BANKFINANCIAL CORPORATION 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 ofBankFinancial 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 inU.S. Government or State Government budgets, appropriations or funding allocation policies or practices affecting our credit exposures toU.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 theFinancial 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 theU.S. Government , including policies of theU.S. Treasury and theFederal 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 theFDIC 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 ofU.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 endedDecember 31, 2022 , as well as Part II, Items 1A of our subsequent Quarterly Reports on Form 10-Q, and other filings we make with theSEC , 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 endedDecember 31, 2022 , as filed with theSEC . Overview
We reported net income of
Total net loans were stable during the quarter endedMarch 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. 22
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Table of Contents Cash and interest-bearing deposits totaled$77.0 million as ofMarch 31, 2023 , compared to$66.8 million as ofDecember 31, 2022 . To provide additional liquidity during a period in which public confidence in the banking industry was uncertain, we sold$43.1 million inU.S. GovernmentTreasury notes inMarch 2023 at a loss of$454,000 . AtMarch 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 ofMarch 31, 2023 , a decrease of$59.7 million (4.3%) compared toDecember 31, 2022 . TotalFDIC -insured or collateralized public-funds deposits represented 84% of total deposits as ofMarch 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 andNonresidential Real Estate loan originations during the first quarter of 2023, we borrowed$25.0 million inFederal Home Loan Bank term advances with a weighted-average duration of 30 months at a gross interest rate of 4.25% duringMarch 2023 . Net interest income increased by$2.7 million during the quarter endedMarch 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 ofMarch 31, 2023 , compared to 3.59% as ofDecember 31, 2022 . Noninterest income declined by$1.1 million during the quarter endedMarch 31, 2023 . Deposit services and trust/insurance income increased modestly during the first quarter of 2023. InJanuary 2023 we completed the previously announced closings of ourHazel 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 ofMarch 31, 2023 , compared to 0.13% as ofDecember 31, 2022 . InFebruary 2023 , we received notice that the timely repayment of aU.S. Government finance transaction may be disrupted. The government equipment finance transaction, with an aggregate principal balance of$8.4 million as ofMarch 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 ofMarch 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 ofMarch 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 endedMarch 31, 2023 . The Company's tangible book value per common share increased to$12.00 per share as ofMarch 31, 2023 . 23
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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.
December 31,
March 31, 2023 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
Total assets decreased$31.3 million , or 2.0%, to$1.544 billion atMarch 31, 2023 , from$1.575 billion atDecember 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 ofU.S. Treasury Notes. Cash and cash equivalents increased$10.2 million to$77.0 million atMarch 31, 2023 , from$66.8 million atDecember 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 atMarch 31, 2023 . During the three months endedMarch 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 theState 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. AtMarch 31, 2023 ,$317.6 million (58.5%), of our multi-family mortgage loans were in theChicago, Illinois Metropolitan Statistical Area;$75.7 million (14.0%), were inTexas ;$72.0 million (13.3%), were inFlorida and$28.5 million (5.2%), were inNorth Carolina . This information reflects the location of the collateral for the loan and does not necessarily reflect the location of the borrowers. AtMarch 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 atMarch 31, 2023 , from$1.424 billion atDecember 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 atMarch 31, 2023 , from$1.375 billion atDecember 31, 2022 . Interest-bearing NOW accounts decreased$40.0 million , or 10.0%, to$360.4 million atMarch 31, 2023 , from$400.4 million atDecember 31, 2022 . Money market accounts decreased$29.6 million , or 9.8%, to$273.3 million atMarch 31, 2023 , from$302.9 million atDecember 31, 2022 . Savings accounts decreased$3.8 million , or 1.9%, to$200.7 million atMarch 31, 2023 , from$204.5 million atDecember 31, 2022 . Noninterest-bearing demand deposits increased$6.9 million , or 2.4%, to$287.5 million atMarch 31, 2023 , from$280.6 million atDecember 31, 2022 . Retail certificates of deposit increased$6.6 million , or 3.5%, to$193.1 million atMarch 31, 2023 , from$186.5 million atDecember 31, 2022 . Core deposits (which consists of savings, money market, noninterest-bearing demand and NOW accounts) represented 85.3% of total deposits atMarch 31, 2023 , compared to 86.4% atDecember 31, 2022 . Total stockholders' equity was$152.4 million atMarch 31, 2023 , compared to$151.7 million atDecember 31, 2022 . The increase in total stockholders' equity was primarily due to the net income of$2.6 million for the three months endedMarch 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 endedMarch 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 onJanuary 1, 2023 .
Operating Results for the Three Months Ended
Net Income. Net income was$2.6 million for the three months endedMarch 31, 2023 , compared to$1.3 million for the three months endedMarch 31, 2022 . Earnings per basic and fully diluted share of common stock were$0.21 for the three months endedMarch 31, 2023 , compared to$0.10 for the three months endedMarch 31, 2022 . Net Interest Income. Net interest income was$13.5 million for the three months endedMarch 31, 2023 , and$10.8 million for the three months endedMarch 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 endedMarch 31, 2023 , from 2.89% for the three months endedMarch 31, 2022 . The cost of interest-bearing liabilities increased 75 basis points to 0.98% for the three months endedMarch 31, 2023 , from 0.23% for the three months endedMarch 31, 2022 . Total average interest-earning assets decreased$106.8 million , or 6.7%, to$1.494 billion for the three months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2023 , from 2.73% for the same period in 2022, due to an increase in the yield on interest-earning assets. 25
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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
2023 2022
Average Average
Outstanding Outstanding
Balance Interest Yield/Rate (1) 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 endedMarch 31, 2023 was$85,000 , compared to$276,000 for the corresponding period in 2022. The Company adopted the ASC 326 onJanuary 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 atMarch 31, 2023 orDecember 31, 2022 . Net charge-offs were$89,000 for the three months endedMarch 31, 2023 , compared to net charge-offs of$205,000 for the three months endedMarch 31, 2022 .
The allowance for credit losses as a percentage of nonperforming loans
was 113.20% at
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
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:
December 31 ,
March 31, 2023 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. AtMarch 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:
December 31,
March 31, 2023 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 atMarch 31, 2023 from$2.1 million atDecember 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 endedMarch 31, 2023 . InFebruary 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 aU.S. Government military department. The transaction had an aggregate principal balance of$8.4 million as ofDecember 31, 2022 . We reviewed the financing transaction with outside counsel with experience in enforcingU.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 ofMarch 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 ofMarch 31, 2023 . 29
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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 atMarch 31, 2023 and none atDecember 31, 2022 , respectively. The Company is a separate legal entity fromBankFinancial, 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 onMay 15, 2031 . AtMarch 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 isMarch 29, 2024 . The line of credit had no outstanding balance atMarch 31, 2023 .
As of
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 newCommunity 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 ofMarch 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. 30
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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:
Required for Capital Adequacy
Actual 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
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