BankFinancial CORP - Quarter Report: 2023 March (Form 10-Q)

bfin20230331_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 March 31, 2023

☐	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 April 28, 2023, there were 12,693,993 shares of Common Stock, $0.01 par value, outstanding.

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BANKFINANCIAL CORPORATION

Form 10-Q

March 31, 2023

Table of Contents

		Page Number
PART I

Item 1.	Financial Statements	2

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	31

Item 4.	Controls and Procedures	32

PART II

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

Signatures		36

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

	*March 31, 2023*			*December 31, 2022*
Assets
Cash and due from other financial institutions	$	19,963		$	12,046
Interest-bearing deposits in other financial institutions		57,042			54,725
Cash and cash equivalents		77,005			66,771
Securities, at fair value		170,239			210,338
Loans receivable, net of allowance for credit losses: March 31, 2023, $10,032 and December 31, 2022, $8,129		1,225,288			1,226,743
Foreclosed assets, net		1,393			476
Stock in Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB"), at cost		7,490			7,490
Premises held-for-sale		1,246			—
Premises and equipment, net		22,955			24,956
Accrued interest receivable		8,316			7,338
Bank-owned life insurance		18,731			18,815
Deferred taxes		5,395			5,480
Other assets		6,052			7,035
Total assets	$	1,544,110		$	1,575,442

Liabilities
Deposits
Noninterest-bearing	$	287,493		$	280,625
Interest-bearing		1,027,721			1,094,309
Total deposits		1,315,214			1,374,934
Borrowings		35,000			—
Subordinated notes, net of unamortized issuance costs		19,645			19,634
Advance payments by borrowers for taxes and insurance		7,321			8,674
Accrued interest payable and other liabilities		14,571			20,529
Total liabilities		1,391,751			1,423,771

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; 12,693,993 shares issued at March 31, 2023 and 12,742,597 shares issued at December 31, 2022		127			127
Additional paid-in capital		85,346			85,848
Retained earnings		71,449			71,808
Accumulated other comprehensive loss		(4,563	)		(6,112	)
Total stockholders’ equity		152,359			151,671
Total liabilities and stockholders’ equity	$	1,544,110		$	1,575,442

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*
	*March 31,*
	*2023*			*2022*
Interest and dividend income
Loans, including fees	$	14,393		$	10,813
Securities		1,114			299
Other		653			306
Total interest income		16,160			11,418
Interest expense
Deposits		2,300			445
Borrowings and Subordinated notes		360			198
Total interest expense		2,660			643
Net interest income		13,500			10,775
Provision for credit losses - loans		85			276
Recovery of credit losses - unfunded commitments		(37	)		—
Provision for credit losses		48			276
Net interest income after provision for credit losses		13,452			10,499
Noninterest income
Deposit service charges and fees		816			781
Loan servicing fees		129			101
Trust and insurance commissions and annuities income		367			338
(Loss) earnings on bank-owned life insurance		(84	)		28
Losses on sales of securities		(454	)		—
Valuation adjustment on bank premises held-for-sale		(553	)		—
Other		92			196
Total noninterest income		313			1,444
Noninterest expense
Compensation and benefits		5,555			5,480
Office occupancy and equipment		2,038			2,134
Advertising and public relations		190			142
Information technology		849			851
Professional fees		317			373
Supplies, telephone, and postage		359			347
FDIC insurance premiums		154			116
Other		830			846
Total noninterest expense		10,292			10,289
Income before income taxes		3,473			1,654
Income tax expense		840			386
Net income	$	2,633		$	1,268
Basic and diluted earnings per common share	$	0.21		$	0.10
Basic and diluted weighted average common shares outstanding		12,721,841			13,204,041

See accompanying notes to the consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) - Unaudited

	*Three Months Ended*
	*March 31,*
	*2023*			*2022*
Net income	$	2,633		$	1,268
Unrealized holding gain (loss) on securities arising during the period		1,641			(4,065	)
Tax effect		(427	)		1,088
Unrealized holding gain (loss) on securities, net of tax		1,214			(2,977	)
Reclassification adjustment for loss included in net income		454			—
Tax effect, included in income tax expense		(119	)		—
Reclassification adjustment for loss included in net income, net of tax		335			—
Other comprehensive gain (loss), net of tax		1,549			(2,977	)
Comprehensive income (loss)	$	4,182		$	(1,709	)

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 (Loss)*			*Total*
For the three months ended

Balance at December 31, 2021	$	132	$	90,709		$	66,545		$	80		$	157,466
Net income		—		—			1,268			—			1,268
Other comprehensive loss, net of tax effect		—		—			—			(2,977	)		(2,977	)
Repurchase and retirement of common stock (50,000 shares)		—		(539	)		—			—			(539	)
Cash dividends declared on common stock ($0.10 per share)		—		—			(1,323	)		—			(1,323	)
Balance at March 31, 2022	$	132	$	90,170		$	66,490		$	(2,897	)	$	153,895

Balance at December 31, 2022	$	127	$	85,848		$	71,808		$	(6,112	)	$	151,671
Cumulative effect of change in accounting principle		—		—			(1,719	)		—			(1,719	)
Net income		—		—			2,633			—			2,633
Other comprehensive income, net of tax effect		—		—			—			1,549			1,549
Repurchase and retirement of common stock (48,604 shares)		—		(502	)		—			—			(502	)
Cash dividends declared on common stock ($0.10 per share)		—		—			(1,273	)		—			(1,273	)
Balance at March 31, 2023	$	127	$	85,346		$	71,449		$	(4,563	)	$	152,359

See accompanying notes to the consolidated financial statements.

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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited

	*Three Months Ended*
	*March 31,*
	*2023*			*2022*
Cash flows from operating activities
Net income	$	2,633		$	1,268
Adjustments to reconcile net income to net cash from operating activities
Provision for credit losses - loans		85			276
Recovery of credit losses - unfunded commitments		(37	)		—
Depreciation and amortization		216			489
Net change in net deferred loan origination costs		(83	)		(194	)
Losses on sales of securities		454			—
Valuation adjustment on bank premises held-for-sale		553			—
Loss on disposal of premises and equipment		4			—
Gain on sale of foreclosed assets		—			(6	)
Foreclosed assets valuation adjustments		—			(8	)
(Loss) earnings on bank-owned life insurance		84			(28	)
Net change in:
Accrued interest receivable		(978	)		(1,242	)
Other assets		1,132			(334	)
Accrued interest payable and other liabilities		(6,338	)		(8,220	)
Net cash from operating activities		(2,275	)		(7,999	)
Cash flows from (used in) investing activities
Securities:
Proceeds from maturities		—			1,488
Proceeds from principal repayments		170			325
Proceeds from sale of securities		42,631			—
Purchases of securities		(744	)		(52,778	)
Net change in loans receivable		(1,387	)		(11,227	)
Proceeds from sale of foreclosed assets		4			45
Proceeds from sale of premises and equipment		3			—
Purchase of premises and equipment, net		(320	)		(402	)
Net cash from (used in) investing activities		40,357			(62,549	)
Cash flows from financing activities
Net change in:
Deposits		(59,720	)		(26,826	)
Borrowings		35,000			—
Advance payments by borrowers for taxes and insurance		(1,353	)		(1,924	)
Repurchase and retirement of common stock		(502	)		(539	)
Cash dividends paid on common stock		(1,273	)		(1,323	)
Net cash from financing activities		(27,848	)		(30,612	)
Net change in cash and cash equivalents		10,234			(101,160	)
Beginning cash and cash equivalents		66,771			502,162
Ending cash and cash equivalents	$	77,005		$	401,002

Supplemental disclosures of cash flow information:
Interest paid	$	2,411		$	456
Income taxes paid		1			16
Income taxes refunded		—			3
Assets transferred to premises held-for-sale		1,799			—
Loans transferred to foreclosed assets		921			274

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, National Association (the “Bank”). The interim unaudited consolidated financial statements include the accounts and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BFIN Asset Recovery Company, LLC (collectively, “the Company”), and reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. Such adjustments are the only adjustments reflected in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three-month period ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023 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 and actual results could differ from those estimates.

Factored Receivables: The Company purchases invoices from its factoring customers in schedules or batches. These receivables are included in loans receivable on the Consolidated Statements of Financial Condition, and as commercial loans and leases in Note 4 - Loans receivable. The face value of the invoices purchased or amount advanced is recorded by the Company as factored receivables, and the unadvanced portions of the invoices purchased, less fees, are considered customer reserves. The customer reserves are held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as noninterest-bearing deposits in the Consolidated Statements of Financial Condition. The unpaid principal balances of these receivables were $7.7 million and $7.0 million at March 31, 2023 and December 31, 2022, respectively, and are included in commercial loans and leases. The customer reserves associated with the factored receivables were $1.7 million and $1.4 million at March 31, 2023 and December 31, 2022, respectively.

Factoring fees are recognized in interest income as incurred by the customer and deducted from the customer's reserve balances. Other factoring-related fees, which include wire transfer fees, broker fees, and other similar fees, are reported by the Company as loan servicing fees in noninterest income.

Allowance for Credit Losses: On January 1, 2023, the Company adopted Accounting Standards Update (“ASC 326”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. ASC 326 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities. ASC 326 eliminates the probable initial recognition threshold in current US GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. ASC 326 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the reserve for credit losses. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

The Company adopted ASC 326 using the modified retrospective approach. Results for the periods beginning after January 1, 2023 are presented under Accounting Standards Codification 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net reduction of retained earnings of $1.7 million upon adoption. The transition adjustment includes an increase in credit related reserves of $1.9 million and the recording of an unfunded commitment reserve of $417,000, respectively, net of the corresponding increase in deferred tax assets of $604,000.

	*January 1, 2023*
	*Post ASC 326 Adoption*		*Pre-ASC 326 Adoption*		*Pre-tax impact of ASC 326 Adoption*
Assets:
Allowance
One-to-four family residential real estate	$	380	$	281	$	99
Multi-family mortgage		4,647		4,017		630
Nonresidential real estate		1,300		1,234		66
Commercial loans and leases		3,670		2,548		1,122
Consumer		39		49		(10)
Total allowance for credit losses	$	10,036	$	8,129	$	1,907

Liabilities:
Unfunded commitment reserve	$	417	$	—	$	417

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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 (continued)

The allowance for credit losses (“ACL”) is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Portfolio Segmentation (“Pooled Loans”)

Portfolio segmentation is defined as the pooling of loans based upon similar risk characteristics such that quantitative methodologies and qualitative adjustment factors for estimating the allowance for credit losses is constructed for each segment. The allowance for credit losses for Pooled Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function.

Individually Evaluated Loans

The Company establishes a specific loss reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans and other loans deemed appropriate by management.

Accrued Interest Receivable

Upon adoption of ASC 326 and its related amendments on January 1, 2023, the Company made the following elections regarding accrued interest receivable:

●

Presenting accrued interest receivable balances separately within another line item on the Consolidated Statements of Financial Condition.

●

Continuing our policy to fully reserve accrued interest receivable by reversing interest income. For commercial loans, the reserve is established upon becoming 90 days past due. For consumer loans, the charge-off typically occurs upon becoming 120 days past due. Historically, the Company has not experienced uncollectible accrued interest receivable on its investment securities.

●

Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of fully reserving uncollectible accrued interest receivable balances in a timely manner, as described above.

Reserve for Unfunded Commitments

The reserve for unfunded commitments (the “Unfunded Commitment Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Commitment Reserve is recognized as a liability (other liabilities on the Consolidated Statements of Financial Condition), with adjustments to the unfunded commitment reserve recognized as a provision for credit loss expense in the Consolidated Statements of Income. The Unfunded Commitment Reserve is determined by estimating expected future fundings, under each segment, and applying the expected loss rates. Expected future fundings are based on historical averages of funding rates (i.e., the likelihood of draws taken). To estimate future fundings on unfunded balances, current funding rates are compared to historical funding rates.

Troubled Debt Restructurings and Vintage Disclosures: ASU 2022-02 “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” eliminates the Troubled Debt Restructurings (“TDR”) accounting model for creditors that have already adopted ASC 326. In lieu of the TDR accounting model, loan refinancing and restructuring guidance in ASC Subtopic 310-20 “Investments—Debt Securities” will apply to all loan modifications, including those made for borrowers experiencing financial difficulty. This standard also enhances disclosure requirements related to certain loan modifications. Additionally, this standard introduces new requirements to disclose gross write-off information in the vintage disclosures of financing receivables by credit quality indicator and class of financing receivable by year of origination. The Company adopted the standard on January 1, 2023.

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, 2022, as filed with the Securities and Exchange Commission.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - EARNINGS PER SHARE

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period.

	*Three Months Ended*
	*March 31,*
	*2023*		*2022*
Net income available to common stockholders	$	2,633	$	1,268
Basic and diluted weighted average common shares outstanding		12,721,841		13,204,041
Basic and diluted earnings per common share	$	0.21	$	0.10

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

March 31, 2023
Certificates of deposit	$	2,977	$	—	$	—		$	2,977
Municipal securities		240		—		(13	)		227
U.S. Treasury Notes		128,137		—		(5,772	)		122,365
U.S. government-sponsored agencies		40,000		—		(261	)		39,739
Mortgage-backed securities - residential		3,880		25		(124	)		3,781
Collateralized mortgage obligations - residential		1,171		—		(21	)		1,150
	$	176,405	$	25	$	(6,191	)	$	170,239
December 31, 2022
Certificates of deposit	$	2,233	$	—	$	—		$	2,233
Municipal securities		240		—		(15	)		225
U.S. Treasury Notes		170,906		—		(7,803	)		163,103
U.S. government-sponsored agencies		40,000		—		(301	)		39,699
Mortgage-backed securities - residential		3,997		27		(143	)		3,881
Collateralized mortgage obligations - residential		1,223		—		(26	)		1,197
	$	218,599	$	27	$	(8,288	)	$	210,338

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.

	*March 31, 2023*
	*Amortized Cost*		*Fair Value*
Due in one year or less	$	63,028	$	61,858
Due after one year through five years		108,326		103,450
		171,354		165,308
Mortgage-backed securities - residential		3,880		3,781
Collateralized mortgage obligations - residential		1,171		1,150
	$	176,405	$	170,239

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - SECURITIES (continued)

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*
March 31, 2023
Municipal securities		—	$	—	$	—			1	$	227	$	(13	)		1	$	227	$	(13	)
U.S. Treasury Notes		2		4,170		(53	)		179		118,195		(5,719	)		181		122,365		(5,772	)
U.S. government-sponsored agencies		9		39,739		(261	)		—		—		—			9		39,739		(261	)
Mortgage-backed securities - residential		14		2,414		(78	)		2		539		(46	)		16		2,953		(124	)
Collateralized mortgage obligations - residential		4		256		(4	)		4		894		(17	)		8		1,150		(21	)
		29	$	46,579	$	(396	)		186	$	119,855	$	(5,795	)		215	$	166,434	$	(6,191	)

December 31, 2022
Municipal securities		1	$	225	$	(15	)		—	$	—	$	—			1	$	225	$	(15	)
U.S. Treasury Notes		147		104,439		(4,104	)		53		58,664		(3,699	)		200		163,103		(7,803	)
U.S. government-sponsored agencies		9		39,699		(301	)		—		—		—			9		39,699		(301	)
Mortgage-backed securities - residential		18		3,016		(143	)		—		—		—			18		3,016		(143	)
Collateralized mortgage obligations - residential		5		1,009		(18	)		1		171		(8	)		6		1,180		(26	)
		180	$	148,388	$	(4,581	)		54	$	58,835	$	(3,707	)		234	$	207,223	$	(8,288	)

The Company evaluates marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered 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 security is impaired.

U.S. Treasury Notes, U.S. government-sponsored agencies and certain other available-for-sale securities that the Company holds in its investment portfolio were in an unrealized loss position at March 31, 2023, but the unrealized loss was not recognized into income because the U.S. Treasury Notes are backed by the full faith and credit of the United States and the other issuers were high credit quality, it is not likely that the Company will be required to sell these securities before their anticipated recovery occurs and the decline in fair value was due to changes in interest rates and other market conditions. The fair values are expected to recover as maturity dates of these securities approach.

We reviewed the available-for-sale securities in an unrealized loss position within the guidelines of ASC 326 and determined that no credit loss is required to be recognized.

The proceeds from sales of securities and the associated losses were as follows:

	*Three Months Ended*
	*March 31,*
	*2023*			*2022*
Proceeds	$	42,631		$	—
Gross gains		—			—
Gross losses		(454	)		—

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - LOANS RECEIVABLE

The summary of loans receivable by class of loans is as follows:

	*March 31, 2023*			*December 31, 2022*
One-to-four family residential real estate	$	21,475		$	23,133
Multi-family mortgage		544,673			537,394
Nonresidential real estate		123,360			119,705
Commercial loans and leases		544,216			553,056
Consumer		1,596			1,584
		1,235,320			1,234,872
Allowance for credit losses		(10,032	)		(8,129	)
Loans, net	$	1,225,288		$	1,226,743

Net deferred loan origination costs included in the table above were $1.7 million as of March 31, 2023 and $1.6 million as of December 31, 2022.

Allowance for Credit Losses - Loans

The following table represents the activity in the ACL by class of loans:

	*One-to-four family residential real estate*			*Multi-family mortgage*		*Nonresidential real estate*			*Commercial loans and leases*			*Consumer*			*Total*
For the three months ended

March 31, 2023
Beginning balance, prior to adoption of ASC 326	$	281		$	4,017	$	1,234		$	2,548		$	49		$	8,129
Impact of adopting ASC 326		99			630		66			1,122			(10	)		1,907
Beginning balance, after adoption of ASC 326		380			4,647		1,300			3,670			39			10,036
Provision for (recovery of) credit losses		(31	)		62		47			(16	)		23			85
Loans charged off		—			—		—			(79	)		(22	)		(101	)
Recoveries		5			5		—			1			1			12
	$	354		$	4,714	$	1,347		$	3,576		$	41		$	10,032

March 31, 2022
Beginning balance	$	331		$	3,377	$	1,311		$	1,652		$	44		$	6,715
Provision for (recovery of) credit losses		(14	)		8		(162	)		425			19			276
Loans charged off		(4	)		—		(192	)		—			(18	)		(214	)
Recoveries		2			5		—			1			1			9
	$	315		$	3,390	$	957		$	2,078		$	46		$	6,786

As of March 31, 2023 we had $380,000 recorded as an unfunded commitment reserve, included in other liabilities on the Consolidated Statements of Financial Condition.

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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 tables present the balance in the ACL and loans receivable by class of loans based on evaluation method. Allocation of a portion of the ACL to one category does not preclude its availability to absorb losses in other categories:

	*One-to-four family residential real estate*		*Multi-family mortgage*		*Nonresidential real estate*		*Commercial loans and leases*		*Consumer*		*Total*
March 31, 2023
Loans:
Loans individually evaluated	$	89	$	148	$	—	$	8,848	$	—	$	9,085
Loans collectively evaluated		21,386		544,525		123,360		535,368		1,596		1,226,235
	$	21,475	$	544,673	$	123,360	$	544,216	$	1,596	$	1,235,320
ACL:
Loans individually evaluated	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated		354		4,714		1,347		3,576		41		10,032
	$	354	$	4,714	$	1,347	$	3,576	$	41	$	10,032

	*One-to-four family residential real estate*		*Multi-family mortgage*		*Nonresidential real estate*		*Commercial loans and leases*		*Consumer*		*Total*
December 31, 2022
Loans:
Loans individually evaluated	$	752	$	473	$	—	$	1,487	$	—	$	2,712
Loans collectively evaluated		22,381		536,921		119,705		551,569		1,584		1,232,160
	$	23,133	$	537,394	$	119,705	$	553,056	$	1,584	$	1,234,872
ACL:
Loans individually evaluated	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated		281		4,017		1,234		2,548		49		8,129
	$	281	$	4,017	$	1,234	$	2,548	$	49	$	8,129

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)

Individually Evaluated Loans

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

									*Three Months Ended*
									*March 31, 2023*
	*Loan Balance*		*Recorded Investment*		*Partial Charge-off*		*Allowance for Credit Losses Allocated*		*Average Investment*		*Interest Income Recognized*
March 31, 2023
With no related allowance recorded:
One-to-four family residential real estate	$	87	$	89	$	—	$	—	$	78	$	2
Multi-family mortgage		133		148		—		—		49		—
Commercial loans and leases		8,958		8,848		50		—		3,714		—
	$	9,178	$	9,085	$	50	$	—	$	3,841	$	2

									*Year ended*
									*December 31, 2022*
	*Loan Balance*		*Recorded Investment*		*Partial Charge-off*		*Allowance for Credit Losses Allocated*		*Average Investment*		*Interest Income Recognized*
December 31, 2022
With no related allowance recorded:
One-to-four family residential real estate	$	752	$	752	$	—	$	—	$	1,143	$	29
Multi-family mortgage		473		473		—		—		590		27
Commercial loans and leases		1,606		1,487		49		—		445		47
	$	2,831	$	2,712	$	49	$	—	$	2,178	$	103

Nonaccrual Loans

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

	*Nonaccrual*		*Loans Past Due Over 90 Days Still Accruing*
March 31, 2023
One-to-four family residential real estate	$	55	$	—
Commercial loans and leases		8,807		—
	$	8,862	$	—
December 31, 2022
One-to-four family residential real estate	$	92	$	—
Commercial loans and leases		1,310		238
Consumer		5		—
	$	1,407	$	238

Nonaccrual loans and individually evaluated 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 and loans individually evaluated.

The Company’s reserve for uncollected loan interest was $241,000 and $38,000 at March 31, 2023 and December 31, 2022, respectively. When a loan is on nonaccrual status and the ultimate collectability of the total principal of a 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. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported.

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 portfolio segment:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Nonaccrual		Current		Total
March 31, 2023
One-to-four family residential real estate loans	$	496	$	16	$	—	$	512	$	55	$	20,908	$	21,475
Multi-family mortgage:
Senior notes		786		148		—		934		—		500,517		501,451
Junior notes		362		185		—		547		—		42,675		43,222
Nonresidential real estate:
Owner occupied		—		—		—		—		—		22,264		22,264
Non-owner occupied		—		—		—		—		—		101,096		101,096
Commercial loans and leases:
Commercial		5,106		1,139		—		6,245		384		278,775		285,404
Equipment finance - Government		6,421		423		—		6,844		8,420		187,672		202,936
Equipment finance - Corporate Investment-grade		794		—		—		794		3		55,079		55,876
Consumer		6		5		—		11		—		1,585		1,596
	$	13,971	$	1,916	$	—	$	15,887	$	8,862	$	1,210,571	$	1,235,320

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Nonaccrual		Current		Total
December 31, 2022
One-to-four family residential real estate loans	$	411	$	19	$	—	$	430	$	92	$	22,611	$	23,133
Multi-family mortgage:
Senior notes		31		—		—		31		—		494,957		494,988
Junior notes		—		—		—		—		—		42,406		42,406
Nonresidential real estate:
Owner occupied		—		—		—		—		—		22,617		22,617
Non-owner occupied		—		—		—		—		—		97,088		97,088
Commercial loans and leases:
Commercial		2,424		336		111		2,871		1,310		279,272		283,453
Equipment finance - Government		2,034		5,106		—		7,140		—		204,443		211,583
Equipment finance - Corporate Investment-grade		—		81		127		208		—		57,812		58,020
Consumer		12		4		—		16		5		1,563		1,584
	$	4,912	$	5,546	$	238	$	10,696	$	1,407	$	1,222,769	$	1,234,872

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)

At March 31, 2023, the Company had no loan modifications that meet the definition described in ASU 2022-02 “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures for additional reporting.

At December 31, 2022 the Company evaluated 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 Troubled Debt Restructuring (“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 December 31, 2022.

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 as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:

Pass. This category includes loans that are all considered acceptable credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that meet or exceed industry standards.

Watch. A “Watch List” loan is a loan that requires elevated monitoring because it does not conform to the applicable published loan policy or loan product underwriting standards, evidences intermittent past due payments or because of other matters of possible concern.

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.

Based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:

	*Pass*		*Watch*		*Special Mention*		*Substandard*		*Substandard Nonaccrual*		*Total*
March 31, 2023
One-to-four family residential real estate	$	21,080	$	44	$	16	$	280	$	55	$	21,475
Multi-family mortgage		541,885		2,640		—		148		—		544,673
Nonresidential real estate		120,351		3,009		—		—		—		123,360
Commercial loans and leases		505,882		14,283		11,398		3,846		8,807		544,216
Consumer		1,581		5		5		5		—		1,596
	$	1,190,779	$	19,981	$	11,419	$	4,279	$	8,862	$	1,235,320

	*Pass*		*Watch*		*Special Mention*		*Substandard*		*Substandard Nonaccrual*		*Total*
December 31, 2022
One-to-four family residential real estate	$	22,648	$	62	$	4	$	327	$	92	$	23,133
Multi-family mortgage		534,253		3,141		—		—		—		537,394
Nonresidential real estate		116,635		3,070		—		—		—		119,705
Commercial loans and leases		523,889		22,299		1,517		4,041		1,310		553,056
Consumer		1,559		12		4		4		5		1,584
	$	1,198,984	$	28,584	$	1,525	$	4,372	$	1,407	$	1,234,872

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)

	Term Loans Amortized Cost Basis by Origination Year
	2023		2022			2021		2020		2019		Prior		Revolving loans			Total
March 31, 2023

*One-to-four family residential real estate loans:*
Risk-rating
Pass	$	—	$	151		$	—	$	200	$	—	$	16,109	$	4,620		$	21,080
Watch		—		—			—		—		—		44		—			44
Special mention		—		—			—		—		—		16		—			16
Substandard		—		—			—		—		—		128		152			280
Nonaccrual		—		—			—		—		—		26		29			55
	$	—	$	151		$	—	$	200	$	—	$	16,323	$	4,801		$	21,475
*One-to-four family residential real estate loans:*
Current period recoveries	$	—	$	—		$	—	$	—	$	—	$	5	$	—		$	5
	$	—	$	—		$	—	$	—	$	—	$	5	$	—		$	5
Multi-family mortgage:
Risk rating
Pass	$	20,500	$	217,091		$	125,506	$	63,839	$	23,907	$	82,363	$	8,679		$	541,885
Watch		—		—			—		—		—		2,640		—			2,640
Substandard		—		—			—		—		—		148		—			148
	$	20,500	$	217,091		$	125,506	$	63,839	$	23,907	$	85,151	$	8,679		$	544,673
Multi-family mortgage:
Current period recoveries	$	—	$	—		$	—	$	—	$	—	$	5	$	—		$	5
	$	—	$	—		$	—	$	—	$	—	$	5	$	—		$	5
Nonresidential real estate:
Risk rating
Pass	$	8,759	$	54,580		$	22,232	$	8,660	$	10,171	$	15,695	$	254		$	120,351
Watch		—		1,030			1,632		—		—		347		—			3,009
	$	8,759	$	55,610		$	23,864	$	8,660	$	10,171	$	16,042	$	254		$	123,360
Commercial loans and leases :
Risk rating
Pass	$	23,848	$	213,313		$	102,419	$	65,130	$	9,314	$	5,771	$	86,087		$	505,882
Watch		393		121			43		1,648		33		65		11,980			14,283
Special mention		—		11,050			—		—		—		—		348			11,398
Substandard		—		—			—		40		58		—		3,748			3,846
Nonaccrual		—		8,494			4		306		3		—		—			8,807
	$	24,241	$	232,978		$	102,466	$	67,124	$	9,408	$	5,836	$	102,163		$	544,216
Commercial loans and leases :
Current period gross charge-offs	$	—	$	(79	)	$	—	$	—	$	—	$	—	$	—		$	(79	)
Current period recoveries		—		—			—		—		—		1		—			1
	$	—	$	(79	)	$	—	$	—	$	—	$	1	$	—		$	(78	)
Consumer:
Risk rating
Pass	$	84	$	134		$	247	$	160	$	335	$	5	$	616		$	1,581
Watch		—		—			—		—		—		—		5			5
Special mention		—		—			—		—		—		—		5			5
Substandard		—		—			—		—		—		—		5			5
	$	84	$	134		$	247	$	160	$	335	$	5	$	631		$	1,596
Consumer:
Current period gross charge-offs	$	—	$	—		$	—	$	—	$	—	$	—	$	(22	)	$	(22	)
Current period recoveries		—		—			—		—		—		—		1			1
	$	—	$	—		$	—	$	—	$	—	$	—	$	(21	)	$	(21	)

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 credit 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’ debts are initially recorded at fair value of the asset less estimated costs to sell.

	*March 31, 2023*						*December 31, 2022*
	*Balance*		*Valuation Allowance*		*Net Balance*		*Balance*		*Valuation Allowance*		*Net Balance*

Other real estate owned	$	472	$	—	$	472	$	472	$	—	$	472
Other foreclosed assets		921		—		921		4		—		4
	$	1,393	$	—	$	1,393	$	476	$	—	$	476

The following represents the roll forward of foreclosed assets:

	*For the Three Months Ended*
	*March 31,*
	*2023*			*2022*
Beginning balance	$	476		$	725
New foreclosed assets		921			274
Valuation reductions from sales		—			8
Sales		(4	)		(39	)
Ending balance	$	1,393		$	968

Activity in the valuation allowance is as follows:

	*For the Three Months Ended*
	*March 31,*
	*2023*		*2022*
Beginning balance	$	—	$	227
Reductions from sales		—		(8	)
Ending balance	$	—	$	219

The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $5,000 at March 31, 2023, compared to no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at December 31, 2022. At March 31, 2023, other foreclosed assets consisted of vehicles and small construction equipment collateral repossessed in connection with equipment finance leases. At March 31, 2023, the balance of OREO included no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property without title.

Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 - BORROWINGS AND SUBORDINATED NOTES

Borrowings and subordinated notes were as follows:

	*March 31, 2023*					*December 31, 2022*
	*Contractual*					*Contractual*
	*Rate*			*Amount*		*Rate*			*Amount*
Fixed-rate advance from FHLB, due April 7, 2023		4.88	%	$	10,000		—	%	$	—
Fixed-rate advance from FHLB, due September 16, 2024		4.55	%		5,000		—	%		—
Fixed-rate advance from FHLB, due March 17, 2025		4.27	%		5,000		—	%		—
Fixed-rate advance from FHLB, due September 17, 2025		4.20	%		5,000		—	%		—
Fixed-rate advance from FHLB, due March 17, 2026		4.15	%		5,000
Fixed-rate advance from FHLB, due September 17, 2026		4.06	%		5,000		—	%		—
Subordinated notes, due May 15, 2031		3.75	%		19,645		3.75	%		19,634
Line of credit, due March 29, 2024		7.50	%		—		6.75	%		—

In 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 March 31, 2023 and December 31, 2022, there were $355,000 and $366,000, respectively, 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 minus 0.50%, 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 29, 2024. The line of credit had no outstanding balance at March 31, 2023 and December 31, 2022.

NOTE 7– 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 value for investment securities is determined by quoted market prices, if available (Level 1). 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 7 - FAIR VALUE (continued)

Loans Evaluated Individually: The Company does not record portfolio loans at fair value on a recurring basis. However, periodically, a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. If the collateral value is not sufficient, a specific reserve is recorded. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of unobservable inputs, fair values of individually evaluated collateral dependent loans have
been classified as Level 3.

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*
March 31, 2023
Securities:
Certificates of deposit	$	—	$	2,977	$	—	$	2,977
Municipal securities		—		227		—		227
U.S. Treasury Notes		122,365		—		—		122,365
U.S. government-sponsored agencies		—		39,739		—		39,739
Mortgage-backed securities – residential		—		3,781		—		3,781
Collateralized mortgage obligations – residential		—		1,150		—		1,150
	$	122,365	$	47,874	$	—	$	170,239
December 31, 2022
Securities:
Certificates of deposit	$	—	$	2,233	$	—	$	2,233
Municipal securities		—		225		—		225
U.S. Treasury Notes		163,103		—		—		163,103
U.S. government-sponsored agencies		—		39,699		—		39,699
Mortgage-backed securities – residential		—		3,881		—		3,881
Collateralized mortgage obligations – residential		—		1,197		—		1,197
	$	163,103	$	47,235	$	—	$	210,338

At March 31, 2023 and December 31, 2022, the Company had no individually evaluated loans that were measured using the fair value of the collateral for collateral–dependent loans and which had specific valuation allowances.

Foreclosed assets are carried at the lower of cost or fair value less costs to sell. At March 31, 2023 and December 31, 2022 there were no foreclosed assets with valuation allowances.

In January 2023, we completed the previously disclosed closings of our Hazel Crest and Naperville branches. At the time of transfer, we recorded a $553,000 valuation adjustment on bank premises held-for-sale.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - FAIR VALUE (continued)

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

			*Fair Value Measurements at March 31, 2023 Using:*
	*Carrying Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Cash and cash equivalents	$	77,005	$	76,432	$	573	$	—	$	77,005
Securities		170,239		122,365		47,874		—		170,239
Loans receivable, net of allowance for credit losses		1,225,288		—		—		1,185,493		1,185,493
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		8,316		304		477		7,535		8,316
Financial liabilities
Certificates of deposit		193,365		—		189,910		—		189,910
Borrowings		35,000		—		35,088		—		35,088
Subordinated notes		19,645		—		17,000		—		17,000

			*Fair Value Measurements at December 31, 2022 Using:*
	*Carrying Amount*		*Level 1*		*Level 2*		*Level 3*		*Total*
Financial assets
Cash and cash equivalents	$	66,771	$	65,967	$	804	$	—	$	66,771
Securities		210,338		163,103		47,235		—		210,338
Loans receivable, net of allowance for credit losses		1,226,743		—		—		1,198,616		1,198,616
FHLB and FRB stock		7,490		—		—		—		N /A
Accrued interest receivable		7,338		514		477		6,347		7,338
Financial liabilities
Certificates of deposit		186,524		—		182,398		—		182,398
Subordinated notes		19,634		—		17,800		—		17,800

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

While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – 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*
	*March 31,*
	*2023*			*2022*
Deposit service charges and fees	$	816		$	781
Loan servicing fees ⁽¹⁾		129			101
Trust and insurance commissions and annuities income		367			338
(Loss) earnings on bank-owned life insurance ⁽¹⁾		(84	)		28
Losses on sales of securities⁽¹⁾		(454	)		—
Valuation adjustment on bank premises held-for-sale⁽¹⁾		(553	)		—
Other ⁽¹⁾		92			196
Total noninterest income	$	313		$	1,444

⁽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 $334,000 and $360,000 for the three months ended March 31, 2023 and 2022, 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 months ended March 31, 2023 and 2022 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. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, expenses, 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,” “continue,” “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) the impact of re-pricing and competitors’ pricing initiatives on loan and deposit products; (ii) interest rate movements and their impact on the economy, customer behavior and our net interest margin; (iii) changes in U.S. Government or State Government budgets, appropriations or funding allocation policies or practices affecting our credit exposures to U.S. Government or State governments, agencies or related entities, or borrowers dependent on the receipt of Federal or State appropriations, including but not limited to, defense, healthcare, transportation, education and law enforcement programs; (iv) less than anticipated loan and lease growth; (v) effects of the adoption of the Financial Accounting Standards Board's (FASB) Accounting Standards Codification Topic 326: Measurement of Credit Losses on Financial Instruments (“ASC 326”) on the Bank’s allowance for credit losses due to the operation of the underlying model; (vi) for any significant credit exposure, borrower-specific adverse developments with respect to the adequacy of cash flows, liquidity or collateral; (vii) the inherent credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs; (viii) adverse economic conditions in general, or specific events such as a pandemic or national or international war, act of conflict 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; (ix) declines in real estate values that adversely impact the value of our loan collateral, other real estate owned ("OREO"), asset dispositions and the level of borrower equity in their investments; (x) 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 credit losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (xi) changes, disruptions or illiquidity in national or global financial markets; (xii) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; (xiii) factors affecting our ability to retain or access deposits or cost-effective funding, including changes in public confidence, withdrawals of deposits not insured by the FDIC or the availability of other borrowing sources for any reason; (xiv) legislative or regulatory changes that have an adverse impact on our products, services, operations and operating expenses; (xv) higher federal deposit insurance premiums; (xvi) higher than expected overhead, infrastructure and compliance costs; (xvii) changes in accounting principles, policies or guidelines; (xviii) the effects of any federal government shutdown or failure to enact legislation related to the maximum permitted amount of U.S. Government debt obligations; and (xix) 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, 2022, 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, 2022, as filed with the SEC.

Overview

We reported net income of $2.6 million, or $0.21 per common share for the quarter ended March 31, 2023. At March 31, 2023, the Company had total assets of $1.544 billion, total loans of $1.225 billion, total deposits of $1.315 billion and stockholders' equity of $152.4 million.

Total net loans were stable during the quarter ended March 31, 2023. Total commercial loans and leases decreased by $8.8 million as a $21.6 million decline in equipment finance balances was partially offset by a $12.7 million increase in commercial loans and line of credit balances. Multi-family mortgage and nonresidential real estate loans increased by $10.9 million due to reduced loan prepayment activity during the first quarter of 2023.

Yields on loan originations were 8.67% in the first quarter of 2023, compared to 6.88% in the fourth quarter of 2022, reflecting the growth in commercial finance balances and higher yields on variable-rate lines of credit due to the increase in the Wall Street Journal Prime Rate.

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Cash and interest-bearing deposits totaled $77.0 million as of March 31, 2023, compared to $66.8 million as of December 31, 2022. To provide additional liquidity during a period in which public confidence in the banking industry was uncertain, we sold $43.1 million in U.S. Government Treasury notes in March 2023 at a loss of $454,000. At March 31, 2023, the investment securities portfolio totaled $170.2 million, with an average duration of 1.34 years.

Total deposits were $1.315 billion as of March 31, 2023, a decrease of $59.7 million (4.3%) compared to December 31, 2022. Total FDIC-insured or collateralized public-funds deposits represented 84% of total deposits as of March 31, 2023. The decrease in deposits during the first quarter of 2023 was primarily due to an $18.1 million seasonal decline in balances involving collateralized public funds / tax collection depositors (compared to a $15.1 million seasonal decline in the first quarter of 2022), $19.8 million in disbursements from estate, trust, and family office accounts, $10.9 million in funds transferred from deposit accounts to our Trust Department and approximately $12.5 million in withdrawals from retail accounts due to increased rate competition for retail money market and certificate of deposit accounts.

Total borrowings increased by $35.0 million during the first quarter of 2023. To maintain appropriate asset-liability matching on new Equipment Finance and Nonresidential Real Estate loan originations during the first quarter of 2023, we borrowed $25.0 million in Federal Home Loan Bank term advances with a weighted-average duration of 30 months at a gross interest rate of 4.25% during March 2023.

Net interest income increased by $2.7 million during the quarter ended March 31, 2023, due to higher yields on loans, investment securities and deposits held in other financial institutions. Our net interest margin was 3.66% as of March 31, 2023, compared to 3.59% as of December 31, 2022.

Noninterest income declined by $1.1 million during the quarter ended March 31, 2023. Deposit services and trust/insurance income increased modestly during the first quarter of 2023. In January 2023 we completed the previously announced closings of our Hazel Crest and Naperville branches. During the first quarter of 2023, we recorded a total valuation adjustment of $553,000 based on the pending offers and valuations for these locations. In addition, as noted above, we recorded $454,000 of losses on the sales of investment securities. The combined effect of the investment portfolio sales activity and the valuation adjustment related to the branch office closure activity reduced noninterest income by $0.06 per share on an after-tax basis.

Noninterest expense remained stable. Compensation and benefits increased by $189,000 compared to the fourth quarter of 2022 due to $239,000 of seasonally-higher payroll tax expense. The increase in compensation expense was partially offset by decreases in information technology and other expenses.

The Company’s ratio of nonperforming loans to total loans increased to 0.72% as of March 31, 2023, compared to 0.13% as of December 31, 2022. In February 2023, we received notice that the timely repayment of a U.S. Government finance transaction may be disrupted. The government equipment finance transaction, with an aggregate principal balance of $8.4 million as of March 31, 2023, was placed on nonaccrual status pending the required federal contract claim process. Our allowance for credit losses increased to 0.81% of total loans as of March 31, 2023 due to a $1.9 million increase in the allowance related to the adoption of ASC 326 and a $85,000 provision in the allowance for credit losses - loans for the first quarter of 2023.

The Company’s capital position remained strong, with a Tier 1 leverage ratio of 10.03% as of March 31, 2023. The Company recorded a net reduction of retained earnings of $1.7 million upon adoption of ASC 326. The Company repurchased 48,604 of its common shares during the quarter ended March 31, 2023. The Company’s tangible book value per common share increased to $12.00 per share as of March 31, 2023.

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SELECTED FINANCIAL DATA

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

	March 31, 2023		December 31, 2022		Change
	(In thousands)
Selected Financial Condition Data:
Total assets	$	1,544,110	$	1,575,442	$	(31,332	)
Loans, net		1,225,288		1,226,743		(1,455	)
Securities, at fair value		170,239		210,338		(40,099	)
Deposits		1,315,214		1,374,934		(59,720	)
Borrowings		35,000		—		35,000
Subordinated notes, net of unamortized issuance costs		19,645		19,634		11
Equity		152,359		151,671		688

	Three Months Ended
	March 31,
	2023		2022		$ Change
	(In thousands)
Selected Operating Data:
Interest income	$	16,160	$	11,418	$	4,742
Interest expense		2,660		643		2,017
Net interest income		13,500		10,775		2,725
Provision for credit losses		48		276		(228	)
Net interest income after provision for credit losses		13,452		10,499		2,953
Noninterest income		313		1,444		(1,131	)
Noninterest expense		10,292		10,289		3
Income before income taxes		3,473		1,654		1,819
Income tax expense		840		386		454
Net income	$	2,633	$	1,268	$	1,365

	Three Months Ended
	March 31,
	2023			2022
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) ⁽¹⁾		0.68	%		0.30	%
Return on equity (ratio of net income to average equity) ⁽¹⁾		6.96			3.24
Average equity to average assets		9.75			9.39
Net interest rate spread ^{(1) (2)}		3.41			2.66
Net interest margin ^{(1) (3)}		3.66			2.73
Efficiency ratio ⁽⁴⁾		74.51			84.20
Noninterest expense to average total assets ⁽¹⁾		2.65			2.47
Average interest-earning assets to average interest-bearing liabilities		135.85			139.03
Dividends declared per share	$	0.10		$	0.10
Dividend payout ratio		48.36	%		104.33	%

	At March 31, 2023			At December 31, 2022
Asset Quality Ratios:
Nonperforming assets to total assets ⁽⁵⁾		0.66	%		0.13	%
Nonperforming loans to total loans		0.72			0.13
Allowance for credit losses to nonperforming loans		113.20			494.16
Allowance for credit losses to total loans		0.81			0.66
Capital Ratios:
Equity to total assets at end of period		9.87	%		9.63	%
Tier 1 leverage ratio (Bank only)		10.52	%		10.31	%
Other Data:
Number of full-service offices		18			20
Employees (full-time equivalents)		202			203

⁽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.

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Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets decreased $31.3 million, or 2.0%, to $1.544 billion at March 31, 2023, from $1.575 billion at December 31, 2022. The decrease in total assets was primarily due to decreases in securities and loans receivable, partially offset by an increase in cash and cash equivalents. Securities decreased $40.1 million to $170.2 million, due to the sale of $43.1 million of U.S. Treasury Notes. Cash and cash equivalents increased $10.2 million to $77.0 million at March 31, 2023, from $66.8 million at December 31, 2022.

Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, and commercial loans and leases), which together totaled 98.1% of gross loans at March 31, 2023. During the three months ended March 31, 2023, multi-family loans increased by $7.3 million, or 1.4%, nonresidential real estate loans increased by $3.7 million, or 3.1%, and commercial loans and leases decreased by $8.8 million, or 1.6%. The increase in multi-family loans was due to $17.1 million of originations, partially offset by payments and payoffs of $10.2 million. The decrease in commercial loans and leases was primarily due to decreases in government, corporate and middle market leases of $8.6 million, $8.9 million and $5.1 million, respectively.

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 March 31, 2023, $317.6 million (58.5%), of our multi-family mortgage loans were in the Chicago, Illinois Metropolitan Statistical Area; $75.7 million (14.0%), were in Texas; $72.0 million (13.3%), were in Florida and $28.5 million (5.2%), were in North Carolina. This information reflects the location of the collateral for the loan and does not necessarily reflect the location of the borrowers. At March 31, 2023, our concentration within the nonresidential real estate portfolio was retail shopping malls of $53.1 million (43.1%); industrial of $16.7 million (13.6%); office buildings of $16.2 million (13.2%); mixed use buildings of $14.0 million (11.4%), and single tenant commercial properties of $6.5 million (5.3%).

Total liabilities decreased $32.0 million, or 2.2%, to $1.392 billion at March 31, 2023, from $1.424 billion at December 31, 2022, due to a decrease in total deposits, partially offset by the increase in borrowings. Total deposits decreased $59.7 million, or 4.3%, to $1.315 billion at March 31, 2023, from $1.375 billion at December 31, 2022. Interest-bearing NOW accounts decreased $40.0 million, or 10.0%, to $360.4 million at March 31, 2023, from $400.4 million at December 31, 2022. Money market accounts decreased $29.6 million, or 9.8%, to $273.3 million at March 31, 2023, from $302.9 million at December 31, 2022. Savings accounts decreased $3.8 million, or 1.9%, to $200.7 million at March 31, 2023, from $204.5 million at December 31, 2022. Noninterest-bearing demand deposits increased $6.9 million, or 2.4%, to $287.5 million at March 31, 2023, from $280.6 million at December 31, 2022. Retail certificates of deposit increased $6.6 million, or 3.5%, to $193.1 million at March 31, 2023, from $186.5 million at December 31, 2022. Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) represented 85.3% of total deposits at March 31, 2023, compared to 86.4% at December 31, 2022.

Total stockholders’ equity was $152.4 million at March 31, 2023, compared to $151.7 million at December 31, 2022. The increase in total stockholders’ equity was primarily due to the net income of $2.6 million for the three months ended March 31, 2023 and a $1.5 million increase, net of tax, of accumulated other comprehensive loss on our securities portfolio, partially offset by our repurchase of 48,604 shares of our common stock during the three months ended March 31, 2023 at a total cost of $502,000, our declaration and payment of cash dividends totaling $1.3 million during the same period, and the one-time recording of a cumulative effect of change in accounting principle with the adoption of ASC 326 of $1.7 million on January 1, 2023.

Operating Results for the Three Months Ended March 31, 2023 and 2022

Net Income. Net income was $2.6 million for the three months ended March 31, 2023, compared to $1.3 million for the three months ended March 31, 2022. Earnings per basic and fully diluted share of common stock were $0.21 for the three months ended March 31, 2023, compared to $0.10 for the three months ended March 31, 2022.

Net Interest Income. Net interest income was $13.5 million for the three months ended March 31, 2023, and $10.8 million for the three months ended March 31, 2022. Net interest income increased $2.7 million, primarily due to a $4.7 million increase in interest income.

The increase in net interest income was due in substantial part to the increase in the weighted average yield on interest-earning assets. The yield on interest-earning assets increased 150 basis points to 4.39% for the three months ended March 31, 2023, from 2.89% for the three months ended March 31, 2022. The cost of interest-bearing liabilities increased 75 basis points to 0.98% for the three months ended March 31, 2023, from 0.23% for the three months ended March 31, 2022. Total average interest-earning assets decreased $106.8 million, or 6.7%, to $1.494 billion for the three months ended March 31, 2023, from $1.601 billion for the same period in 2022. Total average interest-bearing liabilities decreased $51.6 million, or 4.5%, to $1.100 billion for the three months ended March 31, 2023, from $1.152 billion for the same period in 2022. The decrease in interest-bearing liabilities is partially attributable to the decrease in deposits of $60.6 million, partially offset by the increase in FHLB advances in the first quarter of 2023. Our net interest rate spread increased by 75 basis points to 3.41% for the three months ended March 31, 2023, from 2.66% for the same period in 2022, due primarily to an increase in the yield on loans receivable, securities and interest-bearing deposits in other financial institutions. Our net interest margin increased by 93 basis points to 3.66% for the three months ended March 31, 2023, from 2.73% for the same period in 2022, due to an increase in the yield on interest-earning assets.

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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, however, the Company believes that the effect of these inclusions is not material.

	For the Three Months Ended March 31,
	2023								2022
	Average Outstanding Balance			Interest		Yield/Rate (1)			Average Outstanding Balance			Interest		Yield/Rate (1)
	(Dollars in thousands)
Interest-earning Assets:
Loans	$	1,225,636		$	14,393		4.76	%	$	1,050,668		$	10,813		4.17	%
Securities		212,344			1,114		2.13			116,360			299		1.04
Stock in FHLB and FRB		7,490			92		4.98			7,490			85		4.60
Other		48,778			561		4.66			426,522			221		0.21
Total interest-earning assets		1,494,248			16,160		4.39			1,601,040			11,418		2.89
Noninterest-earning assets		59,197								65,046
Total assets	$	1,553,445							$	1,666,086
Interest-bearing Liabilities:
Savings deposits	$	203,547			90		0.18		$	204,080			31		0.06
Money market accounts		288,195			836		1.18			328,546			115		0.14
NOW accounts		386,509			679		0.71			390,313			132		0.14
Certificates of deposit		188,070			695		1.50			204,030			167		0.33
Total deposits		1,066,321			2,300		0.87			1,126,969			445		0.16
Borrowings and Subordinated notes		33,629			360		4.34			24,595			198		3.26
Total interest-bearing liabilities		1,099,950			2,660		0.98			1,151,564			643		0.23
Noninterest-bearing deposits		273,771								335,385
Noninterest-bearing liabilities		28,307								22,645
Total liabilities		1,402,028								1,509,594
Equity		151,417								156,492
Total liabilities and equity	$	1,553,445							$	1,666,086
Net interest income				$	13,500							$	10,775
Net interest rate spread ⁽²⁾							3.41	%							2.66	%
Net interest-earning assets ⁽³⁾	$	394,298							$	449,476
Net interest margin ⁽⁴⁾							3.66	%							2.73	%
Ratio of interest-earning assets to interest-bearing liabilities		135.85	%							139.03	%

⁽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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Allowance and Provision for Credit Losses

The ACL is a significant estimate in our unaudited consolidated financial statements, affecting both earnings and capital. The methodology adopted influences, and is influenced by, the Bank’s overall credit risk management processes. The ACL is recorded in accordance with US GAAP to provide an adequate reserve for expected credit losses that is reflective of management’s best estimate of what is expected to be collected. All estimates of credit losses should be based on a careful consideration of all significant factors affecting the collectability as of the evaluation date. The ACL is established through the provision for credit loss expense charged to income.

The provision for credit losses - loans for the three months ended March 31, 2023 was $85,000, compared to $276,000 for the corresponding period in 2022. The Company adopted the ASC 326 on January 1, 2023, and recorded a one-time increase of $1.9 million for the change in accounting principle with the adoption. The provision for credit losses - loans varies based primarily on forecasted unemployment rates, loan growth, net charge-offs, collateral values associated with collateral dependent loans and qualitative factors.

There were no reserves established for loans individually evaluated at March 31, 2023 or December 31, 2022. Net charge-offs were $89,000 for the three months ended March 31, 2023, compared to net charge-offs of $205,000 for the three months ended March 31, 2022.

The allowance for credit losses as a percentage of nonperforming loans was 113.20% at March 31, 2023, compared to 494.16% at December 31, 2022.

Noninterest Income

	Three Months Ended
	March 31,
	2023			2022		Change
	(Dollars in thousands)
Deposit service charges and fees	$	816		$	781	$	35
Loan servicing fees		129			101		28
Trust and insurance commissions and annuities income		367			338		29
(Loss) earnings on bank-owned life insurance		(84	)		28		(112	)
Losses on sales of securities		(454	)		—		(454	)
Valuation adjustment on bank premises held-for-sale		(553	)		—		(553	)
Other		92			196		(104	)
	$	313		$	1,444	$	(1,131	)

Noninterest income decreased $1.1 million, or 78.3%, to $313,000, for the three months ended March 31, 2023, compared to $1.4 million for the same period in 2022, due to the sales of investment securities at a loss to improve liquidity and a valuation adjustment that we recorded on two retail branches that we closed in January 2023 to improve operating efficiency. We recorded $454,000 of losses on sales of securities for the three months ended March 31, 2023; we also recorded a valuation adjustment of $553,000 for the three months ended March 31, 2023, at the time of transfer of two of our retail branches to premises held-for sale.

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Noninterest Expense

	Three Months Ended
	March 31,
	2023		2022		Change
	(Dollars in thousands)
Compensation and benefits	$	5,555	$	5,480	$	75
Office occupancy and equipment		2,038		2,134		(96	)
Advertising and public relations		190		142		48
Information technology		849		851		(2	)
Professional fees		317		373		(56	)
Supplies, telephone and postage		359		347		12
FDIC insurance premiums		154		116		38
Other		830		846		(16	)
Total noninterest expense	$	10,292	$	10,289	$	3

Noninterest expense remained at $10.3 million for the three months ended March 31, 2023 and 2022. Compensation and benefits increased $75,000, or 1.4%, to $5.6 million for the three months ended March 31, 2023, from $5.5 million for the same period in 2022.

Income Taxes

We recorded income tax expense of $840,000 for the three months ended March 31, 2023, compared to $386,000 for the three months ended March 31, 2022. Our combined state and federal effective tax rate for the three months ended March 31, 2023 was 24.2%, compared to 23.3% for the three months ended March 31, 2022.

Criticized and Classified Assets

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 as to credit risk. Risk ratings are updated any time the situation warrants. The following table sets forth the criticized and classified loans:

	March 31, 2023		December 31, 2022		Quarter Change
	(Dollars in thousands)
Criticized - Special Mention:
One-to-four family residential real estate	$	16	$	4	$	12
Commercial loans and leases:
Asset-based and factored receivables		348		873		(525	)
Commercial loans and leases - Equipment finance:
Government		10,468		—		10,468
Corporate - Other		582		644		(62	)
Consumer		5		4		1
	$	11,419	$	1,525	$	9,894

Classified - Performing Substandard:
One-to-four family residential real estate	$	280	$	327	$	(47	)
Multi-family mortgage		148		—		148
Commercial loans and leases:
Asset-based and factored receivables		3,748		3,815		(67	)
Commercial loans and leases - Equipment finance:
Government		52		52		—
Corporate - Investment-rated		—		130		(130	)
Corporate - Other		46		44		2
Consumer		5		4		1
	$	4,279	$	4,372	$	(93	)

In February 2023, we received an informal notice of non-renewal of a contract securing the repayment of a software financing transaction in its commercial loan and leasing portfolio with a U.S. Government agency. The transaction had an aggregate principal balance of $10.5 million as of December 31, 2022 with a payment due date of March 25, 2023. We are currently waiting for either an official notification of renewal, or a formal letter of non-renewal pursuant to the underlying federal government contract, from the contracting officer. Given the uncertainty of the receipt of timely payment, we assigned a “Special Mention” credit rating as of March 31, 2023.

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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 March 31, 2023, we had no loans in this category.

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

	March 31, 2023			December 31, 2022			Quarter Change
	(Dollars in thousands)
Nonaccrual loans:
One-to-four family residential real estate	$	55		$	92		$	(37	)
Commercial loans and leases - Equipment finance:
Government		8,420			—			8,420
Corporate - Investment-rated		3			—			3
Corporate - Other		—			331			(331	)
Middle market		306			891			(585	)
Small ticket		78			88			(10	)
Consumer		—			5			(5	)
		8,862			1,407			7,455
Loans past due over 90 days, still accruing		—			238			(238	)

Foreclosed assets:
Foreclosed assets		472			472			—
Other foreclosed assets		921			4			917
		1,393			476			917

Total nonperforming assets	$	10,255		$	2,121		$	8,134

Ratios:
Allowance for credit losses to total loans		0.81	%		0.66	%
Allowance for credit losses to nonperforming loans		113.20			494.16
Nonperforming loans to total loans		0.72			0.13
Nonperforming assets to total assets		0.66			0.13
Nonaccrual loans to total loans		0.72			0.11
Nonaccrual loans to total assets		0.57			0.09

Nonperforming Assets

Nonperforming assets increased $8.1 million to $10.3 million at March 31, 2023 from $2.1 million at December 31, 2022. Vehicles and small construction equipment collateral repossessed in connection with equipment finance leases were transferred from nonaccrual loans to other foreclosed assets during the three months ended March 31, 2023.

In February 2023, we received a formal notice of non-renewal of a contract securing the repayment of a software financing transaction in its commercial loan and leases portfolio with a U.S. Government military department. The transaction had an aggregate principal balance of $8.4 million as of December 31, 2022. We reviewed the financing transaction with outside counsel with experience in enforcing U.S. government contracts and related claims. Based on counsel’s evaluation, we believe that we have meritorious claims for recovery of the contract amounts due under the federal Contract Disputes Act. In addition, depending on the specific circumstances, there may also be additional claims for recovery from the prime contractor and software vendor. Accordingly, there was no provision made for an allowance for credit losses as of March 31, 2023; however, due to the formal confirmation of non-renewal of the federal contract and the expected duration of the claims process, we placed the credit exposure on nonaccrual status as of March 31, 2023.

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Liquidity and Capital Resources

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

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, the sales of loans and securities and lease payments. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize FHLB advances as an additional source of funds. We had $35.0 million of FHLB advances outstanding at March 31, 2023 and none at December 31, 2022, respectively.

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 2021, at a rate of 3.75% maturing on May 15, 2031. At March 31, 2023, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $11.8 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 the Prime rate minus 0.50%. The line of credit has been extended since its original maturity date and the current maturity date is March 29, 2024. The line of credit had no outstanding balance at March 31, 2023.

As of March 31, 2023, 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 March 31, 2023, 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 regulation, 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 net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

The federal banking agencies have 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%. A banking organization that had a leverage ratio of 9% or greater and met certain other criteria could elect to use the Community Bank Leverage Ratio framework. 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 March 31, 2023, the Bank's Community Bank Leverage Ratio was 10.52%.

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 Policies that target a Tier 1 leverage ratio of at least 7.5% and a total risk-based capital ratio of at least 10.5% at the Bank. The minimum capital ratios set forth in the Regulatory Capital Policies will be increased and other minimum capital requirements will be established if and as necessary. In accordance with the Regulatory Capital Policies, 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 targeted 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 March 31, 2023 the Bank was well-capitalized under the regulatory framework for prompt corrective action. 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)
March 31, 2023
Community Bank Leverage Ratio	$	163,249		10.52	%	$	139,676		9.00	%

December 31, 2022
Community Bank Leverage Ratio	$	165,252		10.31	%	$	144,288		9.00	%

Quarterly Cash Dividends. The Company declared cash dividends of $0.10 per share for each of the three months ended March 31, 2023 and March 31, 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest rate risk, we have de-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, 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.

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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 March 31, 2023, 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	$	(38,947	)		(16.49	)%	$	1,815			3.18	%
+300		(22,132	)		(9.37	)		1,467			2.57
+200		(8,562	)		(3.62	)		1,133			1.98
+100		(2,224	)		(0.94	)		705			1.23
0
-100		1,306			0.55			127			0.22
-200		(8,463	)		(3.58	)		(1,171	)		(2.05	)
-300		(26,832	)		(11.36	)		(3,710	)		(6.50	)
-400		(48,705	)		(20.62	)		(6,661	)		(11.67	)

The table set forth above indicates that at March 31, 2023, in the event of an immediate 200 basis point decrease in interest rates, the Bank would be expected to experience a 3.58% decrease in NPV and a $1.2 million 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 3.62% decrease in NPV and a $1.1 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 March 31, 2023. Based on that evaluation, the Company’s management, including the Chairman, Chief Executive Officer, and President and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2023, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Our financial condition, results of operation and stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions.

Recently, certain large financial institutions with extremely high concentrations of uninsured customer deposits were closed and resolved by state and federal regulatory authorities. These bank failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions. These events have led to a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of its deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. Notwithstanding our efforts to promote deposit insurance coverage with our customers and otherwise effectively manage our liquidity, deposit portfolio retention and other related matters, our financial condition, results of operation and stock price may be adversely affected by future negative events within the banking sector and adverse customer or investor responses to such events.

Material adverse changes to our deposit portfolio could adversely affect our financial condition and results of operation, and result in regulatory limits being placed upon us.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also receive funds from loan repayments, investment maturities and income on other interest-earning assets. While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area. Additionally, deposit balances can decrease if customers perceive alternative investments as providing a better risk/return tradeoff. Accordingly, as a part of our liquidity management, we maintain a number of secondary funding sources in addition to deposits and repayments and maturities of loans and investments. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources.

If we are ever required to rely more heavily on more expensive funding sources to support our liquidity requirements, our revenues may not increase proportionately to cover our increased costs. In this case, our operating margins and profitability would be adversely affected. Any decline in our present primary or secondary funding sources could adversely impact our ability to originate loans, invest in securities, pay our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our financial condition, results of operations, business strategy and stock price.

Our investment securities portfolio and our loan and lease portfolio include securities, loans and asset financing agreements issued or guaranteed by, or extended to, the U.S. Government, State Governments, local governments or related entities, private healthcare providers and non-profit entities, and the repayment of these credit exposures is largely dependent upon the receipt of cash payments from government programs. Consequently, the failure to address the federal debt ceiling in a timely manner, or any other interruption in the availability of funds to pay obligations by these government entities, could have a negative effect on our financial condition, results of operations, liquidity and stock price.

The repayment of these credit exposures is largely dependent on the receipt of payments and reimbursements from the U.S Government, U.S Government agencies and individual state government programs, including Medicaid, Medicare and state-level assistance programs. As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments or obligations directly or indirectly issued, guaranteed or reimbursed by the federal government pose credit default and liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investment securities, loans or leases may occur. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities and could result in our counterparties requiring additional collateral for our borrowings.

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In addition, changes to federal budgets related to federal debt ceiling restrictions may also affect the repayment of credit exposures reliant upon federal budgets and appropriations. The ability of the U.S. Government, U.S. Government agencies or State governments to timely pay obligations, perform on current contracts or exercise contract options may be reduced or eliminated by changes to the federal budget for the current or future fiscal years. The ability of borrowers to service loans we have made to them may be adversely impacted by the financial ability of the U.S Government, individual state governments or local governments to make direct reimbursement payments, or, via managed healthcare organizations operating under agreements with the federal government or individual states, to make indirect reimbursements for the services provided. The failure of a direct or indirect payor to make payments to a contractor, subcontractor or provider, or a significant delay in the making of such reimbursements, could adversely affect the ability of the operators of these facilities to repay their obligations to us.

Furthermore, some of our retail deposit customers receive Social Security, U.S. Government pension and other federal transfer payments. Any interruption of the timely remittance and receipt of such payments by our depositors could result in a decrease in our deposit portfolio balances and an increase in our liquidity requirements.

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

Unregistered Sale of Equity Securities. Not applicable.


	(b)	Use of Proceeds. Not applicable.


	(c)	Repurchases of Equity Securities.

The following table sets forth information in connection with purchases of our common stock made by, or on behalf of us, during the first quarter of 2023.

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
January 1, 2023 through January 31, 2023		—	$	—		—		264,112
February 1, 2023 through February 28, 2023		48,604		10.32		48,604		215,508
March 1, 2023 through March 31, 2023		—		-		—		215,508
		48,604		.		48,604

As of March 31, 2023, the Company had repurchased 7,852,263 shares of its common stock out of the 8,067,771 shares of common stock authorized under the current share repurchase authorization. On January 26, 2023, we extended the expiration date of the share repurchase authorization from April 28, 2023 to July 15, 2023, and increased the total number of shares currently authorized for repurchase under the Share Repurchase Program to 264,112 shares. On April 27, 2023, we extended the expiration date of the share repurchase authorization from July 15, 2023 to January 15, 2024. Pursuant to the current share repurchase authorization, there were 215,508 shares of common stock authorized for repurchase as of March 31, 2023.

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		Exhibit Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101		The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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:	May 2, 2023	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