BankFinancial CORP - Quarter Report: 2020 September (Form 10-Q)

bfin20200423_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2020

☐	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.)

60 North Frontage Road, Burr Ridge, Illinois 60527
(Address of Principal Executive Offices)

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

BFIN

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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	☒
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 ☒.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. At October 26, 2020 there were 14,780,628 shares of Common Stock, $0.01 par value, outstanding.

Table of Contents

BANKFINANCIAL CORPORATION

Form 10-Q

September 30, 2020

Table of Contents

		Page Number
PART I

Item 1.	Financial Statements	1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	34

Item 4.	Controls and Procedures	35

PART II

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	37

Signatures		38

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

	*September 30, 2020*		*December 31, 2019*
Assets
Cash and due from other financial institutions	$	13,740	$	9,785
Interest-bearing deposits in other financial institutions		415,925		180,540
Cash and cash equivalents		429,665		190,325
Securities, at fair value		42,048		60,193
Loans receivable, net of allowance for loan losses: September 30, 2020, $8,011 and December 31, 2019, $7,632		1,065,892		1,168,008
Other real estate owned, net		110		186
Stock in Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB"), at cost		7,490		7,490
Premises and equipment, net		24,241		24,346
Accrued interest receivable		4,354		4,563
Bank-owned life insurance		18,996		18,945
Deferred taxes		3,520		3,873
Other assets		8,627		10,086
Total assets	$	1,604,943	$	1,488,015

Liabilities
Deposits
Noninterest-bearing	$	328,915	$	210,762
Interest-bearing		1,073,329		1,073,995
Total deposits		1,402,244		1,284,757
Borrowings		4,000		61
Advance payments by borrowers for taxes and insurance		9,998		10,222
Accrued interest payable and other liabilities		16,304		18,603
Total liabilities		1,432,546		1,313,643

Stockholders’ equity
Preferred Stock, $0.01 par value, 25,000,000 shares authorized, none issued or outstanding		—		—
Common Stock, $0.01 par value, 100,000,000 shares authorized; 14,824,628 shares issued at September 30, 2020 and 15,278,464 issued at December 31, 2019		148		153
Additional paid-in capital		108,231		112,420
Retained earnings		63,787		61,573
Accumulated other comprehensive income		231		226
Total stockholders’ equity		172,397		174,372
Total liabilities and stockholders’ equity	$	1,604,943	$	1,488,015

See accompanying notes to the consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2020*			*2019*			*2020*			*2019*
Interest and dividend income
Loans, including fees	$	12,027		$	15,371		$	38,307		$	46,112
Securities		183			508			758			1,712
Other		275			749			1,267			1,852
Total interest income		12,485			16,628			40,332			49,676
Interest expense
Deposits		1,488			3,385			6,041			10,023
Borrowings		—			1			—			89
Total interest expense		1,488			3,386			6,041			10,112
Net interest income		10,997			13,242			34,291			39,564
Provision for (recovery of ) loan losses		(187	)		(134	)		326			3,736
Net interest income after provision for (recovery of) loan losses		11,184			13,376			33,965			35,828
Noninterest income
Deposit service charges and fees		833			983			2,456			2,887
Loan servicing fees		44			99			189			178
Mortgage brokerage and banking fees		44			28			84			77
Gain on sale of equity securities		—			—			—			295
Loss on disposal of other assets		—			—			(2	)		(19	)
Trust and insurance commissions and annuities income		222			198			728			627
Earnings on bank-owned life insurance		10			37			51			105
Other		111			129			319			374
Total noninterest income		1,264			1,474			3,825			4,524
Noninterest expense
Compensation and benefits		5,398			5,218			16,084			16,128
Office occupancy and equipment		1,860			1,879			5,383			5,348
Advertising and public relations		135			182			405			488
Information technology		781			892			2,453			2,351
Professional fees		307			213			831			757
Supplies, telephone, and postage		288			312			875			1,037
Amortization of intangibles		6			13			27			47
Nonperforming asset management		57			17			154			129
Operations of other real estate owned, net		23			19			13			22
FDIC insurance premiums		105			(127	)		241			127
Other		827			891			2,198			2,645
Total noninterest expense		9,787			9,509			28,664			29,079
Income before income taxes		2,661			5,341			9,126			11,273
Income tax expense		713			1,417			2,408			2,991
Net income	$	1,948		$	3,924		$	6,718		$	8,282
Basic and diluted earnings per common share	$	0.13		$	0.26		$	0.45		$	0.53
Basic and diluted weighted average common shares outstanding		14,842,150			15,373,964			15,008,271			15,679,927

See accompanying notes to the consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) - Unaudited

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2020*			*2019*			*2020*			*2019*
Net income	$	1,948		$	3,924		$	6,718		$	8,282
Unrealized holding gain (loss) arising during the period		(4	)		(16	)		7			9
Tax effect		—			5			(2	)		(2	)
Net of tax		(4	)		(11	)		5			7
Comprehensive income	$	1,944		$	3,913		$	6,723		$	8,289

See accompanying notes to the consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except per share data) - Unaudited

										*Accumulated*
				*Additional*						*Other*
	*Common*			*Paid-in*			*Retained*			*Comprehensive*
	*Stock*			*Capital*			*Earnings*			*Income*			*Total*
For the three months ended

Balance at July, 1 2019	$	154		$	113,717		$	57,331		$	289		$	171,491
Net income		—			—			3,924			—			3,924
Other comprehensive loss, net of tax		—			—			—			(11	)		(11	)
Cash dividends declared on common stock ($0.10 per share)		—			—			(1,537	)		—			(1,537	)
Balance at September 30, 2019	$	154		$	113,717		$	59,718		$	278		$	173,867

Balance at July, 1 2020	$	149		$	108,748		$	63,322		$	235		$	172,454
Net income		—			—			1,948			—			1,948
Other comprehensive loss, net of tax		—			—			—			(4	)		(4	)
Repurchase and retirement of common stock (66,000 shares)		(1	)		(517	)		—			—			(518	)
Cash dividends declared on common stock ($0.10 per share)		—			—			(1,483	)		—			(1,483	)
Balance at September 30, 2020	$	148		$	108,231		$	63,787		$	231		$	172,397

For the nine months ended

Balance at January 1, 2019	$	165		$	130,547		$	56,167		$	271		$	187,150
Net income		—			—			8,282			—			8,282
Other comprehensive income, net of tax		—			—			—			7			7
Repurchase and retirement of common stock (1,107,550 shares)		(11	)		(16,830	)		—			—			(16,841	)
Cash dividends declared on common stock ($0.30 per share)		—			—			(4,731	)		—			(4,731	)
Balance at September 30, 2019	$	154		$	113,717		$	59,718		$	278		$	173,867

Balance at January 1, 2020	$	153		$	112,420		$	61,573		$	226		$	174,372
Net income		—			—			6,718			—			6,718
Other comprehensive income, net of tax		—			—			—			5			5
Repurchase and retirement of common stock (453,836 shares)		(5	)		(4,189	)		—			—			(4,194	)
Cash dividends declared on common stock ($0.30 per share)		—			—			(4,504	)		—			(4,504	)
Balance at September 30, 2020	$	148		$	108,231		$	63,787		$	231		$	172,397

See accompanying notes to the consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited

	*Nine Months Ended*
	*September 30,*
	*2020*			*2019*
Cash flows from operating activities
Net income	$	6,718		$	8,282
Adjustments to reconcile to net income to net cash from operating activities
Provision for loan losses		326			3,736
Depreciation		1,236			1,211
Amortization of premiums and discounts on securities		4			4
Amortization of intangibles		27			47
Amortization of servicing assets		56			63
Net change in net deferred loan origination costs		545			127
Gain on sale of other real estate owned		(22	)		(112	)
Gain on sale of equity securities		—			(295	)
Loss on disposal of other assets		2			19
Other real estate owned valuation adjustments		—			38
Earnings on bank-owned life insurance		(51	)		(105	)
Net change in:
Accrued interest receivable		209			189
Other assets		1,942			4,379
Accrued interest payable and other liabilities		(2,399	)		(3,570	)
Net cash from operating activities		8,593			14,013
Cash flows from investing activities
Securities
Proceeds from maturities		55,599			79,210
Proceeds from principal repayments		2,206			2,234
Proceeds from sale of equity securities		—			3,722
Purchases of securities		(39,657	)		(58,700	)
Net decrease in loans receivable		101,108			105,846
Purchase of FHLB and FRB stock		—			(4	)
Redemption of FHLB and FRB stock		—			540
Proceeds from sale of other real estate owned		120			1,107
Purchase of premises and equipment, net		(1,133	)		(623	)
Net cash from investing activities		118,243			133,332
Cash flows from financing activities
Net change in:
Deposits		117,487			(63,659	)
Borrowings		3,939			(19,796	)
Advance payments by borrowers for taxes and insurance		(224	)		271
Repurchase and retirement of common stock		(4,194	)		(16,841	)
Cash dividends paid on common stock		(4,504	)		(4,731	)
Net cash from (used in) financing activities		112,504			(104,756	)
Net change in cash and cash equivalents		239,340			42,589
Beginning cash and cash equivalents		190,325			98,204
Ending cash and cash equivalents	$	429,665		$	140,793

Supplemental disclosures of cash flow information:
Interest paid	$	6,047		$	10,295
Income taxes paid		155			349
Income taxes refunded		8			10
Loans transferred to other real estate owned		33			76
Recording of right of use asset in exchange for lease obligations in other assets and other liabilities		111			6,694

See accompanying notes to the consolidated financial statements.

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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, is the owner of all of the issued and outstanding capital stock of BankFinancial, NA (the “Bank”). The interim unaudited consolidated financial statements include the accounts and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BFIN Asset Recovery Company, LLC (collectively, “the Company”), and reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. Such adjustments are the only adjustments reflected in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020 or for any other period.

Certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

Use of Estimates: The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual information, actual results could differ from those estimates.

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

Reclassifications: Certain reclassifications have been made in the prior period’s financial statements to conform them to the current period’s presentation.

These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission.

Newly Issued Not Yet Effective Accounting Standards

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. For SEC filers who are smaller reporting companies, such as the Company, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

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.

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2020*		*2019*		*2020*		*2019*
Net income available to common stockholders	$	1,948	$	3,924	$	6,718	$	8,282
Basic and diluted weighted average common shares outstanding		14,842,150		15,373,964		15,008,271		15,679,927
Basic and diluted earnings per common share	$	0.13	$	0.26	$	0.45	$	0.53

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - SECURITIES

The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income is as follows:

	*Amortized Cost*		*Gross Unrealized Gains*		*Gross Unrealized Losses*			*Fair Value*
Available-for-Sale Securities
September 30, 2020
Certificates of deposit	$	32,724	$	—	$	—		$	32,724
Municipal securities		503		9		—			512
Mortgage-backed securities - residential		6,124		305		—			6,429
Collateralized mortgage obligations - residential		2,381		4		(2	)		2,383
	$	41,732	$	318	$	(2	)	$	42,048
December 31, 2019
Certificates of deposit	$	48,666	$	—	$	—		$	48,666
Municipal securities		505		8		—			513
Mortgage-backed securities - residential		7,727		310		—			8,037
Collateralized mortgage obligations - residential		2,986		4		(13	)		2,977
	$	59,884	$	322	$	(13	)	$	60,193

The mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities or agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support.

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.

	*September 30, 2020*
	*Amortized Cost*		*Fair Value*
Due in one year or less	$	32,576	$	32,577
Due after one year through five years		651		659
		33,227		33,236
Mortgage-backed securities - residential		6,124		6,429
Collateralized mortgage obligations - residential		2,381		2,383
	$	41,732	$	42,048

Investment securities available-for-sale with carrying values of $1.2 million and $2.0 million at September 30, 2020 and December 31, 2019, respectively, were pledged as collateral on customer repurchase agreements and for other purposes as required or permitted by law.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - SECURITIES (continued)

Sales of equity securities were as follows:

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2020*		*2019*		*2020*		*2019*
Proceeds	$	—	$	—	$	—	$	3,722
Gross gains		—		—		—		295
Gross losses		—		—		—		—

Securities with unrealized losses not recognized in income are as follows:

			*Less than 12 Months*							*12 Months or More*							*Total*
	*Count*		*Fair Value*		*Unrealized Loss*			*Count*		*Fair Value*		*Unrealized Loss*			*Count*		*Fair Value*		*Unrealized Loss*
September 30, 2020
Collateralized mortgage obligations - residential		—	$	—	$	—			3	$	1,695	$	(2	)		3	$	1,695	$	(2	)

December 31, 2019
Collateralized mortgage obligations - residential		3	$	1,566	$	(10	)		1	$	937	$	(3	)		4	$	2,503	$	(13	)

The Company evaluates marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides 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 collateralized mortgage obligations that the Company holds in its investment portfolio were in an unrealized loss position at September 30, 2020, but the unrealized losses were not considered significant under the Company’s impairment testing methodology. In addition, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell these securities before their anticipated recovery occurs.

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

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

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - LOANS RECEIVABLE

Loans receivable are as follows:

	*September 30, 2020*			*December 31, 2019*
One-to-four family residential real estate	$	44,812		$	55,750
Multi-family mortgage		522,825			563,750
Nonresidential real estate		124,477			134,674
Commercial loans and leases		379,638			418,343
Consumer		1,784			2,211
		1,073,536			1,174,728
Net deferred loan origination costs		367			912
Allowance for loan losses		(8,011	)		(7,632	)
Loans, net	$	1,065,892		$	1,168,008

The following tables present the balance in the allowance for loan losses and 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*
September 30, 2020
One-to-four family residential real estate	$	—	$	623	$	623	$	1,746	$	43,066	$	44,812
Multi-family mortgage		—		4,143		4,143		596		522,229		522,825
Nonresidential real estate		20		1,697		1,717		1,870		122,607		124,477
Commercial loans and leases		—		1,480		1,480		155		379,483		379,638
Consumer		—		48		48		—		1,784		1,784
	$	20	$	7,991	$	8,011	$	4,367	$	1,069,169		1,073,536
Net deferred loan origination costs												367
Allowance for loan losses												(8,011	)
Loans, net											$	1,065,892

	*Allowance for loan losses*						*Loan Balances*
	*Individually evaluated for impairment*		*Collectively evaluated for impairment*		*Total*		*Individually evaluated for impairment*		*Collectively evaluated for impairment*		*Total*
December 31, 2019
One-to-four family residential real estate	$	—	$	675	$	675	$	1,835	$	53,915	$	55,750
Multi-family mortgage		—		3,676		3,676		620		563,130		563,750
Nonresidential real estate		—		1,176		1,176		288		134,386		134,674
Commercial loans and leases		—		2,065		2,065		—		418,343		418,343
Consumer		—		40		40		—		2,211		2,211
	$	—	$	7,632	$	7,632	$	2,743	$	1,171,985		1,174,728
Net deferred loan origination costs												912
Allowance for loan losses												(7,632	)
Loans, net											$	1,168,008

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 table represents the activity in the allowance for loan losses by portfolio segment:

	*Beginning balance*		*Provision for (recovery of) loan losses*			*Loans charged off*			*Recoveries*		*Ending balance*
For the three months ended

September 30, 2020
One-to-four family residential real estate	$	665	$	(42	)	$	(2	)	$	2	$	623
Multi-family mortgage		4,185		(98	)		—			56		4,143
Nonresidential real estate		1,602		115			—			—		1,717
Commercial loans and leases		1,658		(178	)		—			—		1,480
Consumer		46		16			(14	)		—		48
	$	8,156	$	(187	)	$	(16	)	$	58	$	8,011

September 30, 2019
One-to-four family residential real estate	$	563	$	56		$	(44	)	$	5	$	580
Multi-family mortgage		3,988		(268	)		—			8		3,728
Nonresidential real estate		1,195		77			(55	)		—		1,217
Construction and land		3		(1	)		—			—		2
Commercial loans and leases		2,044		(8	)		—			4		2,040
Consumer		31		10			(5	)		—		36
	$	7,824	$	(134	)	$	(104	)	$	17	$	7,603

For the nine months ended

September 30, 2020
One-to-four family residential real estate	$	675	$	(63	)	$	(7	)	$	18	$	623
Multi-family mortgage		3,676		384			—			83		4,143
Nonresidential real estate		1,176		541			—			—		1,717
Commercial loans and leases		2,065		(588	)		—			3		1,480
Consumer		40		52			(44	)		—		48
	$	7,632	$	326		$	(51	)	$	104	$	8,011

September 30, 2019
One-to-four family residential real estate	$	699	$	(30	)	$	(117	)	$	28	$	580
Multi-family mortgage		3,991		(287	)		—			24		3,728
Nonresidential real estate		1,476		(176	)		(83	)		—		1,217
Construction and land		4		(2	)		—			—		2
Commercial loans and leases		2,272		4,203			(4,443	)		8		2,040
Consumer		28		28			(20	)		—		36
	$	8,470	$	3,736		$	(4,663	)	$	60	$	7,603

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

The following tables present loans individually evaluated for impairment by class of loans:

									*Three Months Ended*				*Nine Months Ended*
									*September 30, 2020*				*September 30, 2020*
	*Loan Balance*		*Recorded Investment*		*Partial Charge off*		*Allowance for Loan Losses Allocated*		*Average Investment in Impaired Loans*		*Interest Income Recognized*		*Average Investment in Impaired Loans*		*Interest Income Recognized*
September 30, 2020
With no related allowance recorded:
One-to-four family residential real estate	$	2,092	$	1,746	$	358	$	—	$	1,760	$	10	$	1,798	$	34
Multi-family mortgage - Illinois		596		596		—		—		600		8		608		26
Nonresidential real estate		1,582		1,582		—		—		791		—		316		32
Commercial leases - other		155		155		—		—		478		27		259		27
		4,425		4,079		358		—		3,629		45		2,981		119

With a related allowance recorded - nonresidential		280		288		—		20		288		—		288		—
	$	4,705	$	4,367	$	358	$	20	$	3,917	$	45	$	3,269	$	119

									*Year ended*
									*December 31, 2019*
	*Loan Balance*		*Recorded Investment*		*Partial Charge-off*		*Allowance for Loan Losses Allocated*		*Average Investment in Impaired Loans*		*Interest Income Recognized*
December 31, 2019
With no related allowance recorded:
One-to-four family residential real estate	$	2,168	$	1,835	$	339	$	—	$	2,208	$	51
Multi-family mortgage - Illinois		620		620		—		—		637		37
Nonresidential real estate		280		288		—		—		589		2
	$	3,068	$	2,743	$	339	$	—	$	3,434	$	90

Nonaccrual Loans

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

	*Loan Balance*		*Recorded Investment*		*Loans Past Due Over 90 Days, Still Accruing*
September 30, 2020
One-to-four family residential real estate	$	485	$	465	$	—
Nonresidential real estate		1,863		1,870		—
	$	2,348	$	2,335	$	—
December 31, 2019
One-to-four family residential real estate	$	598	$	512	$	—
Nonresidential real estate		280		288		—
Investment-rated commercial leases		47		—		47
	$	925	$	800	$	47

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

The Company’s reserve for uncollected loan interest was $135,000 and $81,000 at September 30, 2020 and December 31, 2019, respectively. When a loan is on nonaccrual status and the ultimate collectability of the total principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on nonaccrual 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.

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 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*
September 30, 2020
One-to-four family residential real estate loans:
Owner occupied	$	48	$	-	$	462	$	510	$	35,604	$	36,114
Non-owner occupied		3		95		—	$	98		8,600		8,698
Multi-family mortgage:
Illinois		—		—		—		—		224,919		224,919
Other		—		—		—		—		297,906		297,906
Nonresidential real estate		—		—		1,870		1,870		122,607		124,477
Commercial loans and leases:
Commercial		—		—		—		—		90,767		90,767
Asset-based		—		—		—		—		1,471		1,471
Equipment finance:
Government		—		—		—		—		71,504		71,504
Investment-rated		439		124		—		563		81,449		82,012
Other		633		—		—		633		133,251		133,884
Consumer		6		4		—		10		1,774		1,784
	$	1,129	$	223	$	2,332	$	3,684	$	1,069,852	$	1,073,536

	*30-59 Days Past Due*		*60-89 Days Past Due*		*90 Days or Greater Past Due*		*Total Past Due*		*Loans Not Past Due*		*Total*
December 31, 2019
One-to-four family residential real estate loans:
Owner occupied	$	777	$	340	$	507	$	1,624	$	43,365	$	44,989
Non-owner occupied		280		15		—		295		10,466		10,761
Multi-family mortgage:
Illinois		981		302		—		1,283		246,680		247,963
Other		—		—		—		—		315,787		315,787
Nonresidential real estate		—		—		288		288		134,386		134,674
Commercial loans and leases:
Commercial		—		—		—		—		133,976		133,976
Asset-based		—		—		—		—		11,738		11,738
Equipment finance:
Government		—		—		—		—		33,555		33,555
Investment-rated		826		—		47		873		101,015		101,888
Other		543		136		—		679		136,507		137,186
Consumer		24		37		—		61		2,150		2,211
	$	3,431	$	830	$	842	$	5,103	$	1,169,625	$	1,174,728

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - LOANS RECEIVABLE (continued)

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

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was passed by Congress and signed into law on March 27, 2020. The CARES Act established the Paycheck Protection Program loan, designed to provide a direct incentive for small businesses to keep their workers on the payroll. Under the most recently published guidance, the U.S. Small Business Administration ("SBA") will forgive PPP loans if all employee retention criteria are met, and the funds are used for eligible expenses. For the nine months ended September 30, 2020, we allocated approximately $11 million to the PPP based on the expected 100% guaranty of the SBA.

The following table presents the PPP activity:

	*Number of loans*		*Originated*		*Balance*
For the Nine Months Ended September 30, 2020
Paycheck protection program loan originations		315	$	11,160

September 30, 2020
Paycheck protection program loans		310			$	11,042

COVID-19 Loan Forbearance Programs

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

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

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

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

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

The following table summarizes the remaining loan forbearance modifications at September 30, 2020:

	*Number of loans*		*Principal Balance*		*Remaining Amounts Deferred*

Small Investment Property COVID-19 Qualified Limited Forbearance Agreement
Multi-family mortgage		15	$	4,511	$	46
Nonresidential real estate		15		5,871		93
Apartment and Commercial Real Estate COVID-19 Qualified Limited Forbearance Agreement
Multi-family mortgage		53		42,663		185
Nonresidential real estate		28		31,861		273
Commercial leases ⁽¹⁾		25		9,211		—
One-to-four family residential real estate		10		1,422		11

		146	$	95,539	$	608

(1) Commercial lease deferrals have been reamortized to maturity.

Troubled Debt Restructurings

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under OCC Bulletin 2020-35 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR.

Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.

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 Company had no TDRs at September 30, 2020 and December 31, 2019. During the nine months ended September 30, 2020 and 2019, there were no loans modified and classified as TDRs. During the three and nine months ended September 30, 2020 and 2019, there were no TDR loans that subsequently defaulted within twelve months of their modification.

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

To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans categorized as Substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time. The risk rating guidance published by the Office of the Comptroller of the Currency clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated Substandard.

Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

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*
September 30, 2020
One-to-four family residential real estate loans:
Owner occupied	$	35,165	$	-	$	484	$	465	$	36,114
Non-owner occupied		8,637		28		33		—		8,698
Multi-family mortgage:
Illinois		224,919		—		—		—		224,919
Other		297,906		—		—		—		297,906
Nonresidential real estate		119,260		2,151		1,196		1,870		124,477
Commercial loans and leases:
Commercial		90,767		—		—		—		90,767
Asset-based		1,471		—		—		—		1,471
Equipment finance:
Government		71,504		—		—		—		71,504
Investment-rated		82,012		—		—		—		82,012
Other		132,588		—		1,296		—		133,884
Consumer		1,774		5		5		—		1,784
	$	1,066,003	$	2,184	$	3,014	$	2,335	$	1,073,536

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - LOANS RECEIVABLE (continued)

	*Pass*		*Special Mention*		*Substandard*		*Nonaccrual*		*Total*
December 31, 2019
One-to-four family residential real estate loans:
Owner occupied	$	43,908	$	36	$	533	$	512	$	44,989
Non-owner occupied		10,696		30		35		—		10,761
Multi-family mortgage:
Illinois		247,757		—		206		—		247,963
Other		315,787		—		—		—		315,787
Nonresidential real estate		134,134		162		90		288		134,674
Commercial loans and leases:
Commercial		125,630		8,346		—		—		133,976
Asset-based		11,738		—		—		—		11,738
Equipment finance:
Government		33,555		—		—		—		33,555
Investment-rated		101,381		507		—		—		101,888
Other		136,289		761		136		—		137,186
Consumer		2,153		5		53		—		2,211
	$	1,163,028	$	9,847	$	1,053	$	800	$	1,174,728

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.

	*September 30, 2020*						*December 31, 2019*
	*Balance*		*Valuation Allowance*		*Net OREO Balance*		*Balance*		*Valuation Allowance*		*Net OREO Balance*
One–to–four family residential	$	110	$	-	$	110	$	186	$	—	$	186

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

	*For the Three Months Ended*						*For the Nine Months Ended*
	*September 30,*						*September 30,*
	*2020*			*2019*			*2020*			*2019*
Beginning balance	$	143		$	497		$	186		$	1,226
New foreclosed properties		—			30			33			76
Valuation adjustments		—			(17	)		—			(38	)
Sales and other reductions		(33	)		(241	)		(109	)		(995	)
Ending balance	$	110		$	269		$	110		$	269

Activity in the valuation allowance is as follows:

	*For the Three Months Ended*				*For the Nine Months Ended*
	*September 30,*				*September 30,*
	*2020*		*2019*		*2020*		*2019*
Beginning balance	$	—	$	21	$	—	$	23
Additions charged to expense		—		17		—		38
Reductions from sales of OREO		—		—		—		(23	)
Ending balance	$	—	$	38	$	—	$	38

At September 30, 2020 and December 31, 2019, the balance of OREO included no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title. At September 30, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $180,000 and $237,000, respectively.

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 - LEASES

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

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

	*Statement of Financial Condition Location*	*September 30, 2020*			*December 31, 2019*
Operating Lease Right of Use Asset:
Gross carrying amount		$	6,694		$	—
New lease obligation			111			6,694
Accumulated amortization			(1,508	)		(848	)
Net carrying value	Other assets	$	5,297		$	5,846

Operating Lease Liabilities:
Right of use lease obligations	Other liabilities	$	5,297		$	5,846

Amortization expense was $221,000 and $212,000 for the three months ended September 30, 2020 and 2019, respectively, and $660,000 and $636,000 for the nine months ended September 30, 2020 and 2019. At September 30, 2020, the weighted-average remaining lease term for the operating leases was 8.4 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.13%. The Company utilized the FHLB fixed rate advance rate for the term most closely aligning with the remaining lease term at inception.

	*For the Three Months Ended*						*For the Nine Months Ended*
	*September 30,*						*September 30,*
Lease cost:	*2020*			*2019*			*2020*			*2019*
Operating lease cost	$	221		$	212		$	660		$	636
Short-term lease cost		42			26			113			86
Sublease income		(19	)		(17	)		(56	)		(32	)
Total lease cost	$	244		$	221		$	717		$	690

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	238		$	225		$	709		$	674

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

Twelve months ended September 30,
2021	$	957
2022		991
2023		1,002
2024		582
2025		505
Thereafter		2,344
Total future minimum operating lease payments		6,381
Amounts representing interest		(1,084	)
Present value of net future minimum operating lease payments	$	5,297

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - BORROWINGS

Advances from the FHLB were as follows:

	*September 30, 2020*					*December 31, 2019*
	*Contractual*					*Contractual*
	*Rate*			*Amount*		*Rate*			*Amount*
Fixed-rate advance from FHLB, due within 1 year		—	%	$	4,000		—	%	$	—

Securities sold under agreements to repurchase, which are included with borrowings on the consolidated balance sheet, are shown below.

	*Overnight and Continuous*		*Up to 30 days*		*30 - 90 days*		*Greater Than 90 days*		*Total*
December 31, 2019
Repurchase agreements and repurchase-to-maturity transactions	$	61	$	—	$	—	$	—	$	61
Gross amount of recognized liabilities for repurchase agreements in Consolidated Statements of Financial Condition									$	61

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

Securities sold under agreements to repurchase were secured by a mortgage-backed security with a carrying amount of $2.0 million at December 31, 2019, As the security's value fluctuates due to market conditions, the Company has no control over the market value. The Company is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase price, per the agreement.

On April 1, 2020, the Company established a $5.0 million unsecured line of credit with a correspondent bank. Interest is payable at a rate of Prime rate minus 0.75%. The line of credit will mature on April 1, 2021. The line of credit had no outstanding balance at September 30, 2020.

NOTE 8 – 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 debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Impaired loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

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.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE (continued)

The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	*Fair Value Measurements Using*
	*Quoted Prices in Active Markets for Identical Assets (Level 1)*		*Significant Observable Inputs (Level 2)*		*Significant Unobservable Inputs (Level 3)*		*Fair Value*
September 30, 2020
Securities:
Certificates of deposit	$	—	$	32,724	$	—	$	32,724
Municipal securities		—		512		—		512
Mortgage-backed securities – residential		—		6,429		—		6,429
Collateralized mortgage obligations – residential		—		2,383		—		2,383
	$	—	$	42,048	$	—	$	42,048
December 31, 2019
Securities:
Certificates of deposit	$	—	$	48,666	$	—	$	48,666
Municipal securities		—		513		—		513
Mortgage-backed securities - residential		—		8,037		—		8,037
Collateralized mortgage obligations – residential		—		2,977		—		2,977
	$	—	$	60,193	$	—	$	60,193

The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:

	*Fair Value Measurement Using*
	*Quoted Prices in Active Markets for Identical Assets (Level 1)*		*Significant Observable Inputs (Level 2)*		*Significant Unobservable Inputs (Level 3)*		*Fair Value*
September 30, 2020
Impaired loans - nonresidential real estate	$	—	$	—	$	268	$	268

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans, had a carrying amount of $288,000, with a valuation allowance of $20,000 at September 30, 2020. At December 31, 2019 there were no impaired loans that were measured for impairment using the fair value of the collateral for collateral–dependent loans and which had specific valuation allowances. There is an increase in the provision for loan losses of $20,000 for the three and nine months ended September 30, 2020, compared to no specific provision for loan losses for the three and nine months ended September 30, 2019.

At September 30, 2020 and December 31, 2019 there were no OREO properties with valuation allowances.

The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2020:

	*Fair Value*		*Valuation Technique(s)*	*Significant Unobservable Input(s)*	*Range (Weighted Average)*
September 30, 2020
Impaired loans - nonresidential real estate	$	268	Sales comparison	Discount applied to valuation		22.0	%

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE (continued)

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

			*Fair Value Measurements at September 30, 2020 Using:*
	*Carrying Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Cash and cash equivalents	$	429,665	$	13,740	$	415,925	$	—	$	429,665
Securities		42,048		—		42,048		—		42,048
Loans receivable, net of allowance for loan losses		1,065,892		—		—		1,073,308		1,073,308
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		4,354		—		158		4,196		4,354
Financial liabilities
Certificates of deposit		301,351		—		302,791		—		302,791
Borrowings		4,000		—		3,997		—		3,997

			*Fair Value Measurements at December 31, 2019 Using:*
	*Carrying Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Cash and cash equivalents	$	190,325	$	9,785	$	180,540	$	—	$	190,325
Securities		60,193		—		60,193		—		60,193
Loans receivable, net of allowance for loan losses		1,168,008		—		—		1,177,459		1,177,459
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		4,563		—		252		4,311		4,563
Financial liabilities
Certificates of deposit		402,034		—		402,914		—		402,914
Borrowings		61		—		61		—		61

Loans: The exit price observations are obtained from an independent third-party using its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The valuation is based on the probability of default, loss given default, recovery delay, prepayment, and discount rate assumptions.

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.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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

	*Three Months Ended*				*Nine Months Ended*
	*September 30,*				*September 30,*
	*2020*		*2019*		*2020*			*2019*
Deposit service charges and fees	$	833	$	983	$	2,456		$	2,887
Loan servicing fees ⁽¹⁾		44		99		189			178
Mortgage brokerage and banking fees ⁽¹⁾		44		28		84			77
Gain on sale of equity securities ⁽¹⁾		—		—		—			295
Loss on disposal of other assets		—		—		(2	)		(19	)
Trust and insurance commissions and annuities income		222		198		728			627
Earnings on bank-owned life insurance ⁽¹⁾		10		37		51			105
Other ⁽¹⁾		111		129		319			374
Total noninterest income	$	1,264	$	1,474	$	3,825		$	4,524

⁽¹⁾ Not within the scope of ASC 606

A description of the Company's revenue streams accounted for under ASC 606 follows:

Deposit service charges and fees: The Company earns fees from its deposit customers based on specific types of transactions, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange income: The Company earns interchange fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is included in deposit service charges and fees. Interchange income was $ 394,000 and $ 395,000 for the three months ended September 30, 2020 and 2019. Interchange income was $ 1.1 million and $ 1.2 million for the nine months ended September 30, 2020 and 2019.

Trust and insurance commissions and annuities income: The Company earns trust, insurance commissions and annuities income from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided include fees the Company earns, which are based on a fixed fee schedule, are recognized when the services are rendered.

Gains/losses on sales of OREO and other assets: The Company records a gain or loss from the sale of OREO and other assets when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. OREO sales for the three and nine months ended September 30, 2020 and 2019 were not financed by the Bank.

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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 contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “expect,” “estimate,” “intend,” “anticipate,” “preliminary,” “project,” “plan,” or similar expressions. Forward looking statements speak only as of the date made. They are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.

Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) less than anticipated loan growth due to intense competition for loans and leases, particularly in terms of pricing and credit underwriting, or a dearth of borrowers who meet our underwriting standards, or the COVID-19 pandemic and the related adverse local and national economic consequences; (ii) the impact of re-pricing and competitors’ pricing initiatives on loan and deposit products; (iii) interest rate movements and their impact on the economy, customer behavior and our net interest margin; (iv) adverse economic conditions in general, or specific events such as the COVID-19 pandemic or terrorism, and in the markets in which we lend 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) legislative or regulatory changes, that have an adverse impact on our products, services, operations and operating expenses; (xiii) higher federal deposit insurance premiums; (xiv) higher than expected overhead, infrastructure and compliance costs; (xv) changes in accounting or tax principles, policies or guidelines; (xvi) the effects of any federal government shutdown; and (xvii) privacy and cybersecurity risks, including the risks of business interruption and the compromise of confidential customer information resulting from intrusions.

These risks and uncertainties, together with the Risk Factors and other information set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as well as Part II, Items 1A of our subsequent Quarterly Reports on Form 10-Q, and other filings we make with the SEC, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward looking statements speak only as of the date they are made. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled “Critical Accounting Policies” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC.

Overview

At September 2020, the Company continued to be in a strong financial and operational condition. The Company had a Tier 1 leverage ratio of 10.66% and a Tier 1 risk-based capital ratio of 17.84%. Our ratio of nonperforming loans to total loans was 0.22% and the ratio of nonperforming assets to total assets was 0.15%. The Company’s subsidiary, BankFinancial NA, had 28.3% of total assets in cash deposited at the Federal Reserve Bank and other insured depository institutions. We believe the Company continues to be prepared for the economic and social consequences of the COVID-19 global pandemic.

Pandemic Operational Status

Beginning in the third quarter of 2020, we restored walk-in branch service hours for limited periods and modestly expanded drive-in hours for certain branch offices to accommodate customer service needs at peak periods. We implemented enhanced health safety protocols in all branch facilities for which we restored walk-in branch services. As of September 30, 2020, two branch offices remain closed as we consolidated the customer service capabilities of these facilities with another nearby branch location.

Loan Composition & Activity

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

In the third quarter of 2020, total loans declined by $15.9 million (1.5%) compared to June 30, 2020. Commercial loan and lease finance balances increased by $5.0 million (1.3%) as growth in Equipment Finance originations offset reductions in commercial line of credit balances and scheduled principal amortizations in the Equipment Finance portfolio. Total equipment finance originations were $58.9 million in the third quarter of 2020, compared to $18.0 million in the second quarter of 2020, primarily due to substantial growth in government and middle market commercial equipment and software finance transactions. Line of credit usage by healthcare providers remains at historically low levels, as providers continued to receive substantial additional liquidity from Medicare reimbursement advances and other sources, and most line of credit borrowers chose to pay down credit exposures to the maximum extent possible. Multi-family residential mortgage loans decreased by $13.8 million (2.6%) primarily due to prepayment activity related to project sales and external refinance activity. Nonresidential real estate mortgage loans declined by $3.1 million (2.4%) primarily due to scheduled principal amortization.

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

We originated ten loans for $135,000 pursuant to the U.S. Small Business Administration Paycheck Protection Program ("PPP") in the third quarter of 2020. Due to the uncertainties concerning the PPP, borrower demand for PPP loans declined each month during the second and third quarters of 2020. At September 30, 2020, we had 310 PPP loans with $11.0 million in outstanding principal balance. We focused our PPP loan origination capabilities on new and existing small business deposit customers, resulting in an average loan origination amount of approximately $35,000. On October 8, 2020, the SBA announced that PPP loans of $50,000 or less would be eligible for a streamlined loan forgiveness process. As of September 30, 2020, we had 168 PPP loans for a total of $3.2 million with balances of $50,000 or less eligible for streamlined forgiveness, of which 41 loans totaling $678,000 had completed PPP Loan Forgiveness Applications submitted to the SBA.

In anticipation of further extensions and enhancements to the PPP, we implemented a technology solution to automate the processing of PPP loans. We also implemented a technology solution to automate the processing of requests for forgiveness of PPP loans not forgiven by operation of law. As of September 30, 2020, we submitted 57 completed Loan Forgiveness Applications for a total of $2.4 million to the SBA PPP Loan Forgiveness Portal. As of October 23, 2020, the SBA had processed and paid 16 PPP Loan Forgiveness Applications, totaling approximately $388,000 in principal.

COVID-19 Loan Forbearance Program

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

Our Apartment and Commercial Real Estate Qualified Limited Forbearance Program permits borrowers who qualify under Section 4013 of the CARES Act to make an election to pay scheduled interest and escrow payments (if applicable) for a four-month period beginning in April, 2020, and pay all deferred principal payments by December 2020. As of September 30, 2020, 104 borrowers with $90.0 million in total outstanding balances executed a Qualified Limited Forbearance Program Agreement. At September 30, 2020, 23 borrowers had paid all deferred amounts owed. The remaining 81 borrowers owe approximately $458,000 in deferred principal payments which are scheduled for payment in full by December 31, 2020.

For small investment property owners with loan balances under $750,000, the borrower could elect to defer the May 2020 loan payment entirely, with all deferred interest amounts due by December, 2020 and all deferred principal amounts due by June 30, 2021. As of September 30, 2020, 40 borrowers with $12.3 million in outstanding principal balances executed to a Small Investment Property Limited Forbearance Program Agreement. At September 30, 2020, ten borrowers had paid all deferred amounts owed. The remaining 30 borrowers owe approximately $139,000 of deferred payments, of which $97,000 is scheduled for payment by December 31, 2020 and $42,000 is scheduled for payment by June 30, 2021.

CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements are available to qualified commercial loan and commercial finance borrowers, and to commercial equipment lessees. As of September 30, 2020, we had no commercial loan borrowers subject to any form of forbearance agreement. As of September 30, 2020, there were 25 commercial equipment lease obligations with $9.2 million in outstanding principal balances subject to a forbearance agreement which extended the maturity and re-amortized the principal over the remaining term with a weighted average maturity of 33 months. As of September 30, 2020, all lessees subject to re-amortization were current on all required payments.

Owner-Occupied Residential Mortgage & Consumer Loans

For residential mortgage and consumer loans, CARES Act Section 4013 or OCC Bulletin 2020-35 forbearance agreements are available to qualified borrowers. As of September 30, 2020, we had ten borrowers with $1.4 million in outstanding principal balances subject to a forbearance agreement with terms consistent with secondary residential mortgage market standards established by Fannie Mae. As of September 30, 2020, there were approximately $11,000 of deferred payments of which $4,000 is scheduled for payment by December 31, 2020 and $7,000 is scheduled for payment by June 30, 2021.

Asset Quality

Our nonperforming loans to total loans ratio was 0.22% as of September 30, 2020. We placed one Chicago nonresidential real estate loan in the amount of $1.6 million on nonaccrual status during the third quarter of 2020, due to our decision to commence receivership proceedings based on the borrower’s unauthorized material alteration of the collateral; however, the borrower expects to repay the loan in full prior to the November, 2020 effective date of the receivership. Past due loan balances, including payments due on any loan or leases subject to a forbearance agreement, continued to remain nominal; however, these trends could change based on the pace of economic recovery from the COVID-19 pandemic and based on any further fiscal stimulus, if any, from the U.S. Government in the future.

Allowance for Loan Losses

Our allowance for loan losses ("ALLL") decreased by $145,000 (1.8%), compared to an increase of $44,000 for the quarter ended June 30, 2020, primarily due to the decline in lessor line of credit balances, partially offset by continued precautionary increases in the loan loss reserve ratios for multi-family residential and nonesidential real estate loans. As of September 30, 2020, the required reserve ratios for multi-family residential real estate loans and nonresidential real estate loans increased by 21.5%, and 58.2%, respectively, compared to December 31, 2019.

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

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Deposit Portfolio Composition & Activity

Our deposit portfolio composition consists almost entirely of core transaction accounts, including local retail and business money market deposit accounts, and local retail certificates of deposit accounts. In the third quarter of 2020, total deposits increased by $14.1 million (1.0%), net of a $11.3 million reduction in wholesale deposit balances. Core transaction account balances increased by $53.5 million during the third quarter of 2020 and $218.2 million since December 31, 2019, primarily due to the continuing impacts of multiple COVID-19 U.S. Government fiscal stimulus programs and reductions in personal and business spending by depositors. We also note that the delays enacted for federal and state tax reporting and remittances also deferred seasonal deposit withdrawal activities which typically occur earlier in the calendar year. For the remainder of 2020, we expect greater volatility in deposit balances, as various forms of government stimulus provide additional liquidity to depositors, but in most cases this liquidity may also be consumed to pay current or past due obligations. Given our substantial liquidity, we expect to maintain a moderate competitive posture for interest-bearing deposits, particularly certificates of deposit, with pricing flexibility reserved for our most valuable overall deposit relationships.

Net Interest Income and Noninterest Income

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

The average yield on our loan and lease portfolio for the quarter ended September 30, 2020 was 4.43%, compared to an average loan and lease portfolio yield of 4.57% for the quarter ended June 30, 2020. The average cost of retail and commercial deposits decreased to 0.48% for the quarter ended September 30, 2020, compared to an average cost of 0.63% for the quarter ended June 30, 2020. The average cost of wholesale deposits and borrowings declined to 2.22% for the quarter ended September 30, 2020. Our net interest margin decreased to 2.85% for the quarter ended September 30, 2020, compared to 3.09% for the quarter ended June 30, 2020.

For the third quarter of 2020, noninterest income was $1.3 million, compared to $1.2 million in the second quarter of 2020. Noninterest income improved slightly in the third quarter of 2020 as the impact of “Stay-At-Home” orders on use of card-based payments for retail sales and on commercial mortgage brokerage activity began to recover. Changes in the market return of trust assets caused a slight reduction in wealth management and trust income. Due to the abrupt change in market interest rates in the first quarter, income on our bank-owned life insurance portfolio remained at significantly reduced levels. We expect to see some continued gradual improvement in consumer spending, trust and wealth management income, and commercial real estate brokerage fees as these market-based opportunities commensurate with the reduction of uncertainties in consumer incomes, commercial real estate rental collections and debt/equity market investments return potential.

Noninterest Expense

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

Noninterest expense increased to $9.8 million for the quarter ended September 30, 2020 compared to the quarter ended June 30, 2020. Compensation and benefits increased by $230,000, compared to the quarter ended June 30, 2020, including $100,000 of employee severance accruals, $100,000 for branch employee pandemic service recognition payments and $13,000 for additional security related to civil unrest in the Chicago metropolitan area. Occupancy expenses increased by $137,000 due to extensive cleaning activities for branch and corporate facilities. Information technology expenses decreased slightly due to the renegotiation of technology contracts and completion of improvements in our information security and network capacities. Despite increased expenses for health safety and other COVID-19 protections and responses, other expenses remained well-contained, as we curtailed marketing expenses and other discretionary expenses to improve efficiencies.

Capital Management

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

We repurchased 66,000 shares at an average cost of $7.82 during the third quarter of 2020. Our tangible book value increased to $11.63 at September 30, 2020 from $11.58 at June 30, 2020. At September 30, 2020, we had 89,127 shares available for repurchase in our share repurchase program. The current share repurchase authorization will expire on October 31, 2020, unless extended.

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SELECTED FINANCIAL DATA

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

	September 30, 2020		December 31, 2019		Change
	(In thousands)
Selected Financial Condition Data:
Total assets	$	1,604,943	$	1,488,015	$	116,928
Loans, net		1,065,892		1,168,008		(102,116	)
Securities, at fair value		42,048		60,193		(18,145	)
Other real estate owned, net		110		186		(76	)
Deposits		1,402,244		1,284,757		117,487
Borrowings		4,000		61		3,939
Equity		172,397		174,372		(1,975	)

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2020			2019			Change			2020		2019		Change
	(In thousands)
Selected Operating Data:
Interest income	$	12,485		$	16,628		$	(4,143	)	$	40,332	$	49,676	$	(9,344	)
Interest expense		1,488			3,386			(1,898	)		6,041		10,112		(4,071	)
Net interest income		10,997			13,242			(2,245	)		34,291		39,564		(5,273	)
Provision for (recovery of) loan losses		(187	)		(134	)		(53	)		326		3,736		(3,410	)
Net interest income after provision for (recovery of) loan losses		11,184			13,376			(2,192	)		33,965		35,828		(1,863	)
Noninterest income		1,264			1,474			(210	)		3,825		4,524		(699	)
Noninterest expense		9,787			9,509			278			28,664		29,079		(415	)
Income before income tax expense		2,661			5,341			(2,680	)		9,126		11,273		(2,147	)
Income tax expense		713			1,417			(704	)		2,408		2,991		(583	)
Net income	$	1,948		$	3,924		$	(1,976	)	$	6,718	$	8,282	$	(1,564	)

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) ⁽¹⁾		0.49	%		1.05	%		0.58	%		0.72	%
Return on equity (ratio of net income to average equity) ⁽¹⁾		4.50			9.04			5.15			6.20
Average equity to average assets		10.83			11.59			11.34			11.68
Net interest rate spread ^{(1) (2)}		2.69			3.38			2.91			3.34
Net interest margin ^{(1) (3)}		2.85			3.67			3.12			3.63
Efficiency ratio ⁽⁴⁾		79.82			64.62			75.20			65.96
Noninterest expense to average total assets ⁽¹⁾		2.45			2.54			2.49			2.54
Average interest-earning assets to average interest-bearing liabilities		141.40			131.18			137.45			131.57
Dividends declared per share	$	0.10		$	0.10		$	0.30		$	0.30
Dividend payout ratio		76.13	%		39.18	%		67.04	%		57.12	%

	At September 30, 2020			At December 31, 2019
Asset Quality Ratios:
Nonperforming assets to total assets ⁽⁵⁾		0.15	%		0.07	%
Nonperforming loans to total loans		0.22			0.07
Allowance for loan losses to nonperforming loans		343.08			901.06
Allowance for loan losses to total loans		0.75			0.65
Capital Ratios:
Equity to total assets at end of period		10.74	%		11.72	%
Tier 1 leverage ratio (Bank only)		10.13	%		10.89	%
Other Data:
Number of full-service offices		19			19
Employees (full-time equivalents)		210			222

⁽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 September 30, 2020 and December 31, 2019

Total assets increased $ 116.9 million, or 7.9%, to $1.605 billion at September 30, 2020, from $1.488 billion at December 31, 2019. The increase in total assets was primarily due to an increase in cash and cash equivalents, which was partially offset by a decrease in loans receivable. Cash and cash equivalents increased $ 239.3 million, or 125.8%, to $429.7 million at September 30, 2020, from $190.3 million at December 31, 2019. Loans decreased $102.1 million, or 8.7%, to $1.066 billion at September 30, 2020, from $1.168 billion at December 31, 2019.

Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, commercial loans and leases), which together totaled 95.7% of gross loans at September 30, 2020. During the nine months ended September 30, 2020, multi-family loans decreased by $ 40.9 million, or 7.3%; commercial loans and leases decreased by $ 38.7 million, or 9.3%; and nonresidential real estate loans decreased $ 10.2 million, or 7.6%. The decrease in multi-family loans was primarily due to a significant amount of loan prepayments.

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Our primary lending area consists of the counties in the State of Illinois where our branch offices are located, and contiguous counties. We derive the most significant portion of our revenues from these geographic areas. We also engage in multi-family mortgage lending activities in carefully selected metropolitan areas outside our primary lending area and engage in certain types of commercial lending and leasing activities on a nationwide basis. At September 30, 2020, $222.8 million, or 42.6%, of our multi-family mortgage loans were in the Metropolitan Statistical Area for Chicago, Illinois; $63.9 million, or 12.2%, were in the Metropolitan Statistical Area for Dallas, Texas; $46.9 million, or 9.0%, were in the Metropolitan Statistical Area for Denver, Colorado; $29.1 million, or 5.6%, were in the Metropolitan Statistical Area for Tampa, Florida; $28.3 million, or 5.4%, were in the Metropolitan Statistical Area for Greenville-Spartanburg, South Carolina; $21.4 million, or 4.1%, were in the Metropolitan Statistical Area for San Antonio, Texas; and $16.4 million, or 3.1%, were in the Metropolitan Statistical Area for Minneapolis, Minnesota. This information reflects the location of the collateral and does not necessarily reflect the location of the borrower.

Total liabilities increased $ 118.9 million, or 9.1%, to $1.433 billion at September 30, 2020, from $1.314 billion at December 31, 2019, primarily due to an increase in total deposits. Total deposits increased $ 117.5 million, or 9.1%, to $1.402 billion at September 30, 2020, from $1.285 billion at December 31, 2019. Noninterest-bearing demand deposits increased $118.2 million, or 56.1%, to $ 328.9 million at September 30, 2020, from $ 210.8 million at December 31, 2019 and interest-bearing NOW accounts increased $43.8 million, or 16.0%, to $ 317.0 million at September 30, 2020, from $ 273.2 million at December 31, 2019. Money market accounts increased $37.6 million, or 15.3%, to $ 283.2 million at September 30, 2020, from $ 245.6 million at December 31, 2019. Savings accounts increased $18.6 million, or 12.1%, to $ 171.8 million at September 30, 2020, from $ 153.2 million at December 31, 2019. Retail certificates of deposit decreased $61.1 million, or 18.1%, to $ 275.9 million at September 30, 2020, from $ 336.9 million at December 31, 2019. Wholesale certificates of deposit decreased $39.6 million, or 60.8%, to $ 25.5 million at September 30, 2020, from $ 65.1 million at December 31, 2019. Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) represented 78.5% of total deposits at September 30, 2020, compared to 68.7% at December 31, 2019. Borrowings increased $3.9 million in May 2020, as the Bank borrowed $4.0 million from the FHLB at zero percent interest rate for a one year term.

Total stockholders’ equity was $172.4 million at September 30, 2020, compared to $174.4 million at December 31, 2019. The decrease in total stockholders’ equity was primarily due to our repurchase of 453,836 shares of our common stock during the nine months ended September 30, 2020 at a total cost of $ 4.2 million and our declaration and payment of cash dividends totaling $ 4.5 million during the same period. These reductions in total stockholders’ equity were partially offset by the net income of $ 6.7 million that the Company recorded for the nine months ended September 30, 2020.

Operating Results for the Three Months Ended September 30, 2020 and 2019

Net Income. Net income was $1.9 million for the three months ended September 30, 2020, compared to $3.9 million for the three months ended September 30, 2019. Earnings per basic and fully diluted share of common stock were $0.13 for the three months ended September 30, 2020, compared to $0.26 for the three months ended September 30, 2019.

Net Interest Income. Net interest income was $ 11.0 million for the three months ended September 30, 2020, compared to $ 13.2 million for the three months ended September 30, 2019. The decrease in net interest income reflected a $4.1 million, or 24.9%, decrease in interest income, partially offset by a $1.9 million decrease in interest expense.

The decrease in interest income was due in substantial part to a decrease in the average yield on interest-earning assets, which was partially offset by a decrease in the cost of interest-bearing liabilities and a decrease in total average interest-bearing liabilities. The yield on interest-earning assets decreased 137 basis points to 3.24% for the three months ended September 30, 2020, from 4.61% for the three months ended September 30, 2019. The cost of interest-bearing liabilities decreased 68 basis points to 0.55% for the three months ended September 30, 2020, from 1.23% for the same period in 2019. Total average interest-earning assets increased $103.5 million, or 7.2%, to $1.534 billion for the three months ended September 30, 2020, from $1.431 billion for the same period in 2019. Total average interest-bearing liabilities decreased $5.6 million, or 0.5%, to $1.085 billion for the three months ended September 30, 2020, from $1.091 billion for the same period in 2019. Our net interest rate spread decreased by 69 basis points to 2.69% for the three months ended September 30, 2020, from 3.38% for the same period in 2019. Our net interest margin decreased by 82 basis points to 2.85% for the three months ended September 30, 2020, from 3.67% for the same period in 2019.

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Average Balance Sheets

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

	For the Three Months Ended September 30,
	2020								2019
	Average Outstanding Balance			Interest		Yield/Rate (1)			Average Outstanding Balance			Interest		Yield/Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	1,080,521		$	12,027		4.43	%	$	1,239,774		$	15,371		4.92	%
Securities		52,265			183		1.39			78,221			508		2.58
Stock in FHLB and FRB		7,490			87		4.62			7,490			86		4.56
Other		394,048			188		0.19			105,345			663		2.50
Total interest-earning assets		1,534,324			12,485		3.24			1,430,830			16,628		4.61
Noninterest-earning assets		64,824								67,550
Total assets	$	1,599,148							$	1,498,380
Interest-bearing liabilities:
Savings deposits	$	169,989			27		0.06		$	151,523			115		0.30
Money market accounts		274,160			163		0.24			241,180			562		0.92
NOW accounts		310,024			121		0.16			268,742			301		0.44
Certificates of deposit		326,956			1,177		1.43			428,151			2,407		2.23
Total deposits		1,081,129			1,488		0.55			1,089,596			3,385		1.23
Borrowings		4,000			—		—			1,170			1		0.34
Total interest-bearing liabilities		1,085,129			1,488		0.55			1,090,766			3,386		1.23
Noninterest-bearing deposits		314,965								208,279
Noninterest-bearing liabilities		25,788								25,637
Total liabilities		1,425,882								1,324,682
Equity		173,266								173,698
Total liabilities and equity	$	1,599,148							$	1,498,380
Net interest income				$	10,997							$	13,242
Net interest rate spread ⁽²⁾							2.69	%							3.38	%
Net interest-earning assets ⁽³⁾	$	449,195							$	340,064
Net interest margin ⁽⁴⁾							2.85	%							3.67	%
Ratio of interest-earning assets to interest-bearing liabilities		141.40	%							131.18	%

⁽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.

A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the portion of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legally discharged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.

We recorded a recovery of loan losses of $187,000 for the three months ended September 30, 2020, compared to a recovery of $134,000 for the same period in 2019. The provision for, or recovery of, loan losses is a function of the allowance for loan loss methodology that we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses that is attributable to loans collectively evaluated for impairment decreased $165,000, or 2.0%, to $8.0 million at September 30, 2020 from $8.2 million at June 30, 2020. There were $20,000 reserves established for loans individually evaluated for impairment for the three months ended September 30, 2020, compared to no reserves established for loans individually evaluated for impairment for the three months ended September 30, 2019. Net recoveries were $42,000 for the three months ended September 30, 2020, compared to net charge-offs of $87,000 for the three months ended September 30, 2019.

The allowance for loan losses as a percentage of nonperforming loans was 343.08% at September 30, 2020, compared to 457.43% at June 30, 2020 and 901.06 % at December 31, 2019.

Noninterest Income

	Three Months Ended
	September 30,
	2020		2019		Change
	(Dollars in thousands)
Deposit service charges and fees	$	833	$	983	$	(150	)
Loan servicing fees		44		99		(55	)
Mortgage brokerage and banking fees		44		28		16
Trust and insurance commissions and annuities income		222		198		24
Earnings on bank-owned life insurance		10		37		(27	)
Other		111		129		(18	)
Total noninterest income	$	1,264	$	1,474	$	(210	)

Noninterest income decreased $ 210,000, or 14.2%, for the three months ended September 30, 2020 to $ 1.3 million, compared to $ 1.5 million for the same period in 2019. Deposit service charges decreased $150,000, or 15.3%, primarily due to reduced non-sufficient funds (“ NSF”) returns charges and negative balance fees. Loan servicing fees decreased $55,000 for the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Earnings on bank-owned life insurance decreased by $27,000 to $10,000 for the three months ended September 30, 2020, due to lower interest rates. Other income decreased $18,000, or 14.0%, to $111,000 for the three months ended September 30, 2020, compared to $129,000 for the three months ended September 30, 2019.

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Noninterest Expense

	Three Months Ended
	September 30,
	2020		2019			Change
	(Dollars in thousands)
Compensation and benefits	$	5,398	$	5,218		$	180
Office occupancy and equipment		1,860		1,879			(19	)
Advertising and public relations		135		182			(47	)
Information technology		781		892			(111	)
Professional fees		307		213			94
Supplies, telephone and postage		288		312			(24	)
Amortization of intangibles		6		13			(7	)
Nonperforming asset management		57		17			40
Operations of other real estate owned, net		23		19			4
FDIC insurance premiums		105		(127	)		232
Other		827		891			(64	)
Total noninterest expense	$	9,787	$	9,509		$	278

Noninterest expense increased by $278,000, or 2.9%, to $ 9.8 million for the three months ended September 30, 2020, from $ 9.5 million for the same period in 2019. The increase in noninterest expense was due in substantial part to increases in compensation and FDIC insurance expense, partially offset by a decrease in information technology expense. Compensation and benefits expense increased $180,000, or 3.4%, primarily due to increased payroll stemming from special performance compensation related to COVID-19 risk management and customer service activities in addition to severance accruals. Information technology expense decreased $111,000, or 12.4%, to $781,000 for the three months ended September 30, 2020, from $892,000 for the same period in 2019, primarily due to the renegotiation of technology contracts as we continue to upgrade our system and implement cybersecurity prevention. Professional fees increased $94,000, or 44.1%, to $307,000 for the three months ended September 30, 2020, from $213,000 for the same period in 2019, due in substantial part to several consulting projects at the Bank. FDIC insurance premiums increased $232,000, to $105,000 for the three months ended September 30, 2020, compared to a credit of $127,000 for the same period in 2019, due to the receipt of the FDIC's small bank assessment credit in third quarter 2019. Supplies and office occupancy expense included $219,000 in expenses related to civil unrest and COVID-19 for additional cleaning and sanitation costs that were incurred for infection control and prevention.

Income Taxes

We recorded income tax expense of $713,000 for the three months ended September 30, 2020, compared to $1.4 million for the three months ended September 30, 2019. Our combined state and federal effective tax rate for the three months ended September 30, 2020 was 26.8% versus an effective tax rate of 26.5% for the three months ended September 30, 2019.

Operating Results for the Nine Months Ended September 30, 2020 and 2019

Net Income. We had net income of $6.7 million for the nine months ended September 30, 2020, compared to $8.3 million for the nine months ended September 30, 2019. Earnings per basic and fully diluted share of common stock were $0.45 for the nine months ended September 30, 2020, compared to $0.53 per basic and fully diluted share for the same period in 2019.

Net Interest Income. Net interest income was $ 34.3 million for the nine months ended September 30, 2020, compared to $ 39.6 million for the same period in 2019. The $5.3 million decrease in net interest income reflected a $9.3 million, or 18.8%, decrease in interest income, partially offset by a $4.1 million decrease in interest expense.

The decrease in net interest income was primarily attributable to a decrease in the average yield on interest-earning assets, which was partially offset by a decrease in the cost of interest-bearing liabilities and a decrease in total interest-bearing liabilities. The yield on interest-earning assets decreased 90 basis points, or 19.7%, to 3.66% for the nine months ended September 30, 2020, from 4.56% for the nine months ended September 30, 2019. The cost of interest-bearing liabilities decreased 47 basis points to 0.75% for the nine months ended September 30, 2020, from 1.22% for the same period in 2019. Total average interest-earning assets increased $14.6 million, or 1.0%, to $1.470 billion for the nine months ended September 30, 2020, from $1.456 billion for the same period in 2019. Our net interest rate spread decreased 43 basis points to 2.91% for the nine months ended September 30, 2020, from 3.34% for the same period in 2019. Our net interest margin decreased by 51 basis points to 3.12% for the nine months ended September 30, 2020, from 3.63% for the same period in 2019.

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Average Balance Sheets

	For the Nine Months Ended September 30,
	2020								2019
	Average Outstanding Balance			Interest		Yield/Rate (1)			Average Outstanding Balance			Interest		Yield/Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	1,118,637		$	38,307		4.57	%	$	1,280,333		$	46,112		4.82	%
Securities		60,606			758		1.67			85,148			1,712		2.69
Stock in FHLB and FRB		7,490			259		4.62			7,713			278		4.82
Other		283,493			1,008		0.47			82,425			1,574		2.55
Total interest-earning assets		1,470,226			40,332		3.66			1,455,619			49,676		4.56
Noninterest-earning assets		64,689								68,565
Total assets	$	1,534,915							$	1,524,184
Interest-bearing liabilities:
Savings deposits	$	162,501			118		0.10		$	153,261			346		0.30
Money market accounts		260,314			829		0.43			246,879			1,703		0.92
NOW accounts		287,478			472		0.22			268,708			903		0.45
Certificates of deposit		357,182			4,622		1.73			431,965			7,071		2.19
Total deposits		1,067,475			6,041		0.76			1,100,813			10,023		1.22
Borrowings		2,144			—		—			5,501			89		2.16
Total interest-bearing liabilities		1,069,619			6,041		0.75			1,106,314			10,112		1.22
Noninterest-bearing deposits		265,928								214,512
Noninterest-bearing liabilities		25,372								25,364
Total liabilities		1,360,919								1,346,190
Equity		173,996								177,994
Total liabilities and equity	$	1,534,915							$	1,524,184
Net interest income				$	34,291							$	39,564
Net interest rate spread ⁽²⁾							2.91	%							3.34	%
Net interest-earning assets ⁽³⁾	$	400,607							$	349,305
Net interest margin ⁽⁴⁾							3.12	%							3.63	%
Ratio of interest-earning assets to interest-bearing liabilities		137.45	%							131.57	%

⁽¹⁾	Annualized

⁽²⁾	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽³⁾	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

⁽⁴⁾	Net interest margin represents net interest income divided by average total interest-earning assets.

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Provision for Loan Losses

We recorded a provision for loan losses of $326,000 for the nine months ended September 30, 2020, compared to a provision for loan losses of $3.7 million for the same period in 2019. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment increased $359,000, or 4.7%, to $8.0 million at September 30, 2020, from $7.6 million at December 31, 2019. There were $20,000 reserves established for loans individually evaluated for impairment for the nine months ended September 30, 2020 and no reserves established for loans individually evaluated for impairment for the nine months ended September 30, 2019. Net recoveries were $53,000 for the nine months ended September 30, 2020, compared to net charge-offs of $4.6 million for the same period in 2019. The decreases in net charge-offs and provision for loan losses were primarily due to the fact that our operating results for the nine months ended September 30, 2019 included a $4.4 million loss on the sale of a Chicago commercial credit exposure that experienced an unexpected deterioration in the second quarter of 2019.

The allowance for loan losses as a percentage of nonperforming loans was 343.08% at September 30, 2020, compared to 901.06% at December 31, 2019.

Noninterest Income

	Nine Months Ended
	September 30,
	2020			2019			Change
	(Dollars in thousands)
Deposit service charges and fees	$	2,456		$	2,887		$	(431	)
Loan servicing fees		189			178			11
Mortgage brokerage and banking fees		84			77			7
Gain on sale of equity securities		—			295			(295	)
Loss on disposal of other assets		(2	)		(19	)		17
Trust and insurance commissions and annuities income		728			627			101
Earnings on bank-owned life insurance		51			105			(54	)
Other		319			374			(55	)
Total noninterest income	$	3,825		$	4,524		$	(699	)

Noninterest income decreased by $699,000, or 15.5%, to $3.8 million for the nine months ended September 30, 2020, from $4.5 million for the nine months ended September 30, 2019. Deposit service charges and fees decreased $431,000, or 14.9%, to $2.5 million for the nine months ended September 30, 2020, compared to $2.9 million for the nine months ended September 30, 2019, primarily due to reduced NSF return charges, Visa fees and negative balance fees. We recorded a gain on sale of equity securities for the nine months ended September 30, 2019 of $295,000. Trust and insurance commissions and annuities income increased $101,000, or 16.1%, to $728,000 for the nine months ended September 30, 2020, compared to $627,000 for the nine months ended September 30, 2019. Earnings on bank-owned life insurance decreased $54,000 to $51,000 for the nine months ended September 30, 2020, due to lower interest rates. Other income decreased $55,000, or 14.7%, to $319,000 for the nine months ended September 30, 2020, compared to $374,000 for the nine months ended September 30, 2019.

Noninterest Expense

	Nine Months Ended
	September 30,
	2020		2019		Change
	(Dollars in thousands)
Compensation and benefits	$	16,084	$	16,128	$	(44	)
Office occupancy and equipment		5,383		5,348		35
Advertising and public relations		405		488		(83	)
Information technology		2,453		2,351		102
Professional fees		831		757		74
Supplies, telephone and postage		875		1,037		(162	)
Amortization of intangibles		27		47		(20	)
Nonperforming asset management		154		129		25
Operations of other real estate owned, net		13		22		(9	)
FDIC insurance premiums		241		127		114
Other		2,198		2,645		(447	)
Total noninterest expense	$	28,664	$	29,079	$	(415	)

Noninterest expense decreased by $415,000, or 1.4%, to $28.7 million for the nine months ended September 30, 2020, from $29.1 million for the same period in 2019. The decrease in noninterest expense is due in substantial part to decreases in compensation and benefits, advertising and public relations and other noninterest expense, offset in part by an increase in information technology expense. Compensation and benefits expense decreased $44,000, or 0.3%, partially due to a decrease in full-time equivalent employees to 210 at September 30, 2020 from 223 at September 31, 2019. Information technology expense increased $102,000, or 4.3%, to $2.5 million for the nine months ended September 30, 2020, compared to $2.4 million for the same period in 2019, primarily due to system upgrades and cybersecurity prevention expenses. FDIC insurance premiums increased $114,000, to $241,000 for the nine months ended September 30, 2020, compared to $127,000 for the same period in 2019, due to the receipt of the FDIC's small bank assessment credit in third quarter 2019. Other expenses decreased $447,000, or 16.9%, to $2.2 million for the nine months ended September 30, 2020, from $2.6 million for the same period in 2019, due in substantial part to the reversal of a $116,000 reserve established for the open letters of credit related to a loan charge-off that was recorded in the second quarter 2019. Supplies and office occupancy expense for the nine months ended September 30, 2020 included $341,000 in expenses related to civil unrest and COVID-19 for additional cleaning and sanitation costs that were incurred for infection control and prevention.

Income Taxes

For the nine months ended September 30, 2020, we recorded $2.4 million of income tax expense, compared to $3.0 million for the nine months ended September 30, 2019. Our effective tax rate for the nine months ended September 30, 2020 was 26.4%, compared to 26.5% for the same period in 2019.

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Nonperforming Loans and Assets

We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we place loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six consecutive months of contractual payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At September 30, 2020, we had no loans in this category.

We typically obtain new third–party appraisals or collateral valuations when we place a loan on nonaccrual status, conduct impairment testing or conduct a TDR analysis unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.

Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.

As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as–is,” “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 September 30, 2020, substantially all impaired real estate loan collateral and OREO were valued on an “as–is basis.”

Estimates of the net realizable value of real estate collateral also include a deduction for the expected costs to sell the collateral or such other deductions from the cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, we generally apply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs to sell the collateral. For OREO, we generally apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.

Nonperforming Assets Summary

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

	September 30, 2020			June 30, 2020			December 31, 2019			Quarter Change			Nine-Month Change
	(Dollars in thousands)
Nonaccrual loans:
One-to-four family residential real estate	$	465		$	662		$	512		$	(197	)	$	(47	)
Nonresidential real estate		1,870			288			288			1,582			1,582
Other commercial leases		—			833			—			(833	)		—
		2,335			1,783			800			552			1,535
Loans past due over 90 days, still accruing - commercial leases		—			—			47			—			(47	)

Nonperforming loans		2,335			1,783			847			552			1,488

Other real estate owned - One-to-four family residential		110			143			186			(33	)		(76	)
Total nonperforming assets	$	2,445		$	1,926		$	1,033		$	519		$	1,412
Ratios:
Nonperforming loans to total loans		0.22	%		0.16	%		0.07	%
Nonperforming assets to total assets		0.15			0.12			0.07

Nonperforming Assets

Nonperforming assets increased $1.4 million to $2.4 million at September 30, 2020, from $1.0 million at December 31, 2019, due in substantial part to our placing one Chicago nonresidential real estate loan in the amount of $1.6 million on nonaccrual status due to our decision to commence receivership proceedings based on the borrower’s unauthorized material alteration of the collateral; however, the borrower expects to repay the loan in full prior to the November 2020 effective date of the receivership. One residential loan with a book balance of $33,000 was transferred from nonaccrual loans to OREO during the nine months ended September 30, 2020. We continue to experience modest quantities of defaults on residential real estate loans principally due either to the borrower’s personal financial condition or deteriorated collateral value.

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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, the sales of loans and securities and lease payments. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize FHLB advances as an additional source of funds. We had $4.0 million of FHLB advances outstanding at September 30, 2020 and none at December 31, 2019.

The Company is a separate legal entity from BankFinancial, NA. The Company must provide for its own liquidity to pay any dividends to its shareholders and to repurchase shares of its common stock, and for other corporate purposes. The Company's primary source of liquidity is dividend payments it receives from the Bank. The Bank's ability to pay dividends to the Company is subject to regulatory limitations. At September 30, 2020, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $8.0 million. On April 1, 2020, the Company obtained a $5.0 million unsecured line of credit with a correspondent bank. Interest is payable at a rate of Prime rate minus 0.75%. The line of credit will mature on April 1, 2021. The line of credit had no outstanding balance at September 30, 2020.

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

Capital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain sufficient capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.

The Bank is subject to regulatory capital requirements administered by the federal banking agencies. The capital adequacy guidelines and 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 in 2015. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

In addition, as a result of the legislation, the federal banking agencies developed a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the Community Bank Leverage Ratio framework; and qualified community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement is re-established at greater than 9%. Pursuant to Section 4012 of the CARES Act and related interim final rules, the Community Bank Leverage Ratio will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time. As a qualified community bank, we elected to be subject to this definition beginning the second quarter of 2020. As of September 30, 2020, the Bank's Community Bank Leverage Ratio was 10.13%.

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.

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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, the Bank will not pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels or the capital levels required for capital adequacy plus the capital conservation buffer (“ CCB”). The minimum CCB is 2.5%.

As of September 30, 2020, the Bank was 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.

Actual and required capital amounts and ratios for the Bank were:

	Actual					Required for Capital Adequacy Purposes					To be Well-Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2019
Total capital (to risk-weighted assets)	$	170,203		16.38	%	$	83,130		8.00	%	$	103,913		10.00	%
Tier 1 (core) capital (to risk-weighted assets)		162,455		15.63			62,348		6.00			83,130		8.00
Common Tier 1 (CET1)		162,455		15.63			46,761		4.50			67,543		6.50
Tier 1 (core) capital (to adjusted average total assets):		162,455		10.89			59,666		4.00			74,583		5.00

Quarterly Cash Dividends. The Company declared cash dividends of $0.30 per share for both of the nine months ended September 30, 2020 and September 30, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Qualitative Analysis. A significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.

The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.

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

Quantitative Analysis. The following table sets forth, as of September 30, 2020, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

	Estimated Increase (Decrease) in NPV						Increase (Decrease) in Estimated Net Interest Income
Change in Interest Rates (basis points)	Amount			Percent			Amount			Percent
	(Dollars in thousands)
+400	$	8,190			4.56	%	$	8,832			20.34	%
+300		8,264			4.60			6,816			15.70
+200		4,282			2.39			4,536			10.45
+100		99			0.06			2,184			5.03
0
-25		(4,448	)		(2.48	)		(328	)		(0.76	)

The table set forth above indicates that at September 30, 2020, in the event of an immediate 25 basis point decrease in interest rates, the Bank would be expected to experience a 2.48% decrease in NPV and a $328,000 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 2.39% increase in NPV and a $4.5 million increase in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Because of the shortcomings mentioned above, management considers many additional factors such as projected changes in loan and deposit balances and various projected forward interest rate scenarios when evaluating strategies for managing interest rate risk. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

ITEM 4.

CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2020. Based on that evaluation, the Company’s management, including the Chairman, Chief Executive Officer, and President and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2020, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1.

LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations

ITEM 1A.

RISK FACTORS

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 third quarter of 2020. As of September 30, 2020, the Company had repurchased 5,721,628 shares of its common stock out of the 5,810,755 shares of common stock authorized under the current share repurchase authorization approved on March 30, 2015. Pursuant to the share repurchase authorization, as of September 30, 2020, there are 89,127 shares of common stock authorized for repurchase through October 31, 2020.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased under the Plans or Programs
July 1, 2020 through July 31, 2020		53,500	$	7.91		53,500		101,627
August 1, 2020 through August 31, 2020		7,500		7.51		7,500		94,127
September 1, 2020 through September 30, 2020		5,000		7.39		5,000		89,127
		66,000				66,000

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

	Exhibit Number		Description
	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 September 30, 2020, formatted in Inline Extensive Business Reporting Language (iXBRL): (i) consolidated statements of financial condition, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in stockholders' equity, (v) consolidated statements of cash flows and (vi) the notes to consolidated financial statements.
	104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		BANKFINANCIAL CORPORATION

Dated:	October 28, 2020	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