BankFinancial CORP - Quarter Report: 2006 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period ended March 31, 2006

OR

For transition period from              to             

Commission File Number 0-51331

BANKFINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number including area code: (800) 894-6900

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Indicate the number of shares outstanding of each of the Issuer’s class of common stock as of the latest practicable date.

24,466,250 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of May 10, 2006.

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BANKFINANCIAL CORPORATION

Form 10-Q Quarterly Report

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PART I

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PART I

ITEM 1. FINANCIAL STATEMENTS

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

March 31, 2006 and December 31, 2005

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

See accompanying unaudited notes to consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, 2006 and 2005

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

N.A. = Not Applicable

See accompanying unaudited notes to consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS)

Three months ended March 31, 2006 and 2005

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

See accompanying unaudited notes to consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31, 2006 and 2005

(In thousands) - (Unaudited)

(Continued)

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

Three months ended March 31, 2006 and 2005

(In thousands) - (Unaudited)

See accompanying unaudited notes to consolidated financial statements.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

Note 1 – Basis of Presentation.

BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois, became the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”) on June 23, 2005, when we consummated a plan of conversion and reorganization that the Bank and its predecessor holding companies, BankFinancial MHC, Inc. (“BankFinancial MHC”) and BankFinancial Corporation, a federal corporation, adopted on August 25, 2004. BankFinancial Corporation, the Maryland corporation, was organized in 2004 to facilitate the mutual-to-stock conversion and to become the holding company for the Bank upon its completion.

As part of the mutual-to-stock conversion, BankFinancial Corporation, the Maryland corporation, sold 24,466,250 shares of common stock in a subscription offering for $10.00 per share. The separate corporate existences of BankFinancial MHC and BankFinancial Corporation, the federal corporation, ceased upon the completion of the mutual-to-stock conversion. For a further discussion of the mutual-to-stock conversion, see our Prospectus as filed on April 29, 2005 with the Securities and Exchange Commission pursuant to Rule 424(b)(3) of the Rules and Regulations of the Securities Act of 1933 (File Number 333-119217).

BankFinancial Corporation, the Maryland corporation, did not engage in any business prior to the completion of the mutual-to-stock conversion on June 23, 2005. Consequently, the accompanying 2005 and 2006 unaudited consolidated financial statements reflect the financial condition and operating results of BankFinancial MHC and BankFinancial Corporation, the federal corporation, and their direct and indirect subsidiaries, the Bank, Financial Assurance Services, Inc. and BF Asset Recovery Corporation, until June 23, 2005, and of BankFinancial Corporation, the Maryland corporation, and the above subsidiaries thereafter.

As used in this Quarterly Report on Form 10-Q, the words “Company,” “we” and “our” are intended to refer to BankFinancial MHC, BankFinancial Corporation, the federal corporation, and the above subsidiaries, with respect to matters and time periods occurring on or before June 23, 2005, including the information presented for the three-month period ended March 31, 2005, and to BankFinancial Corporation, the Maryland corporation, and the above subsidiaries, with respect to matters and time periods occurring thereafter, including the information presented for the three-month period ended March 31, 2006.

The interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three-month period ended March 31, 2006, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2006.

Certain information and note disclosures normally included in financial statements and prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, mortgage loan servicing rights, impairment of securities and the fair value of investment securities and financial instruments are particularly subject to change.

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, 2005, and all amendments thereto, as filed with the Securities and Exchange Commission.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

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. Earnings per share are reported for the three-month period ended March 31, 2006, but are not reported for the three-month period ended March 31, 2005 because the Company had no common shares outstanding prior to June 23, 2005.

N.A. - not applicable

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

Note 3 – Securities

The fair value of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are as follows:

At March 31, 2006, our debt securities consisted of mortgage-backed pass-through securities issued or sponsored by Fannie Mae, Freddie Mac or Ginnie Mae, collateralized mortgage obligations and real estate mortgage investment conduits guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, SBA guaranteed loan participation certificates, and state and municipal securities. Our equity securities consisted almost entirely of shares of five floating rate preferred stocks issued by two government-sponsored entities, Freddie Mac and Fannie Mae and one Freddie Mac fixed rate preferred stock. All of our investment securities reflected in the above table were classified as available for sale at March 31, 2006.

Interest income on securities is recognized under the interest method, and includes amortization of purchase premium and discount. Gains and losses on sales of securities are based on the amortized cost of the securities sold.

Securities with significant declines in fair value are evaluated on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under Securities and Exchange Commission Staff Accounting Bulletin No. 59, which provides that if a marketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer specific factors, the holder must assess whether the impairment is other-than-temporary. We evaluated the unrealized losses that existed at March 31, 2006 and March 31, 2005 with respect to certain state and municipal bonds, mortgage-backed securities and SBA guaranteed loan participation certificates, and concluded that the unrealized losses were primarily attributable to increases in interest rates rather than credit quality or other issuer-specific factors. Since we have the ability and intent to hold these investments until a recovery occurs or the securities mature, and the carrying cost of these securities is projected to recover as market interest rates change, we did not consider the unrealized losses on these investments to be other-than-temporary impairments. No unrealized losses existed at March 31, 2006 or March 31, 2005 with respect to our marketable equity securities, including our Fannie Mae and Freddie Mac floating rate preferred stocks.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

Note 4 – Loans Receivable

Loans originated are identified as either held for sale or held for investment and accounted for accordingly upon their origination. Loans that have been classified as held for sale are recorded at the lower of their aggregate cost or market value. The Company sells a portion of its mortgage loan production in the secondary market. The Company obtains sales commitments on certain of these loans immediately prior to making the origination commitment. Net unrealized losses are recognized by charges to income. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the cost allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Premiums and discounts associated with loans purchased are amortized over the expected life of the loan using the level-yield method.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the contractual loan term, adjusted for prepayments. Interest income is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans receivable are as follows:

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

Note 4 – Loans Receivable (Continued)

Activity in the allowance for loan losses is as follows:

Impaired loans are as follows:

Interest income received on impaired loans was approximately $235,000 and $220,000 for the three-month periods ended March 31, 2006 and 2005.

Nonperforming loans are as follows:

Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The allowance for loan losses is a valuation allowance for probable incurred credit losses inherent in the loan portfolio. In determining the level of the allowance for loan losses, management considers past and current loss experience, evaluations of collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, the levels of nonperforming and other classified loans, and other relevant factors. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available, or as later events occur or circumstances change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers nonclassified loans and is based on historical loss experience adjusted for current factors.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

Note 4 – Loans Receivable (Continued)

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Note 5 – Deposits

Deposits are as follows:

Included in certificates of deposit are $9.2 million and $9.8 million of brokered deposits at March 31, 2006 and December 31, 2005, respectively. All brokered deposits have balances over $100,000.

Interest expense on deposit accounts is summarized as follows for the periods indicated:

Note 6 – Employee Benefit Plans

Employee Stock Ownership Plan (ESOP). The Bank established an ESOP for its employees effective January 1, 2004. The ESOP covers all eligible employees of the Bank and its subsidiaries. Employees are eligible to participate in the ESOP after attainment of age 21 and completion of one year of service. In connection with our mutual-to-stock conversion, the ESOP borrowed $19.6 million from the Company, and used the proceeds of the loan to purchase 1,957,300 shares of common stock issued in the subscription offering at $10.00 per share. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank’s discretionary contributions to the ESOP and earnings on ESOP assets. The Bank has committed to make discretionary contributions to the ESOP sufficient to service the loan over a period not to exceed 20 years. Expense related to the ESOP was $385,000 and $0 for the three months ended March 31, 2006 and 2005, respectively.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table dollar amounts in thousands, except dollars per share)

(unaudited)

Note 7– Other Comprehensive Income

Other comprehensive income components were as follows:

Note 8 – New Accounting Standards

The Financial Accounting Standards Board issued Statement 123R, “Share-Based Payment,” that would be effective for all employee share awards granted, modified, or settled after January 1, 2006 for calendar year-end companies. As of the effective date, compensation expense related to the non-vested portion of any awards outstanding as of that date would be based on the grant-date fair value as calculated under the original provisions of Statement 123. Adoption of Statement 123R would materially increase the amount of compensation and benefits expense that would be incurred for any share awards that we grant, modify or settle after January 1, 2006. The Company does not currently have a share award program.

Note 9– Subsequent Events

On April 5, 2005, we acquired University National Bank, a privately held community bank with $110 million in assets and $101 million in deposits as of March 31, 2006, and two banking offices in the Hyde Park community in Chicago, Illinois, for approximately $24 million in cash pursuant to the terms of a Stock Purchase Agreement with University Bancorporation dated November 29, 2005. Immediately upon the completion of the stock purchase, University National Bank was merged into the Bank. The transaction will be treated, for federal and state income tax purposes, as a purchase of University National Bank’s assets pursuant to applicable provisions of the Internal Revenue Code, making the goodwill and core deposit intangible arising from the transaction tax-deductible over a period of 15 years.

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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, including this Item 2, contains, and other periodic reports and press releases 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. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. We undertake no obligation to update these forward-looking statements in the future. Factors that could have a material adverse effect on operations and could affect management’s outlook or our future prospects include, but are not limited to: higher than expected overhead, infrastructure and compliance costs, changes in market interest rates, a flattening or inversion of the yield curve, less than anticipated balance sheet growth, lack of demand for loan products, unanticipated changes in secondary mortgage market conditions, deposit flows, pricing, underwriting and other forms of competition, adverse federal or state legislative or regulatory developments, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, deteriorating economic conditions that could result in increased delinquencies in our loan portfolio, the quality or composition of our loan or investment portfolios, demand for financial services and multi-family, commercial and residential real estate loans in our market area, the possible short-term dilutive effect of potential acquisitions or de novo branches, if any, changes in accounting principles, policies and guidelines, and future adverse developments concerning Freddie Mac, Fannie Mae or the Federal Home Loan Bank of Chicago. These risks and uncertainties 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 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 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, and all amendments thereto, as filed with the Securities and Exchange Commission.

Overview

Business conditions remained relatively stable during the first quarter of 2006. Multi-family and commercial real estate loan volumes continued to be difficult to forecast, as loan customers appear to be becoming increasingly opportunistic in their real estate investment decision-making. Demand for commercial leases during the first quarter of 2006 was slightly better than historical seasonal averages. Pricing for the most creditworthy customers in all sectors remained extremely competitive, causing us to decline some loan and lease opportunities due to unacceptably low rate pricing or unacceptable risk. Demand for construction loans remained strong, but we continued to be selective in our lending activities, especially in the residential construction sector. Commercial loan growth was flat, although various new sales initiatives are beginning to have a positive impact. Residential loan volumes continued to diminish consistent with overall industry trends in a rising rate environment. Despite these factors, net loans receivable increased by $29.9 million in the first quarter, with no reliance on any particular sector for this growth. Our provision for loan losses reflected this loan growth, as well as our continued focus on reducing non-accrual and non-performing loans.

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Net deposits declined during the first quarter of 2006, primarily due to deposit outflows that followed the unusually strong seasonal deposit growth that occurred late in the fourth quarter of 2005. Deposit competition in the Chicago market continued to be intense. At almost any point in time, one or more of our competitors are marketing a “special promotion” on selected deposit account products, and these special promotions are increasingly tending to define the overall market for new deposits and thus have tended to increase the marginal cost of new deposits.

In late 2005, we began generating additional loan and commercial lease growth with the expectation that we would close our acquisition of University National Bank early in the second quarter of 2006 and would use these new loans and leases to replace a substantial portion of University National Bank’s portfolio of lower-yielding investment securities. The unusually strong seasonal deposit growth that we experienced late in the fourth quarter of 2005 initially mitigated the need to fund this loan and lease growth with short-term borrowings, but the seasonal deposit outflows that followed during the first quarter of 2006 made it necessary to temporarily increase short-term borrowings. We closed our acquisition of University National Bank on April 5, 2006, and immediately thereafter sold approximately $54 million of its investment securities and used the proceeds of sale to reduce short-term borrowings. The net effect of these actions was that we were able to replace many of University National Bank’s lower-yielding investment securities with higher-yielding loans and leases that were underwritten to our historical underwriting standards in advance of the closing.

Non-interest income during the first quarter of 2006 was in line with seasonal trends, except for the net gain that resulted from our sale of a parcel of surplus real estate that adjoins one of our branch offices. Non-interest expense reflected higher compensation expense due in part to higher effective employment tax rates in the first quarter and higher employee benefit costs related to health care insurance and our ESOP. We also continued to invest in the hiring of additional commercial bankers to enhance our penetration of existing markets, especially in the leasing and commercial loan sectors, in a manner consistent with our overall loan portfolio objectives.

On March 30, 2006, our Board of Directors declared the Company’s first cash dividend to our stockholders in the amount of $0.06 per share of our common stock. The dividend is payable on May 19, 2006 to stockholders of record as of May 3, 2006.

Selected Financial Data

The following tables summarize the major components of the changes in our balance sheet at March 31, 2006 and December 31, 2005, and in our income statement for the three-month periods ended March 31, 2006 and March 31, 2005.

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Selected Financial Data (Continued)

N.M. – not meaningful

(Footnotes on following page)

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Comparison of Financial Condition at March 31, 2006 and December 31, 2005

Total assets increased $28.7 million, or 1.8%, to $1.643 billion at March 31, 2006, from $1.614 billion at December 31, 2005. The increase was primarily the result of an increase in net loans receivable.

Net loans receivable increased by $29.9 million, or 2.4%, to $1.262 billion at March 31, 2006, from $1.232 billion at December 31, 2005. The increase in net loans receivable was primarily attributable to an increased emphasis on the origination of loans in targeted loan categories in anticipation of our pending acquisition of University National Bank and our plan to convert a substantial part of its portfolio of lower-yielding securities into higher-yielding loans. As a result of these efforts, commercial leases increased $6.2 million, or 5.1%. Multi-family mortgage loans increased $9.1 million, or 3.3%. Non-residential real estate loans increased $7.1 million, or 2.6%, and construction loans increased $5.1 million, or 6.3%. One- to four-family residential mortgage loans increased by $4.0 million, or 1.0%.

Net securities available for sale decreased by $2.6 million, or 1.0%, to $245.6 million at March 31, 2006, from $248.2 million at December 31, 2005. The decrease was partially offset by a $4.6 million, or 5.6%, increase in the fair value of our portfolio of Fannie Mae and Freddie Mac floating rate preferred stocks to $86.9 million at March 31, 2006, from $82.3 million at December 31, 2005.

Cash and cash equivalents increased $4.2 million to $42.2 million at March 31, 2006, from $38.0 million at December 31, 2005.

Other assets decreased by $1.9 million, or 16.5%, to $10.0 million at March 31, 2006, from $11.9 million at December 31, 2005. The decrease in other assets was primarily due to a $1.5 million decrease in deferred tax assets that principally related to an increase in the fair value of our portfolio of Fannie Mae and Freddie Mac floating rate preferred stocks.

Deposits decreased $14.5 million, or 1.4%, to $1.053 billion at March 31, 2006, from $1.068 billion at December 31, 2005. The decrease reflected a $12.1 million, or 10.4%, decrease in non-interest-bearing demand deposits to $105.3 million at March 31, 2006, from $117.4 million at December 31, 2005. The decrease was attributable in part to unusually strong seasonal deposit growth that occurred late in the fourth quarter of 2005, followed by deposit outflows in the first quarter of 2006. Total core deposits (savings, money market, noninterest bearing demand and NOW accounts) remained relatively stable as a percentage of total deposits, representing 66.1% of total deposits at March 31, 2006, compared to 67.2% of total deposits at December 31, 2005.

Borrowings increased $44.9 million, or 23.4%, to $236.3 million at March 31, 2006, from $191.4 million at December 31, 2005. The increased borrowings were used primarily to provide short-term funding for targeted loan originations in anticipation of the closing of our acquisition of University National Bank. The increased borrowings were undertaken with the intention to repay them with the proceeds of the sale of a substantial portion of University National Bank’s securities portfolio. We closed our acquisition of University National Bank on April 5, 2006, and used the proceeds from the sale of $54 million of its investment securities to repay short-term borrowings.

Total stockholders’ equity increased $4.3 million to $333.1 million at March 31, 2006, compared to $328.8 million at December 31, 2005. The ESOP’s unallocated shares are reflected as a reduction to equity totaling $18.8 million at March 31, 2006. Retained earnings increased $1.6 million due to the Company’s net income of $3.1 million for the three months ended March 31, 2006, offset by $1.5 million in common stock dividends declared. Total stockholders’ equity at March 31, 2006, reflected an unrealized gain on securities available for sale of $2.1 million, net of tax, compared to an unrealized loss on securities available for sale of $147,000, net of tax, at December 31, 2005.

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Comparison of Operating Results for the Three Months Ended March 31, 2006 and 2005

Net Income. We had net income of $3.1 million for the three months ended March 31, 2006, compared to net income of $1.6 million for the three months ended March 31, 2005. The principal factors impacting the increase in net income from year to year included a $2.6 million, or 23.0%, increase in our net interest income and a $903,000, or 48.8%, increase in noninterest income, offset by a $272,000 increase in our provision for loan losses and an $899,000, or 8.4%, increase in noninterest expense. Our earnings per share of common stock for the three months ended March 31, 2006 were $0.14 per share. There are no earnings per share to report for the three-month period ending March 31, 2006 because we had no shares of common stock outstanding prior to June 23, 2005.

Net Interest Income. Net interest income increased by $2.6 million, or 23.0%, to $13.8 million for the three months ended March 31, 2006, from $11.2 million for the three months ended March 31, 2005. Our net interest rate margin improved by 41 basis points to 3.60% for the three months ended March 31, 2006, from 3.19% for the three months ended March 31, 2005, while our net interest rate spread decreased by 12 basis points to 2.87% for the first quarter of 2006, from 2.99% for the first quarter of 2005. The decrease in our net interest rate spread resulted primarily from the continued flat yield curve environment that we experienced during the first quarter of 2006 and intense competition in the Chicago banking market for loans and deposits. Notwithstanding these market conditions and the resulting decrease in our net interest rate spread, our net interest margin increased during the first quarter of 2006 due to our deployment of the $220.7 million in net proceeds of our subscription offering to increase average earning assets by $130.1 million, or 9.3%, to $1.534 billion at March 31, 2006, from $1.404 billion at March 31, 2005, and to reduce term debt and other higher cost funding.

Interest income increased $4.2 million, or 23.4%, to $22.3 million for the three months ended March 31, 2006, from $18.0 million for the three months ended March 31, 2005. The increase in interest income reflected a 66 basis point improvement in the average yield on interest-earning assets to 5.80% at March 31, 2006, from 5.14%, at March 31, 2005, and a $130.1 million, or 9.3%, increase in total average interest-earning assets, to $1.534 billion at March 31, 2006, from $1.404 billion at March 31, 2005.

Interest income from loans, the most significant portion of interest income, increased $4.2 million, or 27.0%, to $19.6 million for the three months ended March 31, 2006, from $15.4 million for the same period in 2005. The increase reflected earnings on a $156.3 million, or 14.1%, increase in average net loans receivable to $1.261 billion for the three months ended March 31, 2006, from $1.105 billion for the same period in 2005, and a 62 basis point increase in the average yield on loans to 6.20% for the three months ended March 31, 2006, from 5.58% for the three months ended March 31, 2005. The increase in interest income from loans also reflected increased interest income from loan categories that are predominantly indexed to the prime rate, such as construction loans, commercial loans and home equity loans. The yields on construction loans, commercial loans and home equity loans improved by more than 175 basis points from the first quarter in 2005 to the first quarter in 2006 due primarily to the increases in the prime rate that occurred during this period. The yields on non-residential real estate loans only increased moderately, and the yields on other loan categories only increased slightly, during the same period.

Interest income from securities available for sale increased by $207,000, or 9.0%, to $2.5 million for the three months ended March 31, 2006, from $2.3 million for the three months ended March 31, 2005. The average yield on securities available for sale increased by 70 basis points to 4.07% at March 31, 2006, from 3.37% at March 31, 2005, primarily due to rising interest rates. This increase in the average yield on securities available for sale was offset by a decrease of $25.9 million, or 9.5%, in the average outstanding balance of securities available for sale to $245.5 million at March 31, 2006, from $271.4 million at March 31, 2005.

Income from cash dividends on our Federal Home Loan Bank of Chicago common stock totaled $192,000 for the three months ended March 31, 2006, compared to a stock dividend of $334,000 for the three months ended March 31, 2005. The decrease was attributable to a reduction in the dividends paid by the Federal Home Loan Bank of Chicago on its common stock, from an average rate of 5.48% for the three months ended March 31, 2005, to an average rate of 3.02% for the three months ended March 31, 2006.

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Interest income from cash that we maintained in interest bearing deposits totaled $22,000 for the three months ended March 31, 2006, compared to $14,000 for the three months ended March 31, 2005. The increase reflects a 248 basis point increase in the yield on interest bearing deposits, which was partially offset by a $1.3 million decrease in average balances of cash maintained in interest bearing deposits.

Interest expense increased $1.6 million, or 24.1%, to $8.5 million for the three months ended March 31, 2006, from $6.8 million for the three months ended March 31, 2005. This increase reflected an increase in the weighted average interest rates that we paid on deposit accounts, and an increase in the average interest rates that we paid on our Federal Home Loan Bank advances and other borrowings. The increase in interest expense reflected an overall increase of 78 basis points in the cost of average interest-bearing liabilities, to 2.93% for the three months ended March 31, 2006, from 2.15% for the three months ended March 31, 2005, which was partially offset by a reduction in our average interest bearing liabilities to $1.156 billion at March 31, 2006, from $1.274 billion at March 31, 2005.

Interest expense on deposits increased $1.8 million, or 40.3%, to $6.3 million for the three months ended March 31, 2006, from $4.5 million for the same period in 2005. The increase reflected a 90 basis point increase in the average rate paid on deposits to 2.69% for the three months ended March 31, 2006, from 1.79% for the three months ended March 31, 2005. This increase in the average rate paid on deposits was partially offset by a $68.0 million, or 6.8%, decrease in average interest-bearing deposits to $932.9 million for the three months ended March 31, 2006, from $1.001 billion for the same period in 2005, which included a $92.1 million decrease in the average balance of certificates of deposit during that period. Interest expense on deposits increased for all categories of interest bearing deposits due to increases in short-term market interest rates and the effect of those increases on the interest rates paid on deposits, including competitive market conditions and increased average balances for money market deposits.

Interest expense on money market accounts increased $1.2 million, or 113.4%, reflecting an increase of $41.7 million, or 20.3%, in the average balance of money market account deposits to $247.3 million for the three months ended March 31, 2006, from $205.5 million for the three months ended March 31, 2005, and a 156 basis point increase in the interest rate paid on these accounts to 3.57% from 2.01%. We had $157.6 million in indexed money market accounts at March 31, 2006. Beginning in the third quarter of 2004, we have increased the interest rates paid on money market accounts, certain NOW accounts and savings accounts due to changes in applicable indices, and in response to increasing short-term market interest rates and anticipated increases in rates paid by our competitors. Rates on other selected money market products and certificates of deposit were also increased for competitive reasons.

Interest expense on certificates of deposit increased $374,000, or 13.8%, reflecting a 110 basis point increase in the interest rates paid on certificates of deposit to 3.57% for the three months ended March 31, 2006, from 2.47% for the same period in 2005. This increase was partially offset by a $92.1 million, or 21.1%, decrease in the average balance of certificates of deposit to $344.7 million for the three months ended March 31, 2006, from $436.8 million for the three months ended March 31, 2005. Decreases occurred broadly within our categories of certificates of deposit.

Interest expense on borrowings decreased by $154,000, or 6.5%, to $2.2 million for the three months ended March 31, 2006, from $2.4 million for the same period in 2005. The decrease was due in part to our use of $30 million of the net proceeds of our subscription offering to retire term debt that we incurred in acquiring Success Bancshares in 2001, and in redeeming trust preferred securities that we assumed in that acquisition. In addition, interest expense for the three months ended March 31, 2005 included $175,000 in yield adjustment amortization expense relating to our restructuring of $170.0 million of Federal Home Loan Bank borrowings in July 2003, while there was no yield adjustment amortization expense for the three months ended March 31, 2006.

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Average Balances and Net Interest Margin

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. 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 were 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, purchase accounting adjustments and Federal Home Loan Bank advance prepayment penalties that are amortized or accreted to interest income or expense.