. The Company therefore elected to pursue a resolution that would result in a finite, known consequence rather than pursue alternative resolution strategies that presented multiple uncertainties and risks that were difficult to quantify.
2019. 

The allowance for loan losses as a percentage of nonperforming loans was 321.46%457.43 at SeptemberJune 30, 2017,2020, compared to 246.57%901.06 at December 31, 2016.

2019.

Noninterest Income

 Nine Months Ended
September 30,		  
 2017 2016 Change
 (Dollars in thousands)
Deposit service charges and fees$1,682
 $1,691
 $(9)
Other fee income1,494
 1,478
 16
Insurance commissions and annuities income170
 180
 (10)
Gain on sale of loans, net70
 59
 11
Gain on sales of securities—
 46
 (46)
Loan servicing fees188
 214
 (26)
Amortization of servicing assets(86) (96) 10
Earnings on bank owned life insurance196
 151
 45
Trust income534
 492
 42
Other526
 553
 (27)
Total noninterest income$4,774
 $4,768
 $6

  

Six Months Ended

     
  

June 30,

     
  

2020

  

2019

  

Change

 
  

(Dollars in thousands)

 

Deposit service charges and fees

 $1,623  $1,904  $(281)

Loan servicing fees

  145   79   66 

Mortgage brokerage and banking fees

  40   49   (9)

Gain on sale of equity securities

  —   295   (295)
Loss on disposal of other assets  (2)  (19)  17 

Trust and insurance commissions and annuities income

  506   429   77 

Earnings on bank-owned life insurance

  41   68   (27)

Other

  208   245   (37)

Total noninterest income

 $2,561  $3,050  $(489)

Noninterest income remained constant at $4.8decreased by $489,000, or 16.0%, to $2.6 million for the nine month periodssix months ended SeptemberJune 30, 2017 and 2016. Other fee income increased $16,000, or 1.1%. Noninterest income2020, from $3.1 million for the ninesix months ended SeptemberJune 30, 2017 included2019.  Deposit service charges and fees decreased $281,000, or 14.8%, to $1.6 million for the six months ended June 30, 2020, compared to $1.9 million for the six months ended June 30, 2019, primarily due to reduced NSF return charges, Visa fees and negative balance fees. We recorded a $70,000 gain on sale of loans,equity securities for the six months ended June 30, 2019 of $295,000.  Trust and insurance commissions and annuities income increased $77,000, or 17.9%, to $506,000 for the six months ended June 30, 2020, compared to a $59,000 gain on sale of loans$429,000 for the same period in 2016. Loan servicing feessix months ended June 30, 2019.  Earnings on bank-owned life insurance decreased $26,000$27,000 to $41,000 for the six months ended June 30, 2020, due to lower interest rates.  Other income decreased $37,000, or 15.1%, to $208,000 for the six months ended June 30, 2020, compared to $245,000 for the same nine month period in 2016 due to a decrease in the balance of loans serviced for others.




37


six months ended June 30, 2019.

Noninterest Expense

 Nine Months Ended
September 30,		  
 2017 2016 Change
 (Dollars in thousands)
Compensation and benefits$16,792
 $17,021
 $(229)
Office occupancy and equipment4,914
 4,769
 145
Advertising and public relations807
 618
 189
Information technology2,070
 2,130
 (60)
Supplies, telephone and postage1,027
 1,018
 9
Amortization of intangibles374
 394
 (20)
Nonperforming asset management215
 300
 (85)
Loss (gain) on sale other real estate owned100
 (15) 115
Valuation adjustments of other real estate owned301
 244
 57
Operations of other real estate owned460
 539
 (79)
FDIC insurance premiums462
 691
 (229)
Other3,551
 3,639
 (88)
Total noninterest expense$31,073
 $31,348
 $(275)

  

Six Months Ended

     
  

June 30,

     
  

2020

  

2019

  

Change

 
  

(Dollars in thousands)

 

Compensation and benefits

 $10,686  $10,910  $(224)

Office occupancy and equipment

  3,523   3,469   54 

Advertising and public relations

  270   306   (36)

Information technology

  1,672   1,459   213 

Professional fees

  524   544   (20)

Supplies, telephone and postage

  587   725   (138)

Amortization of intangibles

  21   34   (13)

Nonperforming asset management

  97   112   (15)

Operations of other real estate owned, net

  (10)  3   (13)

FDIC insurance premiums

  136   254   (118)

Other

  1,371   1,754   (383)

Total noninterest expense

 $18,877  $19,570  $(693)

Noninterest expense decreased by $275,000,$693,000, or 0.9%3.5%, to $31.1$18.9 million for the ninesix months ended SeptemberJune 30, 2017,2020, from $31.3$19.6 million for the same period in 2016.2019. The decrease in noninterest expense is due in substantial part to decreases in compensation and benefits, FDIC insurance premiums and other noninterest expense, offset in part by an increase in information technology expense. Compensation and benefits expense decreased $229,000,$224,000, or 1.3%2.1%, partially due to a decrease in full-time equivalent employees to 199 at June 30, 2020 from 231 at June 30, 2019.  Office occupancy and equipment expense increased $54,000, or 1.6%, to $3.5 million for the six months ended June 30, 2020 and 2019, due in substantial part to a $131,000 increase in real estate taxes for Bank properties, as well as an increase of $78,000 in equipment upgrade expenses, offset in part by a $156,000 decrease of $590,000 in stock-based compensationsnow removal expense. Information technology expense increased $213,000, or 14.6%, to $1.7 million for the ninesix months ended SeptemberJune 30, 2017, which was partially offset by increased accruals for loan origination and business plan performance incentives. In the first quarter of 2017, we recorded a one-time, non-cash, non-tax deductible equity compensation expense of $1.12020, compared to $1.5 million related to the termination of the Bank's ESOP and the repayment of the ESOP’s Share Acquisition Loan. ESOP and equity-based compensation expense for the nine months ended September 30, 2016 was $1.7 million. Expenses for office occupancy and equipment increased $145,000, or 3.0%,same period in 2019, primarily due to increased real estate taxessystem upgrades and increased rent expensecybersecurity prevention expenses. FDIC insurance premiums decreased $118,000, or 46.5%, to $136,000 for the lending operationssix months ended June 30, 2020, compared to $254,000 for the same period in selected metropolitan areas outside our primary lending area. Operations of OREO decreased $79,000, or 14.7%,2019, due to decreasesthe receipt of the FDIC's small bank assessment credit in legal expense and maintenance and repairs expense, partially offset by a decrease of $80,000 in rental income.third quarter 2019. Other expenses decreased $88,000,$383,000, or 2.4%21.8%, primarilyto $1.4 million for the six months ended June 30, 2020, from $1.8 million for the same period in 2019, due in substantial part to reductions in loss duethe reversal of a $116,000 reserve established for the open letters of credit related to frauda loan charge-off that was recorded in the ninesecond quarter 2019.  Supplies and office occupancy expense included $122,000 in expenses related to civil unrest and COVID-19 for additional cleaning and sanitation costs that were incurred for infection control and prevention.

Income Taxes

For the six months ended SeptemberJune 30, 2017 and the fact that2020, we recorded an expense of $150,000 in the nine months ended September 30, 2016 for a mortgage representation and warranty reserve for mortgage loans sold and serviced for others.

Income Taxes
For the nine months ended September 30, 2017, we recorded $2.5$1.7 million of income tax expense, compared to $3.2$1.6 million for the ninesix months ended SeptemberJune 30, 2016.2019. Our effective tax rate for the ninesix months ended SeptemberJune 30, 20172020 was 23.7%26.2%, compared to 38.2%26.5% for the same period in 2016. Our effective tax rate for the nine months ended September 2019.

30 2017 included the impact
Table of the stock option exercises and the one-time, non-cash, non-tax deductible equity compensation expense relating to the termination of the ESOP. In addition, our income tax expense was reduced by $879,000 due to an increase in the deferred tax asset related to our Illinois net operating loss carryforward. Effective in July 2017, our Illinois income tax rate increased from 7.75% to 9.5%.

Nonperforming Loans and Assets

We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company placeswe 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




38


received or the renewal of the loan has not occurred for administrative reasons. At SeptemberJune 30, 2017,2020, 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”,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 SeptemberJune 30, 2017,2020, 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.




39


Nonperforming Assets Summary

The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets.

 September 30, 2017 June 30, 2017 December 31, 2016 Quarter Change Nine Month Change
 (Dollars in thousands)
Nonaccrual loans:         
One-to-four family residential real estate$2,234
 $2,585
 $2,851
 $(351) $(617)
Multi-family mortgage371
 371
 185
 —
 186
Nonresidential real estate—
 —
 260
 —
 (260)
 2,605
 2,956
 3,296
 (351) (691)
Other real estate owned:         
One-to-four family residential1,748
 1,946
 1,565
 (198) 183
Multi-family mortgage—
 357
 370
 (357) (370)
Nonresidential real estate1,551
 1,736
 1,066
 (185) 485
Land270
 857
 894
 (587) (624)
 3,569
 4,896
 3,895
 (1,327) (326)
Total nonperforming assets$6,174
 $7,852
 $7,191
 $(1,678) $(1,017)
Ratios:         
Nonperforming loans to total loans0.19% 0.22% 0.25%    
Nonperforming assets to total assets0.37
 0.48
 0.44
    

  

June 30, 2020

  March 31, 2020  

December 31, 2019

  

Quarter Change

  

Six-Month Change

 
  

(Dollars in thousands)

 

Nonaccrual loans:

                    

One-to-four family residential real estate

 $662  $476  $512  $186  $150 

Nonresidential real estate

  288   288   288   —   — 
Other commercial leases  833   —   —   833   833 
   1,783   764   800   1,019   983 
Loans past due over 90 days, still accruing - commercial leases  —   —   47   —   (47)
                     
Nonperforming loans  1,783   764   847   1,019   936 
     ��               

Other real estate owned - One-to-four family residential

  143   110   186   33   (43)

Total nonperforming assets

 $1,926  $874  $1,033  $1,052  $893 

Ratios:

                    

Nonperforming loans to total loans

  0.16%  0.07%  0.07%        

Nonperforming assets to total assets

  0.12   0.06   0.07         

Nonperforming Assets

Nonperforming assets totaled $6.2 million, $7.9 million, and $7.2increased $893,000 to $1.9 million at September 30, 2017, June 30, 2017 and2020, from $1.0 million at December 31, 2016, respectively. Nonperforming assets decreased $1.7 million, during2019. Due in part to disruptions in payment processing related to COVID-19, we placed three lessees with a total exposure of $833,000 on non-accrual status in the three months ended Septembersecond quarter of 2020; of these, we received payments subsequent to June 30, 2017. Although we experience occasional isolated instances2020 from two with a total exposure of new nonaccrual loans, we believe that continuing our aggressive resolution posture will maintain$526,000 sufficient to repay the trends favoring very strong asset quality.

Fiveexposures in full or restore the lessee to current payment status.  One residential one multi-family loan and two nonresidential real estate loans with an aggregatea book balance of $2.0 million were$33,000 was transferred from nonaccrual loans to OREO during the ninesix months ended SeptemberJune 30, 2017.2020. 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.

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Table of Contents

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 FHLBCFHLB advances as an additional sourcessource of funds. We had $60.0$4.0 million of FHLBCFHLB advances outstanding at SeptemberJune 30, 20172020 and $50.0 millionnone at December 31, 2016.

2019.

The Company 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. The Company's primary source of liquidity is dividend payments it receives from the Bank. The Bank's ability to pay dividends to the Company is subject to regulatory limitations. At June 30, 2020, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $6.8 million.  On April 1, 2020, the Company entered into a $5.0 million unsecured line of credit with a correspondent bank at the parent company level. Interest is payable at a rate of Prime rate minus 0.75%. The line of credit will mature on April 1, 2021.

As of SeptemberJune 30, 2017,2020, we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material adverse impact on our liquidity.  As of SeptemberJune 30, 2017,2020, we had no other material commitments for capital expenditures.




40


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 areis 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, 2019.2015. The net unrealized gain or loss on available for saleavailable-for-sale securities is not included in computing regulatory capital.

In addition, as a result of the legislation, the federal banking agencies developed a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the Community Bank Leverage Ratio framework; and qualified community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement is re-established at greater than 9%. Pursuant to Section 4012 of the CARES Act and related interim final rules, the Community Bank Leverage Ratio will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time. As a qualified community bank, we elected to be subject to this definition beginning the second quarter of 2020.   As of June 30, 2020, the Bank's Community Bank Leverage Ratio was 10.54%.

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

32
Table of September 30, 2017 and December 31, 2016, 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.Contents
The Company and the Bank have each adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 7.5%, 7.0% for common equity tier 1 captial and a total risk-based capital ratio of at least 10.5% (including the Capital Conservation Buffer ("CCB")).

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 not 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 CCB. The minimum CCB at Septemberis 2.5%.

As of June 30, 2017 is 1.25% and will increase 0.625% annually through 2019 to 2.5%. In addition, the Company will continue to maintain its ability to serve as a source of financial strength to2020, the Bank by holding at least $5.0 million of cash or liquid assets for that purpose. As of September 30, 2017, the Bank and the Company werewas 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.




41


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)
September 30, 2017           
Total capital (to risk-weighted assets):           
Consolidated$191,058
 16.43% $93,011
 8.00% N/A N/A
BankFinancial, NA184,213
 15.85
 92,998
 8.00
 $116,247
 10.00%
Tier 1 (core) capital (to risk-weighted assets):          
Consolidated182,683
 15.71
 69,758
 6.00
 N/A N/A
BankFinancial, NA175,838
 15.13
 69,748
 6.00
 92,998
 8.00
Common Tier 1 (CET1)           
Consolidated182,683
 15.71
 52,319
 4.50
 N/A N/A
BankFinancial, NA175,838
 15.13
 52,311
 4.50
 75,561
 6.50
Tier 1 (core) capital (to adjusted average total assets):        
Consolidated182,683
 11.36
 64,310
 4.00
 N/A N/A
BankFinancial, NA175,838
 10.94
 64,306
 4.00
 80,382
 5.00
 Actual Required for Capital Adequacy Purposes To be Well-Capitalized under Prompt Corrective Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
 (Dollars in thousands)
December 31, 2016           
Total capital (to risk-weighted assets):           
Consolidated$193,845
 16.96% $91,414
 8.00% N/A N/A
BankFinancial, NA168,113
 14.72
 91,386
 8.00
 $114,232
 10.00%
Tier 1 (core) capital (to risk-weighted assets):          
Consolidated185,718
 16.25
 68,560
 6.00
 N/A N/A
BankFinancial, NA159,986
 14.01
 68,539
 6.00
 91,386
 8.00
Common Tier 1 (CET1)           
Consolidated185,718
 16.25
 51,420
 4.50
 N/A N/A
BankFinancial, NA159,986
 14.01
 51,404
 4.50
 74,251
 6.50
Tier 1 (core) capital (to adjusted average total assets):        
Consolidated185,718
 11.92
 62,306
 4.00
 N/A N/A
BankFinancial, NA159,986
 10.27
 62,303
 4.00
 77,879
 5.00
Capital Management - Company. Total stockholders’ equity was $199.8 million at September 30, 2017, compared to $204.8 million at December 31, 2016. The decrease in total stockholders’ equity was due to the combined impact of our repurchase of 614,673 shares of our common stock during the first nine months of 2017 at a total cost of $9.1 million, our declaration and payment of cash dividends totaling $3.7 million during the same period, and the $1.2 million net impact of stock option exercises. These items were partially offset by the net income of $8.0 million that we recorded for the nine months ended September 30, 2017 and the $1.1 million impact of the ESOP loan repayment on March 29, 2017.
Bank 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)

 

December 31, 2019

                        

Total capital (to risk-weighted assets)

 $170,203   16.38% $83,130   8.00% $103,913   10.00%

Tier 1 (core) capital (to risk-weighted assets)

  162,455   15.63   62,348   6.00   83,130   8.00 

Common Tier 1 (CET1)

  162,455   15.63   46,761   4.50   67,543   6.50 

Tier 1 (core) capital (to adjusted average total assets):

  162,455   10.89   59,666   4.00   74,583   5.00 

Quarterly Cash Dividends. The Company declared cash dividends of $0.20 and $0.15 per share for both of the ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016, respectively.2019.




42


Stock Repurchase Program. During the quarter ending September 30, 2017, the Company repurchased 166,237 shares of its common stock. As of September 30, 2017, the Company had repurchased 2,482,879 shares of its common stock out of the 2,830,755 shares of common stock authorized under the share repurchase authorizations. The Board increased the share repurchase authorization by 250,000 shares to its current level on July 27, 2017. The share repurchase authorization will expire on December 31, 2017 unless further extended by the Board.

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.

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We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rateinterest 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 sheetoff-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.




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Quantitative Analysis. The following table sets forth, as of SeptemberJune 30, 2017,2020, 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$(19,288) (7.68)% $4,055
 7.97 %
+300(6,644) (2.65) 3,169
 6.23
+2001,771
 0.71
 2,293
 4.51
+1006,259
 2.49
 1,231
 2.42
0       
-254,021
 1.60
 (791) (1.55)

   

Estimated Increase (Decrease) in NPV

  

Increase (Decrease) in Estimated Net Interest Income

 

Change in Interest Rates (basis points)

  

Amount

  

Percent

  

Amount

  

Percent

 
   

(Dollars in thousands)

 
+400  $(1,742)  (0.95)% $7,438   17.25%

+300

   359   0.20   5,746   13.32 

+200

   (1,003)  (0.55)  3,813   8.84 

+100

   (2,780)  (1.52)  1,819   4.22 
0                 
-25   (4,405)  (2.41)  (659)  (1.53)

The table set forth above indicates that at SeptemberJune 30, 2017,2020, in the event of an immediate 25 basis point decrease in interest rates, the Bank would be expected to experience a 1.60%2.41% decrease in NPV and a $791,000$659,000 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 0.71% increase0.55% decrease in NPV and a $2.3$3.8 million increase in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. 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 SeptemberJune 30, 2017.2020. 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 SeptemberJune 30, 2017,2020, 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.

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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 financial condition or results of operations

ITEM 1A.

RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates 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 changesadditions to the risk factors previously disclosed in our Annual Report on Form 10-K for the Company's filingsfiscal year ended December 31, 2019 and 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission.
Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

  The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December, 2019, a novel coronavirus (COVID-19) was reported in China, and in March, 2020, the World Health Organization declared it a pandemic.  On March 12, 2020, the President of the United States declared the COVID-19 pandemic in the United States a national emergency.  The COVID-19 pandemic has caused significant economic disruption in the United States, as many state and local governments imposed Stay-At-Home orders on individuals and closures or restrictions on business operations, which in turn resulted in rapid increases in unemployed and declines in economic activity.  In response to the COVID-19 pandemic, the U.S. Federal Reserve Board reduced the benchmark Federal Funds rate to a target rate of 0% to 0.25%, and the yields on 10-year U.S. Treasury notes declined to historic lows.  Various federal agencies, state and local governments established moratoria on tenant evictions and mortgage loan foreclosures which limits the timely collection of monthly payments due to landlord and lenders. 

The U.S. Congress adopted several fiscal stimulus and regulatory relief measures providing direct support payments to individuals and families, expanded unemployment benefits, and funding the Paycheck Protection Program, a federal loan program to enable businesses to retain workers on private payrolls.  The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and the related Revised Interagency Guidance adopted by the federal banking agencies on April 7, 2020 also changed the reporting requirements with respect to past due loan payments, non-accrual status, loan classification or Troubled Debt Restructuring status for loan modifications granted pursuant to the CARES Act or the Revised Interagency Guidance.  As of July 28, 2020, the U.S. Congress was considering further extensions of some or all of these fiscal stimuli measures, but there is no assurance as to whether any legislation will be adopted, and if adopted, whether the legislation will have a material positive impact in mitigating the negative economic effects of the COVID-19 pandemic.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

●

demand for our products and services may decline, making it difficult to grow assets and income;

●

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

●

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

●

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

●

changes to the U.S. Small Business Administration Paycheck Protection Program (“the PPP”), including to the Interim Final Rules under which the PPP is administered, with respect to the origination, servicing, or forgiveness of PPP loans, whether now existing or originated in the future, or the terms and conditions of any guaranteed payments due to us from the SBA with respect to PPP loans.

●

the changes to reporting requirements for loans subject to the CARES Act or the Revised Interagency Guidance of April 7, 2020 could result in reported financial and operational data that would be more favorable than the reporting requirements under U.S. Generally Accepted Accounting Principles.

●

disruptions to borrower cash flows arising from the reduction or termination of payments by the Federal, state or any local government, arising from or related to the COVID-19 pandemic, including any changes to Federal, state or local governmental fiscal policies due to reductions in tax or user revenues due to the impact of the COVID-19 pandemic.

●

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

●

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

●

our wealth management and trust revenues may decline with continuing market turmoil;

●

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;

●

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

●

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

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Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

(a)

Unregistered Sale of Equity Securities. Not applicable.

(b)

(b)

Use of Proceeds. Not applicable.

(c)

(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 thirdsecond quarter of 2017:

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)
July 1, 2017 through July 31, 2017 66,659 $14.97
 66,659 447,454
August 1, 2017 through August 31, 2017 53,770 15.72
 53,770 393,684
September 1, 2017 through September 30, 2017 45,808 15.91
 45,808 347,876
  166,237   166,237  
2020.  As of June 30, 2020, the Company had repurchased 5,655,628 shares of its common stock out of the 5,810,755 shares of common stock authorized under the current share repurchase authorization approved on March 30, 2015. Pursuant to the share repurchase authorization, as of June 30, 2020, there are 155,127 shares of common stock authorized for repurchase through October 31, 2020.

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 

April 1, 2020 through April 30, 2020

  66,800  $8.05   66,800   269,967 

May 1, 2020 through May 31, 2020

  61,740   7.95   61,740   208,227 

June 1, 2020 through June 30, 2020

  53,100   8.28   53,100   155,127 
   181,640       181,640     

(1)
On July 27, 2017, the Board increased the total number of shares authorized by 250,000 under the Company's current share repurchase authorization which expires December 31, 2017. As of September 30, 2017, the Company had repurchased 2,482,879 shares of its common stock out of the 2,830,755 shares of common stock authorized under the share repurchase authorizations.

ITEM 3.

DEFAULTS

DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

Exhibit

Number

Description

ITEM 5.OTHER INFORMATION
None.

31.1

ITEM 6.

EXHIBITS



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Exhibit NumberDescription

10.1

Amendment No. 2 to the Amended and Restated Employment Agreement Between BankFinancial Corporation with F. Morgan Gasior (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on August 1, 2017)
10.2
Amendment No. 2 to the Amended and Restated Employment Agreement Between BankFinancial Corporation with Paul A. Cloutier (Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed on August 1, 2017)
10.3
Amendment No. 2 to the Amended and Restated Employment Agreement Between BankFinancial Corporation with James J. Brennan (Incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, filed on August 1, 2017)
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101

101

The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2020, formatted in Inline Extensive Business Reporting Language (XBRL)(iXBRL): (i) consolidated statementstatements of conditions,financial condition, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in stockholders' equity, (v) consolidated statements of cash flows and (iv)(vi) the notes to consolidated financial statements.


*104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

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.




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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:

July 29, 2020 

By:

BANKFINANCIAL CORPORATION
Dated:October 25, 2017By:

/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





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