Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2017
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from             to             
Commission File Number 0-51331
 
BANKFINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
 
Maryland
75-3199276
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification No.)
 
 
15W060 North Frontage Road, Burr Ridge, Illinois 60527
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (800) 894-6900
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. At April 24, 2017, there were 18,379,256 shares of Common Stock, $0.01 par value, outstanding.




BANKFINANCIAL CORPORATION
Form 10-Q
March 31, 2017
Table of Contents
 
 
Page
Number
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 


Table of Contents

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


 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from other financial institutions
$
10,247

 
$
13,053

Interest-bearing deposits in other financial institutions
65,219

 
83,631

Cash and cash equivalents
75,466

 
96,684

Securities, at fair value
110,230

 
107,212

Loans receivable, net of allowance for loan losses:
March 31, 2017, $7,971 and December 31, 2016, $8,127
1,319,287

 
1,312,952

Other real estate owned, net
5,301

 
3,895

Stock in Federal Home Loan Bank and Federal Reserve Bank, at cost

8,147

 
11,650

Premises and equipment, net
31,149

 
31,413

Accrued interest receivable
4,478

 
4,381

Core deposit intangible
653

 
782

Bank owned life insurance
22,657

 
22,594

Deferred taxes
22,103

 
22,411

Other assets
4,002

 
6,063

Total assets
$
1,603,473

 
$
1,620,037

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
234,415

 
$
249,539

Interest-bearing
1,094,867

 
1,089,851

Total deposits
1,329,282

 
1,339,390

Borrowings
52,046

 
51,069

Advance payments by borrowers for taxes and insurance
9,068

 
11,041

Accrued interest payable and other liabilities
11,056

 
13,757

Total liabilities
1,401,452

 
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; 18,440,440 shares issued at March 31, 2017 and 19,233,760 issued at December 31, 2016
184

 
192

Additional paid-in capital
161,265

 
173,047

Retained earnings
40,209

 
39,483

Unearned Employee Stock Ownership Plan shares

 
(8,318
)
Accumulated other comprehensive income
363

 
376

Total stockholders’ equity
202,021

 
204,780

Total liabilities and stockholders’ equity
$
1,603,473

 
$
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
March 31,
 
2017
 
2016
Interest and dividend income
 
 
 
Loans, including fees
$
12,760

 
$
12,347

Securities
349

 
314

Other
253

 
98

Total interest income
13,362

 
12,759

Interest expense
 
 
 
Deposits
1,180

 
787

Borrowings
96

 
69

Total interest expense
1,276

 
856

Net interest income
12,086

 
11,903

Provision for (recovery of) loan losses
161

 
(490
)
Net interest income after provision for (recovery of) loan losses
11,925

 
12,393

Noninterest income
 
 
 
Deposit service charges and fees
529

 
567

Other fee income
481

 
495

Insurance commissions and annuities income
77

 
55

Gain on sale of loans, net
7

 
18

Gain on sale of securities (includes $46 accumulated other comprehensive income reclassifications for unrealized net gains on available for sale securities for the three months ended March 31, 2016)

 
46

Loan servicing fees
68

 
73

Amortization and impairment of servicing assets
(31
)
 
(31
)
Earnings on bank owned life insurance
63

 
51

Trust income
172

 
160

Other
178

 
160

Total noninterest income
1,544

 
1,594

Noninterest expense
 
 
 
Compensation and benefits
6,352

 
5,993

Office occupancy and equipment
1,622

 
1,647

Advertising and public relations
381

 
222

Information technology
753

 
724

Supplies, telephone, and postage
332

 
376

Amortization of intangibles
129

 
136

Nonperforming asset management
104

 
84

Operations of other real estate owned
213

 
376

FDIC insurance premiums
187

 
217

Other
1,193

 
1,155

Total noninterest expense
11,266

 
10,930

Income before income taxes
2,203

 
3,057

Income tax expense
322

 
1,153

Net income
$
1,881

 
$
1,904

Basic earnings per common share
$
0.10

 
$
0.10

Diluted earnings per common share
$
0.10

 
$
0.10

Weighted average common shares outstanding
18,642,054

 
19,428,551

Diluted weighted average common shares outstanding
18,647,516

 
19,431,490


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
March 31,
 
2017
 
2016
Net income
$
1,881

 
$
1,904

Unrealized holding loss arising during the period
(20
)
 
(22
)
Tax effect
7

 
8

Net of tax
(13
)
 
(14
)
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 loss
(13
)
 
(42
)
Comprehensive income
$
1,868

 
$
1,862


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


 
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

 

 
1,904

 

 

 
1,904

Other comprehensive loss, net of tax

 

 

 

 
(42
)
 
(42
)
Repurchase and retirement of common stock (357,817 shares)
(4
)
 
(4,389
)
 

 

 

 
(4,393
)
Nonvested stock awards-stock-based compensation expense

 
377

 

 

 

 
377

Cash dividends declared on common stock ($0.05 per share)

 

 
(1,010
)
 

 

 
(1,010
)
ESOP shares earned

 
45

 

 
243

 

 
288

Balance at March 31, 2016
$
199

 
$
180,830

 
$
37,008

 
$
(9,054
)
 
$
505

 
$
209,488

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
192

 
$
173,047

 
$
39,483

 
$
(8,318
)
 
$
376

 
$
204,780

Net income

 

 
1,881

 

 

 
1,881

Other comprehensive loss, net of tax

 

 

 

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

 
(1,220
)
 

 

 

 
(1,218
)
Prepayment of ESOP Share Acquisition Loan

(8
)
 
(7,185
)
 

 
8,318

 

 
1,125

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

 

 

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

 

 
(1,155
)
 

 

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

 
$
161,265

 
$
40,209

 
$

 
$
363

 
$
202,021


See accompanying notes to the consolidated financial statements.

4

Table of Contents

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

 
Three Months Ended
March 31,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
1,881

 
$
1,904

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

 
(490
)
Prepayment of ESOP Share Acquisition Loan

1,125

 

ESOP shares earned

 
288

Stock–based compensation expense

 
377

Depreciation and amortization
958

 
939

Amortization of premiums and discounts on securities and loans
(65
)
 
(37
)
Amortization of core deposit intangible
129

 
136

Amortization of servicing assets
31

 
31

Net change in net deferred loan origination costs
129

 
(40
)
Net loss on sale of other real estate owned
16

 
38

Net gain on sale of loans
(7
)
 
(18
)
Net gain on sale of securities

 
(46
)
Loans originated for sale
(239
)
 
(360
)
Proceeds from sale of loans
246

 
378

Other real estate owned valuation adjustments
20

 
119

Net change in:
 
 
 
Accrued interest receivable
(97
)
 
(120
)
Earnings on bank owned life insurance
(63
)
 
(51
)
Other assets
1,834

 
2,198

Accrued interest payable and other liabilities
(2,701
)
 
(218
)
Net cash from operating activities
3,358

 
5,028

Cash flows from investing activities
 
 
 
Securities
 
 
 
Proceeds from maturities
13,623

 
17,453

Proceeds from principal repayments
637

 
1,126

Proceeds from sales of securities

 
46

Purchases of securities
(17,302
)
 
(15,293
)
Loans receivable
 
 
 
Loan participations sold
1,615

 

Principal payments on loans receivable
136,090

 
106,840

Purchase of loans
(20,406
)
 

Originated for investment
(125,813
)
 
(106,884
)
Proceeds of redemption of Federal Home Loan Bank of Chicago stock
3,514

 

Purchase of Federal Home Loan Bank and Federal Reserve Bank stock
(11
)
 

Proceeds from sale of other real estate owned
494

 
1,290

Purchase of premises and equipment, net
(179
)
 
(96
)
Net cash from (used in) investing activities
(7,738
)
 
4,482


Continued

5

Table of Contents

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

 
Three Months Ended
March 31,
 
2017
 
2016
Cash flows from financing activities
 
 
 
Net change in deposits
$
(10,108
)
 
$
51,770

Net change in borrowings
977

 
(46,697
)
Net change in advance payments by borrowers for taxes and insurance
(1,973
)
 
(2,614
)
Repurchase and retirement of common stock
(3,379
)
 
(4,393
)
Cash dividends paid on common stock
(1,155
)
 
(1,010
)
Shares retired for tax liability
(1,200
)
 

Net cash used in financing activities
(16,838
)
 
(2,944
)
Net change in cash and cash equivalents
(21,218
)
 
6,566

Beginning cash and cash equivalents
96,684

 
59,377

Ending cash and cash equivalents
$
75,466

 
$
65,943

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
1,243

 
$
766

Income taxes paid
1

 
60

Loans transferred to other real estate owned
1,936

 
65


See accompanying notes to the consolidated financial statements.

6

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, NA (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 BF Asset Recovery Corporation (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. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three month period ended March 31, 2017 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.
Certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
Reclassifications: Certain reclassifications have been made in the prior period’s financial statements to conform them to the current period’s presentation.
These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Our preliminary 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.
On January 5, 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 are currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Our preliminary finding is that the new pronouncement will not have a significant impact on our Statement of Operations.



7


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 (continued)


The pronouncement will require some revision to our disclosures within the consolidated financial statements and we are currently evaluating the impact.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements. Our preliminary finding is that the new pronouncement will not have a significant impact on our consolidated financial statements as the projected minimum lease payments under existing leases subject to the new pronouncement are less than one percent of our current total assets.
In 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 reduces 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, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”).  These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements. Our initial review indicates that we have maintained sufficient historical loan data to support the requirements of this pronouncement. We are currently evaluating various loss methodologies to determine their correlation to our various loan categories historical performance.
In March of 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date (with an explicit, noncontingent call feature that is callable at a fixed price and on a preset dates), rather than contractual maturity date as currently required under GAAP. The ASU does not impact instruments without preset call dates such as mortgage-backed securities.  For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the ASU.  ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted.  Accordingly, effective January of 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, exclusive of unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock.
 
Three Months Ended
March 31,
 
2017
 
2016
Net income available to common stockholders
$
1,881

 
$
1,904

Average common shares outstanding
19,243,941

 
20,155,541

Less:
 
 
 
Unearned ESOP shares
(600,947
)
 
(719,109
)
Unvested restricted stock shares
(940
)
 
(7,881
)
Weighted average common shares outstanding
18,642,054

 
19,428,551

Add - Net effect of dilutive unvested restricted stock
5,462

 
2,939

Diluted weighted average common shares outstanding
18,647,516

 
19,431,490

Basic earnings per common share
$
0.10

 
$
0.10

Diluted earnings per common share
$
0.10

 
$
0.10

Number of antidilutive stock options excluded from the diluted earnings per share calculation

 
1,752,156

Weighted average exercise price of anti-dilutive option shares
$

 
$
12.30

 
NOTE 3 - SECURITIES
The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income are shown below.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
March 31, 2017
 
 
 
 
 
 
 
Certificates of deposit
$
89,926

 
$

 
$

 
$
89,926

Equity mutual fund
500

 

 
(1
)
 
499

Mortgage-backed securities - residential
13,907

 
622

 
(20
)
 
14,509

Collateralized mortgage obligations - residential
5,293

 
15

 
(27
)
 
5,281

SBA-guaranteed loan participation certificates
15

 

 

 
15

 
$
109,641

 
$
637

 
$
(48
)
 
$
110,230

December 31, 2016
 
 
 
 
 
 
 
Certificates of deposit
$
85,938

 
$

 
$

 
$
85,938

Equity mutual fund
500

 

 
(1
)
 
499

Mortgage-backed securities - residential
14,561

 
644

 
(21
)
 
15,184

Collateralized mortgage obligations - residential
5,587

 
15

 
(28
)
 
5,574

SBA-guaranteed loan participation certificates
17

 

 

 
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)

The mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities or agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support. All securities reflected in the preceding table were classified as available-for-sale at March 31, 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.
 
March 31, 2017
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
89,926

 
$
89,926

Equity mutual fund
500

 
499

Mortgage-backed securities - residential
13,907

 
14,509

Collateralized mortgage obligations - residential
5,293

 
5,281

SBA-guaranteed loan participation certificates
15

 
15

 
$
109,641

 
$
110,230

Sales of securities were as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
Proceeds
$

 
$
46

Gross gains

 
46

Securities with unrealized losses not recognized in income are as follows:
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Equity Mutual Fund
$
499

 
$
(1
)
 
$

 
$

 
$
499

 
$
(1
)
Mortgage-backed securities - residential
1,179

 
(20
)
 

 

 
1,179

 
(20
)
Collateralized mortgage obligations - residential
2,720

 
(17
)
 
976

 
(10
)
 
3,696

 
(27
)
 
$
4,398

 
$
(38
)
 
$
976

 
$
(10
)
 
$
5,374

 
$
(48
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Equity Mutual Fund
$
499

 
$
(1
)
 
$

 
$

 
$
499

 
$
(1
)
Mortgage-backed securities - residential
1,187

 
(21
)
 

 

 
1,187

 
(21
)
Collateralized mortgage obligations - residential
3,691

 
(18
)
 
1,028

 
(10
)
 
4,719

 
(28
)
 
$
5,377

 
$
(40
)
 
$
1,028

 
$
(10
)
 
$
6,405

 
$
(50
)
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 March 31, 2017, 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.
NOTE 4 - LOANS RECEIVABLE
Loans receivable are as follows:
 
March 31, 2017
 
December 31, 2016
One-to-four family residential real estate
$
122,310

 
$
135,218

Multi-family mortgage
549,829

 
542,887

Nonresidential real estate
179,896

 
182,152

Construction and land
1,354

 
1,302

Commercial loans
105,671

 
103,063

Commercial leases
364,768

 
352,539

Consumer
1,896

 
2,255

 
1,325,724

 
1,319,416

Net deferred loan origination costs
1,534

 
1,663

Allowance for loan losses
(7,971
)
 
(8,127
)
Loans, net
$
1,319,287

 
$
1,312,952

The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method:
 
Allowance for loan losses
 
Loan Balances
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
 
Individually
evaluated  for
impairment
 
Collectively
evaluated  for
impairment
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
993

 
$
993

 
$
4,869

 
$
117,441

 
$
122,310

Multi-family mortgage

 
3,704

 
3,704

 
703

 
549,126

 
549,829

Nonresidential real estate

 
1,732

 
1,732

 

 
179,896

 
179,896

Construction and land

 
33

 
33

 

 
1,354

 
1,354

Commercial loans

 
807

 
807

 

 
105,671

 
105,671

Commercial leases

 
685

 
685

 

 
364,768

 
364,768

Consumer

 
17

 
17

 

 
1,896

 
1,896

 
$

 
$
7,971

 
$
7,971

 
$
5,572

 
$
1,320,152

 
1,325,724

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
1,534

Allowance for loan losses
 
 
 
 
 
 
 
 
 
(7,971
)
Loans, net
 
 
 
 
 
 
 
 
 
 
$
1,319,287




11


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)

 
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 estate
26

 
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 in the allowance for loan losses is as follows:
 
Three Months Ended
March 31,
 
2017
 
2016
Beginning balance
$
8,127

 
$
9,691

Loans charged off:
 
 
 
One-to-four family residential real estate
(171
)
 
(52
)
Multi-family mortgage
(3
)
 
(45
)
Nonresidential real estate
(165
)
 
(3
)
Consumer

 
(16
)
 
(339
)
 
(116
)
Recoveries:
 
 
 
One-to-four family residential real estate
6

 
81

Multi-family mortgage
11

 
137

Construction and land

 
35

Commercial loans
5

 
77

Consumer

 
1

 
22

 
331

Net recoveries (charge-offs)
(317
)
 
215

Provision for (recovery of) loan losses
161

 
(490
)
Ending balance
$
7,971

 
$
9,416




12


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 March 31, 2017
 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate
$
5,146

 
$
4,250

 
$
871

 
$

 
$
4,453

 
$
19

One-to-four family residential real estate - non-owner occupied
624

 
588

 
60

 

 
634

 

Multi-family mortgage - Illinois
704

 
706

 

 

 
727

 
10

 
$
6,474

 
$
5,544

 
$
931

 
$

 
$
5,814

 
$
29

 
 
 
 
 
 
 
 
 
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 occupied
503

 
386

 
119

 

 
251

 
9

Multi-family mortgage - Illinois
787

 
787

 

 

 
980

 
41

 
6,669

 
5,721

 
1,005

 

 
4,178

 
120

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Nonresidential real estate
262

 
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)

Nonaccrual Loans
The following tables present the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans:
 
Loan Balance
 
Recorded
Investment
 
Loans Past
Due Over 90
Days, Still
Accruing
March 31, 2017
 
 
 
 
 
One-to-four family residential real estate
$
2,049

 
$
1,724

 
$

One-to-four family residential real estate – non-owner occupied
550

 
572

 

Multi-family mortgage - Illinois
158

 
106

 

 
$
2,757

 
$
2,402

 
$

December 31, 2016
 
 
 
 
 
One-to-four family residential real estate
$
2,861

 
$
2,483

 
$

One-to-four family residential real estate – non-owner occupied
428

 
368

 

Multi-family mortgage - Illinois
187

 
185

 

Nonresidential real estate
262

 
260

 

 
$
3,738

 
$
3,296

 
$

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some 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 $208,000 and $199,000 at March 31, 2017 and December 31, 2016, respectively. When a loan is on nonaccrual status and the ultimate collectability of the total principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.



14


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 March 31, 2017 by class of loans:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
One-to-four family residential real estate loans
$
881

 
$
51

 
$
1,597

 
$
2,529

 
$
88,704

 
$
91,233

One-to-four family residential real estate loans – non-owner occupied
471

 
3

 
573

 
1,047

 
29,452

 
30,499

Multi-family mortgage - Illinois
1,415

 

 
106

 
1,521

 
293,113

 
294,634

Multi-family mortgage - Other

 

 

 

 
252,197

 
252,197

Nonresidential real estate

 

 

 

 
177,998

 
177,998

Construction

 

 

 

 
1,025

 
1,025

Land

 

 

 

 
327

 
327

Commercial loans:
 
 
 
 
 
 

 
 
 

Regional commercial banking

 

 

 

 
41,149

 
41,149

Health care

 

 

 

 
35,957

 
35,957

Direct commercial lessor

 

 

 

 
28,779

 
28,779

Commercial leases:
 
 
 
 
 
 


 
 
 


Investment rated commercial leases
1,487

 

 

 
1,487

 
279,408

 
280,895

Other commercial leases
140

 

 

 
140

 
85,711

 
85,851

Consumer
5

 

 

 
5

 
1,899

 
1,904

 
$
4,399

 
$
54

 
$
2,276

 
$
6,729

 
$
1,315,719

 
$
1,322,448




15


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)

The following tables present the aging of the recorded investment of loans 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 occupied
664

 
114

 
368

 
1,146

 
37,179

 
38,325

Multi-family mortgage - Illinois
605

 
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

 

 

 

 
36,086

 
36,086

Health care

 

 

 

 
35,455

 
35,455

Direct commercial lessor

 

 

 

 
31,847

 
31,847

Commercial leases:
 
 
 
 
 
 


 
 
 


Investment rated commercial leases
51

 

 

 
51

 
269,430

 
269,481

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

Troubled Debt Restructurings
The Company evaluates loan extensions or modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a Troubled Debt Restructuring ("TDR"). In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.
The Company had $17,000 of TDRs at March 31, 2017, compared to $341,000 at December 31, 2016. No specific valuation reserves were allocated to those loans at March 31, 2017 and December 31, 2016. The Company had no outstanding commitments to borrowers whose loans were classified as TDRs at either date. During the first quarter of 2017, six loans totaling $324,000 were declassified as TDRs as they successfully met the criteria for removal from TDR status.
The following table presents loans classified as TDRs:
 
March 31, 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 estate
17

 
136

Troubled debt restructured loans – nonaccrual loans
17

 
136

Total troubled debt restructured loans
$
17

 
$
341

During the three months ended March 31, 2017, there were no loans modified and classified as TDRs. During the three months ended March 31, 2016, the terms of certain loans were modified and classified as TDRs. The modification of the terms of such



16


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)

loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than 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:
 
Three Months Ended March 31,
 
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 Three Months Ended March 31, 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 three months ended March 31, 2016.
The following table presents TDRs for which there was a payment default during the three months ended March 31, 2017 and 2016 within twelve months following the modification.
 
2017
 
2016
 
Number
of loans
 
Recorded
investment
 
Number
of loans
 
Recorded
investment
One-to-four family residential real estate
1

 
$
17

 
2

 
$
42

A TDR 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 three months ended March 31, 2017 and 2016.
There were certain other loan modifications during the three months ended March 31, 2017 that did not meet the definition of a TDR. These loans had a total recorded investment of $133,000 at March 31, 2017. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant. There were no other loan modifications for the three months ended March 31, 2016.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the



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 March 31, 2017, based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard
 
Nonaccrual
 
Total
One-to-four family residential real estate loans
$
89,198

 
$

 
$
685

 
$
1,724

 
$
91,607

One-to-four family residential real estate loans – non-owner occupied
30,089

 

 
41

 
573

 
30,703

Multi-family mortgage loans - Illinois
295,523

 

 
769

 
107

 
296,399

Multi-family mortgage loans - Other
253,430

 

 

 

 
253,430

Nonresidential real estate loans
179,788

 

 
108

 

 
179,896

Construction loans
1,022

 

 

 

 
1,022

Land loans
332

 

 

 

 
332

Commercial loans:
 
 
 
 
 
 
 
 

Regional commercial banking
41,066

 

 
14

 

 
41,080

Health care
35,948

 

 

 

 
35,948

Direct commercial lessor
28,643

 

 

 

 
28,643

Commercial leases:
 
 
 
 
 
 
 
 


Investment rated commercial leases
279,345

 

 

 

 
279,345

Other commercial leases
85,423

 

 

 

 
85,423

Consumer
1,896

 

 

 

 
1,896


$
1,321,703

 
$

 
$
1,617

 
$
2,404

 
$
1,325,724

 



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)

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 occupied
38,179

 

 
41

 
369

 
38,589

Multi-family mortgage loans - Illinois
297,826

 
122

 
1,048

 
187

 
299,183

Multi-family mortgage loans - Other
243,704

 

 

 

 
243,704

Nonresidential real estate loans
180,047

 

 
1,845

 
260

 
182,152

Construction loans
946

 

 

 

 
946

Land loans
356

 

 

 

 
356

Commercial loans:
 
 
 
 
 
 
 
 

Regional commercial banking
35,944

 

 
66

 

 
36,010

Health care
35,372

 

 

 

 
35,372

Direct commercial lessor
30,881

 
800

 

 

 
31,681

Commercial leases:
 
 
 
 
 
 
 
 


Investment rated commercial leases
268,022

 

 

 

 
268,022

Other commercial leases
84,356

 
161

 

 

 
84,517

Consumer
2,255

 

 

 

 
2,255

 
$
1,311,402

 
$
1,083

 
$
3,629

 
$
3,302

 
$
1,319,416

NOTE 5 - OTHER REAL ESTATE OWNED
Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as other real estate owned ("OREO") until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.
 
March 31, 2017
 
December 31, 2016
 
Balance
 
Valuation Allowance
 
Net OREO Balance
 
Balance
 
Valuation Allowance
 
Net OREO Balance
One–to–four family residential
$
2,086

 
$
(100
)
 
$
1,986

 
$
1,702

 
$
(137
)
 
$
1,565

Multi-family mortgage
615

 

 
615

 
370

 

 
370

Nonresidential real estate
1,933

 
(125
)
 
1,808

 
1,171

 
(105
)
 
1,066

Land
1,077

 
(185
)
 
892

 
1,101

 
(207
)
 
894

 
$
5,711

 
$
(410
)
 
$
5,301

 
$
4,344

 
$
(449
)
 
$
3,895




19


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

NOTE 5 - OTHER REAL ESTATE OWNED (continued)


The following represents the roll forward of OREO and the composition of OREO properties:
 
For the Three Months Ended March 31,
 
2017
 
2016
Beginning balance
$
3,895

 
$
7,011

New foreclosed properties
1,936

 
65

Valuation adjustments
(20
)
 
(119
)
Sales and Payments
(510
)
 
(1,328
)
Ending balance
$
5,301

 
$
5,629

Activity in the valuation allowance is as follows:
 
For the Three Months Ended March 31,
 
2017
 
2016
Beginning balance
$
449

 
$
1,042

Additions charged to expense
20

 
119

Reductions from sales of other real estate owned
(59
)
 
(507
)
Ending balance
$
410

 
$
654

At March 31, 2017 and December 31, 2016, the balance of OREO includes no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title. At March 31, 2017 and December 31, 2016, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process was $1.5 million and $1.6 million, respectively.
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, included with borrowings on the consolidated balance sheet, are shown below.
 
 
March 31, 2017
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater Than 90 days
 
Total
Repurchase agreements and repurchase-to-maturity transactions
 
$
2,046

 
$

 
$

 
$

 
$
2,046

Gross amount of recognized liabilities for repurchase agreements in Statement of Condition
 
$
2,046

 
 
December 31, 2016
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater Than 90 days
 
Total
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

Securities sold under agreements to repurchase were secured by mortgage-backed securities with a carrying amount of $4.6 million and $4.7 million at March 31, 2017 and December 31, 2016, respectively. Also included in total borrowings were advances from the FHLBC of $50.0 million at March 31, 2017 and December 31, 2016.



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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 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (continued)


Because security values fluctuate due to market conditions, the Company has no control over the market value of securities sold under agreements to repurchase.  The Company is obligated to promptly transfer additional securities to the counterparty if the market value of the securities falls below the repurchase price, per the agreement.
NOTE 7 – EMPLOYEE BENEFIT PLAN
Employee Stock Ownership Plan. On March 29, 2017, the BankFinancial NA Employee Stock Ownership Plan (the "ESOP") was terminated and the ESOP repaid all amounts owing under the ESOP’s Term Loan Agreement with the Company (the “Share Acquisition Loan”). The ESOP repaid the Share Acquisition Loan by transferring 753,490 unallocated shares of the Company’s common stock to the Company in exchange for the full satisfaction 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 Loan had no outstanding principal balance at March 31, 2017 and $10.8 million at December 31, 2016.
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 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 is 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:
 
March 31, 2017
 
December 31, 2016
Allocated to participants
1,203,810

 
1,125,448

Distributed to participants
(314,062
)
 
(313,223
)
Unearned

 
831,852

Total ESOP shares
889,748

 
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 three months ended March 31, 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
 
(1,717,817
)
 
12.30

 
 
 
 
Stock options outstanding at March 31, 2017
 
34,339

 
$
12.05

 
0.15
 
$
85

Stock options exercisable at March 31, 2017
 
34,339

 
12.05

 
0.15
 
85

Fully vested and expected to vest
 
34,339

 
12.05

 
0.15
 
85

(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 three months ended March 31, 2017, 1,717,817 stock options were exercised. All stock options were exercised on a net settlement basis, using a portion of the shares obtained upon exercise in payment of the exercise price of the stock option. The net settlement resulted in the issuance of 273,514 of the Company's common stock. Certain employees 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 81,299 shares to 192,215 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.
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).



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)

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2017
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
89,926

 
$

 
$
89,926

Equity mutual fund
499

 

 

 
499

Mortgage-backed securities – residential

 
14,509

 

 
14,509

Collateralized mortgage obligations – residential

 
5,281

 

 
5,281

SBA-guaranteed loan participation certificates

 
15

 

 
15

 
$
499

 
$
109,731

 
$

 
$
110,230

December 31, 2016
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
85,938

 
$

 
$
85,938

Equity mutual fund
499

 

 

 
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




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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 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
March 31, 2017
 
 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
Nonresidential real estate
$

 
$

 
$
49

 
$
49

 
$

 
$

 
$
49

 
$
49

 
 
 
 
 
 
 
 
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 March 31, 2017 there were no impaired loans that were measured for impairment using the fair value of the collateral for collateral–dependent loans and which have specific valuation allowances, compared to a carrying amount of $260,000 and a valuation allowance of $26,000 at December 31, 2016. The decrease in the valuation allowance resulted in a decrease in the provision for loan losses of $26,000 for the three months ended March 31, 2017. There was an increase in the provision for loan losses of $13,000 for the three months ended March 31, 2016.
OREO, which is carried at the lower of cost or fair value less costs to sell, had a carrying value of $86,000 less a valuation allowance of $37,000, or $49,000 at March 31, 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 $20,000 of valuation adjustments of OREO recorded for the three months ended March 31, 2017. There were $119,000 of valuation adjustments of OREO recorded for the three months ended March 31, 2016.
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 March 31, 2017:
 
Fair Value
 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
Other real estate owned:
 
 
 
 
 
 
 
Nonresidential real estate loans
$
49

 
Sales comparison
 
Comparison between sales and income approaches
 
3.6%
Other real estate owned
$
49

 
 
 
 
 
 



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 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%
 
$
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 estate
553

 
Sales comparison
 
Comparison between sales and income approaches
 
-3.22% to 4.58(3.7%)
Land
47

 
Sales comparison
 
Discount applied to valuation
 
5.74% to 31.60%
(25.2%)
 
$
1,882

 
 
 
 
 
 
The carrying amount and estimated fair value of financial instruments are as follows:
 
 
 
Fair Value Measurements at
March 31, 2017 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
75,466

 
$
10,247

 
$
65,219

 
$

 
$
75,466

Securities
110,230

 
499

 
109,731

 

 
110,230

Loans receivable, net of allowance for loan losses
1,319,287

 

 
1,321,180

 

 
1,321,180

FHLBC and FRB stock
8,147

 

 

 

 
N/A

Accrued interest receivable
4,478

 

 
4,478

 

 
4,478

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
234,415

 
$

 
$
234,415

 
$

 
$
234,415

Savings deposits
161,938

 

 
161,938

 

 
161,938

NOW and money market accounts
571,138

 

 
571,138

 

 
571,138

Certificates of deposit
361,791

 

 
360,644

 

 
360,644

Borrowings
52,046

 

 
52,073

 

 
52,073

Accrued interest payable
135

 

 
135

 

 
135




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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 9 - FAIR VALUE (continued)

 
 
 
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

Securities
107,212

 
499

 
106,713

 

 
107,212

Loans receivable, net of allowance for loan losses
1,312,952

 

 
1,322,713

 
234

 
1,322,947

FHLBC and FRB stock
11,650

 

 

 

 
N/A

Accrued interest receivable
4,381

 

 
4,381

 

 
4,381

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
249,539

 
$

 
$
249,539

 
$

 
$
249,539

Savings deposits
160,002

 

 
160,002

 

 
160,002

NOW and money market accounts
578,237

 

 
578,237

 

 
578,237

Certificates of deposit
351,612

 

 
350,593

 

 
350,593

Borrowings
51,069

 

 
50,015

 

 
50,015

Accrued interest payable
102

 

 
102

 

 
102

For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents: The estimated fair values for cash and cash equivalents are based on their carrying value due to the short-term nature of these assets.
Loans: The estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid.
FHLBC and FRB Stock: It is not practicable to determine the fair value of FHLBC and FRB stock due to the restrictions placed on its 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.
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.



26


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,” “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, in the Chicago metropolitan area in particular and in other market areas where we operate that could result in increased delinquencies in our loan portfolio or a decline in the value of our investment securities and the collateral for our loans; (v) declines in real estate values that adversely impact the value of our loan collateral, OREO, asset dispositions and the level of borrower equity in their investments; (vi) borrowers that experience legal or financial difficulties that we do not currently foresee; (vii) results of supervisory monitoring or examinations by regulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (viii) changes, disruptions or illiquidity in national or global financial markets; (ix) the credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs or changes in estimates relating to the computation of our allowance for loan losses; (x) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; (xi) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors' pricing initiatives on our deposit products; (xii) the impact of new legislation or regulatory changes, including the Dodd-Frank Act and Basel III, on our products, services, operations and operating expenses; (xiii) higher federal deposit insurance premiums; (xiv) higher than expected overhead, infrastructure and compliance costs; (xv) changes in accounting principles, policies or guidelines; and (xvi) privacy and cybersecurity risks, including the risks of business interruption and the compromise of confidential customer information resulting from intrusions.
These risks and uncertainties, as well as the Risk Factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and this Quarterly Report on Form 10-Q, as well as other filings we make with the SEC, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled “Critical Accounting Policies” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and all amendments thereto, as filed with the Securities and Exchange Commission.
Overview
Total loans increased in the first quarter of 2017 due to net growth in multi-family and commercial loans, and net growth in commercial leases related to the final installment of a $20.4 million commercial lease portfolio purchase. Total commercial-related



27


Table of Contents


loan balances reached a new record level of $1.2 billion, and now comprise 91% of total loans. New loan and lease opportunities continue to arise but it remains difficult to predict the quantity of new loan originations and net loan balances in future quarters due to the various competitive factors we encounter.
Our average yield on loans increased modestly due to the relative composition of new loan originations, partially offset by an increase in higher-yield loan payoffs. Accordingly, our net interest margin expanded modestly due to the higher average loan yield. The expansion of our net interest margin was partially offset by an increase in our cost of funds due to asset-liability duration management activities. Non-interest income decreased modestly due primarily to slightly lower deposit-account related fee income and reduced loan fee income.
Non-interest expense increased primarily due to equity-linked compensation and benefit expense, including the termination of our ESOP and the repayment of the ESOP loan in the first quarter of 2017. These transactions resulted in the recording of a non-tax deductible equity compensation expense of $1.1 million during the first quarter and the elimination of future ESOP benefit expense for greater efficiency and flexibility in managing retirement benefits. Compared to the actual expense recorded for the first quarter of 2017, we expect that our compensation and benefits expense for each of the remaining three quarters of 2017 will be approximately $1.3 million less than it was in the first quarter of 2017. In addition, exercises of stock options outstanding resulted in additional payroll tax and retirement benefit expense of approximately $150,000, which was more than offset by a related income tax benefit of approximately $950,000. We also expect that our marketing and information technology expenses will decline by an average of $200,000 per quarter for the remainder of 2017. Other non-interest expenses remained well-contained.
Past due and classified loan trends remain favorable. Our ratio of nonperforming loans to total loans was 0.18% and our ratio of non-performing assets to total assets was 0.48% at March 31, 2017. Non-performing commercial-related loans represented only 0.01% of total commercial-related loans. Non-performing asset and OREO expenses increased slightly in the first quarter due in part to real estate taxes and litigation expenses against a borrower and guarantor on a previously charged-off loan. We continue to focus on pro-active portfolio management and resolutions of non-performing loans and assets to maintain our strong asset quality ratios and reduce non-performing asset expense to the lowest practicable levels.



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Table of Contents


SELECTED FINANCIAL DATA
The following summary information is derived from the consolidated financial statements of the Company. For additional information, reference is made to the Consolidated Financial Statements of the Company and related notes included elsewhere in this Quarterly Report.
 
March 31, 2017
 
December 31, 2016
 
Change
 
(Dollars in thousands)
Selected Financial Condition Data:
 
 
 
 
 
Total assets
$
1,603,473

 
$
1,620,037

 
$
(16,564
)
Loans, net
1,319,287

 
1,312,952

 
6,335

Securities, at fair value
110,230

 
107,212

 
3,018

Other real estate owned, net
5,301

 
3,895

 
1,406

Deposits
1,329,282

 
1,339,390

 
(10,108
)
Borrowings
52,046

 
51,069

 
977

Equity
202,021

 
204,780

 
(2,759
)

 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Selected Operating Data:
 
 
 
 
 
Interest income
$
13,362

 
$
12,759

 
$
603

Interest expense
1,276

 
856

 
420

Net interest income
12,086

 
11,903

 
183

Provision for (recovery of) loan losses
161

 
(490
)
 
651

Net interest income after provision for (recovery of) loan losses
11,925

 
12,393

 
(468
)
Noninterest income
1,544

 
1,594

 
(50
)
Noninterest expense
11,266

 
10,930

 
336

Income before income tax expense
2,203

 
3,057

 
(854
)
Income tax expense
322

 
1,153

 
(831
)
Net income
$
1,881

 
$
1,904

 
$
(23
)



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Three Months Ended
March 31,
 
2017
 
2016
Selected Financial Ratios and Other Data:
 
 
 
Performance Ratios:
 
 
 
Return on assets (ratio of net income to average total assets) (1)
0.47
%
 
0.50
%
Return on equity (ratio of net income to average equity) (1)
3.66

 
3.59

Average equity to average assets
12.87

 
14.03

Net interest rate spread (1) (2)
3.15

 
3.30

Net interest margin (1) (3)
3.26

 
3.39

Efficiency ratio (4)
82.66

 
80.98

Noninterest expense to average total assets (1)
2.82

 
2.89

Average interest-earning assets to average interest-bearing liabilities
132.57

 
136.26

Dividends declared per share
$
0.06

 
$
0.05

Dividend payout ratio
61.42
%
 
53.05
%
 
At March 31, 2017
 
At December 31, 2016
Asset Quality Ratios:
 
 
 
Nonperforming assets to total assets (5)
0.48
%
 
0.44
%
Nonperforming loans to total loans
0.18

 
0.25

Allowance for loan losses to nonperforming loans
331.85

 
246.57

Allowance for loan losses to total loans
0.60

 
0.62

Capital Ratios:
 
 
 
Equity to total assets at end of period
12.60
%
 
12.64
%
Tier 1 leverage ratio (Bank only)
10.94
%
 
10.27
%
Other Data:
 
 
 
Number of full-service offices
19

 
19

Employees (full-time equivalents)
242

 
246

(1)
Ratios annualized.
(2)
The net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the period.
(3)
The net interest margin represents net interest income divided by average total interest-earning assets for the period.
(4)
The efficiency ratio represents noninterest expense, divided by the sum of net interest income and noninterest income.
(5)
Nonperforming assets include nonperforming loans and other real estate owned.
Comparison of Financial Condition at March 31, 2017 and December 31, 2016
Total assets decreased $16.6 million, or 1.0%, to $1.603 billion at March 31, 2017, from $1.620 billion at December 31, 2016. The decrease in total assets was primarily due to a decrease in cash and cash equivalents. Partially offsetting this decrease was a $6.3 million, or 0.5%, increase in loans to $1.319 billion at March 31, 2017, from $1.313 billion at December 31, 2016 and a $3.0 million, or 2.8%, increase in securities to $110.2 million at March 31, 2017, from $107.2 million at December 31, 2016.
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 90.6% of gross loans at March 31, 2017. Commercial leases increased $12.2 million, or 3.5%, due in part to the Company's acquisition of a portfolio of investment-grade commercial leases from a competitor exiting the sector. The Company closed $20.4 million of the commercial lease portfolio acquisition late in the first quarter of 2017, consisting of commercial leases having an average rate of 2.13% and an average duration of approximately 26 months. Multi-family mortgage loans increased by $6.9 million, or 1.3% and commercial loans increased by $2.6 million, or 2.5%. The Bank’s 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 lending activities in carefully selected metropolitan areas outside our primary lending area, and engage in certain types of



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commercial lending and leasing activities on a nationwide basis. At March 31, 2017, $287.7 million, or 52.3%, of our multi-family loans were in the Metropolitan Statistical Area for Chicago, Illinois, while $66.7 million, or 12.1%, were in the Metropolitan Statistical Area for Dallas, Texas; $54.6 million, or 9.9%, were in the Metropolitan Statistical Area for Denver, Colorado; $26.5 million, or 4.8%, were in the Metropolitan Statistical Area for Tampa, Florida and $19.7 million, or 3.6%, were in the Metropolitan Statistical Area for Minneapolis, Minnesota. This information reflects the location of the collateral, but does not necessarily reflect the location of the borrower.
Total liabilities decreased $13.8 million, or 1.0%, to $1.401 billion at March 31, 2017, from $1.415 billion at December 31, 2016, primarily due to decreases in noninterest-bearing and money market accounts. The decreases were partially offset by increases in savings deposits and certificates of deposit. Total deposits decreased $10.1 million, or 0.8%, to $1.329 billion at March 31, 2017, from $1.339 billion at December 31, 2016. Certificates of deposit increased $10.2 million, or 2.9%, to $361.8 million at March 31, 2017, from $351.6 million at December 31, 2016. This increase included a $11.7 million increase in brokered certificates of deposit. Interest-bearing NOW accounts decreased $897,000, or 0.34%, to $266.2 million at March 31, 2017, from $267.1 million at December 31, 2016. Savings accounts increased $1.9 million, or 1.2%, to $161.9 million at March 31, 2017, from $160.0 million at December 31, 2016. Noninterest-bearing demand deposits decreased $15.1 million, or 6.1%, to $234.4 million at March 31, 2017, from $249.5 million at December 31, 2016. Money market accounts decreased $6.2 million, or 1.99%, to $305.0 million at March 31, 2017, from $311.2 million at December 31, 2016. Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) were 72.8% and 73.7% of total deposits at March 31, 2017 and December 31, 2016, respectively.
Total stockholders’ equity was $202.0 million at March 31, 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 232,045 shares of our common stock at a total cost of $3.4 million, our declaration and payment of cash dividends totaling $1.2 million, and the $1.2 million net impact of exercise of stock options during the three months ended March 31, 2017. These items were partially offset by the net income of $1.9 million that we recorded for the three months ended March 31, 2017 and the $1.1 million impact of the ESOP loan repayment on March 29, 2017.
Operating Results for the Three Months Ended March 31, 2017 and 2016
Net Income. We had net income of $1.9 million for each of the three months ended March 31, 2017 and March 31, 2016. Earnings per basic and fully diluted share of common stock were $0.10 for both the three months ended March 31, 2017 and three months ended March 31, 2016.
Net Interest Income. Net interest income was $12.1 million for the three months ended March 31, 2017, compared to $11.9 million for the same period in 2016. The increase in net interest income reflected a $603,000, or 4.7%, increase in interest income, which was partially offset by a $420,000, or 49.1%, increase in interest expense.
The increase in interest income was primarily attributable to an increase in average interest-earning assets. Total average interest-earning assets increased $88.1 million, or 6.23%, to $1.502 billion for the three months ended March 31, 2017, from $1.414 billion for the same period in 2016. Our net interest rate spread decreased by 15 basis points to 3.15% for the three months ended March 31, 2017, from 3.30% for the same period in 2016. Our net interest margin decreased by 13 basis points to 3.26% for the three months ended March 31, 2017, from 3.39% for the same period in 2016. The decreases in the net interest rate spread and net interest margin resulted from increased average balances and increased costs for interest-bearing liabilities. The yield on interest-earning assets decreased two basis points to 3.61% for the three months ended March 31, 2017 from 3.63% for the same period 2016, and the cost of interest-bearing liabilities increased 13 basis points to 0.46% for the three months ended March 31, 2017, from 0.33% for the same period in 2016.



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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, discounts and premiums and purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
For the Three Months Ended March 31,
 
2017
 
2016
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,313,299

 
$
12,760

 
3.94
%
 
$
1,238,270

 
$
12,347

 
4.01
%
Securities
113,756

 
349

 
1.24

 
118,557

 
314

 
1.07

Stock in FHLBC and FRB
9,158

 
99

 
4.38

 
6,257

 
14

 
0.90

Other
65,933

 
154

 
0.95

 
50,924

 
84

 
0.66

Total interest-earning assets
1,502,146

 
13,362

 
3.61

 
1,414,008

 
12,759

 
3.63

Noninterest-earning assets
93,045

 
 
 
 
 
99,675

 
 
 
 
Total assets
$
1,595,191

 
 
 
 
 
$
1,513,683

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
160,456

 
43

 
0.11

 
$
158,320

 
42

 
0.11

Money market accounts
307,121

 
273

 
0.36

 
324,516

 
249

 
0.31

NOW accounts
263,286

 
121

 
0.19

 
245,115

 
90

 
0.15

Certificates of deposit
352,929

 
743

 
0.85

 
234,872

 
406

 
0.70

Total deposits
1,083,792

 
1,180

 
0.44

 
962,823

 
787

 
0.33

Borrowings
49,306

 
96

 
0.79

 
74,907

 
69

 
0.37

Total interest-bearing liabilities
1,133,098

 
1,276

 
0.46

 
1,037,730

 
856

 
0.33

Noninterest-bearing deposits
235,167

 
 
 
 
 
242,290

 
 
 
 
Noninterest-bearing liabilities
21,547

 
 
 
 
 
21,341

 
 
 
 
Total liabilities
1,389,812

 
 
 
 
 
1,301,361

 
 
 
 
Equity
205,379

 
 
 
 
 
212,322

 
 
 
 
Total liabilities and equity
$
1,595,191

 
 
 
 
 
$
1,513,683

 
 
 
 
Net interest income
 
 
$
12,086

 
 
 
 
 
$
11,903

 
 
Net interest rate spread (2)
 
 
 
 
3.15
%
 
 
 
 
 
3.30
%
Net interest-earning assets (3)
$
369,048

 
 
 
 
 
$
376,278

 
 
 
 
Net interest margin (4)
 
 
 
 
3.26
%
 
 
 
 
 
3.39
%
Ratio of interest-earning assets to interest-bearing liabilities
132.57
%
 
 
 
 
 
136.26
%
 
 
 
 
(1)
Annualized
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.



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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.
We recorded a provision for loan losses of $161,000 for the three months ended March 31, 2017, compared to a recovery of loan losses of $490,000 for the same period in 2016. The provision for or recovery of loan losses is a function of the allowance for loan loss methodology that we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $130,000, or 1.6%, to $8.0 million at March 31, 2017, from $8.1 million at December 31, 2016. The reserve established for loans individually evaluated for impairment decreased $26,000 to no reserve for the three months ended March 31, 2017. Net charge-offs were $317,000 for the three months ended March 31, 2017.
The allowance for loan losses as a percentage of nonperforming loans was 331.85% at March 31, 2017, compared to 246.57% at December 31, 2016.
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.
Noninterest Income
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
529

 
$
567

 
$
(38
)
Other fee income
481

 
495

 
(14
)
Insurance commissions and annuities income
77

 
55

 
22

Gain on sale of loans, net
7

 
18

 
(11
)
Gain on sales of securities

 
46

 
(46
)
Loan servicing fees
68

 
73

 
(5
)
Amortization of servicing assets
(31
)
 
(28
)
 
(3
)
Recovery of servicing assets

 
(3
)
 
3

Earnings on bank owned life insurance
63

 
51

 
12

Trust income
172

 
160

 
12

Other
178

 
160

 
18

Total noninterest income
$
1,544

 
$
1,594

 
$
(50
)
Noninterest income decreased $50,000, or 3.1%, to $1.5 million for the three months ended March 31, 2017, compared to $1.6 million for the three months ended March 31, 2016. Deposit service charges and fees decreased $38,000, or 6.7%, to $529,000 for the three months ended March 31, 2017, compared to $567,000 for the three months ended March 31, 2016. Other fee income decreased $14,000, or 2.8%, to $481,000 for the three months ended March 31, 2017, compared to $495,000 for the three months ended March 31, 2016. Noninterest income for the three months ended March 31, 2017 included a $7,000 gain on sale of loans. Earnings on bank owned life insurance and trust income each increased $12,000 for the three months ended March 31, 2017. Other income increased $18,000, or 11.3%, to $178,000 for the three months ended March 31, 2017, compared to $160,000 for the three



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months ended March 31, 2016. The results for the three months ended March 31, 2016 also included a $46,000 gain on the sale of certain securities the Bank acquired in its acquisition of Downers Grove National Bank in 2011.
Noninterest Expense
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
6,352

 
$
5,993

 
$
359

Office occupancy and equipment
1,622

 
1,647

 
(25
)
Advertising and public relations
381

 
222

 
159

Information technology
753

 
724

 
29

Supplies, telephone and postage
332

 
376

 
(44
)
Amortization of intangibles
129

 
136

 
(7
)
Nonperforming asset management
104

 
84

 
20

Loss on sale other real estate owned
16

 
38

 
(22
)
Valuation adjustments of other real estate owned
20

 
119

 
(99
)
Operations of other real estate owned
177

 
219

 
(42
)
FDIC insurance premiums
187

 
217

 
(30
)
Other
1,193

 
1,155

 
38

Total noninterest expense
$
11,266

 
$
10,930

 
$
336

Noninterest expense increased by $336,000, or 3.1%, to $11.3 million for the three months ended March 31, 2017, from $10.9 million for the same period in 2016. Compensation and benefits increased $359,000, primarily due to a one-time, non-cash, non-tax deductible equity compensation expense of $1.1 million related to the termination of the ESOP and the repayment of the ESOP’s Share Acquisition Loan on March 29, 2017 for greater efficiency and flexibility in managing retirement benefits. Compensation expense for the three months ended March 31, 2016 included $245,000 in stock-based compensation and incentive compensation accruals. Advertising and public relations expense increased $159,000, or 71.6%, to $381,000 for the three months ended March 31, 2017, from $222,000 for the same period in 2016. Nonperforming asset management expense increased $20,000, or 23.8%, to $104,000 for the three months ended March 31, 2017, from $84,000 for the same period in 2016. Valuation adjustments of OREO decreased $99,000, or 83.2%, to $20,000 for the three months ended March 31, 2017, compared to $119,000 for the same period in 2016.
Income Taxes
For the three months ended March 31, 2017, we recorded income tax expense of $322,000, compared to $1.2 million for the three months ended March 31, 2016. Our effective tax rate for the three months ended March 31, 2017 was 14.6%,which includes the impact of the stock option exercises and the ESOP termination charge, compared to 37.7% for the same period in 2016. Excluding the impact of the stock option exercises and the ESOP termination charge, the effective tax rate for the three months ended March 31, 2017 would have been comparable to the effective tax rate for the same period in 2016.
Nonperforming Loans and Assets
We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At March 31, 2017, we had no loans in this category.



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We typically obtain new third–party appraisals or collateral valuations when we place a loan on nonaccrual status, conduct impairment testing or conduct a TDR analysis unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.
Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.
As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as–is”, “as–stabilized” or “as–completed” basis is most likely to produce the highest net realizable value. If we determine that the “as–stabilized” or “as–completed” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of March 31, 2017, 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.



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Nonperforming Assets Summary
The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets.
 
March 31, 2017
 
December 31, 2016
 
Quarter Change
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
One-to-four family residential real estate
$
2,296

 
$
2,851

 
$
(555
)
Multi-family mortgage
106

 
185

 
(79
)
Nonresidential real estate

 
260

 
(260
)
 
2,402

 
3,296

 
(894
)
Other real estate owned:
 
 
 
 
 
One-to-four family residential
1,986

 
1,565

 
421

Multi-family mortgage
615

 
370

 
245

Nonresidential real estate
1,808

 
1,066

 
742

Land
892

 
894

 
(2
)
 
5,301

 
3,895

 
1,406

Total nonperforming assets
$
7,703

 
$
7,191

 
$
512

Ratios:
 
 
 
 
 
Nonperforming loans to total loans
0.18
%
 
0.25
%
 
 
Nonperforming assets to total assets
0.48

 
0.44

 
 
Nonperforming Assets
Nonperforming assets totaled $7.7 million at March 31, 2017, and $7.2 million at of December 31, 2016. Nonperforming assets increased $512,000 for the three months ended March 31, 2017. Although we experience occasional isolated instances of new nonaccrual loans, we believe that continuing our aggressive resolution posture will maintain the trends favoring very strong asset quality.
Four residential, one multi-family and two nonresidential real estate loans with a book balance of $1.9 million were transferred from nonaccrual loans to OREO during the three months ended March 31, 2017. We continue to experience modest quantities of defaults on residential real estate loans principally due either to the borrower’s personal financial condition or deteriorated collateral value.
Liquidity and Capital Resources
Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities and lease payments. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize additional sources of funds through FHLBC advances. We had $50.0 million of FHLBC advances at March 31, 2017 and December 31, 2016.
As of March 31, 2017, we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on our liquidity. As of March 31, 2017, we had no other material commitments for capital expenditures.



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Capital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
The Bank and the Company are subject to regulatory capital requirements administered by the federal banking agencies. The capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve the quantitative measurement of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. The failure to meet minimum capital requirements can result in regulatory actions. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of March 31, 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.
The Company and the Bank have each adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 7.5% and a total risk-based capital ratio of at least 10.5% (including the Capital Conservation Buffer ("CCB")). The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirements will be established if and as necessary. In accordance with the Regulatory Capital Plans, neither the Company nor the Bank will pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels or the capital levels required for capital adequacy plus the CCB. The minimum CCB at March 31, 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 to the Bank by holding at least $5.0 million of cash or liquid assets for that purpose. As of March 31, 2017, the Bank and the Company were well-capitalized, with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.
The Bank is subject to regulatory restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval, and to regulatory notification requirements for dividends that do not require prior regulatory approval.



37


Table of Contents


Actual and required capital amounts and ratios were:
 
Actual
 
Required for Capital Adequacy Purposes
 
To be Well-Capitalized under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
190,479

 
16.65
%
 
$
91,510

 
8.00
%
 
N/A
 
N/A
BankFinancial, NA
180,381

 
15.76

 
91,582

 
8.00

 
$
114,477

 
10.00
%
Tier 1 (core) capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
Consolidated
182,508

 
15.96

 
68,632

 
6.00

 
N/A
 
N/A
BankFinancial, NA
172,410

 
15.06

 
68,686

 
6.00

 
91,582

 
8.00

Common Tier 1 (CET1)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
182,508

 
15.96

 
51,474

 
4.50

 
N/A
 
N/A
BankFinancial, NA
172,410

 
15.06

 
51,515

 
4.50

 
74,410

 
6.50

Tier 1 (core) capital (to adjusted average total assets):
 
 
 
 
 
 
 
 
Consolidated
182,508

 
11.58

 
63,808

 
4.00

 
N/A
 
N/A
BankFinancial, NA
172,410

 
10.94

 
63,029

 
4.00

 
78,786

 
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, NA
168,113

 
14.72

 
91,386

 
8.00

 
$
114,232

 
10.00
%
Tier 1 (core) capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
Consolidated
185,718

 
16.25

 
68,560

 
6.00

 
N/A
 
N/A
BankFinancial, NA
159,986

 
14.01

 
68,539

 
6.00

 
91,386

 
8.00

Common Tier 1 (CET1)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
185,718

 
16.25

 
51,420

 
4.50

 
N/A
 
N/A
BankFinancial, NA
159,986

 
14.01

 
51,404

 
4.50

 
74,251

 
6.50

Tier 1 (core) capital (to adjusted average total assets):
 
 
 
 
 
 
 
 
Consolidated
185,718

 
11.92

 
62,306

 
4.00

 
N/A
 
N/A
BankFinancial, NA
159,986

 
10.27

 
62,303

 
4.00

 
77,879

 
5.00

Capital Management - Company. Total stockholders’ equity was $202.0 million at March 31, 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 232,045 shares of our common stock at a total cost of $3.4 million, our declaration and payment of cash dividends totaling $1.2 million, and the net impact of exercise of stock options of $1.2 million during the three months ended March 31, 2017. These items were partially offset by the net income of $1.9 million that we recorded for the three months ended March 31, 2017 and the $1.1 million impact of the ESOP loan repayment on March 29, 2017.
Quarterly Cash Dividends. The Company declared cash dividends of $0.06 and $0.05 per share for the three months ended March 31, 2017 and March 31, 2016, respectively.



38


Table of Contents


Stock Repurchase Program. On October 27, 2016, the Board extended the expiration date of the current repurchase authorization from December 31, 2016 to June 30, 2017, and increased the total number of shares authorized for repurchase by an additional 478,789 shares. During the quarter ending March 31, 2017, the Company repurchased 232,045 shares of its common stock. As of March 31, 2017, the Company had repurchased 2,100,251 shares of its common stock out of the 2,580,755 shares of common stock authorized under this repurchase authorization.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. A significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.
The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investment portfolio as available-for-sale so as to provide flexibility in liquidity management.
We utilize a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes.
Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the U.S. Treasury yield curve as of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.
Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.



39


Table of Contents


Quantitative Analysis. The following table sets forth, as of March 31, 2017, 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
$
(31,325
)
 
(12.65
)%
 
$
602

 
1.23
 %
+300
(19,434
)
 
(7.85
)
 
556

 
1.13

+200
(9,955
)
 
(4.02
)
 
527

 
1.07

+100
(3,869
)
 
(1.56
)
 
337

 
0.69

0
 
 
 
 
 
 
 
-25
(314
)
 
(0.13
)
 
(310
)
 
(0.63
)
The table set forth above indicates that at March 31, 2017, in the event of an immediate 25 basis point decrease in interest rates, the Bank would be expected to experience a 0.13% decrease in NPV and a $310,000 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 4.02% decrease in NPV and a $527,000 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 March 31, 2017. Based on that evaluation, the Company’s management, including the Chairman, Chief Executive Officer, and President and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended March 31, 2017, 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.



40



PART II
ITEM 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.
ITEM 1A.
RISK FACTORS
There have been no material changes to the risk factors previously disclosed in the Company's filings with the Securities and Exchange Commission.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Unregistered Sale of Equity Securities. Not applicable.
(b)
Use of Proceeds. Not applicable.
(c)
Repurchases of Equity Securities.
The following table sets forth information in connection with purchases of our common stock made by, or, on behalf of us, during the first quarter of 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)
January 1, 2017 through January 31, 2017
 
 
$

 
 
712,549

February 1, 2017 through February 28, 2017
 
79,228
 
14.29

 
79,228
 
633,321

March 1, 2017 through March 31, 2017
 
152,817
 
14.63

 
152,817
 
480,504

 
 
232,045
 
 
 
232,045
 
 
(1) 
On October 27, 2016, the Board extended the expiration date of the current repurchase authorization from December 31, 2016 to June 30, 2017, and increased the total number of shares authorized for repurchase by an additional 478,789 shares. As of March 31, 2017, the Company had repurchased 2,100,251 shares of its common stock out of the 2,580,755 shares of common stock authorized under this repurchase authorization.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS



41



Exhibit Number
 
Description
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101
 
The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statement of conditions, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows and (iv) the notes to consolidated financial statements.

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



42



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BANKFINANCIAL CORPORATION
 
 
 
 
 
 
 
Dated:
April 26, 2017
 
By:
/s/ F. Morgan Gasior
 
 
 
 
 
F. Morgan Gasior
 
 
 
 
 
Chairman of the Board, Chief Executive Officer and President
 
 
 
 
 
 
 
 
 
 
/s/ Paul A. Cloutier
 
 
 
 
 
Paul A. Cloutier
 
 
 
 
 
Executive Vice President and Chief Financial Officer




43