BankFinancial CORP - Quarter Report: 2021 September (Form 10-Q)

bfin20210930_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, 2021

☐	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 27, 2021 there were 13,280,723 shares of Common Stock, $0.01 par value, outstanding.

Table of Contents

BANKFINANCIAL CORPORATION

Form 10-Q

September 30, 2021

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	33

Item 4.	Controls and Procedures	34

PART II

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

Signatures		37

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

	*September 30, 2021*		*December 31, 2020*
Assets
Cash and due from other financial institutions	$	11,432	$	14,115
Interest-bearing deposits in other financial institutions		517,183		489,381
Cash and cash equivalents		528,615		503,496
Securities, at fair value		14,693		23,829
Loans receivable, net of allowance for loan losses: September 30, 2021, $6,895 and December 31, 2020, $7,751		1,047,056		1,002,578
Foreclosed assets, net		1,049		157
Stock in Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB"), at cost		7,490		7,490
Premises and equipment, net		24,772		24,675
Accrued interest receivable		5,118		3,941
Bank-owned life insurance		19,097		19,015
Deferred taxes		2,348		2,741
Other assets		9,904		8,920
Total assets	$	1,660,142	$	1,596,842

Liabilities
Deposits
Noninterest-bearing	$	328,182	$	326,188
Interest-bearing		1,126,207		1,067,356
Total deposits		1,454,389		1,393,544
Borrowings		5,000		4,000
Subordinated Notes, net of unamortized issuance costs		19,578		—
Advance payments by borrowers for taxes and insurance		7,910		8,670
Accrued interest payable and other liabilities		15,092		17,698
Total liabilities		1,501,969		1,423,912

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; 13,374,133 shares issued at September 30, 2021 and 14,769,765 shares issued at December 31, 2020		134		148
Additional paid-in capital		92,381		107,815
Retained earnings		65,498		64,754
Accumulated other comprehensive income		160		213
Total stockholders’ equity		158,173		172,930
Total liabilities and stockholders’ equity	$	1,660,142	$	1,596,842

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,*
	*2021*			*2020*			*2021*			*2020*
Interest and dividend income
Loans, including fees	$	11,389		$	12,027		$	33,510		$	38,307
Securities		46			183			152			758
Other		313			275			831			1,267
Total interest income		11,748			12,485			34,493			40,332
Interest expense
Deposits		520			1,488			1,740			6,041
Subordinated Notes		198			—			368			—
Total interest expense		718			1,488			2,108			6,041
Net interest income		11,030			10,997			32,385			34,291
(Recovery of) provision for loan losses		(6	)		(187	)		(1,019	)		326
Net interest income after (recovery of) provision for loan losses		11,036			11,184			33,404			33,965
Noninterest income
Deposit service charges and fees		814			833			2,352			2,456
Loan servicing fees		140			44			336			189
Mortgage brokerage and banking fees		16			44			33			84
Trust and insurance commissions and annuities income		263			222			880			728
Earnings on bank-owned life insurance		31			10			82			51
Other		110			111			375			317
Total noninterest income		1,374			1,264			4,058			3,825
Noninterest expense
Compensation and benefits		5,782			5,398			16,811			16,084
Office occupancy and equipment		1,882			1,860			5,971			5,383
Advertising and public relations		150			135			525			405
Information technology		710			781			2,021			2,453
Professional fees		311			341			1,024			943
Supplies, telephone, and postage		382			288			1,224			875
Amortization of intangibles		—			6			7			27
Nonperforming asset management		6			57			55			154
Operations of foreclosed assets, net		81			23			366			13
FDIC insurance premiums		125			105			345			241
Other		737			793			2,245			2,086
Total noninterest expense		10,166			9,787			30,594			28,664
Income before income taxes		2,244			2,661			6,868			9,126
Income tax expense		600			713			1,829			2,408
Net income	$	1,644		$	1,948		$	5,039		$	6,718
Basic and diluted earnings per common share	$	0.12		$	0.13		$	0.35		$	0.45
Basic and diluted weighted average common shares outstanding		13,722,333			14,842,150			14,289,615			15,008,271

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,*
	*2021*			*2020*			*2021*			*2020*
Net income	$	1,644		$	1,948		$	5,039		$	6,718
Unrealized holding (loss) gain arising during the period		(38	)		(4	)		(73	)		7
Tax effect		10			—			20			(2	)
Net of tax		(28	)		(4	)		(53	)		5
Comprehensive income	$	1,616		$	1,944		$	4,986		$	6,723

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 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

Balance at July, 1 2021	$	141		$	100,877		$	65,230		$	188		$	166,436
Net income		—			—			1,644			—			1,644
Other comprehensive loss, net of tax		—			—			—			(28	)		(28	)
Repurchase and retirement of common stock (744,587 shares)		(7	)		(8,496	)		—			—			(8,503	)
Cash dividends declared on common stock ($0.10 per share)		—			—			(1,376	)		—			(1,376	)
Balance at September 30, 2021	$	134		$	92,381		$	65,498		$	160		$	158,173

For the nine months ended

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

Balance at January 1, 2021	$	148		$	107,815		$	64,754		$	213		$	172,930
Net income		—			—			5,039			—			5,039
Other comprehensive loss, net of tax		—			—			—			(53	)		(53	)
Repurchase and retirement of common stock (1,395,632 shares)		(14	)		(15,434	)		—			—			(15,448	)
Cash dividends declared on common stock ($0.30 per share)		—			—			(4,295	)		—			(4,295	)
Balance at September 30, 2021	$	134		$	92,381		$	65,498		$	160		$	158,173

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,*
	*2021*			*2020*
Cash flows from operating activities
Net income	$	5,039		$	6,718
Adjustments to reconcile net income to net cash from operating activities
(Recovery of) provision for loan losses		(1,019	)		326
Depreciation and amortization		1,530			1,323
Net change in net deferred loan origination costs		316			545
Gain on sale of foreclosed assets		(29	)		(22	)
Loss on disposal of other assets		—			2
Foreclosed assets valuation adjustments		405			—
Earnings on bank-owned life insurance		(82	)		(51	)
Net change in:
Accrued interest receivable		(1,177	)		209
Other assets		411			1,942
Accrued interest payable and other liabilities		(3,472	)		(2,399	)
Net cash from operating activities		1,922			8,593
Cash flows from investing activities
Securities
Proceeds from maturities		14,869			55,599
Proceeds from principal repayments		1,386			2,206
Purchases of securities		(7,193	)		(39,657	)
Net (increase) decrease in loans receivable		(43,419	)		101,108
Loan participation purchased		(5,000	)		—
Proceeds from sale of foreclosed assets		3,205			120
Purchase of premises and equipment, net		(1,552	)		(1,133	)
Net cash (used in) from investing activities		(37,704	)		118,243
Cash flows from financing activities
Net change in:
Deposits		60,845			117,487
Borrowings		1,000			3,939
Advance payments by borrowers for taxes and insurance		(760	)		(224	)
Proceeds from issuance of Subordinated Notes		20,000			—
Costs paid for issuance of Subordinated Notes		(441	)		—
Repurchase and retirement of common stock		(15,448	)		(4,194	)
Cash dividends paid on common stock		(4,295	)		(4,504	)
Net cash from financing activities		60,901			112,504
Net change in cash and cash equivalents		25,119			239,340
Beginning cash and cash equivalents		503,496			190,325
Ending cash and cash equivalents	$	528,615		$	429,665

Supplemental disclosures of cash flow information:
Interest paid	$	1,763		$	6,047
Income taxes paid		2,641			155
Income taxes refunded		—			8
Loans transferred to foreclosed assets		4,473			33
Recording of right of use asset in exchange for lease obligations in other assets and other liabilities		866			111

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 nine month period ended September 30, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021 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: On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic. 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 range 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, 2020, 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,*
	*2021*		*2020*		*2021*		*2020*
Net income available to common stockholders	$	1,644	$	1,948	$	5,039	$	6,718
Basic and diluted weighted average common shares outstanding		13,722,333		14,842,150		14,289,615		15,008,271
Basic and diluted earnings per common share	$	0.12	$	0.13	$	0.35	$	0.45

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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, 2021
Certificates of deposit	$	7,441	$	—	$	—		$	7,441
Municipal securities		401		1		—			402
Mortgage-backed securities - residential		4,909		212		—			5,121
Collateralized mortgage obligations - residential		1,724		5		—			1,729
	$	14,475	$	218	$	—		$	14,693
December 31, 2020
Certificates of deposit	$	15,117	$	—	$	—		$	15,117
Municipal securities		402		7		—			409
Mortgage-backed securities - residential		5,826		282		—			6,108
Collateralized mortgage obligations - residential		2,193		3		(1	)		2,195
	$	23,538	$	292	$	(1	)	$	23,829

Mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities and 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 available-for-sale 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, 2021*
	*Amortized Cost*		*Fair Value*
Due in one year or less	$	7,842	$	7,843
Mortgage-backed securities - residential		4,909		5,121
Collateralized mortgage obligations - residential		1,724		1,729
	$	14,475	$	14,693

Investment securities available-for-sale with carrying value of $1.1 million and $1.2 million at September 30, 2021 and December 31, 2020, respectively, were pledged as collateral on customer repurchase agreements and for other purposes as required or permitted by law.

Securities available-for-sale 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*

December 31, 2020
Collateralized mortgage obligations - residential		—	$	—	$	—		3	$	1,588	$	(1	)		3	$	1,588	$	(1	)

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.

There were no unrealized loss positions at September 30, 2021. Certain collateralized mortgage obligations that the Company holds in its investment portfolio were in an unrealized loss position at December 31, 2020, but the unrealized loss was 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.

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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, 2021*			*December 31, 2020*
One-to-four family residential real estate	$	31,829		$	41,691
Multi-family mortgage		435,634			452,241
Nonresidential real estate		100,469			108,658
Construction and land		499			499
Commercial loans and leases		483,705			405,057
Consumer		1,760			1,812
		1,053,896			1,009,958
Net deferred loan origination costs		55			371
Allowance for loan losses		(6,895	)		(7,751	)
Loans, net	$	1,047,056		$	1,002,578

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, 2021
One-to-four family residential real estate	$	—	$	401	$	401	$	1,354	$	30,475	$	31,829
Multi-family mortgage		—		3,579		3,579		503		435,131		435,634
Nonresidential real estate		28		1,278		1,306		296		100,173		100,469
Construction and land		—		12		12		—		499		499
Commercial loans and leases		—		1,554		1,554		9		483,696		483,705
Consumer		—		43		43		—		1,760		1,760
	$	28	$	6,867	$	6,895	$	2,162	$	1,051,734		1,053,896
Net deferred loan origination costs												55
Allowance for loan losses												(6,895	)
Loans, net											$	1,047,056

	*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, 2020
One-to-four family residential real estate	$	—	$	518	$	518	$	1,718	$	39,973	$	41,691
Multi-family mortgage		—		4,062		4,062		520		451,721		452,241
Nonresidential real estate		28		1,541		1,569		296		108,362		108,658
Construction and land		—		12		12		—		499		499
Commercial loans and leases		—		1,536		1,536		—		405,057		405,057
Consumer		—		54		54		—		1,812		1,812
	$	28	$	7,723	$	7,751	$	2,534	$	1,007,424		1,009,958
Net deferred loan origination costs												371
Allowance for loan losses												(7,751	)
Loans, net											$	1,002,578

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - LOANS RECEIVABLE (continued)

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, 2021
One-to-four family residential real estate	$	396	$	(33	)	$	—		$	38	$	401
Multi-family mortgage		3,690		(118	)		—			7		3,579
Nonresidential real estate		1,336		(30	)		—			—		1,306
Construction and land		11		1			—			—		12
Commercial loans and leases		1,377		176			—			1		1,554
Consumer		47		(2	)		(2	)		—		43
	$	6,857	$	(6	)	$	(2	)	$	46	$	6,895

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

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

September 30, 2021
One-to-four family residential real estate	$	518	$	(264	)	$	—		$	147	$	401
Multi-family mortgage		4,062		(511	)		—			28		3,579
Nonresidential real estate		1,569		(263	)		—			—		1,306
Construction and land		12		—			—			—		12
Commercial loans and leases		1,536		15			(86	)		89		1,554
Consumer		54		4			(17	)		2		43
	$	7,751	$	(1,019	)	$	(103	)	$	266	$	6,895

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

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, 2021*				*September 30, 2021*
	*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, 2021
With no related allowance recorded:
One-to-four family residential real estate	$	1,465	$	1,354	$	111	$	—	$	1,428	$	7	$	1,524	$	23
Multi-family mortgage - Illinois		503		503		—		—		506		7		512		22
Equipment finance - investment - rated		9		9		—		—		2		—		1		—
		1,977		1,866		111		—		1,936		14		2,037		45

With an allowance recorded - nonresidential real estate		280		296		—		28		296		—		296		—
	$	2,257	$	2,162	$	111	$	28	$	2,232	$	14	$	2,333	$	45

									*Year ended*
									*December 31, 2020*
	*Loan Balance*		*Recorded Investment*		*Partial Charge-off*		*Allowance for Loan Losses Allocated*		*Average Investment in Impaired Loans*		*Interest Income Recognized*
December 31, 2020
With no related allowance recorded:
One-to-four family residential real estate	$	2,069	$	1,718	$	363	$	—	$	1,782	$	42
Multi-family mortgage - Illinois		520		520		—		—		594		31
		2,589		2,238		363		—		2,376		73

With an allowance recorded - nonresidential real estate		280		296		—		28		289		—
	$	2,869	$	2,534	$	363	$	28	$	2,665	$	73

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, 2021
One-to-four family residential real estate	$	373	$	341	$	—
Nonresidential real estate		280		296		—
Equipment finance - investment - rated		9		9		—
	$	662	$	646	$	—
December 31, 2020
One-to-four family residential real estate	$	946	$	925	$	—
Nonresidential real estate		280		296		—
	$	1,226	$	1,221	$	—

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 $132,000 and $133,000 at September 30, 2021 and December 31, 2020, 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, 2021
One-to-four family residential real estate loans:
Owner occupied	$	32	$	251	$	341	$	624	$	24,476	$	25,100
Non-owner occupied		5		9		—		14		6,715		6,729
Multi-family mortgage:
Illinois		—		—		—		—		232,181		232,181
Other		—		—		—		—		203,453		203,453
Nonresidential real estate		—		—		296		296		100,173		100,469
Construction and land		—		—		—		—		499		499
Commercial loans and leases:
Commercial		—		—		—		—		79,873		79,873
Asset-based		—		—		—		—		14,716		14,716
Equipment finance:
Government		—		1,190		—		1,190		157,989		159,179
Investment-rated		748		—		9		757		78,065		78,822
Other		1,112		476		—		1,588		108,095		109,683
Middle market		—		—		—		—		33,125		33,125
Small ticket		—		—		—		—		8,307		8,307
Consumer		7		21		—		28		1,732		1,760
	$	1,904	$	1,947	$	646	$	4,497	$	1,049,399	$	1,053,896

	*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, 2020
One-to-four family residential real estate loans:
Owner occupied	$	252	$	211	$	834	$	1,297	$	32,078	$	33,375
Non-owner occupied		3		132		91		226		8,090		8,316
Multi-family mortgage:
Illinois		86		—		—		86		221,943		222,029
Other		—		—		—		—		230,212		230,212
Nonresidential real estate		—		—		296		296		108,362		108,658
Construction and land		—		—		—		—		499		499
Commercial loans and leases:
Commercial		4,886		—		—		4,886		72,809		77,695
Asset-based		—		—		—		—		1,740		1,740
Equipment finance:
Government		2,468		—		—		2,468		100,272		102,740
Investment-rated		618		225		—		843		87,751		88,594
Other		853		2,487		—		3,340		122,677		126,017
Middle market		—		—		—		—		6,988		6,988
Small ticket		—		—		—		—		1,283		1,283
Consumer		6		5		—		11		1,801		1,812
	$	9,172	$	3,060	$	1,221	$	13,453	$	996,505	$	1,009,958

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.

The following table presents the PPP activity:

	*For the Three Months Ended September 30,*				*For the Nine Months Ended September 30,*
	*2021*		*2020*		*2021*		*2020*
Paycheck protection program:
Number of loans originated		—		10		238		315
Loan balance originations	$	—	$	136	$	10,135	$	11,160
Loan balance forgiven	$	4,801	$	—	$	14,538	$	117

	*September 30, 2021*		*December 31, 2020*
Paycheck protection program loans
Number of loans		116		290
Loan balance	$	5,777	$	10,180

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 defines 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 only scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and to 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 only scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and to 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.

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)

Per the terms of the COVID-19 loan forbearance modifications program, all loan deferrals were paid in full as of June 30, 2021.

The following table summarizes the remaining loan forbearance modifications as of December 31, 2020:

	*Number of loans*		*Principal Balance*		*Remaining Amounts Deferred*
Small Investment Property COVID-19 Qualified Limited Forbearance Agreement
Multi-family mortgage		8	$	3,092	$	17
Nonresidential real estate		10		3,363		22
Apartment and Commercial Real Estate COVID-19 Qualified Limited Forbearance Agreement
Nonresidential real estate		2		2,480		6
One-to-four family residential real estate		10		1,402		8

		30	$	10,337	$	53

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.

The Company had no TDRs at September 30, 2021 and December 31, 2020. During the three and nine months ended September 30, 2021 and 2020, there were no loans modified and classified as TDRs. During the three and nine months ended September 30, 2021 and 2020, 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.

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)

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, 2021
One-to-four family residential real estate loans:
Owner occupied	$	24,362	$	—	$	397	$	341	$	25,100
Non-owner occupied		6,617		—		112		—		6,729
Multi-family mortgage:
Illinois		231,855		326		—		—		232,181
Other		203,453		—		—		—		203,453
Nonresidential real estate		100,173		—		—		296		100,469
Construction and land		499		—		—		—		499
Commercial loans and leases:
Commercial		79,873		—		—		—		79,873
Asset-based		14,716		—		—		—		14,716
Equipment finance:
Government		159,179		—		—		—		159,179
Investment-rated		78,813		—		—		9		78,822
Other		108,492		—		1,191		—		109,683
Middle market		33,125		—		—		—		33,125
Small ticket		8,307		—		—		—		8,307
Consumer		1,751		2		7		—		1,760
	$	1,051,215	$	328	$	1,707	$	646	$	1,053,896

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, 2020
One-to-four family residential real estate loans:
Owner occupied	$	32,089	$	—	$	452	$	834	$	33,375
Non-owner occupied		8,164		27		34		91		8,316
Multi-family mortgage:
Illinois		222,029		—		—		—		222,029
Other		230,212		—		—		—		230,212
Nonresidential real estate		106,280		1,998		84		296		108,658
Construction and land		499		—		—		—		499
Commercial loans and leases:
Commercial		72,809		—		4,886		—		77,695
Asset-based		1,740		—		—		—		1,740
Equipment finance:
Government		102,740		—		—		—		102,740
Investment-rated		88,594		—		—		—		88,594
Other		125,012		—		1,005		—		126,017
Middle market		6,988		—		—		—		6,988
Small ticket		1,283		—		—		—		1,283
Consumer		1,802		5		5		—		1,812
	$	1,000,241	$	2,030	$	6,466	$	1,221	$	1,009,958

NOTE 5 - FORECLOSED ASSETS

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.

Assets are classified as foreclosed when physical possession of the collateral is taken regardless of whether foreclosure proceedings have taken place. Other foreclosed assets received in satisfaction of borrowers debt are initially recorded at fair value of the asset less estimated costs to sell.

	*September 30, 2021*							*December 31, 2020*
	*Balance*		*Valuation Allowance*			*Net Balance*		*Balance*		*Valuation Allowance*		*Net Balance*
Other real estate owned:
One–to–four family residential	$	340	$	(228	)	$	112	$	157	$	—	$	157
Nonresidential real estate		170		(30	)		140		—		—		—
		510		(258	)		252		157		—		157

Other foreclosed assets		875		(78	)		797		—		—		—
	$	1,385	$	(336	)	$	1,049	$	157	$	—	$	157

The following represents the roll forward of foreclosed assets:

	*For the Three Months Ended*						*For the Nine Months Ended*
	*September 30,*						*September 30,*
	*2021*			*2020*			*2021*			*2020*
Beginning balance	$	1,702		$	143		$	157		$	186
New foreclosed assets		—			—			4,473			33
Valuation adjustments		(124	)		—			(405	)		—
Valuation reductions from sales		69			—			69			—
Sales		(598	)		(33	)		(3,245	)		(109	)
Ending balance	$	1,049		$	110		$	1,049		$	110

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 - FORECLOSED ASSETS (continued)

Activity in the valuation allowance is as follows:

	*For the Three Months Ended*					*For the Nine Months Ended*
	*September 30,*					*September 30,*
	*2021*			*2020*		*2021*			*2020*
Beginning balance	$	281		$	—	$	—		$	—
Additions charged to expense		124			—		405			—
Reductions from sales		(69	)		—		(69	)		—
Ending balance	$	336		$	—	$	336		$	—

There were no valuation allowances at December 31, 2020.

At September 30, 2021 and December 31, 2020, the balance of OREO includes no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title. At September 30, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $73,000 and $187,000, respectively. The other foreclosed assets consist of non real estate collateral repossessed related to a previously classified Chicago area commercial loan.

NOTE 6 - LEASES

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

	*Statement of Financial Condition Location*	*September 30, 2021*			*December 31, 2020*
Operating Lease Right of Use Asset:
Gross carrying amount		$	6,805		$	6,694
New lease obligation			866			111
Accumulated amortization			(2,502	)		(1,730	)
Net recorded value	Other assets	$	5,169		$	5,075

Operating Lease Liabilities:
Right of use lease obligations	Other liabilities	$	5,169		$	5,075

Lease amortization expense was $292,000 and $221,000 for the three months ended September 30, 2021 and 2020, respectively, and $773,000 and $660,000 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, the weighted-average remaining lease term for the Company's operating leases was 7.1 years and the weighted-average discount rate used in the measurement of the Company's operating lease liabilities was 2.83%. For each operating lease, the discount rate is 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:	*2021*			*2020*			*2021*			*2020*
Operating lease cost	$	292		$	221		$	773		$	660
Short-term lease cost		35			42			127			113
Sublease income		(8	)		(19	)		(30	)		(56	)
Total lease cost	$	319		$	244		$	870		$	717

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	279		$	238		$	795		$	709

Future minimum payments under non-cancellable operating leases with terms longer than 12 months, are as follows. Future minimum payments on shorter term leases are excluded as the amounts are insignificant.

Twelve months ended September 30,
2022	$	1,280
2023		1,290
2024		808
2025		505
2026		511
Thereafter		1,833
Total future minimum operating lease payments		6,227
Amounts representing interest		(1,058	)
Present value of net future minimum operating lease payments	$	5,169

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - BORROWINGS AND SUBORDINATED NOTES

Borrowings and Subordinated Notes were as follows:

	*September 30, 2021*					*December 31, 2020*
	*Contractual*					*Contractual*
	*Rate*			*Amount*		*Rate*			*Amount*
Fixed-rate advance from FHLB, due May 9, 2022		—	%	$	5,000		—	%	$	4,000
Subordinated Notes, due May 15, 2031		3.75	%		19,578		—	%		—
Line of credit, due March 31, 2022		2.50	%		—		2.50	%		—

On April 14, 2021, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors pursuant to which the Company sold and issued $20.0 million in aggregate principal amount of its 3.75% Fixed-to-Floating Rate Subordinated Notes due May 15, 2031 (the “Notes”).

The Company incurred $441,000 of issuance costs associated with the Notes. These issuance costs are being amortized over the 10-year life of the Notes. At September 30, 2021, there were $422,000 in remaining unamortized issuance costs and they are presented in the Company's financial statements as a reduction of the principal amount of the Notes.

The Notes bear interest at a fixed annual rate of 3.75%, from and including the date of issuance to May 14, 2026, payable semi-annually in arrears. From and including May 15, 2026 but excluding the maturity date or early redemption date, as applicable, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined in the Notes) plus 299 basis points, payable quarterly in arrears. Under the conditions specified in the Notes, the interest rate accruing during the applicable floating rate period may be determined based on a rate other than Three-Month Term SOFR. The Notes have a stated maturity date of May 15, 2031 and are redeemable, in whole or in part, on May 15, 2026, on any interest payment date thereafter, and at any time upon the occurrence of certain events.

Principal and interest payments due on the Notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events with respect to the Company. The Notes are unsecured, subordinated obligations of the Company and generally rank junior in right of payment to the Company’s current and future senior indebtedness. The Notes qualify as Tier 2 capital for regulatory capital purposes.

In 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 as published in the Wall Street Journal rate minus 0.75%, with a minimum rate of 2.40%. The line of credit has been extended since its original maturity date and the current maturity date is March 31, 2022. The line of credit had no outstanding balance at September 30, 2021 and December 31, 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).

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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)

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.

Foreclosed assets: 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. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

	*Fair Value Measurements Using*
	*Quoted Prices in Active Markets for Identical Assets (Level 1)*		*Significant Observable Inputs (Level 2)*		*Significant Unobservable Inputs (Level 3)*		*Fair Value*
September 30, 2021
Securities:
Certificates of deposit	$	—	$	7,441	$	—	$	7,441
Municipal securities		—		402		—		402
Mortgage-backed securities – residential		—		5,121		—		5,121
Collateralized mortgage obligations – residential		—		1,729		—		1,729
	$	—	$	14,693	$	—	$	14,693
December 31, 2020
Securities:
Certificates of deposit	$	—	$	15,117	$	—	$	15,117
Municipal securities		—		409		—		409
Mortgage-backed securities - residential		—		6,108		—		6,108
Collateralized mortgage obligations – residential		—		2,195		—		2,195
	$	—	$	23,829	$	—	$	23,829

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, 2021
Impaired loans - nonresidential real estate	$	—	$	—	$	268	$	268

Foreclosed assets:
One–to–four family residential	$	—	$	—	$	73	$	73
Nonresidential real estate		—		—		140		140
Other foreclosed assets		—		—		792		792
	$	—	$	—	$	1,005	$	1,005


December 31, 2020
Impaired loans - nonresidential real estate	$	—	$	—	$	268	$	268

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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)

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans, had a carrying amount of $296,000, with a valuation allowance of $28,000 at September 30, 2021 and December 31, 2020. There was no change in the provision for loan losses of $28,000 for the three and nine months ended September 30, 2021, compared to the provision for loan losses of $20,000 for the three and nine months ended September 30, 2020.

Foreclosed assets are carried at the lower of cost or fair value less costs to sell. At September 30, 2021 foreclosed assets had a carrying value of $1.4 million less a valuation allowance of $336,000, or $1.0 million. At December 31, 2020, there were no foreclosed assets with valuation allowances. There were $124,000 of valuation adjustments of foreclosed assets recorded in the three months ended September 30, 2021 and $405,000 of valuation adjustments of foreclosed assets for the nine months ended September 30, 2021, compared to no valuation adjustment recorded for the three or nine months ended September 30, 2020.

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

	*Fair Value*		*Valuation Technique(s)*	*Significant Unobservable Input(s)*	*Range (Weighted Average)*
September 30, 2021
Impaired loans - nonresidential real estate	$	268	Sales comparison	Discount applied to valuation		22.0	%

Foreclosed assets:
One–to–four family residential	$	73	Sales comparison	Discount applied to valuation		65.0	%
Nonresidential real estate		140	Sales comparison	Discount applied to valuation		11.8	%
Other foreclosed assets		792	Redemption value	Discount applied to valuation		22.0	%
	$	1,005

December 31, 2020
Impaired loans - nonresidential real estate	$	268	Sales comparison	Discount applied to valuation		22.0	%

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

			*Fair Value Measurements at September 30, 2021 Using:*
	*Carrying Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Cash and cash equivalents	$	528,615	$	11,432	$	517,183	$	—	$	528,615
Securities		14,693		—		14,693		—		14,693
Loans receivable, net of allowance for loan losses		1,047,056		—		—		1,045,500		1,045,500
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		5,118		—		103		5,015		5,118
Financial liabilities
Certificates of deposit		217,267		—		217,452		—		217,452
Borrowings		5,000		—		4,998		—		4,998
Subordinated Notes		19,578		—		20,525		—		20,525

			*Fair Value Measurements at December 31, 2020 Using:*
	*Carrying Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Cash and cash equivalents	$	503,496	$	14,115	$	489,381	$	—	$	503,496
Securities		23,829		—		23,829		—		23,829
Loans receivable, net of allowance for loan losses		1,002,578		—		—		1,004,854		1,004,854
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		3,941		—		52		3,889		3,941
Financial liabilities
Certificates of deposit		253,000		—		253,906		—		253,906
Borrowings		4,000		—		3,998		—		3,998

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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)

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.

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,*
	*2021*		*2020*		*2021*		*2020*
Deposit service charges and fees	$	814	$	833	$	2,352	$	2,456
Loan servicing fees ⁽¹⁾		140		44		336		189
Mortgage brokerage and banking fees ⁽¹⁾		16		44		33		84
Trust and insurance commissions and annuities income		263		222		880		728
Earnings on bank-owned life insurance ⁽¹⁾		31		10		82		51
Other ⁽¹⁾		110		111		375		317
Total noninterest income	$	1,374	$	1,264	$	4,058	$	3,825

⁽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 $409,000 and $394,000 for the three months ended September 30, 2021 and 2020, respectively. Interchange income was $1.2 million and $1.1 million for the nine months ended September 30, 2021 and 2020, respectively.

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 foreclosed assets and other assets: The Company records a gain or loss from the sale of foreclosed assets 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 foreclosed assets 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 foreclosed assets 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. Foreclosed assets sales for the three and nine months ended September 30, 2021 and 2020 were not financed by the Company.

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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, inflation 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 asset 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, leasing and other financing 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, operating expenses and tax rates; (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, 2020, 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, 2020, as filed with the SEC.

Overview

We reported net income of $1.6 million, or $0.12, per common share for the quarter ended September 30, 2021. At September 30, 2021, the Company had total assets of $1.660 billion, total loans of $1.047 billion, total deposits of $1.454 billion and stockholders' equity of $158 million.

Total net loans increased by $14.9 million during the quarter ended September 30, 2021. Total commercial loans increased by $13.6 million (16.8%), net of $4.8 million in SBA Paycheck Protection Program payments, due to originations of commercial finance and lessor finance lines of credit and higher utilization of healthcare finance lines of credit. Total commercial equipment leases increased by $2.6 million (0.7%) as stronger originations of middle market, small ticket and government equipment finance transactions slightly offset higher levels of scheduled government equipment finance payments. For the third quarter of 2021, middle market and small ticket equipment finance transactions represented 30% of total equipment finance originations. Multi-family and nonresidential real estate loans increased slightly as stronger originations offset continued elevated multi-family real estate loan prepayments.

Total deposits increased by $15.8 million during the three months ended September 30, 2021, primarily due to a $23.5 million increase in core retail and business deposits, partially offset by a $7.2 million decrease in retail certificates of deposit.

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Net interest income increased by $255,000 for the quarter ended September 30, 2021 due to higher yields on loans and leases increased commercial line utilization, and revenues related to PPP loan forgiveness. Interest expense decreased by $4,000 for the quarter ended September 30, 2021 primarily due to a reduction in the cost of deposits.

Noninterest income decreased by $52,000 primarily due to reduced trust and insurance revenues, and other revenues notwithstanding increases in deposit services charges and commercial mortgage banking fees. Noninterest expenses decreased $75,000 due to decreased occupancy and supplies expense, offset by increased compensation for commercial finance, equipment finance and multi-family real estate loan personnel and higher information technology expenses.

The Company’s ratio of nonperforming loans to total loans was 0.06% at September 30, 2021. Nonperforming commercial-related loans represented 0.03% of total commercial-related loans at September 30, 2021. The ratio of nonperforming assets to total assets was 0.10% at September 30, 2021. Our allowance for loan losses was 0.65% of total loans as of September 30, 2021. The allowance for losses on loans and leases increased by $38,000, primarily due to the increase in required reserves due to growth in commercial loans and leases.

The Company’s capital position remained strong, with a Tier 1 leverage ratio of 9.45% at September 30, 2021. The Company repurchased 744,587 of its common shares during the quarter ended September 30, 2021. The Company’s tangible book value per common share increased to $11.83 per share at September 30, 2021.

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, 2021		December 31, 2020		Change
	(In thousands)
Selected Financial Condition Data:
Total assets	$	1,660,142	$	1,596,842	$	63,300
Loans, net		1,047,056		1,002,578		44,478
Securities, at fair value		14,693		23,829		(9,136	)
Foreclosed assets, net		1,049		157		892
Deposits		1,454,389		1,393,544		60,845
Borrowings		5,000		4,000		1,000
Subordinated Notes, net of unamortized issuance costs		19,578		—		19,578
Equity		158,173		172,930		(14,757	)

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2021			2020			Change			2021			2020		Change
	(In thousands)
Selected Operating Data:
Interest income	$	11,748		$	12,485		$	(737	)	$	34,493		$	40,332	$	(5,839	)
Interest expense		718			1,488			(770	)		2,108			6,041		(3,933	)
Net interest income		11,030			10,997			33			32,385			34,291		(1,906	)
(Recovery of) provision for loan losses		(6	)		(187	)		181			(1,019	)		326		(1,345	)
Net interest income after (recovery of) provision for loan losses		11,036			11,184			(148	)		33,404			33,965		(561	)
Noninterest income		1,374			1,264			110			4,058			3,825		233
Noninterest expense		10,166			9,787			379			30,594			28,664		1,930
Income before income taxes		2,244			2,661			(417	)		6,868			9,126		(2,258	)
Income tax expense		600			713			(113	)		1,829			2,408		(579	)
Net income	$	1,644		$	1,948		$	(304	)	$	5,039		$	6,718	$	(1,679	)

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) ⁽¹⁾		0.40	%		0.49	%		0.41	%		0.58	%
Return on equity (ratio of net income to average equity) ⁽¹⁾		4.05			4.50			3.99			5.15
Average equity to average assets		9.79			10.83			10.34			11.34
Net interest rate spread ^{(1) (2)}		2.68			2.69			2.70			2.91
Net interest margin ^{(1) (3)}		2.75			2.85			2.77			3.12
Efficiency ratio ⁽⁴⁾		81.96			79.82			83.95			75.20
Noninterest expense to average total assets ⁽¹⁾		2.45			2.45			2.50			2.49
Average interest-earning assets to average interest-bearing liabilities		138.97			141.40			140.45			137.45
Dividends declared per share	$	0.10		$	0.10		$	0.30		$	0.30
Dividend payout ratio		83.58	%		76.13	%		85.21	%		67.04	%

	At September 30, 2021			At December 31, 2020
Asset Quality Ratios:
Nonperforming assets to total assets ⁽⁵⁾		0.10	%		0.09	%
Nonperforming loans to total loans		0.06			0.12
Allowance for loan losses to nonperforming loans		1,067.34			634.81
Allowance for loan losses to total loans		0.65			0.77
Capital Ratios:
Equity to total assets at end of period		9.53	%		10.83	%
Tier 1 leverage ratio (Bank only)		10.00	%		10.10	%
Other Data:
Number of full-service offices		19			19
Employees (full-time equivalents)		224			210

⁽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 foreclosed assets.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets increased $63.3 million, or 4.0%, to $1.660 billion at September 30, 2021, from $1.597 billion at December 31, 2020. The increase in total assets was primarily due to increases in cash and cash equivalents and loans receivable. Cash and cash equivalents increased $25.1 million to $528.6 million at September 30, 2021, from $503.5 million at December 31, 2020. Loans receivable increased $44.5 million, or 4.4%, to $1.047 billion at September 30, 2021, from $1.003 billion at December 31, 2020.

Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, and commercial loans and leases), which together totaled 96.8% of gross loans at September 30, 2021. During the nine months ended September 30, 2021, commercial loans and leases increased by $78.6 million, or 19.4%. The increase in commercial loans and leases was primarily due to a $56.4 million increase in government equipment finance balances, $33.2 million increase in middle market and small ticket equipment finance balances, and $17.8 million increase in lessor finance lines of credit balances, partially offset by a decrease of $26.1 million in corporate equipment finance balances. Nonresidential real estate loans decreased $8.2 million, or 7.5%, and multi-family real estate loans decreased by $16.6 million, or 3.7%.

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Our primary lending area for regulatory purposes consists of the counties in the State of Illinois where our branch offices are located, and contiguous counties. We currently 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 we engage in certain types of commercial lending and commercial equipment finance activities on a nationwide basis. At September 30, 2021, $229.2 million, or 52.6%, of our multi-family mortgage loans were in the Metropolitan Statistical Area for Chicago, Illinois; $88.4 million, or 20.3%, were in Texas; $35.6 million, or 8.2%, were in Colorado; and $43.0 million, or 9.9%, were in Florida. This information reflects the location of the collateral for the loan and does not necessarily reflect the location of the borrowers.

Total liabilities increased $78.1 million, or 5.5%, to $1.502 billion at September 30, 2021, from $1.424 billion at December 31, 2020, due to an increase in total deposits and our issuance of $20.0 million of Subordinated Notes in April of 2021. Total deposits increased $60.8 million, or 4.4%, to $1.454 billion at September 30, 2021, from $1.394 billion at December 31, 2020. Interest-bearing NOW accounts increased $55.3 million, or 16.4%, to $392.3 million at September 30, 2021, from $337.0 million at December 31, 2020. Money market accounts increased $22.1 million, or 7.4%, to $319.9 million at September 30, 2021, from $297.8 million at December 31, 2020. Savings accounts increased $17.2 million, or 9.6%, to $196.8 million at September 30, 2021, from $179.6 million at December 31, 2020. Noninterest-bearing demand deposits increased $2.0 million, or 0.6%, to $328.2 million at September 30, 2021, from $326.2 million at December 31, 2020. Retail certificates of deposit decreased $32.5 million, or 13.2%, to $213.3 million at September 30, 2021, from $245.8 million at December 31, 2020 and wholesale certificates of deposit decreased $3.2 million, or 45.0%, to $3.9 million at September 30, 2021, from $7.2 million at December 31, 2020. Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) represented 85.1% of total deposits at September 30, 2021, compared to 81.8% at December 31, 2020. Borrowings increased by $1.0 million from the FHLB, by obtaining a FHLB advance of $5.0 million at zero percent interest rate for a one-year term in May 2021.

Total stockholders’ equity was $158.2 million at September 30, 2021, compared to $172.9 million at December 31, 2020. The decrease in total stockholders’ equity was primarily due to our repurchase of 1,395,632 shares of our common stock during the nine months ended September 30, 2021 at a total cost of $15.4 million, and our declaration and payment of cash dividends totaling $4.3 million during the same period. These reductions in total stockholders’ equity were partially offset by the net income of $5.0 million that the Company recorded for the nine months ended September 30, 2021.

Operating Results for the Three Months Ended September 30, 2021 and 2020

Net Income. Net income was $1.6 million for the three months ended September 30, 2021, compared to $1.9 million for the three months ended September 30, 2020. Earnings per basic and fully diluted share of common stock were $0.12 for the three months ended September 30, 2021, compared to $0.13 for the three months ended September 30, 2020.

Net Interest Income. Net interest income was $11.0 million for the three months ended September 30, 2021 and September 30, 2020. Interest income decreased $737,000, which was offset by a $770,000 decrease in interest expense.

The average yield on interest-earning assets decrease was offset by a decrease in the cost of interest-bearing liabilities and an increase in total average interest-earning assets. Loan interest income for the three months ended September 30, 2021 includes amortized fees of $329,000 from SBA Paycheck Protection Program loans. We recorded prepayment income of $208,000 for the three months ended September 30, 2021, compared to $88,000 for the same period in 2020. The yield on interest-earning assets decreased 31 basis points to 2.93% for the three months ended September 30, 2021, from 3.24% for the three months ended September 30, 2020. The cost of interest-bearing liabilities decreased 30 basis points to 0.25% for the three months ended September 30, 2021, from 0.55% for the same period in 2020. Total average interest-earning assets increased $58.2 million, or 3.8%, to $1.592 billion for the three months ended September 30, 2021, from $1.534 billion for the same period in 2020. Total average interest-bearing liabilities increased $60.8 million, or 5.6%, to $1.146 billion for the three months ended September 30, 2021, from $1.085 billion for the same period in 2020. The increase in interest-bearing liabilities is partly attributable to the Company's issuance of $20.0 million of Subordinated Notes in April of 2021. Our net interest rate spread decreased by one basis point to 2.68% for the three months ended September 30, 2021, from 2.69% for the same period in 2020. Our net interest margin decreased by ten basis points to 2.75% for the three months ended September 30, 2021, from 2.85% for the same period in 2020.

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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,
	2021								2020
	Average Outstanding Balance			Interest		Yield/Rate ⁽¹⁾			Average Outstanding Balance			Interest		Yield/Rate ⁽¹⁾
	(Dollars in thousands)
Interest-earning assets:
Loans	$	1,045,586		$	11,389		4.32	%	$	1,080,521		$	12,027		4.43	%
Securities		16,915			46		1.08			52,265			183		1.39
Stock in FHLB and FRB		7,490			85		4.50			7,490			87		4.62
Other		522,491			228		0.17			394,048			188		0.19
Total interest-earning assets		1,592,482			11,748		2.93			1,534,324			12,485		3.24
Noninterest-earning assets		65,380								64,824
Total assets	$	1,657,862							$	1,599,148
Interest-bearing liabilities:
Savings deposits	$	196,551			30		0.06		$	169,989			27		0.06
Money market accounts		327,029			117		0.14			274,160			163		0.24
NOW accounts		377,169			132		0.14			310,024			121		0.16
Certificates of deposit		220,565			241		0.43			326,956			1,177		1.43
Total deposits		1,121,314			520		0.18			1,081,129			1,488		0.55
Borrowings and Subordinated Notes		24,573			198		3.20			4,000			—		—
Total interest-bearing liabilities		1,145,887			718		0.25			1,085,129			1,488		0.55
Noninterest-bearing deposits		321,417								314,965
Noninterest-bearing liabilities		28,197								25,788
Total liabilities		1,495,501								1,425,882
Equity		162,361								173,266
Total liabilities and equity	$	1,657,862							$	1,599,148
Net interest income				$	11,030							$	10,997
Net interest rate spread ⁽²⁾							2.68	%							2.69	%
Net interest-earning assets ⁽³⁾	$	446,595							$	449,195
Net interest margin ⁽⁴⁾							2.75	%							2.85	%
Ratio of interest-earning assets to interest-bearing liabilities		138.97	%							141.40	%

⁽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 $6,000 for the three months ended September 30, 2021, compared to a recovery of loan losses of $187,000 for the same period in 2020. The provision for, or recovery of, loan losses is a function of the allowance for loan loss methodology that we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses that is attributable to loans collectively evaluated for impairment increased $38,000, or 0.6%, to $6.9 million at September 30, 2021, from $6.8 million at June 30, 2021. There were $28,000 of reserves established for loans individually evaluated for impairment at September 30, 2021 and June 30, 2021. Net recoveries were $44,000 for the three months ended September 30, 2021, compared to net recoveries of $42,000 for the three months ended September 30, 2020.

The allowance for loan losses as a percentage of nonperforming loans was 1,067.34% at September 30, 2021, compared to 775.68% at June 30, 2021.

Noninterest Income

	Three Months Ended
	September 30,
	2021		2020		Change
	(Dollars in thousands)
Deposit service charges and fees	$	814	$	833	$	(19	)
Loan servicing fees		140		44		96
Mortgage brokerage and banking fees		16		44		(28	)
Trust and insurance commissions and annuities income		263		222		41
Earnings on bank-owned life insurance		31		10		21
Other		110		111		(1	)
Total noninterest income	$	1,374	$	1,264	$	110

Noninterest income increased $110,000 to $1.4 million, or 8.7%, for the three months ended September 30, 2021, compared to $1.3 million for the same period in 2020. Deposit service charges decreased $19,000, or 2.3%, primarily due to reduced non-sufficient funds returns charges, service charges and ATM service charges. Loan servicing fees increased $96,000 due to the collection of $125,000 loan commitment and letter of credit service fees. Mortgage brokerage and banking fees decreased $28,000 due to payoffs and paydowns on serviced mortgage loans. Trust and insurance commissions and annuities income increased $41,000, or 18.5%, to $263,000 for the three months ended September 30, 2021, from $222,000 for the three months ended September 30, 2020 due to increased assets under management. Earnings on bank-owned life insurance increased by $21,000 to $31,000 for the three months ended September 30, 2021. Other noninterest income remained constant for the three months ended September 30, 2021 and September 30, 2020.

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Noninterest Expense

	Three Months Ended
	September 30,
	2021		2020		Change
	(Dollars in thousands)
Compensation and benefits	$	5,782	$	5,398	$	384
Office occupancy and equipment		1,882		1,860		22
Advertising and public relations		150		135		15
Information technology		710		781		(71	)
Professional fees		311		341		(30	)
Supplies, telephone and postage		382		288		94
Amortization of intangibles		—		6		(6	)
Nonperforming asset management		6		57		(51	)
Operations of foreclosed assets, net		81		23		58
FDIC insurance premiums		125		105		20
Other		737		793		(56	)
Total noninterest expense	$	10,166	$	9,787	$	379

Noninterest expense increased by $379,000, or 3.9%, to $10.2 million for the three months ended September 30, 2021, compared to $9.8 million for the same period in 2020. The increase in noninterest expense was due in substantial part to increases in compensation and benefits expense, office occupancy and equipment expense, advertising and public relations expense, supplies, telephone and postage expense, and expense for operations of foreclosed assets. These increases were partially offset by a decrease in information technology expense and professional fees. Compensation and benefits expense increased $384,000, or 7.1%; primarily due to an increase in full time equivalent employees (FTE's), from 224 at September 30, 2021, compared to 210 at September 30, 2020. Office occupancy and equipment increased $22,000, or 1.2%, primarily due to increased rent expense and expense from depreciation of fixed assets. Information technology expense decreased $71,000, or 9.1%, to $710,000 for the three months ended September 30, 2021, from $781,000 for the same period in 2020, primarily due to the renegotiation of technology contracts as we continue to upgrade our systems and implement cybersecurity measures. Professional fees decreased $30,000, or 8.8%, for the three months ended September 30, 2021, primarily due to less consulting projects at the Bank during the third quarter of 2021. Telephone expense increased $94,000 due to the upgrade and conversion of our telephone and data systems and the temporary need to operate concurrent systems. Expense from operations of foreclosed assets was $81,000 for the three months ended September 30, 2021, an increase from $23,000 over the same period in 2020, primarily due to the combined impact of the recording of a $55,000 valuation allowance of foreclosed assets, and a $22,000 loss on sales of foreclosed assets that we recorded for the three months ended September 30, 2021. Other noninterest expense decreased $56,000, or 7.1%, to $737,000 for the three months ended September 30, 2021, from $793,000 for the three months ended September 30, 2020, primarily due to decreases in losses due to fraud and ATM expenses.

Income Taxes

We recorded income tax expense of $600,000 for the three months ended September 30, 2021, compared to $713,000 for the three months ended September 30, 2020. Our combined state and federal effective tax rate for the three months ended September 30, 2021 was 26.7%, compared to 26.8% for the three months ended September 30, 2020. During the second quarter 2021, Illinois Senate Bill 2017 was passed which created a temporary limitation on Illinois net operating loss carryforward utilization. For tax years 2021, 2022, and 2023, corporations are limited to applying a maximum of $100,000 of Illinois net operating loss carryforwards to taxable income. Illinois net operating loss carryforwards that are limited during these years have an extended expiration date for the years in which they are limited. The extended expiration of the Company’s Illinois net operating loss carryforwards are from 2026 to 2028.

Operating Results for the Nine Months Ended September 30, 2021 and 2020

Net Income. Net income was $5.0 million for the nine months ended September 30, 2021, compared to $6.7 million for the nine months ended September 30, 2020. Earnings per basic and fully diluted share of common stock were $0.35 for the nine months ended September 30, 2021, compared to $0.45 for the nine months ended September 30, 2020.

Net Interest Income. Net interest income was $32.4 million for the nine months ended September 30, 2021, compared to $34.3 million for the nine months ended September 30, 2020. The decrease in net interest income reflected a $5.8 million, or 14.5%, decrease in interest income, partially offset by a $3.9 million, or 65.1%, decrease in interest expense.

The decrease in net interest income was due in substantial part to a decrease in the average yield on interest-earning assets, which was partially offset by an increase in total average interest-earning assets and a decrease in the cost of interest-bearing liabilities. Loan interest income for the nine months ended September 30, 2021 included amortized fees of $682,000 from SBA Paycheck Protection Program loans and $164,000 of interest that we recovered from a previously charged-off commercial loan. We recorded prepayment income of $485,000 for the nine months ended September 30, 2021, compared to $396,000 for the same period in 2020. The yield on interest-earning assets decreased 71 basis points to 2.95% for the nine months ended September 30, 2021, from 3.66% for the same period in 2020. The cost of interest-bearing liabilities decreased 50 basis points to 0.25% for the nine months ended September 30, 2021, from 0.75% for the same period in 2020. Total average interest-earning assets increased $94.8 million, or 6.4%, to $1.565 billion for the nine months ended September 30, 2021, from $1.470 billion for the same period in 2020. Total average interest-bearing liabilities increased $44.7 million, or 4.2%, to $1.114 billion for the nine months ended September 30, 2021, from $1.070 billion for the same period in 2020. The increase in interest-bearing liabilities is attributable to the Company's issuance of $20.0 million of Subordinated Notes in April of 2021. Our net interest rate spread decreased by 21 basis points to 2.70% for the nine months ended September 30, 2021, from 2.91% for the same period in 2020. Our net interest margin decreased by 35 basis points to 2.77% for the nine months ended September 30, 2021, from 3.12% for the same period in 2020.

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Average Balance Sheets

	For the Nine Months Ended September 30,
	2021								2020
	Average Outstanding Balance			Interest		Yield/Rate⁽¹⁾			Average Outstanding Balance			Interest		Yield/Rate ⁽¹⁾
	(Dollars in thousands)
Interest-earning assets:
Loans	$	1,032,782		$	33,510		4.34	%	$	1,118,637		$	38,307		4.57	%
Securities		19,604			152		1.04			60,606			758		1.67
Stock in FHLB and FRB		7,490			255		4.55			7,490			259		4.62
Other		505,153			576		0.15			283,493			1,008		0.47
Total interest-earning assets		1,565,029			34,493		2.95			1,470,226			40,332		3.66
Noninterest-earning assets		65,358								64,689
Total assets	$	1,630,387							$	1,534,915
Interest-bearing liabilities:
Savings deposits	$	191,822			88		0.06		$	162,501			118		0.10
Money market accounts		319,302			338		0.14			260,314			829		0.43
NOW accounts		354,810			366		0.14			287,478			472		0.22
Certificates of deposit		231,622			948		0.55			357,182			4,622		1.73
Total deposits		1,097,556			1,740		0.21			1,067,475			6,041		0.76
Borrowings and Subordinated Notes		16,771			368		2.93			2,144			—		—
Total interest-bearing liabilities		1,114,327			2,108		0.25			1,069,619			6,041		0.75
Noninterest-bearing deposits		321,641								265,928
Noninterest-bearing liabilities		25,886								25,372
Total liabilities		1,461,854								1,360,919
Equity		168,533								173,996
Total liabilities and equity	$	1,630,387							$	1,534,915
Net interest income				$	32,385							$	34,291
Net interest rate spread ⁽²⁾							2.70	%							2.91	%
Net interest-earning assets ⁽³⁾	$	450,702							$	400,607
Net interest margin ⁽⁴⁾							2.77	%							3.12	%
Ratio of interest-earning assets to interest-bearing liabilities		140.45	%							137.45	%

⁽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 recovery of loan losses of $1.0 million for the nine months ended September 30, 2021, compared to a provision for loan losses of $326,000 for the same period in 2020. 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 $856,000, or 11.1%, to $6.9 million at September 30, 2021, from $7.7 million at December 31, 2020. There were $28,000 of reserves established for loans individually evaluated for impairment at September 30, 2021 and at September 30, 2020. Net recoveries were $163,000 for the nine months ended September 30, 2021, compared to net recoveries of $53,000 for the nine months ended September 30, 2020.

The allowance for loan losses as a percentage of nonperforming loans was 1,067.34% at September 30, 2021, compared to 634.81% at December 31, 2020.

Noninterest Income

	Nine Months Ended
	September 30,
	2021		2020		Change
	(Dollars in thousands)
Deposit service charges and fees	$	2,352	$	2,456	$	(104	)
Loan servicing fees		336		189		147
Mortgage brokerage and banking fees		33		84		(51	)
Trust and insurance commissions and annuities income		880		728		152
Earnings on bank-owned life insurance		82		51		31
Other		375		317		58
Total noninterest income	$	4,058	$	3,825	$	233

Noninterest income increased $233,000, or 6.1%, for the nine months ended September 30, 2021 to $4.1 million, compared to $3.8 million for the same period in 2020. Deposit service charges decreased $104,000, or 4.2%, due to lower non-sufficient funds returns charges and negative balance fees. Loan servicing fees increased $147,000, or 77.8%, due to the collection of commitment fees, letter of credit fees and a $61,000 release fee from a corporate lessor. Mortgage brokerage and banking fees decreased $51,000 for the nine months ended September 30, 2021, due to payoffs and paydowns on serviced mortgages loans. Trust and insurance commissions and annuities income increased $152,000, or 20.9%, to $880,000 for the nine months ended September 30, 2021, from $728,000 for the nine months ended September 30, 2020 due to increased assets under management. Earnings on bank-owned life insurance increased by $31,000 to $82,000 for the nine months ended September 30, 2021. Other income increased $56,000, or 17.6%, to $375,000 for the nine months ended September 30, 2021, compared to $319,000 for the nine months ended September 30, 2020, primarily due to the receipt of $67,000 for the final dissolution of a low-income housing investment.

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Noninterest Expense

	Nine Months Ended
	September 30,
	2021		2020		Change
	(Dollars in thousands)
Compensation and benefits	$	16,811	$	16,084	$	727
Office occupancy and equipment		5,971		5,383		588
Advertising and public relations		525		405		120
Information technology		2,021		2,453		(432	)
Professional fees		1,024		943		81
Supplies, telephone and postage		1,224		875		349
Amortization of intangibles		7		27		(20	)
Nonperforming asset management		55		154		(99	)
Operations of foreclosed assets, net		366		13		353
FDIC insurance premiums		345		241		104
Other		2,245		2,086		159
Total noninterest expense	$	30,594	$	28,664	$	1,930

Noninterest expense increased by $1.9 million, or 6.7%, to $30.6 million for the nine months ended September 30, 2021, from $28.7 million for the same period in 2020. The increase in noninterest expense was due in substantial part to increases in compensation and benefits expense, office occupancy and equipment expense, advertising and public relations expense, professional fees, supplies, telephone and postage expense, expense for operations of foreclosed assets and other expense. These increases were partially offset by a decrease in information technology expense. Compensation and benefits expense increased $727,000, or 4.5% primarily due to an increase in full time equivalent employees (FTE's). The increase in FTE's was primarily due to staffing increases for commercial finance, multi-family lending and equipment finance originations and the restoration of services in certain branch offices that were reduced or suspended due to COVID-19. Office occupancy and equipment increased $588,000, or 10.9%, primarily due to increased rent expense, snow removal expense and expense related to COVID-19 cleaning and sanitation. Information technology expense decreased $432,000, or 17.6%, to $2.0 million for the nine months ended September 30, 2021, from $2.5 million for the same period in 2020, primarily due to the renegotiation of technology contracts as we continued to upgrade our systems and implement cybersecurity measures. Professional fees increased $81,000, or 8.6%, for the nine months ended September 30, 2021, primarily due to increases in audit and accounting fees and placement fees for staffing additions. Telephone expense increased $413,000 due to the upgrade and conversion of our telephone and data systems and the temporary need to operate concurrent systems. Operations of foreclosed assets increased to $366,000 for the nine months ended September 30, 2021, compared to $13,000 for the same period in 2020, primarily due to the recording of a $336,000 valuation allowance on foreclosed assets, which was partially offset by $29,000 of gains on sales of foreclosed assets that we recorded for the nine months ended September 30, 2021. FDIC insurance premiums increased $104,000, to $345,000 for the nine months ended September 30, 2021, compared to $241,000 for the same period in 2020, because the insurance premiums for the nine months ended September 30, 2020 was partially offset by the FDIC's small bank assessment credit. Other noninterest expense increased $159,000, or 7.6%, to $2.2 million for the nine months ended September 30, 2021, from $2.1 million for the nine months ended September 30, 2020, primarily due to increased loan expenses and the reversal of a $116,000 reserve on open commitments for two undrawn letters of credit in 2020.

Income Taxes

We recorded income tax expense of $1.8 million for the nine months ended September 30, 2021, compared to $2.4 million for the nine months ended September 30, 2020. Our combined state and federal effective tax rate for the nine months ended September 30, 2021 was 26.6%, compared to 26.4% for the nine months ended September 30, 2020. During the second quarter 2021, Illinois Senate Bill 2017 was passed which created a temporary limitation on Illinois net operating loss carryforward utilization. For tax years 2021, 2022, and 2023, corporations are limited to applying a maximum of $100,000 of Illinois net operating loss carryforwards to taxable income. Illinois net operating loss carryforwards that are limited during these years have an extended expiration date for the years in which they are limited. The extended expiration of the Company’s Illinois net operating loss carryforwards are from 2026 to 2028.

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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, 2021, 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 and foreclosed assets 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, 2021, 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 sets forth the amounts and categories of our nonperforming loans and nonperforming assets.

	September 30, 2021			June 30, 2021			December 31, 2020			Quarter Change			Nine-Month Change
	(Dollars in thousands)
Nonaccrual loans:
One-to-four family residential real estate	$	341		$	588		$	925		$	(247	)	$	(584	)
Nonresidential real estate		296			296			296			—			—
Equipment finance - investment-rated		9			—			—			9			9
Nonperforming loans		646			884			1,221			(238	)		(575	)

Other real estate owned:
One-to-four family residential real estate		112			335			157			(223	)		(45	)
Nonresidential real estate		140			140			—			—			140
Other real estate owned		252			475			157			(223	)		95

Other foreclosed assets		797			1,227			—			(430	)		797

Total nonperforming assets	$	1,695		$	2,586		$	1,378		$	(891	)	$	317

Ratios:
Nonperforming loans to total loans		0.06	%		0.09	%		0.12	%
Nonperforming assets to total assets		0.10			0.16			0.09

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Nonperforming Assets

Nonperforming assets increased $317,000 to $1.7 million at September 30, 2021, net of additions and sales of foreclosed collateral. In the second and third quarters of 2021, we redeemed and sold $3.2 million of repossessed collateral related to a $4.3 million previously classified Chicago commercial loan. Two residential loans with a total book balance of $128,000 were transferred from nonaccrual loans to OREO during the nine months ended September 30, 2021. We continue to experience modest quantities of defaults on residential real estate loans principally due either to the borrower’s personal financial condition or deteriorated collateral value.

Liquidity and Capital Resources

Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, 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 $5.0 million of FHLB advances outstanding at September 30, 2021 and $4.0 million at December 31, 2020.

The Company is a separate legal entity from BankFinancial, NA. The Company must provide for its own liquidity to pay any dividends to its stockholders 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. The Company completed the issuance of $20.0 million of Subordinated Notes in April 2021, at a rate of 3.75%. maturing on May 15, 2031. At September 30, 2021, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $9.7 million. In 2020, the Company obtained a $5.0 million unsecured line of credit with a correspondent bank to provide a secondary source of liquidity. Interest is payable at a rate of Prime rate minus 0.75%. The line of credit will mature on March 31, 2022. The line of credit had no outstanding balance at September 30, 2021.

As of September 30, 2021, 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, 2021, 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 2020, a banking organization that had a leverage ratio of 8% or greater and met certain other criteria could elect to use the Community Bank Leverage Ratio framework; and qualifying 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 is 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 qualifying community bank, we elected to be subject to this definition beginning in the second quarter of 2020. As of September 30, 2021, the Bank's Community Bank Leverage Ratio was 10.00%.

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 Company and the Bank have each adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 7.5% and a total risk-based capital ratio of at least 10.5%. 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, 2021, 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
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2021
Community Bank Leverage Ratio	$	165,537		10.00	%	$	140,761		8.50	%

December 31, 2020
Community Bank Leverage Ratio	$	160,236		10.10	%	$	126,964		8.00	%

Quarterly Cash Dividends. The Company declared cash dividends of $0.30 per share for both of the nine months ended September 30, 2021 and September 30, 2020.

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, and 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, and 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, 2021, 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	$	17,185			8.60	%	$	13,270			31.33	%
+300		17,522			8.76			10,183			24.04
+200		13,662			6.83			6,765			15.97
+100		6,980			3.49			3,253			7.68
0
-25		(6,736	)		(3.37	)		(744	)		(1.76	)

The table set forth above indicates that at September 30, 2021, in the event of an immediate 25 basis point decrease in interest rates, the Bank would be expected to experience a 3.37% decrease in NPV and a $744,000 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 6.83% increase in NPV and a $6.8 million increase in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.

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

ITEM 4.

CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2021. 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, 2021, 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 2021.

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, 2021 through July 31, 2021		307,498	$	11.42		307,498		625,721
August 1, 2021 through August 31, 2021		221,792		11.37		221,792		403,929
September 1, 2021 through September 30, 2021		215,297		11.38		215,297		188,632
		744,587				744,587

As of September 30, 2021, the Company had repurchased 7,172,123 shares of its common stock out of the 7,360,755 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, 2021, there were 188,632 shares of common stock authorized for repurchase. On April 19, 2021, the Board extended the expiration of the Company's share repurchase authorization from April 30, 2021 to November 15, 2021, and increased the total number of shares currently authorized for repurchase by 250,000 shares. On June 24, 2021, the Board increased the number of shares currently authorized for repurchase by 900,000 shares.

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, 2021, 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 29, 2021	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