BankFinancial(BFIN) - 2024 Q4 - Annual Report

Part I Business Overview BankFinancial Corporation operates as a bank holding company through its subsidiary, BankFinancial, National Association, providing a full range of financial services primarily in the Chicago metropolitan area with specialized commercial finance activities conducted regionally or nationally - BankFinancial Corporation is a holding company for BankFinancial, National Association, a full-service national bank headquartered in Burr Ridge, Illinois[23][25] - The company operates as a single unit, with consolidated results used for strategic decisions[24] - The Bank's lending activities are concentrated in the Chicago metropolitan area, with specialized commercial finance divisions operating regionally or nationally[28] Lending Activities As of December 31, 2024, the company's gross loan portfolio totaled $895.2 million, heavily concentrated in commercial-type loans, with multi-family residential real estate, nonresidential real estate, and commercial loans and leases representing 98.2% of the total Loan Portfolio Composition at December 31, 2024 | Loan Category | Amount (in millions) | Percentage of Gross Portfolio | | :--- | :--- | :--- | | Multi-family residential real estate | $522.0 | 58.3% | | Commercial loans and leases | $248.6 | 27.8% | | Nonresidential real estate | $108.2 | 12.1% | | One-to-four family residential real estate | $14.8 | 1.7% | | Total Gross Loans | $895.2 | 100.0% | Deposit Activities At December 31, 2024, total deposits were $1.218 billion, primarily composed of interest-bearing accounts (80.4%) and core deposits (61.1%), with noninterest-bearing demand deposits at 19.6% Deposit Composition at December 31, 2024 | Deposit Category | Amount (in billions) | Percentage of Total Deposits | | :--- | :--- | :--- | | Total Deposits | $1.218 | 100.0% | | Interest-bearing deposits | $0.979 | 80.4% | | Noninterest-bearing demand deposits | $0.239 | 19.6% | | Savings, money market and NOW accounts | $0.744 | 61.1% | | Certificates of deposit | $0.235 | 19.3% | Supervision and Regulation The Bank is primarily regulated by the OCC and the holding company by the Federal Reserve, adhering to strict capital requirements and maintaining an 'Outstanding' CRA rating, while navigating new FDIC special assessments - The Bank is primarily regulated by the OCC, while the holding company is supervised by the Federal Reserve Board (FRB)[40][43] - The Bank maintained a Community Bank Leverage Ratio of 11.23% as of December 31, 2024, exceeding the 9% minimum for well-capitalized status[53] - The Bank's Community Reinvestment Act (CRA) performance has been rated "Outstanding" in every evaluation since 1998, though new CRA regulations are subject to legal challenges[57] - The FDIC implemented a special assessment effective April 1, 2024, at a rate of 3.36 basis points on uninsured deposits to recover losses from 2023 bank failures[69] Risk Factors The company faces significant risks from intense competition, interest rate fluctuations, operational vulnerabilities, concentrated credit risk in commercial real estate, evolving regulatory changes, and adverse economic conditions in its primary markets Risks Related to Competitive Matters The company operates in a highly competitive financial services environment, facing pressure from larger banks and non-bank entities, which could hinder growth and profitability, and is highly sensitive to market interest rate fluctuations affecting net interest income - The company faces substantial competition from various financial service providers, including those with greater resources and less regulatory burden[90] - Increasing use of non-bank alternatives could lead to a loss of fee income and low-cost deposits[91] - Net interest income is highly sensitive to market interest rate changes, where rising rates could increase funding costs and default risk, and falling rates could compress margins[93][95] Risks Related to our Lending Activities A significant concentration in commercial real estate loans (368.12% of total risk-based capital) creates credit risk, while the company actively reduces exposure in government and healthcare equipment finance portfolios, and the allowance for credit losses involves significant judgment - The Bank has a significant concentration in commercial real estate (CRE) loans, totaling 368.12% of total risk-based capital at December 31, 2024, exceeding the 300% regulatory guideline[111] - The company is actively reducing risk in specific portfolios, with government equipment finance decreasing by 47.2% and healthcare finance by 53.9% in 2024[117] - The allowance for credit losses was $7.6 million, or 0.85% of total loans, at December 31, 2024, an estimate involving significant judgment that could be insufficient[118] Risks Related to Laws and Regulations The company faces risks from a complex and evolving regulatory landscape, including stringent capital requirements, potential fines for non-compliance with laws like the USA PATRIOT Act, and restrictions on dividend payments from its subsidiary Bank - The Bank is subject to a 2.5% capital conservation buffer, which, if not maintained, would limit dividends and share repurchases, though it met this requirement as of December 31, 2024[128][129] - The company's ability to pay dividends is limited by regulatory restrictions on dividends from its subsidiary Bank, which depend on the Bank's capital and earnings performance[138] Risks Related to Economic Conditions The company's financial health is vulnerable to economic downturns in the Chicago metropolitan area, financial difficulties of local governments, inflationary pressures increasing operating costs, and potential negative impacts from changes in U.S. trade policies - A significant portion of the company's loan and deposit activities are concentrated in the Chicago metropolitan area, making it vulnerable to local economic downturns[139] - The financial difficulties of the City of Chicago and the State of Illinois could adversely affect the local economy and borrower repayment ability[144] - Potential new tariffs on imports from Canada, Mexico, and China could harm customers' financial health and ability to service debt[146] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[161] Cybersecurity The company integrates cybersecurity into its overall risk management, with no material incidents to date, maintaining a comprehensive Information Security Program overseen by the Board and external auditors - To date, the Company has not experienced a cybersecurity incident that has materially affected its operations[162] - The Bank's Board of Directors and senior management oversee cybersecurity risk management, supported by internal divisions and independent external consultants and auditors[108][109] - The company employs a multi-layered security program including technical controls, employee training with simulated phishing attacks, and annually tested incident response plans[165][168][169] Properties The company operates 18 banking offices in the Chicago metropolitan area, mostly owned, and closed two branches in 2023, which were subsequently sold - The company operates through 18 banking offices in the Chicago area, most of which are owned[170] - In 2023, the company closed its Hazel Crest and Naperville branches, with sales finalized in April 2023 and February 2024, respectively[171] Legal Proceedings The company is involved in various legal actions arising in the normal course of business, which management does not expect to have a material adverse effect on financial results - The Company is subject to various legal actions in the normal course of business, which management does not expect to have a material adverse effect on its results of operations[173] Mine Safety Disclosures This item is not applicable to the company - Not applicable[174] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ Global Select Market under 'BFIN', with no repurchases in Q4 2024 and 182,193 shares remaining authorized for repurchase - The company's common stock trades on the NASDAQ Global Select Market under the symbol "BFIN"[176] - No common stock was repurchased in the fourth quarter of 2024, with 182,193 shares remaining authorized for repurchase as of December 31, 2024[178][179] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, net income significantly decreased to $4.1 million due to a large charge-off, total assets declined by 3.5%, net interest income fell by 6.5%, and the loan portfolio shrank by 15.5%, while asset quality remained stable and the company plans to accelerate commercial loan growth in 2025 Results of Operations Net income for 2024 decreased to $4.1 million from $9.4 million in 2023, primarily due to a $3.4 million decline in net interest income and a $5.1 million provision for credit losses, despite an increase in noninterest income Comparison of Operations (2024 vs. 2023) | Metric | 2024 (in millions) | 2023 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $48.4 | $51.8 | -6.5% | | Provision for Credit Losses | $5.0 | $0.3 | +1613% | | Noninterest Income | $5.8 | $4.4 | +31.1% | | Noninterest Expense | $44.2 | $43.2 | +2.3% | | Net Income | $4.1 | $9.4 | -56.6% | | Diluted EPS | $0.33 | $0.74 | -55.4% | - Net interest margin (tax-equivalent basis) decreased slightly by 3 basis points to 3.55% in 2024, as the increase in cost of liabilities outpaced the yield on assets[216] - The provision for credit losses was $5.1 million in 2024, including a $4.8 million charge-off for a U.S. Government Contract Dispute claim settlement[220] Comparison of Financial Condition Total assets decreased by $52.6 million to $1.435 billion at year-end 2024, driven by a $163.2 million decrease in net loans, partially offset by a $207.3 million increase in securities, while total deposits also decreased Financial Condition at Year-End | Balance Sheet Item | Dec 31, 2024 (in billions) | Dec 31, 2023 (in billions) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $1.435 | $1.487 | -3.5% | | Loans, net | $0.888 | $1.051 | -15.5% | | Securities | $0.361 | $0.153 | +135.5% | | Total Deposits | $1.218 | $1.262 | -3.5% | | Total Stockholders' Equity | $0.156 | $0.155 | +0.6% | Asset Quality Asset quality improved with total nonperforming assets decreasing by $6.8 million to $18.3 million at year-end 2024, primarily due to a U.S. Government contract dispute settlement, reducing the nonperforming loan ratio to 1.89% Nonperforming Assets (NPA) | Metric | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total NPAs | $18.3 million | $25.1 million | | Nonperforming loans to total loans | 1.89% | 2.11% | | NPA to total assets | 1.28% | 1.69% | | Allowance for credit losses to nonperforming loans | 44.71% | 37.36% | - The decrease in nonperforming assets was primarily due to the settlement of a $10.5 million U.S. Government Contract Disputes Act claim for $5.6 million in cash and returned software licenses, resulting in a $4.8 million pre-tax charge-off[253] - A second U.S. Government equipment finance exposure of $8.4 million remains unresolved, with a claim pending under the Contract Disputes Act[254] - Net charge-offs for 2024 were $5.9 million, a significant increase from $2.1 million in 2023, largely due to the government contract settlement[271] Management of Interest Rate Risk The company manages interest rate risk to reduce exposure of net interest income to market rate changes, with models indicating asset-sensitivity to rising rates and liability-sensitivity to falling rates, projecting a 4.27% NII increase for a 200 bps rise and a 6.23% NII decrease for a 200 bps fall Estimated Impact of Instantaneous Parallel Rate Shifts (as of Dec 31, 2024) | Change in Interest Rates (bps) | Change in Net Interest Income (Amount) | Change in Net Interest Income (%) | | :--- | :--- | :--- | | +200 | $2,124,000 | 4.27% | | +100 | $1,099,000 | 2.21% | | -100 | ($2,082,000) | (4.19)% | | -200 | ($3,097,000) | (6.23)% | Quantitative and Qualitative Disclosure about Market Risk This section refers to the 'Management of Interest Rate Risk' discussion within Item 7 for information regarding the company's market risk - Information regarding market risk is provided in Item 7 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management of Interest Rate Risk"[311] Financial Statements and Supplementary Data This section includes management's report on effective internal controls, the independent auditor's unqualified opinion on financial statements, and notes detailing significant accounting policies and loan portfolio specifics Report of Independent Registered Public Accounting Firm The independent auditor, RSM US LLP, issued an unqualified opinion on the consolidated financial statements, identifying the 'Allowance for Credit Losses—Loans' as a critical audit matter due to significant management judgment - The auditor issued an unqualified opinion on the consolidated financial statements[316] - The critical audit matter identified was the 'Allowance for Credit Losses—Loans' due to significant auditor judgment required to evaluate management's subjective estimates for pooled loans[321][323] Note 1 – Summary of Significant Accounting Policies This note outlines significant accounting policies, including the adoption of ASC 326 (CECL) on January 1, 2023, which resulted in a $2.324 million pre-tax increase to credit-related reserves and a $1.7 million net reduction to retained earnings - The company adopted ASC 326 (CECL) on January 1, 2023, using the modified retrospective approach[351] Pre-Tax Impact of Adopting ASC 326 on January 1, 2023 | Item | Impact (in thousands) | | :--- | :--- | | Increase in Allowance for Credit Losses | $1,907 | | Recognition of Unfunded Commitment Reserve | $417 | | Total Pre-Tax Increase in Reserves | $2,324 | Note 4 – Loans Receivable This note details the loan portfolio, with net loans receivable at $887.6 million as of December 31, 2024, segmented by risk characteristics, showing nonaccrual loans at $16.9 million, and outlining risk management practices Credit Quality of Loans by Risk Rating (December 31, 2024) | Risk Rating | Amount (in thousands) | % of Total Loans | | :--- | :--- | :--- | | Pass | $866,318 | 96.8% | | Special Mention | $7,446 | 0.8% | | Substandard | $4,459 | 0.5% | | Nonaccrual | $16,934 | 1.9% | | Total | $895,157 | 100.0% | - The company discontinued originating U.S. Government equipment and software finance transactions in the first quarter of 2023 due to payment disputes[415] Note 11 – Regulatory Matters The Bank is subject to regulatory capital requirements, electing the Community Bank Leverage Ratio (CBLR) framework, and maintained a CBLR of 11.23% at December 31, 2024, exceeding the 9% well-capitalized threshold Bank's Community Bank Leverage Ratio (CBLR) | Date | Actual Ratio | Required for Capital Adequacy | | :--- | :--- | :--- | | December 31, 2024 | 11.23% | 9.00% | | December 31, 2023 | 10.85% | 9.00% | Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2024, with no material changes to internal controls during Q4 2024 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[501] - As a non-accelerated filer, the company's management report on internal control over financial reporting is not subject to an attestation report by its registered public accounting firm[503] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, Section 16(a) compliance, and Code of Ethics is incorporated by reference from the definitive Proxy Statement - Required information for this item is incorporated by reference from the company's Proxy Statement[508] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Required information for this item is incorporated by reference from the company's Proxy Statement[511] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive Proxy Statement - Required information for this item is incorporated by reference from the company's Proxy Statement[512] Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Required information for this item is incorporated by reference from the company's Proxy Statement[512] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Required information for this item is incorporated by reference from the company's Proxy Statement[513] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements filed under Item 8 and provides a comprehensive list of all exhibits filed with or incorporated by reference into the Form 10-K - This section lists the consolidated financial statements and exhibits filed with the annual report[514][516] Form 10-K Summary This item is not applicable to the company - Not applicable[520]