Executive Summary / Key Takeaways

• BankFinancial Corporation is undergoing a significant strategic reorientation, pivoting towards higher-yielding commercial finance and specialized equipment finance segments, aiming to enhance net interest margin and overall profitability. This strategy is underpinned by disciplined asset deployment and a focus on commercial deposit growth.
• The company's financial performance in the nine months ended September 30, 2025, reflects this transition, with net income of $4.10 million and a notable increase in securities, partially offset by a decline in the loan portfolio due to strategic repayments and specific credit challenges.
• A pending merger with First Financial Bancorp. , unanimously approved by both boards, introduces a new dimension to BFIN's future, subject to regulatory and stockholder approvals.
• Credit quality remains a key focus, particularly with ongoing litigation related to a U.S. Government equipment finance exposure, for which a $2.1 million specific reserve has been recorded.
• BFIN's competitive advantage lies in its strong local deposit franchise and customer-centric service model, which helps mitigate intense competition for deposits and loans, particularly against larger, more technologically advanced rivals.

Strategic Reorientation and Foundational Strengths

BankFinancial Corporation, established in 1924 and headquartered in Burr Ridge, Illinois, operates as a regional bank holding company providing comprehensive banking, financial planning, and fiduciary services. The company has historically built a robust deposit franchise through organic growth, acquisitions, and strategic initiatives, forming a foundational strength in its local Illinois markets. Over time, BFIN strategically de-emphasized residential mortgage originations to focus on higher-value nonresidential real estate, multi-family residential real estate, commercial loans, and commercial equipment leases, expanding its reach nationwide for certain commercial activities.

The company's current strategy is firmly anchored in adapting to the prevailing interest rate environment and intense deposit competition by significantly pivoting towards higher-yielding commercial finance and specialized equipment finance segments. This reorientation is designed to enhance net interest margin (NIM) and overall profitability. BFIN's operational excellence is demonstrated through its customer-centric service model and product specialization, rather than proprietary technological differentiation. The company invests in advanced credit and product training for its bankers to effectively sell its specialized offerings, including standard bank credit loans, asset-based lending (ABL) platforms, and accounts receivable factoring. This approach contrasts with larger competitors who often prioritize digital innovation, allowing BFIN to foster deeper customer loyalty through personalized interactions.

A significant development in BFIN's trajectory is the Agreement and Plan of Merger with First Financial Bancorp. , entered into on August 11, 2025. This merger, unanimously approved by both boards, would see BankFinancial merge into First Financial, and BankFinancial, National Association, merge into First Financial Bank, pending customary closing conditions, regulatory approvals, and BankFinancial's stockholder approval. This potential merger introduces a new strategic dimension, signaling a possible consolidation in its market presence and operational scale.

Competitive Landscape and Market Positioning

BankFinancial operates within a competitive landscape dominated by larger regional banks such as Wintrust Financial Corporation (WTFC), Fifth Third Bancorp (FITB), and Huntington Bancshares (HBAN), as well as indirect competitors like fintech companies and online banks. BFIN's market standing is competitive but generally secondary to these larger rivals in terms of overall presence and scale.

BFIN's core competitive advantages stem from its strong local brand recognition, established branch network in Illinois, and expertise in personalized banking services. These tangible benefits foster customer loyalty, potentially leading to recurring revenue and reduced customer acquisition costs. For instance, while WTFC pursues broader expansion, BFIN's local expertise allows it to counter by offering tailored services, potentially enhancing its pricing power in niche segments within Illinois. Similarly, against FITB's advanced digital focus, BFIN's emphasis on in-person interactions differentiates it, appealing to customers who value traditional banking relationships. This localized approach helps BFIN maintain stronger customer retention in its core markets.

However, BFIN faces vulnerabilities due to its smaller scale, limited geographic reach, and potential lags in digital capabilities compared to its larger counterparts. This smaller scale can lead to higher operating costs and may hinder its ability to compete on growth rates or innovation speed. For example, FITB's broader geographic footprint and advanced digital tools offer more seamless experiences in areas like consumer loans and online banking, potentially limiting BFIN's ability to attract tech-savvy customers. Indirect competitors, including fintech firms and online banks, further pressure BFIN by offering accessible and often cheaper alternative financial services, which could erode market share in basic banking and personal loans.

Financial Performance and Operational Details

For the three months ended September 30, 2025, BankFinancial reported net income of $2.36 million, an increase from $1.99 million in the prior year. Net interest income remained stable at $11.64 million, compared to $11.66 million for the same period in 2024. Total assets increased by $19.70 million, or 1.40%, to $1.46 billion at September 30, 2025, from $1.44 billion at December 31, 2024. This increase was primarily driven by a significant rise in securities, which grew by $177 million to $537.50 million, partially offset by decreases in interest-bearing time deposits and a $127.80 million decline in loans receivable to $759.80 million. The loan portfolio's decline of $36.10 million in the third quarter of 2025 was mainly due to scheduled repayments, with modest originations in multi-family residential and corporate equipment leases.

Noninterest income increased by $221,000, or 14.90%, to $1.70 million for the three months ended September 30, 2025, driven by higher deposit service charges and fees and other noninterest income. Conversely, noninterest expense rose by $694,000, or 6.90%, to $10.80 million, primarily due to increased office occupancy, equipment, advertising, professional fees, and other expenses. Compensation and benefits expense decreased by $1.10 million, or 19.30%, to $4.40 million, largely due to a $1.40 million Employee Retention Tax Credit (ERTC) receipt. Professional fees, however, surged by $876,000 to $1.20 million, predominantly due to $893,000 in legal and consulting fees related to the proposed merger.

For the nine months ended September 30, 2025, net income was $4.10 million, a decrease from $5.80 million in the prior year. The $2.40 million decrease in net interest income was primarily due to a $2.70 million reduction in interest income, resulting from lower weighted average interest-earning assets and a reduced yield. Noninterest income for the nine-month period increased by $1.10 million, or 25.50%, to $5.30 million, benefiting from higher deposit service charges, earnings on bank-owned life insurance, and a $417,000 bank-owned life insurance death benefit. Noninterest expense increased by $553,000, or 1.70%, to $33.50 million, mainly due to a $1.20 million increase in professional fees related to the merger and $1.20 million in write-downs of foreclosed assets, partially offset by a $1.80 million decrease in compensation and benefits from ERTC funds.

Asset quality remains a critical area of focus. The ratio of nonperforming assets to total assets decreased to 0.79% at September 30, 2025. This figure includes an $8.40 million U.S. Government equipment finance transaction, which, if excluded, would reduce the ratio to 0.21%. The company recorded a $2.10 million specific reserve in the second quarter of 2025 for this exposure, reflecting anticipated litigation time and costs after an inadequate settlement offer was received. The allowance for credit losses as a percentage of nonperforming loans increased to 76.74% at September 30, 2025, from 44.71% at December 31, 2024.

Deposit trends show stabilization, with total deposits increasing by $24.50 million, or 2%, to $1.24 billion at September 30, 2025. Core deposits represented 78.90% of total deposits. The cost of total retail and commercial deposits increased to 1.87% in the third quarter of 2025 from 1.84% in the second quarter of 2025. BFIN's capital position remains strong, with a Tier 1 leverage ratio of 10.70% and a Community Bank Leverage Ratio of 11.36% at September 30, 2025, positioning the bank as well-capitalized. The book value of common shares increased to $12.63 at September 30, 2025.

Outlook, Guidance, and Investment Implications

BankFinancial's strategic outlook is firmly anchored in adapting to the prevailing interest rate environment and intense deposit competition, with a clear focus on enhancing profitability and net interest margin (NIM). Management anticipates NIM to remain relatively stable in the first half of 2024, with expansion expected in the second half. This is predicated on the strategic deployment of approximately $100 million in cash flow from securities maturing between Q3 2023 and the end of 2024 (currently yielding below 2%) and $220 million from loan portfolio principal payments (yielding just over 4%). Reinvestment of these funds into higher-yielding commercial finance and corporate equipment finance assets is expected to generate average yields of 8.5% to 9% on new originations, significantly boosting interest income.

Loan growth is projected to be between 5% and 8% for 2024, with a primary focus on the commercial finance portfolio, targeting yields of 9.5% to 10%. Real estate originations are expected to be minimal, while equipment finance will see cash flows repositioned into higher-yielding segments. Deposit levels are projected to remain relatively flat for 2024, with growth in commercial deposits expected to offset any runoff from retail competition. The company does not anticipate material use of broker deposits.

Expense guidance for 2024 is set at approximately $41 million to $42.5 million, with expectations for normalization of legal costs associated with credit claims and anticipated savings from the sale of branch facilities. BFIN aims to achieve earnings per share (EPS) in the mid-to-high $0.20s, with a goal of sustaining $1.00 annually in 2024. Return on equity (ROE) targets are set at 9.5% to 10% on a 9% community bank capital ratio. The pending merger with First Financial Bancorp. introduces a new layer of potential for scale and market reach, though the immediate financial implications will depend on the successful completion and integration of the transaction.

Risks and Challenges

Despite the strategic reorientation and positive outlook, several risks and challenges warrant investor attention. Interest rate risk remains a significant factor, with quantitative analysis indicating that a 200 basis point decrease in rates could lead to a 5.28% decrease in Net Portfolio Value (NPV) and a $4.80 million decrease in net interest income. Conversely, a 200 basis point increase would result in a 0.12% increase in NPV and a $4 million increase in net interest income. Deposit interest expense is a "wildcard" that could impact net interest margin, as competition for deposits remains intense.

Credit risk, particularly concerning the U.S. Government equipment finance portfolio, is a notable challenge. The ongoing litigation for an $8.40 million exposure and the recording of a $2.10 million specific reserve highlight the potential for prolonged legal processes and associated costs. While the company has ceased federal equipment finance originations, the liquidation of special-use equipment from a commercial equipment finance loan also presents a risk of further value reduction. The broader economic environment, including concerns about a potential recession, could impact loan delinquencies and collateral values, particularly in multi-family and commercial real estate, although BFIN's portfolio is focused on less volatile neighborhood projects. Finally, the successful completion of the merger with First Financial Bancorp. is subject to regulatory and stockholder approvals, and integration risks will need to be managed post-closing.

Conclusion

BankFinancial Corporation is at a pivotal juncture, strategically reorienting its business towards higher-yielding commercial finance and specialized equipment finance segments while concurrently pursuing a merger with First Financial Bancorp. (FFBC). This dual focus underscores a commitment to enhancing profitability and shareholder value through disciplined asset deployment and a robust commercial deposit strategy. While the company faces ongoing credit challenges, particularly with U.S. Government equipment finance exposures, and intense competition for deposits, its strong local franchise and customer-centric approach provide a solid foundation. The successful execution of its lending strategy, effective management of deposit costs, and the realization of synergies from the pending merger will be critical determinants of BFIN's ability to achieve its ambitious EPS and ROE targets and sustain long-term growth in a dynamic financial landscape.