BankFinancial
Annual Report 2015

Plain-text annual report

BANKFINANCIAL CORP FORM 10-K (Annual Report) Filed 02/10/16 for the Period Ending 12/31/15 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 15W060 NORTH FRONTAGE ROAD BURR RIDGE, IL 60527 (800) 894-6900 0001303942 BFIN 6035 - Savings Institutions, Federally Chartered S&Ls/Savings Banks Financial 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015or ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For transition period from to Commission File Number 0-51331 BANKFINANCIAL CORPORATION(Exact Name of Registrant as Specified Its Charter) Maryland75-3199276(State or Other Jurisdictionof Incorporation)(I.R.S. EmployerIdentification No.) 15W060 North Frontage Road, Burr Ridge, Illinois 60527(Address of Principal Executive Offices)Registrant’s telephone number, including area code: (800) 894-6900 Securities registered pursuant to Section 12(b) of the Act:Title of Each Class:Name of Each Exchange on Which Registered:Common Stock, par value $0.01 per shareThe NASDAQ Stock MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark whether the issuer is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨ No x .Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x .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 forsuch 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 x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuantto Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K Yes x No ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x .The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on June 30, 2015 , determined using a per share closing price on that date of $11.78, as quoted onThe Nasdaq Global Select Market, was $208.1 million.At February 8, 2016 , there were 20,200,000 shares of common stock, $0.01 par value, outstanding.DOCUMENTS INCORPORATED BY REFERENCENoneBANKFINANCIAL CORPORATIONForm 10-K Annual ReportTable of Contents PageNumber PART I Item 1.Business1Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments17Item 2.Properties17Item 3.Legal Proceedings18Item 4.Mine Safety Disclosures18 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities18Item 6.Selected Financial Data21Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations23Item 7A.Quantitative and Qualitative Disclosure about Market Risk47Item 8.Financial Statements and Supplementary Data48Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure97Item 9A.Controls and Procedures97Item 9B.Other Information97 PART III Item 10.Directo rs, Executive Officers and Corporate Governance97Item 11.Executive Compensation97Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters98Item 13.Certain Relationships and Related Transactions , and Director Independence98Item 14.Principal Accountant Fees and Services98 PART IV Item 15.Exhibits and Financial Statement Schedules98 Signatures102Table of ContentsPART IITEM 1. BUSINESSForward Looking StatementsThis Annual Report on Form 10-K contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancialCorporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which involvesignificant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as ourfuture revenues, expenses, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements aregenerally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “expect,” “estimate,” “intend,” “anticipate,” “project,” “plan,” or similarexpressions. Forward looking statements are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that couldcause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by thesafe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for thepurpose 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 operatingresults, financial condition or future prospects include, but are not limited to: (i) less than anticipated loan growth due to intense competition for high quality loansand leases, particularly in terms of pricing and credit underwriting, or a dearth of borrowers who meet our underwriting standards; (ii) the impact of re-pricing andcompetitors’ pricing initiatives on loan and deposit products; (iii) interest rate movements and their impact on the economy, customer behavior and our net interestmargin; (iv) adverse economic conditions in general and in the Chicago metropolitan area in particular that could result in increased delinquencies in our loanportfolio or a decline in the value of our investment securities and the collateral for our loans; (v) declines in real estate values that adversely impact the value ofour loan collateral, Other Real Estate Owned ("OREO"), asset dispositions and the level of borrower equity in their investments; (vi) borrowers that experiencelegal or financial difficulties that we do not currently foresee; (vii) results of supervisory monitoring or examinations by regulatory authorities, including thepossibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications,write-down assets, reduce credit concentrations or maintain specific capital levels; (viii) changes, disruptions or illiquidity in national or global financial markets;(ix) the credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs or changes inestimates relating to the computation of our allowance for loan losses; (x) monetary and fiscal policies of the U.S. Government, including policies of the U.S.Treasury and the Federal Reserve Board; (xi) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors' pricinginitiatives on our deposit products; (xii) the impact of new legislation or regulatory changes, including the Dodd-Frank Act and Basel III, on our products, services,operations and operating expenses; (xiii) higher federal deposit insurance premiums; (xiv) higher than expected overhead, infrastructure and compliance costs; (xv)changes in accounting principles, policies or guidelines; and (xvi) privacy and cybersecurity risks, including the risks of business interruption and the compromiseof confidential customer information resulting from intrusions.These risks and uncertainties, as well as the Risk Factors set forth in Item 1A below, should be considered in evaluating forward-looking statements and unduereliance 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 toupdate any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement wasmade.BankFinancial CorporationBankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois (the “Company”), became the owner of all of the issued and outstandingcapital stock of BankFinancial, F.S.B. (the “Bank”) on June 23, 2005, when we consummated a plan of conversion and reorganization that the Bank and itspredecessor holding companies, BankFinancial MHC, Inc. and BankFinancial Corporation, a federal corporation, adopted on August 25, 2004. BankFinancialCorporation, the Maryland corporation, was organized in 2004 to facilitate the mutual-to-stock conversion and to become the holding company for the Bank uponits completion.As part of the mutual-to-stock conversion, BankFinancial Corporation, the Maryland corporation, sold 24,466,250 shares of common stock in a subscriptionoffering for $10.00 per share. The separate corporate existences of BankFinancial MHC and BankFinancial Corporation, the federal corporation, ceased upon thecompletion of the mutual-to-stock conversion. For a further discussion of the mutual-to-stock conversion, see our Prospectus as filed on April 29, 2005 with theSecurities and Exchange1Table of ContentsCommission (“SEC”) pursuant to Rule 424(b)(3) of the Rules and Regulations of the Securities Act of 1933 (File Number 333-119217).We manage our operations as one unit, and thus do not have separate operating segments. Our chief operating decision-makers use consolidated results to makeoperating and strategic decisions.BankFinancial, F.S.B.The Bank is a full-service, community-oriented federal savings bank principally engaged in the business of commercial, family and personal banking. The Bankoffers our customers a broad range of loan, deposit, and other financial products and services through 19 full-service Illinois based banking offices located in Cook,DuPage, Lake and Will Counties, and through our Internet Branch, www.bankfinancial.com .The Bank’s primary business is making loans and accepting deposits. The Bank also offers our customers a variety of financial products and services that arerelated or ancillary to loans and deposits, including cash management, funds transfers, bill payment and other online and mobile banking transactions, automatedteller machines, safe deposit boxes, trust services, wealth management, and general insurance agency services.The Bank’s primary lending area consists of the counties where our branch offices are located, and contiguous counties in the State of Illinois. We derive the mostsignificant portion of our revenues from these geographic areas. However, we also engage in multi-family lending activities in selected Metropolitan StatisticalAreas outside our primary lending area and engage in healthcare lending and commercial leasing activities on a nationwide basis.We originate deposits predominantly from the areas where our branch offices are located. We rely on our favorable locations, customer service, competitivepricing, our Internet Branch and related deposit services such as cash management to attract and retain these deposits. While we accept certificates of deposit inexcess of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limits, we generally do not solicit such deposits because they are more difficult toretain than core deposits and at times are more costly than wholesale deposits.Lending ActivitiesOur loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, commercial, construction and land loans, andcommercial leases), which represented $1.079 billion , or 87.0% , of our gross loan portfolio of $1.240 billion at December 31, 2015 . At December 31, 2015 ,$506.0 million , or 40.8% , of our loan portfolio consisted of multi-family mortgage loans; $226.7 million , or 18.3% , of our loan portfolio consisted ofnonresidential real estate loans; $79.5 million , or 6.4% , of our loan portfolio consisted of commercial loans; $265.4 million , or 21.4% , of our loan portfolioconsisted of commercial leases; and $1.3 million , or 0.1% , of our loan portfolio consisted of construction and land loans. $159.5 million , or 12.9% , of our loanportfolio consisted of one-to-four family residential mortgage loans (of which $44.5 million , or 3.6% , were loans to investors in non-owner occupied single-family homes), including home equity loans and lines of credit.Deposit ActivitiesOur deposit accounts consist principally of savings accounts, NOW accounts, checking accounts, money market accounts, certificates of deposit, and IRAs andother retirement accounts. We provide commercial checking accounts and related services such as cash management. We also provide low-cost checking accountservices. We rely on our favorable locations, customer service, competitive pricing, our Internet Branch and related deposit services such as cash management toattract and retain deposit accounts.At December 31, 2015 , our deposits totaled $1.213 billion . Interest-bearing deposits totaled $958.1 million , or 79.0% , and noninterest-bearing demand depositstotaled $254.8 million , or 21.0% . Savings, money market and NOW account deposits totaled $735.4 million , and certificates of deposit totaled $222.7 million , or18.4% , of which $151.5 million had maturities of one year or less.Related Products and ServicesThe Bank provides trust and financial planning services through our Trust Department. The Bank’s Wealth Management Group provides investment, financialplanning and other wealth management services through arrangements with a third-party broker-dealer. The Bank’s wholly-owned subsidiary, Financial AssuranceServices, Inc. (“Financial Assurance”), sells property and casualty insurance and other insurance products on an agency basis. During the year ended December 31,2015 , Financial Assurance recorded a net loss of $44,000 . At December 31, 2015 , Financial Assurance had two full-time employees. The Bank’s other wholly-owned subsidiary, BF Asset Recovery Corporation, holds title to and sells certain Company-owned real estate acquired through foreclosure and collection actions,and recorded a net loss of $696,000 for the year ended December 31, 2015 .2Table of ContentsWebsite and Stockholder InformationThe website for the Company and the Bank is www.bankfinancial.com . Information on this website does not constitute part of this Annual Report on Form 10-K.The Company makes available, free of charge, its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K andamendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon asreasonably practicable after such forms are filed with or furnished to the SEC. Copies of these documents are available to stockholders at the website for theCompany and the Bank, www.bankfinancial.com , under Investor Relations, and through the EDGAR database on the SEC’s website, www.sec.gov .CompetitionWe face significant competition in originating loans and attracting deposits. The Chicago Metropolitan Statistical Area and the other markets in which we operategenerally have a high concentration of financial institutions, many of which are significantly larger institutions that have greater financial resources than we have,and many of which are our competitors to varying degrees. Our competition for loans and leases comes principally from commercial banks, savings banks,mortgage banking companies, the U.S. Government, credit unions, leasing companies, insurance companies, real estate conduits and other companies that providefinancial services to businesses and individuals. Our most direct competition for deposits has historically come from commercial banks, savings banks and creditunions. We face additional competition for deposits from online financial institutions and non-depository competitors such as the mutual fund industry, securitiesand brokerage firms and insurance companies.We seek to meet this competition by emphasizing personalized service and efficient decision-making tailored to individual needs. In addition, we from time to timereward long-standing relationships with preferred rates and terms on deposit products based on existing and prospective lending business. We do not rely on anyindividual, group or entity for a material portion of our loans or our deposits.EmployeesAt December 31, 2015 , we had 230 full-time employees and 43 part-time employees. The employees are not represented by a collective bargaining unit and weconsider our working relationship with our employees to be good.Supervision and RegulationGeneralAs a federally chartered savings bank, the Bank is regulated and supervised primarily by the Office of the Comptroller of the Currency (“OCC”). The Bank is alsosubject to regulation by the FDIC in more limited circumstances because the Bank’s deposits are insured by the FDIC. This regulatory and supervisory structureestablishes a comprehensive framework of activities in which a financial institution may engage, and is intended primarily for the protection of the FDIC’s depositinsurance fund, depositors and the banking system. Under this system of federal regulation, financial institutions are periodically examined to ensure that theysatisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The OCCexamines the Bank and prepares reports for the consideration of its Board of Directors on any identified deficiencies. After completing an examination, the OCCissues a report of examination and assigns a rating (known as an institution’s CAMELS rating). Under federal law and regulations, an institution may not disclosethe contents of its reports of examination or its CAMELS ratings to the public.The Bank is a member of, and owns stock in, the Federal Home Loan Bank of Chicago (“FHLBC”), which is one of the 12 regional banks in the Federal HomeLoan Bank System. The Bank also is regulated by the Board of Governors of the Federal Reserve System (“FRB”) with regard to reserves it must maintain againstdeposits, dividends and other matters. The Bank’s relationship with its depositors and borrowers also is regulated in some respects by both federal and state laws,especially in matters concerning the ownership of deposit accounts, and the form and content of the Bank’s consumer loan documents.The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) of 2010, provided for the transfer of the authority for regulating andsupervising federal savings banks from the Office of Thrift Supervision (“OTS”), the Bank’s previous regulator, to the OCC. The Dodd-Frank Act also providedfor the transfer of authority for regulating and supervising savings and loan holding companies and their non-depository subsidiaries from the OTS to the FRB. Thetransfers occurred in 2011. The Dodd-Frank Act also created a new federal agency, the Consumer Financial Protection Bureau (“CFPB”), as an independent bureauwithin the FRB system, to conduct rule-making, supervision, and enforcement of federal consumer financial protection and fair lending laws and regulations. TheCFPB has examination and primary enforcement authority in connection with these laws and regulations for depository institutions with total assets of more than$10 billion. Depository institutions with $10 billion or less in3Table of Contentstotal assets, such as the Bank, continue to be examined for compliance with these laws and regulations by their primary federal regulators, and remain subject totheir enforcement authority.There can be no assurance that laws, rules and regulations, and regulatory policies will not change in the future, and change could make compliance more difficultor expensive or otherwise adversely affect our business, financial condition, results of operations or prospects. Any change in these laws or regulations, or inregulatory policy, whether by the OCC, the FDIC, the FRB, the CFPB or Congress, could have a material adverse impact on the Company, the Bank and theirrespective operations. The following summary of laws and regulations applicable to the Bank and Company is not intended to be exhaustive and is qualified in itsentirety by reference to the actual laws and regulations involved.Federal Banking RegulationBusiness Activities. As a federal savings bank, the Bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and theregulations, pronouncements or guidance of the OCC. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential andnonresidential real estate, commercial business and consumer loans, certain types of securities and certain other loans and assets. Specifically, the Bank mayoriginate, invest in, sell, or purchase unlimited loans on the security of residential real estate, while loans on nonresidential real estate generally may not, on acombined basis, exceed 400% of the Bank’s total capital. In addition, secured and unsecured commercial loans and certain types of commercial personal propertyleases may not exceed 20% of the Bank’s assets; however, amounts in excess of 10% of assets may only be used for small business loans. Further, the Bank maygenerally invest up to 35% of its assets in consumer loans, corporate debt securities and commercial paper on a combined basis, and up to the greater of its capitalor 5% of its assets in unsecured construction loans. The Bank may invest up to 10% of its assets in tangible personal property, for rental or sale. Certain leases ontangible personal property are not aggregated with commercial or consumer loans for the purposes of determining compliance with the limitations set forth forthose investment categories. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank directly, including realestate investment and insurance agency activities. A violation of the lending and investment limitations may be subject to the same enforcement mechanisms of theprimary federal regulator as other violations of a law or regulation.Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital tototal assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the BaselCommittee on Banking Supervision and certain requirements of the Dodd-Frank Act.In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets ( e.g. ,recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believedinherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generallydefined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. AdditionalTier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capitalinstruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatoryconvertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to amaximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated OtherComprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of alltypes of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes intoconsideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutionswhere deemed necessary.In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments tomanagement if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above theamount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.At December 31, 2015 , the Bank’s capital exceeded all applicable regulatory requirements and the Bank was considered well capitalized.4Table of ContentsThe Company and the Bank each have adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%. The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirementswill be established if and as necessary. In accordance with the Regulatory Capital Plans, neither the Company nor the Bank will pursue any acquisition or growthopportunity, 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 fallbelow the established minimum capital levels. In addition, in accordance with its Regulatory Capital Plan, the Company will continue to maintain its ability toserve as a source of financial strength to the Bank by holding at least $5.0 million of cash or liquid assets for that purpose.Loans-to-One-Borrower. A federal savings bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% ofunimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketablecollateral, which generally does not include real estate. As of December 31, 2015 , the Bank was in compliance with the loans-to-one-borrower limitations.Qualified Thrift Lender Test. As a federal savings bank, the Bank is subject to a qualified thrift lender (“QTL”) test. Under the QTL test, the Bank must maintainat least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally meansthe total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value ofproperty used in the conduct of the federal savings bank’s business.“Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to those purposes, including certainmortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualifiedthrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans. The Bank also may satisfy the QTL test byqualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986. At December 31, 2015 , the Bank satisfied the QTL test.A federal savings bank that fails the QTL test must operate under specified restrictions, including limits on growth, branching, new investment and dividends. As aresult of the Dodd-Frank Act, noncompliance with the QTL test is subject to regulatory enforcement action as a violation of law.Capital Distributions. The regulations of the OCC govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases andother transactions charged to the institution’s capital account. A federal savings bank must file an application for approval of a capital distribution if:•the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the federal savingsbank’s retained net income for the preceding two years;•the institution would not be at least adequately capitalized following the distribution;•the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or•the institution is not eligible for expedited treatment of its filings.At December 31, 2015 , the Bank would have been required to file an application with the OCC for approval of a capital distribution to the Company only if theproposed capital distribution, together with Bank’s total capital distributions for the 2015 , exceeded the sum of the Bank’s net income for 2015 plus the Bank’sretained net income for the preceding two years. Whether or not an application to the OCC is required, every federal savings bank that is a subsidiary of a holdingcompany must file a notice with the FRB at least 30 days before the board of directors declares a dividend or approves a capital distribution. If the dividend orother capital distribution does not require prior OCC approval, the OCC must concurrently be provided with an informational copy of the notice given to the FRB.The FRB may disapprove a notice or application if:•the federal savings bank would be undercapitalized following the distribution;•the proposed capital distribution raises safety and soundness concerns; or•the capital distribution would violate a prohibition contained in any statute, regulation or agreement.Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act (“CRA”) andrelated federal regulations to help meet the credit needs of their communities, including low- and moderate- income neighborhoods. In connection with itsexamination of a federal savings bank, the OCC is required to evaluate5Table of Contentsand rate the federal savings bank’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lendersfrom discriminating in their lending practices based on the characteristics specified in those statutes. A federal savings bank’s failure to comply with the provisionsof the CRA could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the FairHousing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. The Bank’s CRAperformance has been rated as “Outstanding,” the highest possible rating, in all of the seven CRA Performance Evaluations that have been conducted since 1998.Privacy Standards. Financial institutions are subject to regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. Theseregulations require the Bank to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information” to customers at the time ofestablishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to “opt-out” of or consentto having the Bank share their nonpublic personal information with unaffiliated third parties before it can disclose such information, subject to certain exceptions.The implementation of these regulations did not have a material adverse effect on the Bank. The Gramm-Leach-Bliley Act also allows each state to enactlegislation that is more protective of consumers’ personal information.The OCC and other federal banking agencies have adopted guidelines establishing standards for safeguarding customer information to implement certainprovisions of the Gramm-Leach-Bliley Act. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an informationsecurity program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of a financial institution and thenature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records andinformation, to protect against any anticipated threats or hazards to the security or integrity of such records, and to protect against unauthorized access to or use ofsuch records or other information that could result in substantial harm or inconvenience to any customer. The Bank has implemented these guidelines, and suchimplementation has not had a material adverse effect on our operations.Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its “affiliates” is limited by OCC regulations and by Sections23A and 23B of the Federal Reserve Act and its implementing regulation, Regulation W. The term “affiliates” for these purposes generally means any companythat controls or is under common control with an insured depository institution, although subsidiaries of federal savings banks are generally not consideredaffiliates for the purposes of Sections 23A and 23B of the Federal Reserve Act. The Company is an affiliate of the Bank. In general, transactions with affiliatesmust be on terms that are as favorable to the federal savings bank as comparable transactions with non-affiliates. In addition, certain types of these transactions arerestricted to an aggregate percentage of the federal savings bank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receiveloans from the federal savings bank. Federal regulations also prohibit a federal savings bank from lending to any of its affiliates that are engaged in activities thatare not permissible for bank holding companies, and from purchasing the securities of any affiliate, other than a subsidiary.The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currentlygoverned by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, theseprovisions require that extensions of credit to insiders be made on terms that are substantially the same as, and follow credit underwriting procedures that are notless stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or presentother unfavorable features, and not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits arebased, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must receive the prior approval of the Bank’s Boardof Directors.Enforcement. The OCC has primary enforcement responsibility over federal savings banks, and this includes the authority to bring enforcement action against theBank and all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongfulaction likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desistorder to the removal of officers and/or directors, receivership, conservatorship or the termination of deposit insurance. Civil monetary penalties cover a wide rangeof violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million perday. The FDIC also has the authority to recommend to the OCC that an enforcement action be taken with respect to a particular savings institution. If action is nottaken by the OCC, the FDIC has authority to take action under specified circumstances.Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. Thesestandards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate riskexposure, asset growth, compensation and other operational6Table of Contentsand managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety andSoundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federalbanking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controlsand information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits.If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require theinstitution to submit to the agency an acceptable plan to achieve compliance with the standard.Prompt Corrective Action Regulations . Under the Federal Prompt Corrective Action statute, the OCC is required to take supervisory actions againstundercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital. The previously mentioned finalcapital rule effective January 1 , 2015 revised the prompt corrective action categories to incorporate the revised minimum capital requirements, effective the samedate. See “-Capital Requirements.”Under the revised categories, a savings institution that has total risk-based capital of less than 8%, a leverage ratio that is less than 4%, a Tier 1 risk-based capitalratio that is less than 6%, or a common equity Tier 1 ratio of less than 4.5% is considered to be undercapitalized. A savings institution that has total risk-basedcapital less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a leverage ratio that is less than 3%, or a common equity Tier 1 ratio of less than 3% isconsidered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “criticallyundercapitalized."Generally, the banking regulator is required to appoint a receiver or conservator for a federal savings bank that is “critically undercapitalized.” The regulations alsoprovide that a capital restoration plan must be filed with the OCC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantlyundercapitalized” or “critically undercapitalized.” A parent holding company for the institution involved must guarantee performance under the capital restorationplan up to the lesser of the institution’s capital deficiency when deemed undercapitalized or 5% of the institution’s assets. In addition, numerous mandatorysupervisory actions become immediately applicable to the federal savings bank, including, but not limited to, restrictions on growth, investment activities, capitaldistributions and affiliate transactions. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savingsbanks, including the issuance of a capital directive and individual minimum capital requirements and the replacement of senior executive officers and directors.At December 31, 2015 , the Bank met the criteria for being considered “well-capitalized”.Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Under the FDIC’s risk-basedassessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain otherfactors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned, subject to certainadjustments specified by the FDIC. The FDIC may adjust the scale uniformly, except that no adjustment may deviate by more than two basis points from the basescale without notice and comment. No institution may pay a dividend if it is in default of the federal deposit insurance assessment.Prior to the Dodd-Frank Act, assessment rates ranged from seven to 77.5 basis points of assessable deposits. The Dodd-Frank Act required the FDIC to revise itsprocedures to base its assessments upon total assets less tangible equity instead of on deposits. The FDIC issued a final rule, effective April 1, 2011, thatimplemented that change. The FDIC also revised the assessment schedule and certain of the possible adjustments so that the range of assessments is now 2.5 basispoints to 45 basis points of total assets less tangible equity.The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase.The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving the ratio to the discretion of the FDIC. The FDIC exercised that discretion byestablishing a long-range fund ratio of 2%.The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operatingexpenses and results of operations of the Bank. The Bank cannot predict what its insurance assessment rates will be in the future.An insured institution’s deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in anunsafe or unsound condition to continue operations or has violated any applicable law, regulation,7Table of Contentsrule, order or regulatory condition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead totermination of deposit insurance.In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments foranticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980’s to recapitalize the former Federal Savings and Loan InsuranceCorporation. The bonds issued by the FICO are due to mature in 2017 through 2019.Prohibitions Against Tying Arrangements . Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any otherservice, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from theinstitution or its affiliates or not obtain services of a competitor of the institution.Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. TheFederal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLBC, the Bank is required to acquireand hold shares of capital stock in the FHLBC in specified amounts. As of December 31, 2015 , the Bank was in compliance with this requirement.The USA PATRIOT Act and the Bank Secrecy ActThe USA PATRIOT Act and the Bank Secrecy Act require financial institutions to develop programs to detect and report money-laundering and terrorist activities,as well as suspicious activities. The USA PATRIOT Act also gives the federal government powers to address terrorist threats through enhanced domestic securitymeasures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The federal banking agencies arerequired to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger orother acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat moneylaundering would be considered as part of the application process. In addition, non-compliance with these laws and regulations could result in fines, penalties andother enforcement measures. We have developed policies, procedures and systems designed to comply with these laws and regulations.Federal Reserve SystemThe FRB’s regulations require federal savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order ofwithdrawal and regular checking accounts. At December 31, 2015 , the Bank was in compliance with the FRB's reserve requirements. The balances maintained tomeet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the federal regulation.Holding Company RegulationThe Company is a unitary savings and loan holding company and is subject to regulation and supervision by the FRB. The FRB has enforcement authority over theCompany and its non-savings institution subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to bea risk to the Bank. The Dodd-Frank Act provided for the transfer of the authority for supervising and regulating savings and loan holding companies and their non-depository subsidiaries from the OTS to the FRB. The transfer occurred on July 21, 2011.The Company's activities are limited to the activities permissible for financial holding companies or for multiple savings and loan holding companies. A financialholding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities orcomplementary to a financial activity. The Dodd-Frank Act specifies that a savings and loan holding company may only engage in financial holding companyactivities if it meets the qualitative criteria necessary for a bank holding company to engage in such activities. A multiple savings and loan holding company isgenerally limited to activities permissible for bank holding companies under Section 4(c) (8) of the Bank Holding Company Act, subject to the prior approval ofthe FRB, and certain additional activities authorized by FRB regulations.Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savingsinstitution or holding company thereof, without prior written approval of the FRB. It also prohibits the acquisition or retention of, with specified exceptions, morethan 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control ofan institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider the financial andmanagerial resources and future prospects of the savings institution, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of thecommunity and competitive factors.8Table of ContentsCapital. Savings and loan holding companies have not historically been subject to specific regulatory capital requirements. The Dodd-Frank Act, however,required the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and interms of components of capital, than those applicable to their subsidiary depository institutions. Instruments such as cumulative preferred stock and trust-preferredsecurities, which were previously includable within Tier 1 capital by bank holding companies, within certain limits, would no longer be includable as Tier 1capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as tosavings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied tosavings and loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between2016 and 2019.Source of Strength Doctrine. The “source of strength doctrine” requires bank holding companies to provide financial assistance to their subsidiary depositoryinstitutions in the event the subsidiary depository institution experiences financial distress. The Dodd-Frank Act extends the source of strength doctrine to savingsand loan holding companies. The FRB has issued regulations requiring that all bank holding companies and savings and loan holding companies serve as a sourceof strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial distress.The FRB has issued a policy statement regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holdingcompanies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retentionby the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides forprior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividendspreviously paid over that period, is insufficient to fully fund a dividend or the company’s overall rate of earnings retention is inconsistent with the company’scapital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions and stock repurchases.Change in Control RegulationsUnder the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as the Company unless the FRB has been given60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial andmanagerial resources of the acquiror and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holdingirrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or adetermination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policiesof the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable presumption of controlunder the regulations under certain circumstances including where, as is the case with the Company, the issuer has registered securities under Section 12 of theExchange Act.Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals.The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties atpublicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Exchange Act.The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the SEC and national securities exchanges to adopt extensive additionaldisclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC.Federal Securities LawsThe Company’s common stock is registered with the SEC under the Exchange Act. The Company is subject to the information, proxy solicitation, insider tradingrestrictions and other requirements of the Exchange Act.9Table of ContentsITEM 1A. RISK FACTORSAn investment in our securities is subject to risks inherent in our business and the industry in which we operate. Before making an investment decision, you shouldcarefully consider the risks and uncertainties described below and all other information included in this report. The risks described below may adversely affect ourbusiness, financial condition and operating results. In addition to these risks and the other risks and uncertainties described in Item 1, “Business-Forward LookingStatements,” and Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” there may be additional risks anduncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financialcondition or operating results. The value or market price of our securities could decline due to any of these identified or other risks. Past financial performance maynot be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.Our future growth and success will depend on our ability to compete effectively in a highly competitive environmentWe face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability tocompete effectively in this highly competitive environment. To date, our competitive strategies have focused on attracting deposits in our local markets, andgrowing our loan and lease portfolio by emphasizing specific loan products in which we have significant experience and expertise, identifying and targetingmarkets in which we believe we can effectively compete with larger institutions and other competitors, and offering highly competitive pricing to commercialborrowers with low risk profiles. We compete for loans, leases, deposits and other financial services with other commercial banks, thrifts, credit unions, brokeragehouses, mutual funds, insurance companies, real estate conduits, mortgage brokers and specialized finance companies. Many of our competitors offer products andservices that we do not offer, and many have substantially greater resources and lending limits, name recognition and market presence that benefit them inattracting business. In addition, larger competitors may be able to price loans, leases and deposits more aggressively than we do, and because of their larger capitalbases, their underwriting practices for smaller loans may be subject to less regulatory scrutiny than they would be for smaller banks. Newer competitors may bemore aggressive in pricing loans, leases and deposits in order to increase their market share. Some of the financial institutions and financial services organizationswith which we compete are not subject to the extensive regulations imposed on federal savings banks and their holding companies. As a result, these nonbankcompetitors have certain advantages over us in accessing funding and in providing various financial services.Numerous factors could adversely impact future loan growth and thus our future profitabilityOur future profitability will depend in substantial part on our ability to achieve loan and lease growth under intensely competitive conditions in a manner consistentwith our underwriting standards and business plan objectives. Our ability to achieve future loan and lease growth will depend on a number of factors, including ourability to offer loan and lease products at prices and with features that are comparable or superior to those offered by our competitors and attractive to potentialborrowers. Because our business plan targets high quality loans and leases in specific markets and product categories, our underwriting standards and our lendingrequirements relating to collateral eligibility, residual equity, global debt service coverage, loan covenants, loan structure and financial reporting tend to be on theconservative side of the market. This can make it difficult for us to compete with institutions that have comparable loan pricing but more lenient lendingrequirements. Our loan pricing is also impacted in a significant way by the financial strength of the borrower, the guarantor and the collateral. This enables us tocompete effectively for highly qualified borrowers, but it can place us at a competitive disadvantage with respect to borrowers who present acceptable credit risksbut are not highly qualified. Our ability to achieve future loan and lease growth will also be affected by factors that are not exclusively within our control, such asthe level of loan payoffs and regulatory charter limits and concentrations of credit limits. These and other factors could weaken our competitive position, whichcould adversely affect our growth and profitability. This, in turn, could have a material adverse effect on our business, financial condition, and results ofoperations.Historically low interest rates could continue to adversely affect our net interest income and profitabilityOur consolidated operating results are largely dependent on our net interest income. Net interest income is the difference between interest earned on loans andinvestments and interest expense incurred on deposits and other borrowings. Our net interest income is impacted by changes in market rates of interest, changes incredit spreads, changes in the shape of the yield curve, the interest rate sensitivity of our assets and liabilities, prepayments on our loan, leases and investments, andthe mix of our funding sources and assets, among other things.In recent years it has been the policy of the Board of Governors of the Federal Reserve System to maintain interest rates at historically low levels through itstargeted federal funds rate and the purchase of securities. As a result, the interest rates on new loans we have originated and maturing loans that we have renewedand the yields on securities we have purchased during this period have been at historically low levels. Our ability to offset this by lowering the interest rates that wepay on deposits is10Table of Contentsseverely limited because interest rates on deposits are already at historic lows. Accordingly, our net interest income (the difference between interest income earnedon assets and interest expense paid on liabilities) may decrease, which may have an adverse effect on our profitability.Changes in market interest rates could adversely affect our financial condition and results of operationsOur financial condition and results of operations are significantly affected by changes in market interest rates because our assets, primarily loans and leases, andour liabilities, primarily deposits, are monetary in nature. Our results of operations depend substantially on our net interest income, which is the difference betweenthe interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. Market interest rates areaffected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events, and changes in theUnited States and other financial markets. Our net interest income is affected not only by the level and direction of interest rates, but also by the shape of the yieldcurve and relationships between interest sensitive instruments and key driver rates, including credit risk spreads, and by balance sheet growth, customer loan anddeposit preferences and the timing of changes in these variables which themselves are impacted by changes in market interest rates. As a result, changes in marketinterest rates can significantly affect our net interest income as well as the fair market valuation of our assets and liabilities, particularly if they occur more quicklyor to a greater extent than anticipated.While we take measures intended to manage the risks from changes in market interest rates, we cannot control or accurately predict changes in market rates ofinterest or be sure that our protective measures are adequate. If the interest rates paid on deposits and other interest bearing liabilities increase at a faster rate thanthe interest rates received on loans and other interest earning assets, our net interest income, and therefore earnings, could be adversely affected. We would alsoincur a higher cost of funds to retain our deposits in a rising interest rate environment. While the higher payment amounts we would receive on adjustable rateloans in a rising interest rate environment may increase our interest income, some borrowers may be unable to afford the higher payment amounts, and this couldresult in a higher rate of default. Rising interest rates also may reduce the demand for loans and the value of fixed-rate investment securities.A substantial portion of our loan portfolio is secured by real estate. Deterioration in the real estate markets could lead to higher provisions for loan losses,which could have a material negative effect on our financial condition and results of operationsA substantial portion of our loan portfolio is secured by real estate. At December 31, 2015, our loan portfolio included $506.0 million in multi-family mortgageloans, or 40.8% of total loans, $226.7 million in nonresidential real estate loans, or 18.3% of total loans, and $159.5 million in one-to-four family residential realestate loans, or 12.9% of total loans (which includes $44.5 million in non-owner occupied one-to-four family residential real estate loans, or 3.6% of total loans).Adverse economic conditions and increased levels of unemployment in any of the selected markets in which we make multifamily loans and in the Chicago marketwith respect to commercial real estate loans and one-to-four family residential loans could cause us to experience higher levels of defaults, charge-offs, loanclassifications and provisions for loan losses on our real estate loans and write-downs on our other real estate owned.Adverse changes in local economic conditions and adverse conditions in an industry on which a local market in which we do business depends could hurtour business in a material wayExcept for our lease and healthcare lending activities, which we conduct on a nationwide basis, and our multi-family lending activities, which we conduct inselected Metropolitan Statistical Areas, including the Metropolitan Statistical Areas for Chicago, Illinois, Dallas, Texas, Denver, Colorado, Tampa, Florida andMinneapolis, Minnesota, our loan and deposit activities are generally conducted in the Metropolitan Statistical Area for Chicago, Illinois. Our loan and depositactivities are directly affected by, and our financial success depends on, economic conditions within the local markets in which we do business, as well asconditions in the industries on which those markets are economically dependent. A deterioration in local economic conditions or in the condition of an industry onwhich a local market depends could adversely affect such factors as unemployment rates, business formations and expansions, housing demand, apartment vacancyrates and real estate values in the local market, and this could result in, among other things, a decline in loan and lease demand, a reduction in the number ofcreditworthy borrowers seeking loans, an increase in loan delinquencies, defaults and foreclosures, an increase in classified and nonaccrual loans, a decrease in thevalue of the collateral for our loans, and a decline in the net worth and liquidity of our borrowers and guarantors. Any of these factors could hurt our business in amaterial way.11Table of ContentsThe City of Chicago and the State of Illinois have experienced significant financial difficulties, and this could adversely impact certain borrowers and theeconomic vitality of the City and StateThe City of Chicago and the State of Illinois are experiencing significant financial difficulties, including material pension funding shortfalls. Their debt ratingshave been downgraded and the State of Illinois’ executive and legislative branches of government have been unable to reach agreement on a budget for the currentfiscal year. These issues could impact the economic vitality of the City of Chicago and the State of Illinois and the businesses operating there, encouragebusinesses to leave the City of Chicago and the State of Illinois, and discourage new employers from starting or moving businesses to there. These issues couldalso result in delays in the payment of accounts receivable owed to borrowers that do business with the State of Illinois and Medicaid payments to nursing homesand other healthcare providers in Illinois, and impair their ability to repay their loans when due.Repayment of our commercial and commercial real estate loans typically depends on the cash flows of the borrower. If a borrower's cash flows weaken orbecome uncertain, the loan may need to be classified, the collateral securing the loan may decline in value and we may need to increase our loan lossreserves or record a charge offWe underwrite our commercial and commercial real estate loans primarily based on the historical and expected cash flows of the borrower. Although we considercollateral in the underwriting process, it is a secondary consideration that generally relates to the risk of loss in the event of a borrower default. We follow theOCC's published guidance for assigning risk-ratings to loans, which emphasizes the strength of the borrower's cash flow. Specifically, the OCC's loan risk-ratingguidance provides that the primary consideration in assigning risk-ratings to commercial and commercial real estate loans is the strength of the primary source ofrepayment, which is defined as a sustainable source of cash under the borrower's control that is reserved, explicitly or implicitly, to cover the debt obligation. TheOCC's loan risk-rating guidance typically does not consider secondary repayment sources until the strength of the primary repayment source weakens, andcollateral values typically do not have a significant impact on a loan's risk ratings until a loan is classified. Consequently, if a borrower's cash flows weaken orbecome uncertain, the loan may need to be classified, whether or not the loan is performing or fully secured. In addition, real estate appraisers typically placesignificant weight on the cash flows generated by income-producing real estate and the reliability of the cash flows in performing valuations. Thus, economic orborrower-specific conditions that cause a decline in a borrower's cash flows could cause our loan classifications to increase and the appraised value of the collateralsecuring our loans to decline, and require us to increase our loan loss reserves or record charge offs.If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings would be adversely impactedIn the event that our loan customers do not repay their loans according to their terms, and the collateral securing the repayment of these loans is insufficient tocover any remaining loan balance, including expenses of collecting the loan and managing and liquidating the collateral, we could experience significant loanlosses or increase our provision for loan losses or both, which could have a material adverse effect on our operating results. At December 31, 2015 , our allowancefor loan losses was $9.7 million , which represented 0.78% of total loans and 271.30% of nonperforming loans as of that date. In determining the amount of ourallowance for loan losses, we rely on internal and external loan reviews, our experience and our evaluation of economic conditions, among other factors. Inaddition, we make various estimates and assumptions about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value ofthe real estate and other assets, if any, serving as collateral for the repayment of our loans. We also make judgments concerning our legal positions and the priorityof our liens and interests in contested legal or bankruptcy proceedings, and at times, we may lack sufficient information to establish adequate specific reserves forloans involved in such proceedings. We base these estimates, assumptions and judgments on information that we consider reliable, but if an estimate, assumptionor judgment that we make ultimately proves to be incorrect, additional provisions to our allowance for loan losses may become necessary. In addition, as anintegral part of their supervisory and/or examination process, the OCC periodically reviews the methodology for and the sufficiency of the allowance for loanlosses. The OCC has the authority to require us to recognize additions to the allowance based on their inclusion, exclusion or modification of risk factors ordifferences in judgments of information available to them at the time of their examination.Repayment of our lease loans is typically dependent on the cash flows of the lessee, which may be unpredictable, and the collateral securing these loansmay fluctuate in valueWe lend money to small and mid-sized independent leasing companies to finance the debt portion of leases. A lease loan arises when a leasing company discountsthe equipment rental revenue stream owed to the leasing company by a lessee. Our lease loans entail many of the same types of risks as our commercial loans.Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the leased equipment. As withcommercial loans secured by equipment, the equipment securing our lease loans may depreciate over time, may be difficult to appraise and may fluctuate in value.We rely on the lessee’s continuing financial stability, rather than the value of the leased equipment, for the repayment of all required amounts under lease loans. Inthe event of a default on a lease loan, the proceeds from the sale of the leased equipment may not be sufficient12Table of Contentsto satisfy the outstanding unpaid amounts under the terms of the loan. At December 31, 2015 , our lease loans totaled $265.4 million , or 21.4% of our total loanportfolio.Our loan portfolio includes loans to healthcare providers, and the repayment of these loans is largely dependent upon the receipt of governmentalreimbursementsAt December 31, 2015 , we had $50.7 million of loans and unused commitments to a variety of healthcare providers, including lines of credit secured by healthcarereceivables. The repayment of these lines of credit is largely dependent on the borrower's receipt of payments and reimbursements under Medicaid, Medicare andin some cases private insurance contracts for the services they have provided. The ability of the borrowers to service loans we have made to them may be adverselyimpacted by the financial health of the state or federal payors, many of which have experienced budgetary stress, to make reimbursements for the servicesprovided. The failure of one or more state or federal payors to make reimbursements owed to the operators of these facilities, or a significant delay in the making ofsuch reimbursements, could adversely affect the ability of the operators of these facilities to repay their obligations to us. In addition, changes to national healthcare policy involving private health insurance policies may also affect the business prospects and financial condition or operations of commercial loan customersand commercial lessees involved in health care-related businesses.New or changing tax, accounting, and regulatory rules and interpretations could have a significant impact on our strategic initiatives, results ofoperations, cash flows, and financial conditionThe banking services industry is extensively regulated and the degree of regulation is increasing due to the Dodd-Frank Act and regulatory initiatives precipitatedby the Dodd-Frank Act and the most recent economic downturn and the resulting disruptions that certain financial markets experienced. These regulations, alongwith the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies and interpretations, control the methodsby which financial institutions and their holding companies conduct business, engage in strategic and tax planning and implement strategic initiatives, and governfinancial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly overtime.We are subject to security and operational risks relating to our use of technology, including the risk of cyber-attack or cyber-theftCommunications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, generalledger and virtually all other aspects of our business. We depend on the secure processing, storage and transmission of confidential and other information in ourdata processing systems, computers, networks and communications systems. Although we take numerous protective measures and otherwise endeavor to protectand maintain the privacy and security of confidential data, these systems may be vulnerable to unauthorized access, computer viruses, other malicious code, cyber-attacks, cyber-theft and other events that could have a security impact. If one or more of such events were to occur, this potentially could jeopardize confidentialand other information processed and stored in, and transmitted through, our systems or otherwise cause interruptions or malfunctions in our or our customers'operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities orother exposures, and we may be subject to litigation and financial losses that are not fully covered by our insurance. Security breaches in our Internet bankingactivities could expose us to possible liability and deter customers from using our systems. We rely on standard internet security systems to provide the securityand authentication necessary to effect secure transmission of data. These precautions may not fully protect our systems from compromises or breaches of oursecurity measures that could result in damage to our reputation and our business. Although we perform most data processing functions internally, we outsourcecertain services to third parties. If our third party providers encounter operational difficulties or security breaches, it could affect our ability to adequately processand account for customer transactions, which could significantly affect our business operations.Our operations rely on numerous external vendorsWe rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations areexposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an externalvendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure,financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn couldhave a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is notrenewed by the third party vendor or is renewed on terms less favorable to us.13Table of ContentsOur business and operations could be significantly impacted if we or our third party vendors suffer failure or disruptions of information processingsystems, systems failures or security breachesWe have become increasingly dependent on communications, data processing and other information technology systems to manage and conduct our business andsupport our day-to-day banking, investment, and trust activities, some of which are provided through third-parties. If we or our third party vendors encounterdifficulties or become the subject of a cyber-attack on or other breach of their operational systems, data or infrastructure, or if we have difficulty communicatingwith any such third party system, our business and operations could suffer. Any failure or disruption to our systems, or those of a third party vendor, could impedeour transaction processing, service delivery, customer relationship management, data processing, financial reporting or risk management. Although we takeongoing monitoring, detection, and prevention measures and perform penetration testing and periodic risk assessments, our computer systems, software andnetworks and those of our third party vendors may be or become vulnerable to unauthorized access, loss or destruction of data (including confidential clientinformation), account takeovers, unavailability of service, computer viruses, denial of service attacks, malicious social engineering or other malicious code, orcyber-attacks beyond what we can reasonably anticipate and such events could result in material loss. If any of our financial, accounting or other data processingsystems fail or have other significant shortcomings, we could be materially adversely affected. Security breaches in our online banking systems could also have anadverse effect on our reputation and could subject us to possible liability. Additionally, we could suffer disruptions to our systems or damage to our networkinfrastructure from events that are wholly or partially beyond our control, such as electrical or telecommunications outages, natural disasters, widespread healthemergencies or pandemics, or events arising from local or larger scale political events, including terrorist acts. There can be no assurance that our policies,procedures and protective measures designed to prevent or limit the effect of a failure, interruption or security breach, or the policies, procedures and protectivemeasures of our third party vendors, will be effective. If significant failure, interruption or security breaches do occur in our processing systems or those of ourthird party providers, we could suffer damage to our reputation, a loss of customer business, additional regulatory scrutiny, or exposure to civil litigation,additional costs and possible financial liability. In addition, our business is highly dependent on our ability to process, record and monitor, on a continuous basis, alarge number of transactions. To do so, we are dependent on our employees and therefore, the potential for operational risk exposure exists throughout ourorganization, including losses resulting from human error. We could be materially adversely affected if one or more of our employees cause a significantoperational breakdown or failure. If we fail to maintain adequate infrastructure, systems, controls and personnel relative to our size and products and services, ourability to effectively operate our business may be impaired and our business could be adversely affected.We continually encounter technological change, and may have fewer resources than many of our competitors to continue to invest in technologicalimprovementsThe financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. Theeffective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, inpart, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands forconvenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technologicalimprovements. We also may not be able to effectively implement new technology-driven products and services or be successful in marketing these products andservices to our customers.Consumers and businesses are increasingly using non-banks to complete their financial transactions, which could adversely affect our business andresults of operationsTechnology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternativemethods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platformsin which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directlywithout the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income,as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower costdeposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.The Bank is subject to limits on certain types of commercial lending, which restricts our ability to grow our commercial loan portfolio and diversify ouroverall loan portfolioUnder the Home Owners Loan Act, the Bank may originate, invest in, sell or purchase unlimited loans on the security of residential real estate, while loans onnonresidential real estate generally may not, on a combined basis, exceed 400% of the Bank’s total capital. In addition, secured and unsecured commercial loansand certain types of commercial personal property leases may not14Table of Contentsexceed 20% of the Bank’s assets; however, amounts in excess of 10% of assets may only be used for small business loans. Further, the Bank may generally investup to 35% of its assets in consumer loans, corporate debt securities and commercial paper on a combined basis. The Bank may invest up to 10% of its assets intangible personal property, for rental or sale. Certain leases on tangible personal property are not aggregated with commercial or consumer loans for the purposesof determining compliance with the limitations set forth for those investment categories. These limitations limit our ability to grow our commercial loan portfolioand diversify our overall loan portfolio.New lines of business or new products and services may subject us to additional risksFrom time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business in our current markets ornew markets. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. Indeveloping and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for theintroduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not provefeasible, which could in turn have a material negative effect on our operating results.Our sources of funds are limited because of our holding company structureThe Company is a separate legal entity from its subsidiaries and does not have significant operations of its own. Dividends from the Bank provide a significantsource of cash for the Company. The availability of dividends from the Bank is limited by various statutes and regulations. Under these statutes and regulations, theBank is not permitted to pay dividends on its capital stock to the Company, its sole stockholder, if the dividend would reduce the stockholders' equity of the Bankbelow the amount of the liquidation account established in connection with the mutual-to-stock conversion. Federal savings banks may pay dividends without theapproval of its primary federal regulator only if they meet applicable regulatory capital requirements before and after the payment of the dividends and totaldividends do not exceed net income to date over the calendar year plus its retained net income over the preceding two years. Although the Bank's capital exceededapplicable regulatory requirements at December 31, 2015, the Bank did not have sufficient net income over the preceding two years to pay a dividend to theCompany without receiving prior regulatory approval. The Company has also reserved $5.0 million of its available cash to maintain its ability to serve as a sourceof financial strength to the Bank. If in the future, the Company utilizes its available cash for other purposes and the Bank is unable to pay dividends to theCompany, the Company may not have sufficient funds to pay dividends.FDIC deposit insurance costs have increased and may increase further in the futureFDIC insurance rates have increased significantly, and we may pay higher FDIC deposit premiums in the future. The Dodd-Frank Act established 1.35% as theminimum Designated Reserve Ratio (“DRR”) for the deposit insurance fund. The FDIC has determined that the DRR should be 2.0% and has adopted a plan underwhich it will meet the statutory minimum DRR of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act also required the FDIC to basedeposit insurance premiums on an institution's total assets minus its tangible equity instead of its deposits. The FDIC has adopted final regulations that baseassessments for banks and thrifts on a combination of financial ratios and regulatory ratings. The FDIC also revised the assessment schedule and establishedadjustments that increase assessments so that the range of assessments is now 2.5 basis points to 45 basis points of total assets less tangible equity. If there are anychanges in the Bank’s financial ratios and regulatory ratings that require adjustments that increase its assessment, or, if circumstances require the FDIC to imposeadditional special assessments or further increase its quarterly assessment rates, our results of operations could be adversely impacted.We will become subject to more stringent capital requirements, which could adversely impact our return on equity, require us to raise additional capital,or constrain us from paying dividends or repurchasing sharesIn July 2013, the federal banking agencies approved a new rule that substantially amends the regulatory risk-based capital rules applicable to the Bank and theCompany. The final rule implements the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.The final rule includes new minimum risk-based capital and leverage ratios, which became effective for us on January 1, 2015, and refines the definition of whatconstitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%;(ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverageratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculatingregulatory capital requirements unless a one-time opt-out is exercised. The Bank exercised this one-time opt-out option. The final rule also establishes a “capitalconservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assetscapital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The phase in of the new capital conservation buffer requirement began in January 2016 at 0.625% ofrisk-weighted15Table of Contentsassets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in sharerepurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligibleretained income that can be utilized for such actions.We have analyzed the effects of these new capital requirements, and as of December 31, 2015 we believe that the Bank and the Company met all of these newrequirements, including the full 2.5% capital conservation buffer.The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, andresult in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with theimplementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquidassets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/oradditional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, includingpaying out dividends or buying back shares. Specifically, beginning in 2016, the Bank’s ability to pay dividends will be limited if it does not have the capitalconservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. See “Supervision and Regulation-FederalBanking Regulation-New Capital Rule.”The residential loans in our loan portfolio are sensitive to regional and local economic conditionsWe originate fixed and adjustable rate loans secured by one-to-four family residential real estate. Our general practice is to sell a majority of our newly originatedfixed-rate residential real estate loans and to hold in portfolio a limited number of adjustable-rate residential real estate loans. Our portfolio also includes homeequity lines of credit and fixed-rate second mortgage loans. Residential real estate lending is sensitive to regional and local economic conditions that significantlyimpact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Residential loans with high combined loan-to-valueratios generally are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higherincidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the saleproceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which could in turn adversely affect our financial condition andresults of operations.Recent regulations could restrict our ability to originate and sell residential loansThe Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, whichwould hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed tohave complied with the ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certainspecified features, including:•excessive up-front points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);•interest-only payments;•negative-amortization; and•terms longer than 30 years.Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document theincome and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule andmaximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit riskfor any asset that is not a “qualified residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement, which provides that thedefinition of “qualified residential mortgage” is the same as the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau forpurposes of its regulations. These final rules could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict ourability to make loans, any of which could limit our growth or profitability.16Table of ContentsTrading activity in the Company's common stock could result in material price fluctuationsIt is possible that trading activity in the Company's common stock, including short-selling or significant sales by our larger stockholders, could result in materialprice fluctuations of the price per share of the Company's common stock. In addition, such trading activity and the resultant volatility could make it more difficultfor the Company to sell equity or equity-related securities in the future at a time and price it deems appropriate, or to use its stock as consideration for anacquisition.Various factors may make takeover attempts that you might want to succeed more difficult to achieve, which may affect the value of shares of ourcommon stockProvisions of our articles of incorporation and bylaws, federal regulations, Maryland law and various other factors may make it more difficult for companies orpersons to acquire control of the Company without the consent of our board of directors. You may want a takeover attempt to succeed because, for example, apotential acquirer could offer a premium over the then prevailing price of our shares of common stock. Provisions of our articles of incorporation and bylaws alsomay make it difficult to remove our current board of directors or management if our board of directors opposes the removal. We have elected to be subject to theMaryland Business Combination Act, which places restrictions on mergers and other business combinations with large stockholders. In addition, our articles ofincorporation provide that certain mergers and other similar transactions, as well as amendments to our articles of incorporation, must be approved by stockholdersowning at least two-thirds of our shares of common stock entitled to vote on the matter unless first approved by at least two-thirds of the number of our authorizeddirectors, assuming no vacancies. If approved by at least two-thirds of the number of our authorized directors, assuming no vacancies, the action must still beapproved by a majority of our shares entitled to vote on the matter. In addition, a director can be removed from office, but only for cause, if such removal isapproved by stockholders owning at least two-thirds of our shares of common stock entitled to vote on the matter. However, if at least two-thirds of the number ofour authorized directors, assuming no vacancies, approves the removal of a director, the removal may be with or without cause, but must still be approved by amajority of our voting shares entitled to vote on the matter. Additional provisions include limitations on the voting rights of any beneficial owners of more than10% of our common stock. Our bylaws, which can only be amended by the board of directors, also contain provisions regarding the timing, content and proceduralrequirements for stockholder proposals and nominations.Non-Compliance with USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctionsFinancial institutions are required under the USA PATRIOT and Bank Secrecy Acts to develop programs to prevent financial institutions from being used formoney-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department's Office ofFinancial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying andverifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines orpenalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. Duringthe last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the U.S. Governmentimposed and will continue to expand laws and regulations relating to residential and consumer lending activities that create significant new compliance burdensand financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations,but these policies may not be effective to provide such compliance.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.ITEM 2.PROPERTIESWe conduct our business at 19 banking offices located in the Chicago metropolitan area. We own our banking center facilities, except for our Chicago-LincolnPark, and Northbrook offices, which are leased. We also operate four satellite loan and lease production offices, which are leased. We believe that all of ourproperties and equipment are well maintained, in good operating condition and adequate for all of our present and anticipated needs.We believe our facilities in the aggregate are suitable and adequate to operate our banking and related business. Additional information with respect to premisesand equipment is presented in Note 7 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.17Table of ContentsITEM 3.LEGAL PROCEEDINGSThe Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, based on currentlyavailable information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.ITEM 4.MINE SAFETY DISCLOSURESNot applicable.PART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESOur shares of common stock are traded on the NASDAQ Global Select Market under the symbol “BFIN.” The approximate number of holders of record of theCompany’s common stock as of December 31, 2015 was 1,355. Certain shares of the Company’s common stock are held in “nominee” or “street” name, andaccordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.The following table presents quarterly market information provided by the NASDAQ Stock Market for the Company’s common stock and cash dividends paid forthe periods ended December 31, 2015 and 2014 .2014 and 2015 Quarterly Periods High Low Close CashDividendsPaidQuarter ended December 31, 2015 $13.22 $12.10 $12.63 $0.04Quarter ended September 30, 2015 12.48 11.57 12.43 0.08Quarter ended June 30, 2015 13.62 11.47 11.78 0.04Quarter ended March 31, 2015 13.16 11.07 13.14 0.04Quarter ended December 31, 2014 $12.17 $10.24 $11.86 $0.03Quarter ended September 30, 2014 10.69 10.43 10.55 0.04Quarter ended June 30, 2014 11.24 9.40 11.16 0.01Quarter ended March 31, 2014 10.33 9.06 9.98 —The Company is subject to federal regulatory limitations on the payment of dividends. Federal Reserve Board Supervisory Letter SR 09-4 provides that a holdingcompany should, among other things, notify and make a submission to the Federal Reserve Bank prior to declaring a dividend if its net income for the currentquarter is not sufficient to fully fund the dividend, and consider eliminating, deferring or significantly reducing its dividends if its net income for the current quarteris not sufficient to fully fund the dividends, or if its net income for the past four quarters, net of dividends previously paid during that period, is not sufficient tofully fund the dividends.The Company is also subject to state law limitations on the payment of dividends. Maryland law generally limits dividends to an amount equal to the excess of ourcapital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving thedividend, and to an amount that would not make us insolvent provided, however, that even if the Company’s assets are less than the amount necessary to satisfy therequirement set forth above, the Company may make a distribution from: (1) the Company’s net earnings for the fiscal year in which the distribution is made;(2) the Company’s net earnings for the preceding fiscal year; or (3) the sum of the Company’s net earnings for the preceding eight fiscal quarters. Dividends fromthe Bank provide a significant source of cash for the Company. The availability of dividends from the Bank is limited by various statutes and regulations. For adiscussion of the Bank’s ability to pay dividends, see Part I, Item 1, “Business — Supervision and Regulation — Federal Banking Regulation — CapitalDistributions.”Recent Sales of Unregistered SecuritiesThe Company had no sales of unregistered stock during the quarter ended December 31, 2015 .18Table of ContentsRepurchases of Equity SecuritiesOn March 30, 2015, the Company announced that its Board had authorized the repurchase of up to 1,055,098 shares of the Company’s common stock, whichrepresents approximately 5% of the Company’s issued and outstanding shares of common stock. On December 28, 2015, the Board extended this repurchaseauthorization from December 31, 2015 to December 31, 2016, and increased the number of shares that can be repurchased in accordance with the authorization by1,046,868. As of December 31, 2015, the Company had repurchased 804,649 shares of its common stock out of the 2,101,966 shares of common stock authorizedunder this repurchase authorization. Since its inception, the Company has repurchased 5,043,783 shares of its common stock.19Table of ContentsStock Performance GraphThe following line graph shows a comparison of the cumulative returns for the Company, the Russell 2000 Index, the NASDAQ Bank Index, the ABA CommunityBank NASDAQ Index and the KBW Regional Banking Index for the period beginning December 31, 2005 and ending December 31, 2015 . The informationassumes that $100 was invested at the closing price on December 31, 2005 in the Common Stock and each index, and that all dividends were reinvested. December 31, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015BankFinancial Corporation 100.00 122.60 110.83 72.76 72.58 73.47 42.59 57.46 71.22 92.82 100.26Russell 2000 Index 100.00 118.37 116.51 77.15 98.11 124.46 119.26 138.76 192.63 202.06 193.14NASDAQ Bank Index 100.00 111.01 86.51 65.81 53.63 60.01 52.55 60.85 84.52 86.92 92.68ABA Community Bank NASDAQ Index 100.00 110.83 83.35 67.04 52.71 57.58 52.68 60.76 84.60 86.98 93.46KBW Bank Index 100.00 105.62 79.81 62.53 47.38 56.01 52.01 57.45 82.54 82.70 76.2920Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following information is derived from the audited consolidated financial statements of the Company. For additional information, reference is made to Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements of the Company andrelated notes included elsewhere in this Annual Report. At and For the Years Ended December 31, 2015 2014 2013 2012 2011 (Dollars in thousands, except per share data)Selected Financial Condition Data: Total assets$1,512,443 $1,465,410 $1,453,594 $1,481,192 $1,563,575Loans, net1,232,257 1,172,356 1,098,077 1,030,465 1,227,391Loans held-for-sale— — — 2,166 1,918Securities, at fair value114,753 121,174 110,907 77,832 92,832Core deposit intangible1,305 1,855 2,433 3,038 3,671Deposits1,212,919 1,211,713 1,252,708 1,282,351 1,332,552Borrowings64,318 12,921 3,055 5,567 9,322Equity212,364 216,121 175,627 172,890 199,857 Selected Operating Data: Interest and dividend income$48,962 $49,349 $49,392 $60,727 $69,708Interest expense2,814 3,046 3,653 4,447 6,915Net interest income46,148 46,303 45,739 56,280 62,793Provision for (recovery of) loan losses(3,206) (736) (687) 31,522 22,723Net interest income after provision for (recovery of)loan losses49,354 47,039 46,426 24,758 40,070Noninterest income6,691 6,709 8,134 7,723 8,144Noninterest expense (1)41,945 44,451 51,262 59,590 84,535Income (loss) before income taxes14,100 9,297 3,298 (27,109) (36,321)Income tax expense (benefit) (2)5,425 (31,317) — — 12,375Net income (loss)$8,675 $40,614 $3,298 $(27,109) $(48,696)Basic earnings (loss) per common share$0.44 $2.01 $0.16 $(1.36) $(2.46)Diluted earnings (loss) per common share$0.44 $2.01 $0.16 $(1.36) $(2.46)(footnotes on following page)21Table of Contents At and For the Years Ended December 31, 2015 2014 2013 2012 2011Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income (loss) to average totalassets)0.60 % 2.83% 0.23% (1.78)% (3.00)%Return on equity (ratio of net income (loss) to averageequity)4.03 22.58 1.89 (13.36) (19.47)Net interest rate spread (3)3.36 3.35 3.28 3.86 4.09Net interest margin (4)3.43 3.40 3.33 3.93 4.20Efficiency ratio (5)79.38 83.85 95.15 93.11 85.53Noninterest expense to average total assets (6)2.90 3.10 3.53 3.92 3.74Average interest-earning assets to average interest-bearingliabilities132.32 123.09 121.50 123.17 122.68Dividends declared per share$0.20 $0.08 $0.04 $0.03 $0.22Dividend payout ratio47.8 % 4.2% 25.6% N.M. N.M.Asset Quality Ratios: Nonperforming assets to total assets (7)0.70 % 1.27% 1.70% 2.61 % 6.33 %Nonperforming loans to total loans0.29 1.03 1.66 2.70 6.08Allowance for loan losses to nonperforming loans271.30 98.17 76.89 63.64 41.47Allowance for loan losses to total loans0.78 1.01 1.27 1.72 2.52Net charge-offs to average loans outstanding(0.08) 0.13 0.31 3.91 1.04Capital Ratios: Equity to total assets at end of period14.04 % 14.75% 12.08% 11.67 % 12.78 %Average equity to average assets14.88 12.54 12.05 13.36 15.42Tier 1 leverage ratio (Bank only)11.33 11.45 10.16 9.60 10.48Other Data: Number of full-service offices (8)19 19 20 20 20Employees (full-time equivalents)251 269 301 352 357 (1)Noninterest expense for the year ended December 31, 2011 includes a full goodwill impairment of $23.9 million.(2)Income tax expense (benefit) for the year ended December 31, 2014 includes a full recovery of the deferred tax asset valuation allowance of $35.1 million, and incometax expense (benefit) for the year ended December 31, 2011 includes the establishment of a full valuation allowance for the deferred tax asset of $22.6 million.(3)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 theperiod.(4)The net interest margin represents net interest income divided by average total interest-earning assets for the period.(5)The efficiency ratio represents noninterest expense, less goodwill impairment, divided by the sum of net interest income and noninterest income.(6)The noninterest expense to average total assets ratio represents noninterest expense less goodwill impairment, divided by average total assets.(7)Nonperforming assets include nonperforming loans and other real estate owned.(8) The Bank's Hyde Park East branch was closed on January 2, 2014.N.M. Not Meaningful22Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe discussion and analysis that follows focuses on certain factors affecting our consolidated financial condition at December 31, 2015 and 2014 , and ourconsolidated results of operations for the three years ended December 31, 2015 . Our consolidated financial statements, the related notes and the discussion of ourcritical accounting policies appearing elsewhere in this Annual Report should be read in conjunction with this discussion and analysis.Overview of 2015Due to increased marketing, expansion of commercial banking officers and markets, and the introduction of new commercial loan and lease products, totalcommercial loans increased by 7.8% in 2015, with diversified growth in multifamily loans, commercial and industrial loans and commercial leases. Since 2012, theCompany has experienced an average 9.4% annual net increase in commercial loan balances.The deposit portfolio remained stable during 2015 as we managed our deposit portfolio to retain and increase higher value core deposit relationships and maintainthe lowest practicable cost of funds. We ended 2015 with our highest-ever core deposit ratio at 82% of total deposits.Our net interest margin remained stable during 2015 as our loan growth offset the impact of lower market yields on loan originations and loan renewals, and ourdecision not to renew certain higher yielding loans based on their risk characteristics.Noninterest income from customer loan, deposit, wealth management and trust fees increased, while income from mortgage banking operations declined asplanned. We reduced our noninterest expense by 5.6% in 2015, focusing principally on efficiencies related to staffing, facilities and our ongoing initiatives toutilize technology-based transaction processing and customer information delivery capabilities. At the same time, we increased advertising, marketing and staffingin all aspects of commercial lending to further accelerate commercial loan and lease growth.We successfully executed our plan to reduce nonperforming assets and future nonperforming asset expenses during 2015. Nonperforming loans to total loansdeclined from 1.03% at December 31, 2014 to 0.29% at December 31, 2015 of total loans and our ratio of nonperforming assets to total assets declined to 0.70% atDecember 31, 2015. In addition, consistent with our practices in previous years, we actively managed our loan portfolio to exit $24.5 million of multi-family andcommercial real estate relationships based on their risk characteristics.The Company has a strong capital position, and is well-capitalized under all applicable current and anticipated regulatory standards. In particular, the Company’sTier 1 Risk-Based Capital ratio continues to benefit from the Company’s emphasis on originating high-quality multifamily loans that are eligible for the 50% risk-weight category under the risk-based capital rules, and selected commercial equipment leases to government entities that are eligible for the 20% risk-weightcategory.The Company’s tangible book value per share increased to $10.40 from $10.15 in 2014. We increased dividends paid to shareholders by $2.5 million and reducedthe total shares outstanding by 804,649 during 2015.Outlook for 2016We begin 2016 in a strong financial condition and with positive momentum. The combined effect of continued low market interest rates and yields and competitiveforces in the Chicago metropolitan area and in our other business units is expected to maintain pressure on asset yields throughout 2016. The Company’s interestrate risk position is neutral to slightly asset-sensitive, such that an increase in market interest rates will tend to be a positive factor in the Company’s earnings.Our focus in 2016 will be on balance sheet growth as we continue to deploy our available surplus capital. We will continue the evolution of our loan portfoliotowards a configuration that permits better growth rates in multiple, independent segments with comparable risk-adjusted yields. We expect to expand our marketing of new deposit products to further improve deposit-related revenue in 2016; in addition, we may also be successful in furtherincreasing revenues related to trust, non-deposit wealth management, and commercial property and casualty insurance sales due to new product capabilities andincreased dedicated sales capacity. Core noninterest expense is expected to hold steady or continue to decline slightly despite increases in advertising andmarketing expenses related to loan and deposit growth initiatives. Through these actions, we hope to further improve our core operating earnings in 2016 to a levelconsistent with, or in excess of, peer institutions in our market.23Table of ContentsResults of OperationNet IncomeComparison of Year 2015 to 2014 . We recorded net income of $8.7 million for the year ended December 31, 2015 , compared to net income of $40.6 million for2014 . Net income for 2014 included a tax benefit of $35.1 million that we recorded to reflect the reversal of a valuation allowance that we established in 2011 fordeferred tax assets. Excluding this tax benefit, net income for the year ended December 31, 2014 would have been $5.5 million. The $3.2 million , or 57.8% ,increase in year over year earnings exclusive of the 2014 tax benefit was primarily due to the combined effect of a $2.5 million increase in the recovery ofprovision for loan losses and a $2.5 million decrease in noninterest expense for the year ended December 31, 2015 . Our earnings per share of common stock was$0.44 for the year ended December 31, 2015 , compared to $2.01 per share of common stock for the year ended December 31, 2014 . Excluding the tax benefit thatwe recorded for the recovery of the deferred tax assets valuation allowance, our earnings per share of common stock would have been $0.27 for the year endedDecember 31, 2014.Comparison of Year 2014 to 2013 . We recorded net income of $40.6 million for the year ended December 31, 2014, compared to net income of $3.3 million for2013. Net income for 2014 included a tax benefit of $35.1 million that we recorded to reflect the reversal of a valuation allowance that we established in 2011 fordeferred tax assets. Excluding this tax benefit, net income for the year ended December 31, 2014 would have been $5.5 million. Net income for 2013 included a$1.3 million gain on sale of owner-occupied and investor-owned one-to-four family residential loans designated as held-for-sale. Our earnings per share ofcommon stock was $2.01 for the year ended December 31, 2014, compared to $0.16 per share of common stock for the year ended December 31, 2013. Excludingthe tax benefit that we recorded for the recovery of the deferred tax assets valuation allowance, our earnings per share of common stock would have been $0.27 forthe year ended December 31, 2014.Net Interest IncomeNet interest income is our primary source of revenue. Net interest income equals the excess of interest income (including discount accretion on purchased impairedloans) plus fees earned on interest earning assets over interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix ofinterest-earning assets and interest-bearing liabilities impact net interest income. Interest rate spread and net interest margin are utilized to measure and explainchanges in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities thatfund those assets. The net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceedsthe interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders' equity, also supportinterest-earning assets.The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in Note 1 of “Notes toConsolidated Financial Statements” in Item 8 of this Form 10-K.24Table of ContentsAverage Balance SheetsThe following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, asthe effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of averagebalances, 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, discountsand premiums, purchase accounting adjustments that are amortized or accreted to interest income or expense. Years Ended December 31, 2015 2014 2013 AverageOutstandingBalance Interest Yield/Rate AverageOutstandingBalance Interest Yield/Rate AverageOutstandingBalance Interest Yield/Rate (Dollars in thousands)Interest-earning Assets: Loans$1,163,658 $47,488 4.08% $1,126,511 $47,802 4.24% $1,031,240 $47,691 4.62%Securities109,834 1,141 1.04 114,708 1,154 1.01 72,699 981 1.35Stock in FHLBC6,257 31 0.50 6,202 28 0.45 6,736 22 0.33Other64,434 302 0.47 113,535 365 0.32 262,425 698 0.27Total interest-earningassets1,344,183 48,962 3.64 1,360,956 49,349 3.63 1,373,100 49,392 3.60Noninterest-earning assets101,217 73,126 78,461 Total assets$1,445,400 $1,434,082 $1,451,561 Interest-bearing Liabilities: Savings deposits$155,686 164 0.11 $153,671 158 0.10 $147,444 152 0.10Money market accounts336,179 1,054 0.31 347,367 1,116 0.32 343,823 1,169 0.34NOW accounts289,357 360 0.12 349,021 357 0.10 347,528 379 0.11Certificates of deposit225,990 1,216 0.54 252,629 1,407 0.56 288,351 1,939 0.67Total deposits1,007,212 2,794 0.28 1,102,688 3,038 0.28 1,127,146 3,639 0.32Borrowings8,674 20 0.23 2,980 8 0.27 2,964 14 0.47Total interest-bearingliabilities1,015,886 2,814 0.28 1,105,668 3,046 0.28 1,130,110 3,653 0.32Noninterest-bearing deposits192,528 129,282 129,755 Noninterest-bearing liabilities21,882 19,285 16,818 Total liabilities1,230,296 1,254,235 1,276,683 Equity215,104 179,847 174,878 Total liabilities andequity$1,445,400 $1,434,082 $1,451,561 Net interest income $46,148 $46,303 $45,739 Net interest rate spread (1) 3.36% 3.35% 3.28%Net interest-earning assets (2)$328,297 $255,288 $242,990 Net interest margin (3) 3.43% 3.40% 3.33%Ratio of interest-earningassets to interest-bearingliabilities132.32% 123.09% 121.50% _________________(1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.(2)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.(3)Net interest margin represents net interest income divided by average total interest-earning assets.25Table of ContentsComparison of Year 2015 to 2014 . Net interest income decreased by $155,000 , or 0.3% , to $46.1 million for the year ended December 31, 2015 , from $46.3million for the year ended December 31, 2014 . Our net interest rate spread increased one basis point to 3.36% for the year ended December 31, 2015 , from 3.35%for 2014 . Our net interest margin increased by three basis points to 3.43% for the year ended December 31, 2015 , from 3.40% for 2014 . Our average interest-earning assets decreased $16.8 million to $1.344 billion for the year ended December 31, 2015 , from $1.361 billion for the year ended 2014 . Our average interest-bearing liabilities decreased $89.8 million to $1.016 billion for the year ended December 31, 2015 , from $1.106 billion for 2014 .Comparison of Year 2014 to 2013 . Net interest income increased by $564,000 , or 1.2% , to $46.3 million for the year ended December 31, 2014 , from $45.7million for the year ended December 31, 2013 . Our net interest rate spread increased seven basis points to 3.35% for the year ended December 31, 2014 ,compared to 3.28% for 2013 . Our net interest margin increased by seven basis points to 3.40% for the year ended December 31, 2014 from 3.33% for 2013 . Ouraverage interest-earning assets decreased $12.1 million to $1.361 billion for the year ended December 31, 2014 , from $1.373 billion for 2013 , and our averageinterest-bearing liabilities decreased $24.4 million to $1.106 billion for the year ended December 31, 2014 , from $1.130 billion for 2013 .Rate/Volume AnalysisThe following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets andinterest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to changes attributable tochanges in volume (i.e., changes in average balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changes in average ratemultiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocatedproportionately to the change due to volume and the change due to rate. Years Ended December 31, 2015 vs. 2014 2014 vs. 2013 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate TotalIncrease(Decrease) Volume Rate TotalIncrease(Decrease) (Dollars in thousands)Interest-earning assets: Loans$1,535 $(1,849) $(314) $4,205 $(4,094) $111Securities(48) 35 (13) 465 (292) 173Stock in FHLBC— 3 3 (2) 8 6Other(194) 131 (63) (449) 116 (333)Total interest-earning assets1,293 (1,680) (387) 4,219 (4,262) (43)Interest-bearing liabilities: Savings deposits1 5 6 6 — 6Money market accounts(31) (31) (62) 13 (66) (53)NOW accounts(63) 66 3 4 (26) (22)Certificates of deposit(143) (48) (191) (229) (303) (532)Borrowings13 (1) 12 — (6) (6)Total interest-bearing liabilities(223) (9) (232) (206) (401) (607)Change in net interest income$1,516 $(1,671) $(155) $4,425 $(3,861) $56426Table of ContentsProvision for Loan LossesWe establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary toabsorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience,evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loanand the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from suchestimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loanlosses in order to maintain the allowance.We recorded net recoveries of loan losses of $3.2 million , $736,000 and $687,000 , respectively, for the years ended December 31, 2015 , 2014 and 2013 . Theprovision for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent loanlosses after net charge-offs have been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased$1.9 million , or 16.3% , to $9.6 million at December 31, 2015 , from $11.5 million at December 31, 2014 . This decrease occurred primarily because the growth inour loan portfolio focused on loan types with lower loss ratios based on our historical loss experience, and improvements in the historical loan loss factors thatoccurred as the losses incurred in earlier periods aged and thus were either eliminated from the calculation or assigned a lower weight. Net recoveries were$907,000 in 2015 , compared to net charge-offs of $1.4 million in 2014 and $3.2 million in 2013 . For further analysis and information on how we determine theappropriate level for the allowance for loan losses and analysis of credit quality, see “Critical Accounting Policies,” “Risk Classification of Loans” and “Allowancefor Loan Losses.”Noninterest Income Years Ended December 31, Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (Dollars in thousands)Deposit service charges and fees$2,248 $1,977 $2,005 $271 $(28)Other fee income2,143 2,238 2,250 (95) (12)Insurance commissions and annuities income386 431 474 (45) (43)Gain on sale of loans, net102 158 1,469 (56) (1,311)Loss on sale of securities— (7) — 7 (7)Gain (loss) on disposition of premises and equipment(1) 5 (43) (6) 48Loan servicing fees354 418 461 (64) (43)Amortization of servicing assets(137) (135) (233) (2) 98Recovery (impairment) of servicing assets(3) (8) 65 5 (73)Earnings on bank owned life insurance194 235 313 (41) (78)Trust income712 683 711 29 (28)Other693 714 662 (21) 52Total noninterest income$6,691 $6,709 $8,134 $(18) $(1,425)Comparison of Year 2015 to 2014 . Our noninterest income remained stable at $6.7 million for the years ended December 31, 2015 and 2014 . Deposit servicecharges and fees increased $271,000 , or 13.7% , to $2.2 million for the year ended December 31, 2015 , from $2.0 million for the year ended December 31, 2014 ,primarily due to increased fees from deposit accounts. Other fee income decreased $95,000 , or 4.2% , to $2.1 million for the year ended December 31, 2015 , from$2.2 million for the year ended December 31, 2014 . The decrease is primarily due to decreased ATM surcharges and service charges in 2015 compared to 2014 .Bank-owned life insurance produced earnings of $194,000 for 2015 , a decrease of $41,000 , or 17.4% , compared to $235,000 for 2014 , due to decreasedannualized policy returns.Comparison of Year 2014 to 2013 . Our noninterest income decreased by $1.4 million to $6.7 million for the year ended December 31, 2014, from $8.1 million forthe year ended December 31, 2013, primarily due to a decrease in gain on sale of loans. Noninterest income for the year ended December 31, 2014 included a$158,000 gain on sale of loans, compared to a $1.5 million gain on sale of loans for the year ended December 31, 2013 , which included recurring loan sale activitycombined with the completion of the sale of the owner-occupied and investor-owned one-to four family residential loans that we designated as held-for-sale atDecember 31, 2012. The completion of this sale represented approximately $1.3 million of the $1.5 million gain on sale of loans that we recorded for the yearended December 31, 2013 . We recorded an impairment of servicing assets of $8,00027Table of Contentsfor the year ended December 31, 2014 , compared to a recovery of servicing assets of $65,000 in 2013. Bank-owned life insurance produced earnings of $235,000for 2014 , a decrease of $78,000 , or 24.9%, compared to $313,000 for 2013 , due to decreased annualized policy returns.Noninterest Expense Years Ended December 31, Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (Dollars in thousands)Compensation and benefits$22,222 $22,874 $26,195 $(652) $(3,321)Office occupancy and equipment6,522 6,878 7,547 (356) (669)Advertising and public relations991 1,107 925 (116) 182Information technology2,669 2,676 3,091 (7) (415)Supplies, telephone and postage1,586 1,579 1,697 7 (118)Amortization of intangibles550 578 605 (28) (27)Nonperforming asset management681 838 2,638 (157) (1,800)Loss (gain) on sale other real estate owned(58) 35 148 (93) (113)Valuation adjustments of other real estate owned548 438 550 110 (112)Operations of other real estate owned573 935 915 (362) 20FDIC insurance premiums904 1,416 1,913 (512) (497)Other4,757 5,097 5,038 (340) 59Total noninterest expense$41,945 $44,451 $51,262 $(2,506) $(6,811)Comparison of Year 2015 to 2014 . For the year ended December 31, 2015 , noninterest expense decreased by $2.5 million , or 5.6% , to $41.9 million , comparedto $44.5 million for the year ended December 31, 2014 . Compensation and benefits expense decreased $652,000 , or 2.9% , to $22.2 million for the year endedDecember 31, 2015 , compared to $22.9 million in 2014 . The decrease was due in part to the reduction in full time equivalent employees to 251 at December 31,2015 from 269 at December 31, 2014 , the impact of which was partially offset by a $600,000 increase in stock-based compensation to $1.7 million for the yearended December 31, 2015 , from $1.1 million for 2014 . Noninterest expense for 2015 included $1.7 million of nonperforming asset management and OREOexpenses, compared to $2.2 million for 2014 . Nonperforming asset management expenses decreased $157,000 , or 18.7% , to $681,000 for the year endedDecember 31, 2015 , compared to $838,000 in 2014 . The decrease was primarily due to a decline in nonperforming assets and a corresponding decline in expensesrelating to resolutions and accelerated dispositions of nonperforming assets. The most significant decrease in nonperforming asset management expense related toreal estate taxes, which totaled $247,000 for the year ended December 31, 2015 , compared to $417,000 for 2014 . OREO expenses for the year endedDecember 31, 2015 totaled $1.1 million , and included a $548,000 valuation adjustment to OREO properties, compared to a $438,000 valuation adjustment in 2014. Noninterest expense for the for the year ended December 31, 2015 included a provision of $80,000 for mortgage representation and warranty reserve formortgage loans sold, compared to a $73,000 provision for 2014 .Comparison of Year 2014 to 2013 . For the year ended December 31, 2014 , noninterest expense decreased by $6.8 million , or 13.3% , to $44.5 million from$51.3 million for 2013 . Compensation and benefits expense decreased $3.3 million, or 12.7%, to $22.9 million for the year ended December 31, 2014, comparedto $26.2 million in 2013. The decrease was due in substantial part to the reduction in full time equivalent employees to 269 at December 31, 2014 from 301 atDecember 31, 2013. Stock-based compensation for the year ended December 31, 2014 was $1.1 million, compared to $933,000 for 2013. This increase wasattributable to an increase in ESOP expense resulting from the $2.70 increase in the Company’s stock price that occurred between December 31, 2013 andDecember 31, 2014. Noninterest expense for 2014 included $2.2 million of nonperforming asset management and OREO expenses, compared to $4.3 million for2013. Nonperforming asset management expenses decreased $1.8 million, or 68.2%, to $838,000 for the year ended December 31, 2014, compared to $2.6 millionin 2013. The decrease was primarily due to a decline in nonperforming assets and a corresponding decline in expenses relating to resolutions and accelerateddispositions of nonperforming assets. The most significant decreases in nonperforming asset management expense related to legal expenses, receiver fees, and realestate taxes, which totaled $665,000 for the year ended December 31, 2014, compared to $2.5 million for 2013. OREO expenses for the year ended December 31,2014 totaled $1.4 million, and included a $438,000 valuation adjustment to OREO properties, compared to a $550,000 valuation adjustment in 2013. Noninterestexpense for the year ended December 31, 2014 included a provision of $73,000 for mortgage representation and warranty reserve for mortgage loans sold,compared to a $118,000 provision for 2013, and $53,000 in compensatory fees and final settlements of loans serviced for others.28Table of ContentsNoninterest expense for the year ended December 31, 2013 included the payment of $203,000 of settlements concerning two sold mortgage loans.Income TaxesComparison of Year 2015 to 2014 . For the year ended December 31, 2015 we recorded income tax expense of $5.4 million , compared to an income tax benefit of$31.3 million recorded in 2014 , which included the full recovery of the valuation allowance of $35.1 million we established for deferred tax assets in 2011. Theeffective tax rate for the year ended December 31, 2015 was 38.48% .Comparison of Year 2014 to 2013 . For the year ended December 31, 2014 we recorded an income tax benefit of $31.3 million , which included the full recoveryof the valuation allowance of $35.1 million we established for deferred tax assets in 2011. We reversed the valuation allowance for deferred tax assets as ofDecember 31, 2014 based on management’s determination that it was more likely than not that the Company would realize the tax attributes underlying thedeferred tax assets before they expired. In making this determination, management considered all available negative and positive evidence. For the year endedDecember 31, 2013, we recorded no income tax expense or benefit due to the existence of a full valuation allowance for deferred tax assets. See Note 12 of the"Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K for further information. Excluding the full recovery of the valuation allowance, theeffective tax rate for the year ended December 31, 2014 was 39.13% .Comparison of Financial Condition at December 31, 2015 and December 31, 2014Total assets increased $47.0 million , or 3.2% , to $1.512 billion at December 31, 2015 , from $1.465 billion at December 31, 2014 . The increase in total assetswas primarily due to an increase in loans receivable, which was partially offset by a decrease in securities and deferred taxes. Net loans increased $59.9 million , or5.1% , to $1.232 billion at December 31, 2015 , from $1.172 billion at December 31, 2014 . Net securities decreased by $6.4 million , or 5.3% , to $114.8 million atDecember 31, 2015 , from $121.2 million at December 31, 2014 .Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, commercial, construction and land loans, andcommercial leases), which together totaled 87.0% of gross loans at December 31, 2015 . Net loans receivable increased $59.9 million , or 5.1% , to $1.232 billionat December 31, 2015 . Multi-family mortgage loans increased by $25.7 million , or 5.3% ; commercial loans increased by $12.6 million , or 18.9% ;nonresidential real estate loans decreased $7.8 million , or 3.3% ; construction and land loans decreased by $572,000 , or 30.3% ; one-to-four family residentialmortgage loans decreased by $20.8 million , or 11.6% ; and commercial leases increased by $48.3 million , or 22.2% .Our allowance for loan losses decreased by $2.3 million , or 19.2% , to $9.7 million at December 31, 2015 , from $12.0 million at December 31, 2014 . Thedecrease reflected the combined impact of a $3.2 million recovery of loan losses and $907,000 of net recoveries.Securities decreased $6.4 million , or 5.3% , to $114.8 million at December 31, 2015 , from $121.2 million at December 31, 2014 , due primarily to proceeds frommaturities of $59.8 million and repayments of $7.0 million on residential mortgage-backed securities and collateralized mortgage obligations, were partially offsetby securities purchases of $60.7 million . During 2015 and 2014 , we also invested in FDIC insured certificates of deposit issued by other insured depositoryinstitutions.Deposits increased $1.2 million , or 0.1% , to $1.213 billion at December 31, 2015 , from $1.212 billion at December 31, 2014 , due to an increase in savings andchecking accounts that was partially offset by a decrease in certificates of deposits. Core deposits (savings, money market, noninterest-bearing demand and NOWaccounts) increased as a percentage of total deposits, representing 81.6% of total deposits at December 31, 2015 , compared to 80.8% of total deposits atDecember 31, 2014 .The changes in the balances of noninterest bearing demand deposits and money market and interest-bearing NOW accounts were due in substantial part to effortswe undertook through the third quarter of 2015 to simplify our deposit account options. As part of this process, we discontinued several older account types andconverted the discontinued account types to current account types. During the third quarter of 2015, we converted approximately 9,400 older account types,totaling $80 million, to current account types. Approximately 48% of the converted accounts, or 4,500 accounts, were interest-bearing demand accounts that wereconverted to noninterest bearing demand accounts. Approximately $45 million of the accounts that were converted to non-interest bearing account types havebalances that could migrate to interest-bearing accounts if interest rates were to increase materially; accordingly, we have incorporated the possibility of suchmigration into our various interest-rate risk management scenarios.Certificates of deposit decreased $10.2 million , or 4.4% , to $222.7 million at December 31, 2015 , from $232.9 million at December 31, 2014 . The decrease wasprimarily due to a lessening of our competitive pricing position pending the deployment of our excess liquidity through further loan growth.29Table of ContentsTotal stockholders’ equity was $212.4 million at December 31, 2015 , compared to $216.1 million at December 31, 2014 . The decrease in total stockholders’equity was primarily due to the combined impact of our repurchase of 804,649 shares of our common stock at a total cost of $10.0 million , and our declaration andpayment of cash dividends totaling $4.1 million during the year ended December 31, 2015 . These items were partially offset by net income of $8.7 million that werecorded for the year ended December 31, 2015 . The unallocated shares of common stock that our ESOP owns were reflected as a $9.3 million reduction tostockholders’ equity at December 31, 2015 , compared to a $10.3 million reduction to stockholders’ equity at December 31, 2014 .SecuritiesOur investment policy is established by our Board of Directors. The policy emphasizes safety of the investment, liquidity requirements, potential returns, cash flowtargets, and consistency with our interest rate risk management strategy.At December 31, 2015 , our mortgage-backed securities and collateralized mortgage obligations (“CMOs”) reflected in the following table were issued by U.S.government-sponsored enterprises and agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the federal government has affirmed itscommitment to support. All securities reflected in the table were classified as available-for-sale at December 31, 2015 , 2014 and 2013 .We hold FHLBC common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLBC’s advanceprogram. The aggregate cost of our FHLBC common stock as of December 31, 2015 was $6.3 million based on its par value. There is no market for FHLBCcommon stock. We purchased $189,000 of FHLBC stock during 2014 and redeemed $2.3 million of excess FHLBC stock during 2013 . At December 31, 2015 weowned 431,000 shares of FHLBC common stock in excess of the number of shares we were required to own to maintain our membership in the Federal HomeLoan Bank System and to be eligible to obtain advances.The following table sets forth the composition, amortized cost and fair value of our securities. At December 31, 2015 2014 2013 AmortizedCost Fair Value AmortizedCost Fair Value AmortizedCost Fair Value (Dollars in thousands)Securities: Certificates of deposits$87,901 $87,901 $86,049 $86,049 $65,010 $65,010Municipal securities— — — — 180 187Equity mutual fund500 507 500 509 500 497SBA - guaranteed loan participationcertificates23 23 29 29 35 35Total88,424 88,431 86,578 86,587 65,725 65,729Mortgage-backed Securities: Mortgage-backed securities - residential18,330 19,180 23,433 24,611 27,229 28,364CMOs and REMICs - residential7,111 7,142 9,936 9,976 16,851 16,814Total mortgage-backed securities25,441 26,322 33,369 34,587 44,080 45,178 $113,865 $114,753 $119,947 $121,174 $109,805 $110,907The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security. If quoted market prices arenot available for a marketable equity security, we determine its fair value based on the quoted price of a similar security traded in an active market. The fair valuesof debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value of asecurity is used to determine the amount of any unrealized losses that must be reflected in our other comprehensive income and the net book value of our securities.We evaluate marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if a30Table of Contentsmarketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the securitiesmust assess whether the impairment is other-than-temporary.Portfolio Maturities and YieldsThe composition and maturities of the securities portfolio and the mortgage-backed securities portfolio at December 31, 2015 are summarized in the followingtable. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Municipalsecurities yields have not been adjusted to a tax-equivalent basis, as the amount is immaterial. One Year or Less More than One Yearthrough Five Years More than Five Yearsthrough Ten Years More than Ten Years AmortizedCost WeightedAverageYield AmortizedCost WeightedAverageYield AmortizedCost WeightedAverageYield AmortizedCost WeightedAverageYield (Dollars in thousands)Securities: Certificates of deposit$87,901 0.85% $— —% $— —% $— —%Municipal securities— — — — — — — —Equity mutual fund500 1.85 — — — — — —SBA guaranteed loan participationcertificates— — 23 1.75 — — — — 88,401 0.85 23 1.75 — — — —Mortgage-backed Securities: Pass-through securities: Fannie Mae— — — — 3 2.36 8,896 3.04Freddie Mac— — 77 2.33 — — 1,256 3.26Ginnie Mae— — — — 71 1.88 8,027 2.36CMOs and REMICs— — — — 546 1.81 6,565 0.65 — — 77 2.33 620 1.82 24,744 2.19Total securities$88,401 0.85% $100 2.19% $620 1.82% $24,744 2.19%31Table of ContentsLoan PortfolioWe originate multi-family mortgage loans, nonresidential real estate loans, commercial loans and commercial leases. In addition, we originate one-to-four familyresidential mortgage loans and consumer loans, and purchase and sell loan participations from time-to-time. We do not originate construction and land loans, butour loan portfolio contains residual balances of this loan type primarily resulting from our acquisition of another institution. Our principal loan products arediscussed in Note 4 of the "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale, by type of loan. At December 31, 2015 2014 2013 2012 2011 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands)One-to-four familyresidential$159,501 12.86% $180,337 15.24% $201,382 18.12% $218,596 20.86% $272,032 21.62%Multi-family mortgage506,026 40.80 480,349 40.60 396,058 35.64 352,019 33.60 423,615 33.67Nonresidential real estate226,735 18.28 234,500 19.82 263,567 23.72 264,672 25.26 311,641 24.77Construction and land1,313 0.10 1,885 0.16 6,570 0.59 8,552 0.82 19,852 1.58Commercial loans79,516 6.41 66,882 5.65 54,255 4.88 61,388 5.86 93,932 7.46Commercial leases265,405 21.40 217,143 18.36 187,112 16.84 139,783 13.34 134,990 10.73Consumer1,831 0.15 2,051 0.17 2,317 0.21 2,745 0.26 2,147 0.17 1,240,327 100.00% 1,183,147 100.00% 1,111,261 100.00% 1,047,755 100.00% 1,258,209 100.00%Net deferred loanorigination costs1,621 1,199 970 745 908 Allowance for loan losses(9,691) (11,990) (14,154) (18,035) (31,726) Total loans, net$1,232,257 $1,172,356 $1,098,077 $1,030,465 $1,227,391 We engage in multi-family lending activities in carefully selected Metropolitan Statistical Areas outside of our primary lending area and engage in healthcarelending and commercial leasing activities on a nationwide basis. At December 31, 2015 , $309.7 million, or 61.1%, or our multi-family loans were in theMetropolitan Statistical Area for Chicago, Illinois, while $47.5 million, or 9.4%, were in the Metropolitan Statistical Area for Dallas, Texas, $53.8 million, or10.6%, were in the Metropolitan Statistical Area for Denver, Colorado, $22.4 million, or 4.4%, were in the Metropolitan Statistical Area for Minneapolis,Minnesota, and $11.5 million, or 2.3%, were in the Metropolitan Statistical Area for Tampa, Florida.32Table of ContentsLoan Portfolio MaturitiesThe following table summarizes the scheduled repayments of our loan portfolio at December 31, 2015 . Demand loans, loans having no stated repayment scheduleor maturity and overdraft loans are reported as being due in one year or less. WithinOne Year One YearThroughFive Years BeyondFive Years Total (Dollars in thousands)Scheduled Repayments of Loans: One-to-four family residential$18,398 $46,131 $94,972 $159,501Multi-family mortgage34,991 98,917 372,118 506,026Nonresidential real estate67,225 144,932 14,578 226,735Construction and land950 363 — 1,313Commercial loans and leases152,977 179,465 12,479 344,921Consumer429 1,003 399 1,831 $274,970 $470,811 $494,546 $1,240,327 TotalLoans Maturing After One Year: Predetermined (fixed) interest rates $426,565Adjustable interest rates 538,792 $965,35733Table of ContentsNonperforming Loans and AssetsWe 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, theCompany places 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 isplaced on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significantaccounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before theloan 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 categoryof 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 legalbarriers 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 theprocessing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At December 31, 2015 , we had no loans inthis category.We typically obtain new third-party appraisals or collateral valuations when we place a loan on nonaccrual status, conduct impairment testing or complete atroubled debt restructuring (“TDR”) unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of ourAppraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure processconcludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–partyappraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by usand approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statementand management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuationsutilize historical or “ask-side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we willreceive at the time of sale.Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and thecost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approachover another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy orplanned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of thereal estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest andbest use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule ofimprovements.As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use andcondition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream fromthe asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as-is”, “as-stabilized” or “as-improved” basis is mostlikely to produce the highest net realizable value. If we determine that the “as-stabilized” or “as-improved” basis is appropriate, we then complete the necessaryimprovements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected coststo sell. As of December 31, 2015 , substantially all impaired real estate loan collateral and OREO were valued on an “as–is basis.”Estimates of the net realizable value of real estate collateral also include a deduction for the expected costs to sell the collateral or such other deductions from thecash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, weapply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, salescommissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for theasset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in theexpected costs to sell the collateral. For OREO, we apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs areexpensed when incurred.34Table of ContentsNonperforming Assets SummaryThe following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets. At December 31, 2015 2014 2013 2012 2011 (Dollars in thousands)Nonaccrual loans One-to-four family residential$2,455 $4,408 $4,741 $7,299 $10,622Multi-family mortgage821 4,481 7,098 3,517 14,807Nonresidential real estate296 3,245 5,847 8,985 29,927Construction and land— — 382 2,210 3,246Commercial— 76 100 256 2,920Commercial leases— — — — 22Consumer— 3 12 — 3 3,572 12,213 18,180 22,267 61,547Loans Past Due Over 90 Days, still accruing— — 228 329 350Loans held-for-sale— — — 1,752 —Other real estate owned One-to-four family residential2,621 1,263 1,077 1,760 5,328Multi-family mortgage951 2,307 1,921 720 3,655Nonresidential real estate1,747 885 1,181 3,504 4,905Land1,692 1,903 2,127 1,323 2,237 7,011 6,358 6,306 7,307 16,125Nonperforming assets (excluding purchased impaired loans andpurchased other real estate owned)10,583 18,571 24,714 31,655 78,022Purchased impaired loans (1), (2) One-to-four family residential 380 3,941Multi-family mortgage — 1,418Nonresidential real estate 2,568 3,375Construction and land 1,021 4,788Commercial 20 1,078 3,989 14,600Purchased other real estate owned (1), (2) One-to-four family residential 320 327Nonresidential real estate 462 2,546Land 2,269 3,482 3,051 6,355Purchased impaired loans and other real estate owned 7,040 20,955Total nonperforming assets$10,583 $18,571 $24,714 $38,695 $98,977 Ratios Nonperforming loans to total loans0.29% 1.03% 1.66% 2.70% 6.08%Nonperforming assets to total assets0.70% 1.27% 1.70% 2.61% 6.33% (1)Purchased impaired loans and purchased other real estate owned are no longer segregated after 2012.(2)Purchased impaired loans and purchased other real estate owned resulted from the Downers Grove National Bank acquisition.35Table of ContentsNonperforming AssetsNonperforming assets decreased by $8.0 million in 2015 , due in substantial part to the execution of the Company's plan to materially reduce nonperforming assetexpenses and accelerate a return to the Company's historical asset quality levels. Nonperforming assets totaled $10.6 million at December 31, 2015 , and $18.6million at December 31, 2014 . The decrease in nonperforming assets for the year ended December 31, 2015 reflected the disposition of $4.7 million of OREO,and numerous other nonperforming asset resolutions.Approximately $5.9 million nonaccrual loans were transferred to OREO during the year ended December 31, 2015 . These were primarily land, multifamily andnonresidential loans, comprising the majority of the decrease in nonaccrual loans for the period. We continue to experience modest quantities of defaults onresidential loans principally due either to the borrower’s personal financial condition or deteriorated collateral value.Loan Extensions and ModificationsMaturing loans are subject to our standard loan underwriting policies and practices. Due to the need to obtain updated borrower and guarantor financialinformation, collateral information or to prepare revised loan documentations, loans in the process of renewal may appear as past due because the informationneeded to underwrite a renewal of the loan is not available to us prior to the maturity date of the loan. At times, short-term administrative extensions, which aretypically 90 days in duration, are granted to facilitate proper underwriting. In general, loan modifications are subject to a risk-adjusted pricing analysis.When appropriate, we evaluate loan extensions or modifications in accordance with ASC 310-40 and related federal regulatory guidance concerning TDRs and theFFIEC workout guidance to determine the required treatment for nonaccrual status and risk classification purposes. In general, if we grant a loan modification orextension that involves either the absence of principal amortization (other than for revolving lines of credit which are customarily granted on interest-only terms),or if we grant a material extension of an existing loan amortization period in excess of our underwriting standards, the loan will be placed on nonaccrual status andimpairment testing conducted to determine whether a specific valuation allowance or loss classification / charge-off is required. If the loan is well secured by anabundance of collateral and the collectability of both interest and principal is probable, the loan may remain on accrual status, but it will be classified as a TDR dueto the concession made in the loan principal amortization payment component. A loan in full compliance with the payment requirements specified in a loanmodification will not be considered as past due, but may nonetheless be placed on nonaccrual status or be classified as a TDR, as appropriate under thecircumstances.In accordance with the FFIEC workout guidance, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion ofthe note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note isclassified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to therestructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management hasdetermined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming)through the calendar year of the restructuring that the historical payment performance has been established.Troubled Debt RestructuringsThe Company had $2.7 million of TDRs at December 31, 2015 , compared to $3.0 million at December 31, 2014 , with $0 and $38,000 in specific valuationallowances allocated to those loans at December 31, 2015 and 2014 , respectively. The Company had no outstanding commitments to borrowers whose loans areclassified as TDRs.36Table of ContentsThe following table presents the Company's TDRs by class. At December 31, 2015 2014 (Dollars in thousands)One-to-four family residential real estate$1,385 $1,917Multi-family mortgage1,119 510Accrual troubled debt restructured loans2,504 2,427One-to-four family residential real estate174 230Multi-family mortgage— 346Nonaccrual troubled debt restructured loans174 576Total troubled debt restructured loans$2,678 $3,003Risk Classification of LoansOur policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard,doubtful, or loss assets, or designated as special mention.A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classifiedmust have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank willsustain some loss if the deficiencies are not corrected. The risk-rating guidance published by the OCC clarifies that a loan with a well-defined weakness does nothave 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 berated substandard. An asset classified as doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknessesmake collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as lossare those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required byapplicable federal regulations. A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potentialweaknesses 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 arenot adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.Based on a review of our assets at December 31, 2015 , classified loans consisted of $12.5 million performing substandard loans and $3.3 million ofnonperforming loans. As of December 31, 2015 , we had $2.2 million of loans designated as special mention.Allowance for Loan LossesWe establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary toabsorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience,trends in nonaccrual loans, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect aborrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimatelosses may vary from the estimates as more information becomes available or events change.We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it.Additions to the allowance for loan losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition inestimating probable incurred credit losses. We review the loan portfolio on an ongoing basis and make provisions for loan losses on a quarterly basis to maintainthe allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consistsof two components:•specific allowances established for any impaired residential non-owner occupied mortgage, multi-family mortgage, nonresidential real estate, constructionand land, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of the loan; and37Table of Contents•general allowances for loan losses for each loan class based on historical loan loss experience; and adjustments to historical loss experience (generalallowances), maintained to cover uncertainties that affect our estimate of probable incurred credit losses for each loan class.The adjustments to historical loss experience are based on our evaluation of several factors, including levels of, and trends in, past due and classified loans; levelsof, and trends in, charge-offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience, and abilityof lending management and other relevant staff; and national and local economic trends and conditions.We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan portfolio increases,absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses than would be the casewithout the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology generally results in a lowerdollar amount of estimated probable losses than would be the case without the decrease.We review our loan portfolio on an ongoing basis to determine whether any loans require classification and impairment testing in accordance with applicableregulations and accounting principles. When we classify loans as either substandard or doubtful and in certain other cases, we review the collateral and future cashflow projections to determine if a specific reserve is necessary. The allowance for loan losses represents amounts that have been established to recognize incurredcredit losses in the loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. When we classify problemloans as loss, we charge-off such amounts.Our calculation of the general component of the allowance for loan losses includes the FASB disclosure requirement that each loan portfolio category must besegmented into specific loan classes (FASB Standards Update 2010-20 (ASU 210-20), “Receivables (Topic 310): Disclosures about the Credit Quality ofFinancing Receivables and the Allowance for Credit Losses”). Loan class segmentation tables are presented in Note 4 of the "Notes to Consolidated FinancialStatements" in Item 8 of this Form 10-K. To maintain consistency, the loan class segmentation was also applied within the 12-quarter loss history that we use tocalculate the general component of the allowance for loan losses, inherent risk factor weightings were adjusted based on our evaluation of their relevance to thenew loan classes, and duplicative historical loss factors were eliminated from the loan class segmentation.While we use the best information available to make evaluations, future adjustments to the allowance may become necessary if conditions differ substantially fromthe information that we used in making the evaluations. Our determinations as to the risk classification of our loans and the amount of our allowance for loan lossesare subject to review by our regulatory agencies, which can require that we establish additional loss allowances.38Table of ContentsNet Charge-offs and RecoveriesThe following table sets forth activity in our allowance for loan losses. At or For the Years Ended December 31, 2015 2014 2013 2012 2011 (Dollars in thousands)Balance at beginning of year$11,990 $14,154 $18,035 $31,726 $22,180Charge-offs One-to-four family residential(386) (873) (1,505) (12,366) (5,316)Multi-family mortgage(198) (1,230) (1,832) (7,203) (3,514)Nonresidential real estate(391) (1,727) (577) (18,167) (698)Construction and land— (1) (943) (4,311) (2,519)Commercial loans(152) (123) (425) (4,960) (1,394)Commercial leases— (8) — (121) (72)Consumer(16) (12) (55) (103) (93) (1,143) (3,974) (5,337) (47,231) (13,606)Recoveries One-to-four family residential702 418 447 233 51Multi-family mortgage182 100 236 539 125Nonresidential real estate509 423 519 328 73Construction and land44 377 463 250 —Commercial loans611 1,225 470 626 173Commercial leases1 — — — —Consumer1 3 8 42 7 2,050 2,546 2,143 2,018 429Net recoveries (charge-offs)907 (1,428) (3,194) (45,213) (13,177)Provision for (recovery of) loan losses(3,206) (736) (687) 31,522 22,723Balance at end of year$9,691 $11,990 $14,154 $18,035 $31,726 Ratios Net charge-offs to average loans outstanding(0.08)% 0.13% 0.31% 3.91% 1.04%Allowance for loan losses to nonperforming loans271.30 98.17 76.89 63.64 41.47Allowance for loan losses to total loans0.78 1.01 1.27 1.72 2.52We had a recovery of loan losses of $3.2 million in 2015 , compared to a recovery of $736,000 in 2014 . The provision for or recovery of loan losses is a functionof the allowance for loan loss methodology that we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have beendeducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $1.9 million , or 16.3% , to $9.6million at December 31, 2015 , from $11.5 million at December 31, 2014 . The reserve established for loans individually evaluated for impairment decreased$426,000 , or 90.6% , to $44,000 at December 31, 2015 , from $470,000 at December 31, 2014 . Net recoveries were $907,000 for the year ended December 31,2015 , compared to net charge-offs of $1.4 million and $3.2 million for the years ended December 31, 2014 , and December 31, 2013 , respectively. Although ourloan portfolio increased by $57.2 million for the year ended December 31, 2015 , the combined impact of these two factors was sufficient to fully fund theallowance to reflect the growth in our loan portfolio.The reduction in our allowance for loans and lease losses was predominately due to a 19 basis point reduction in our weighted average historical loss rates.A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the portion of the loan that isclassified as loss. Confirmation can occur upon the receipt of updated third-party appraisal39Table of Contentsvaluation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds areinsufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicablefederal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legally discharged (such as a Chapter 7 bankruptcyproceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.Allocation of Allowance for Loan LossesThe following table sets forth our allowance for loan losses allocated by loan category. The allowance for loan losses allocated to each category is not necessarilyindicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. At December 31, 2015 2014 2013 Allowancefor LoanLosses LoanBalances byCategory Percentof Loansin EachCategoryto TotalLoans Allowancefor LoanLosses LoanBalances byCategory Percentof Loansin EachCategoryto TotalLoans Allowancefor LoanLosses LoanBalances byCategory Percentof Loansin EachCategoryto TotalLoans (Dollars in thousands)One-to-four familyresidential$1,704 $159,501 12.86% $2,148 $180,337 15.24% $3,848 $201,382 18.12%Multi-family mortgage3,610 506,026 40.80 5,205 480,349 40.60 4,444 396,058 35.64Nonresidential realestate2,582 226,735 18.28 2,940 234,500 19.82 3,735 263,567 23.72Construction and land43 1,313 0.10 80 1,885 0.16 393 6,570 0.59Commercial loans654 79,516 6.41 554 66,882 5.65 731 54,255 4.88Commercial leases1,073 265,405 21.40 1,009 217,143 18.36 946 187,112 16.84Consumer25 1,831 0.15 54 2,051 0.17 57 2,317 0.21 $9,691 $1,240,327 100.00% $11,990 $1,183,147 100.00% $14,154 $1,111,261 100.00% At December 31, 2012 2011 Allowance forLoan Losses Loan Balancesby Category Percent ofLoans in EachCategory toTotal Loans Allowance forLoan Losses Loan Balancesby Category Percent ofLoans in EachCategory toTotal Loans (Dollars in thousands)One-to-four familyresidential$4,726 $218,596 20.86% $6,103 $272,032 21.62%Multi-family mortgage4,580 352,019 33.60 6,082 423,615 33.67Nonresidential real estate5,545 264,672 25.26 13,756 311,641 24.77Construction and land1,031 8,552 0.82 1,684 19,852 1.58Commercial loans1,324 61,388 5.86 3,539 93,932 7.46Commercial leases666 139,783 13.34 504 134,990 10.73Consumer163 2,745 0.26 58 2,147 0.17 $18,035 $1,047,755 100.00% $31,726 $1,258,209 100.00%40Table of ContentsSources of FundsDeposits. At December 31, 2015 , our deposits totaled $1.213 billion . Interest-bearing deposits totaled $958.1 million and noninterest-bearing demand depositstotaled $254.8 million . NOW, savings and money market accounts totaled $735.4 million . Noninterest-bearing demand deposits at December 31, 2015 included$69,000 in internal checking accounts. At December 31, 2015 , we had $222.7 million of certificates of deposit outstanding, of which $151.5 million had maturitiesof one year or less. Although a significant portion of our certificates of deposit are shorter-term certificates of deposit, we believe, based on historical experienceand our current pricing strategy, that we will retain a significant portion of these accounts upon maturity.The following table sets forth the distribution of total deposit accounts, by account type. Years Ended December 31, 2015 2014 2013 AverageBalance Percent WeightedAverageRate AverageBalance Percent WeightedAverageRate AverageBalance Percent WeightedAverageRate (Dollars in thousands)Noninterest-bearing demand: Retail$99,839 8.32% —% $37,932 3.08% —% $37,779 3.01% —%Commercial92,689 7.73 — 91,350 7.41 — 91,976 7.31 —Total noninterest-bearingdemand192,528 16.05 — 129,282 10.49 — 129,755 10.32 —Savings deposits155,686 12.97 0.11 153,671 12.47 0.10 147,444 11.73 0.10Money market accounts336,179 28.02 0.31 347,367 28.20 0.32 343,823 27.36 0.34Interest-bearing NOWaccounts289,357 24.12 0.12 349,021 28.33 0.10 347,528 27.65 0.11Certificates of deposit225,990 18.84 0.54 252,629 20.51 0.56 288,351 22.94 0.67 $1,199,740 100.00% $1,231,970 100.00% $1,256,901 100.00% The following table sets forth certificates of deposit by time remaining until maturity at December 31, 2015 : Maturity 3 Months orLess Over 3 to 6Months Over 6 to 12Months Over 12Months Total (Dollars in thousands)Certificates of deposit less than $100,000$33,472 $28,463 $45,325 $41,470 $148,730Certificates of deposit of $100,000 or more11,409 10,155 22,721 29,686 73,971Total certificates of deposit$44,881 $38,618 $68,046 $71,156 $222,701Borrowings. Our borrowings consist primarily of Federal Home Loan Bank advances and repurchase agreements. The following table sets forth informationconcerning balances and interest rates on our borrowings. At or For the Years Ended December 31, 2015 2014 2013 (Dollars in thousands)Balance at end of year64,318 12,921 $3,055Average balance during year8,674 2,980 2,964Maximum outstanding at any month end64,318 12,921 3,398Weighted average interest rate at end of year0.28% 0.16% 0.25%Average interest rate during year0.23% 0.27% 0.47%41Table of ContentsAt December 31, 2015 , we had the capacity to borrow an additional $307.8 million under our credit facilities with the FHLBC. Furthermore, we had unpledgedsecurities that could be used to support in excess of $20.9 million of additional FHLBC borrowings.At December 31, 2015 , we had a line of credit with the Federal Reserve Bank of Chicago. At December 31, 2015 , there were no outstanding federal fundsborrowings and there was no outstanding balance on the line of credit.Impact of Inflation and Changing PricesThe Company’s consolidated financial statements and the related notes have been prepared in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars withoutconsidering changes in the relative purchasing power of money over time due to inflation. The impact of inflation, if any, is reflected in the increased cost of ouroperations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greaterimpact on performance than the effects of inflation.Management of Interest Rate RiskQualitative Analysis. A significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of ourassets, liabilities and off balance sheet contracts ( i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in thebehavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrumof maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect theamount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value ofinvestment 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 amanner 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. OurAsset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certainassets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategiesaccordingly. The Board of Directors’ Asset/Liability Management Committee then reviews the ALCO’s activities and strategies, the effect of those strategies onour 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 theintrinsic 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-familymortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sellall or a portion of our longer-term, fixed-rate residential loans, 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 ourinvestments 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 assetsand liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investmentportfolio 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 estimatesthe 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, liabilitiesand off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seemmost likely based on historical experience during prior interest rate changes.Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, includingactual 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 curveshifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting fromthe parallel yield curve shifts.42Table of ContentsOur dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight tofive years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differentialbetween 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 liabilityrepricing 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 December 31, 2015 , the estimated changes in the Bank’s NPV and net interest income that wouldresult from the designated instantaneous parallel shift in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changesare based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon asindicative of actual results. Estimated Increase (Decrease) in NPV Increase (Decrease) in EstimatedNet Interest IncomeChange in Interest Rates (basis points)Amount Percent Amount Percent (Dollars in thousands)+400$(33,647) (13.79)% $113 0.24 %+300(21,734) (8.91) 120 0.25+200(11,598) (4.75) 207 0.43+1002,876 1.18 207 0.430— — — —-25(491) (0.20) (301) (0.63)The table set forth above indicates that at December 31, 2015 , in the event of an immediate 25 basis point decrease in interest rates, the Bank would be expected toexperience a 0.20% decrease in NPV and a $301,000 decrease in net interest income. In the event of an immediate 200 basis point increase in interest rates, theBank would be expected to experience a 4.75% decrease in NPV and a $207,000 increase in net interest income. This data does not reflect any actions that we mayundertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reducethe 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 incomerequires 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. TheNPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of aperiod remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes ininterest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change ininterest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities.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, suchmeasurements 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 differfrom actual results.Liquidity ManagementLiquidity Management – Bank. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financialcommitments 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 frommaturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as wellas proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loansales are greatly influenced by market interest rates, economic conditions and competition.Our cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in ourConsolidated Financial Statements. Our primary investing activities are the origination for43Table of Contentsinvestment of one-to-four family residential mortgage loans, multi-family mortgage loans, nonresidential real estate loans, commercial leases, construction andland loans, and commercial loans and the purchase of investment securities and mortgage-backed securities. During the years ended December 31, 2015 , 2014 and2013 , our loans originated for investment totaled $509.0 million , $513.4 million , and $524.6 million , respectively. Purchases of securities totaled $60.7 million ,$73.1 million and $74.2 million for the years ended December 31, 2015 , 2014 , and 2013 , respectively.These activities were funded primarily by principal repayments on loans and securities, and the sale of loans and securities. During the years ended December 31,2015 , 2014 and 2013 , principal repayments on loans totaled $441.8 million , $432.6 million , and $453.2 million , respectively. During the years endedDecember 31, 2015 , 2014 and 2013 , principal repayments on securities totaled $7.0 million , $7.2 million , and $13.5 million , respectively. During the yearsended December 31, 2015 , 2014 and 2013 , proceeds from maturities and sales of securities totaled $59.8 million , $55.8 million , and $26.8 million , respectively.During the years ended December 31, 2015 , 2014 and 2013 , the proceeds from the sale of loans held-for-sale totaled $3.9 million , $5.5 million and $11.7 million, respectively.Loan origination commitments totaled $52.3 million at December 31, 2015 , and consisted of $29.4 million of fixed-rate loans and $22.9 million of adjustable-rateloans. Unused lines of credit and standby letters of credit granted to customers totaled $126.3 million and $1.1 million , respectively, at December 31, 2015 . AtDecember 31, 2015 , commitments to sell mortgages totaled $64,000 .Deposit flows are generally affected by the level of market interest rates, the interest rates and other terms and conditions on deposit products offered by ourbanking competitors, and other factors. We had a net deposit increase of $1.2 million , for the year ended December 31, 2015 , compared to net deposit decreasesof $41.0 million and $29.6 million for the years ended December 31, 2014 and 2013 , respectively. At times during recent periods, we have not actively competedfor higher cost deposit accounts, including certificates of deposit, choosing instead to fund loan growth from the loan and lease repayments. Certificates of depositthat are scheduled to mature in one year or less from December 31, 2015 totaled $151.5 million . Based upon prior experience and our current pricing strategy, webelieve that we will retain a significant portion of these deposits upon their maturities.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 notrenewed or extended. We generally remain fully invested and may utilize additional sources of funds through FHLBC advances, of which $62.0 million wereoutstanding at December 31, 2015 . At December 31, 2015 we had the ability to borrow an additional $307.8 million under our credit facilities with the FHLBC.Furthermore, we have unpledged securities that could be used to support borrowings in excess of $20.9 million . Finally, at December 31, 2015 , we had a line ofcredit available with the Federal Reserve Bank of Chicago. At December 31, 2015 , there was no outstanding balance on this credit line.Liquidity Management - Company. The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends tostockholders and stock repurchases. The primary sources of liquidity for the Company currently are $15.3 million of cash and cash equivalents and any cashdividends it may receive from the Bank.During 2015 , we paid $10.0 million to repurchase shares of our common stock and paid $4.1 million in cash dividends to stockholders, using the dividendsreceived from the Bank.As of December 31, 2015 , we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on ourliquidity. As of December 31, 2015 , we had no other material commitments for capital expenditures.Capital ManagementCapital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and otherasset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with thebanking 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 capitalinvested by our stockholders.The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can triggercertain mandatory, and possibly additional discretionary, actions by the OCC that, if undertaken, could have a direct material effect on the Bank’s financialstatements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines thatinvolve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’scapital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.44Table of ContentsThe prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantlyundercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Adequately capitalized institutionsrequire regulatory approval to accept brokered deposits. If undercapitalized, a financial institution’s capital distributions, asset growth and expansion are limited,and for the submission of a capital restoration is required.The Company and the Bank have each adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%. The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirementswill be established if and as necessary. In accordance with the Regulatory Capital Plans, neither the Company nor the Bank will pursue any acquisition or growthopportunity, 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 fallbelow the established minimum capital levels. In addition, the Company will continue to maintain its ability to serve as a source of financial strength to the Bankby holding at least $5.0 million of cash or liquid assets for that purpose.At December 31, 2015 , actual and required capital ratios were: ConsolidatedActual Ratio BankFinancial F.S.B.Actual Ratio Required for CapitalAdequacy Purposes To be Well-Capitalized underPrompt CorrectiveAction ProvisionsTotal capital (to risk-weighted assets)17.89% 15.41% 8.00% 10.00%Tier 1 (core) capital (to risk-weighted assets)17.01 14.54 6.00 8.00Common Tier 1 (CET1)17.01 14.54 4.50 6.50Tier 1 (core) capital (to adjusted total assets)13.26 11.33 4.00 5.00As of December 31, 2015 the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events thatmanagement believes have changed the Bank’s prompt corrective action capitalization category.Capital Management - Company. On June 23, 2005, the Company completed its mutual-to-stock conversion and sold 24,466,250 shares of common stock in asubscription offering at $10.00 per share and raised $240.3 million in offering proceeds, net of offering expenses. The Company contributed $120.9 million of thenet proceeds to the Bank, paid off $30 million of term borrowings, loaned $19.6 million to our ESOP and retained the remaining net proceeds of $72 million.Subsequent to the mutual-to-stock conversion, the Bank declared aggregate dividends of $60.0 million to the Company. During this period the Company paiddividends totaling $36.8 million and expended $64.6 million for share repurchases.Total stockholders’ equity was $212.4 million at December 31, 2015 , compared to $216.1 million at December 31, 2014 . The decrease in total stockholders’equity was primarily due to the combined impact of our repurchase of 804,649 shares of our common stock at a total cost of $10.0 million , and our declaration andpayment of cash dividends totaling $4.1 million during the year ended December 31, 2015 . These items were partially offset by net income of $8.7 million that werecorded for the year ended December 31, 2015 . The unallocated shares of common stock that our ESOP owns were reflected as a $9.3 million reduction tostockholders’ equity at December 31, 2015 , compared to a $10.3 million reduction to stockholders’ equity at December 31, 2014 .Cash Dividends. Our Board of Directors declared four quarterly cash dividends of $0.04 per share and one special dividend of $0.04 per share during 2015 ,totaling $4.1 million .Stock Repurchase Program. On March 30, 2015, the Company announced that its Board had authorized the repurchase of up to 1,055,098 shares of theCompany’s common stock, which represents approximately 5% of the Company’s issued and outstanding shares of common stock. On December 28, 2015, theBoard extended this repurchase authorization from December 31, 2015 to December 31, 2016, and increased the number of shares that can be repurchased inaccordance with the authorization by 1,046,868. As of December 31, 2015, the Company had repurchased 804,649 shares of its common stock out of the 2,101,966shares of common stock authorized under this repurchase authorization. Since its inception, the Company has repurchased 5,043,783 shares of its common stock.Off-Balance Sheet Arrangements and Aggregate Contractual ObligationsCommitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments toextend credit, standby letters of credit, unused lines of credit and commitments to sell loans. While45Table of Contentsthese contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.Such commitments are subject to the same credit policies and approval process afforded to loans that we make. Although we consider commitments to extendcredit in determining our allowance for loan losses, at December 31, 2015 , we had made no provision for losses on commitments to extend credit, and had nospecific or general allowance for losses on such commitments, as we have had no historical loss experience with commitments to extend credit and we believedthat no probable and reasonably estimable losses were inherent in our portfolio as a result of our commitments to extend credit. For additional information, seeNote 16 of the "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases forpremises and equipment.The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2015 .The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amountadjustments. Payments Due by Period Less thanOne Year One toThreeYears Three toFive Years More thanFive Years Total (Dollars in thousands)Contractual Obligations Certificates of deposit$151,545 $60,231 $10,925 $— $222,701Borrowings62,000 — — — 62,000Standby letters of credit1,070 5 — — 1,075Operating leases448 948 930 4,708 7,034Total$215,063 $61,184 $11,855 $4,708 $292,810Commitments to extend credit$178,655 $— $— $— $178,655Critical Accounting PoliciesCritical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially differentresults under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results ofoperation depend, and which involve the most complex subjective decisions or assessments, are as follows:Allowance for Loan Losses . Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. Our allowance for loan lossesprovides for probable incurred losses based upon evaluations of known and inherent risks in the loan portfolio. We review the level of the allowance on a quarterlybasis and establish the provision for loan losses based upon historical loan loss experience, the nature and volume of the loan portfolio, information about specificborrower situations, estimated collateral values, economic conditions and other factors to assess the adequacy of the allowance for loan losses. Among the materialestimates that we must make to establish the allowance are loss exposure at default; the amount and timing of future cash flows on affected loans; the value ofcollateral; and a determination of loss factors to be applied to the various elements of the loan portfolio. All of these estimates are susceptible to significant change.Although we believe that we use the best information available to us to establish the allowance for loan losses, future adjustments to the allowance may benecessary if borrower financial, collateral valuation or economic conditions differ substantially from the information and assumptions used in making theevaluation. In addition, as an integral part of their supervisory and/or examination process, our regulatory agencies periodically review the methodology andsufficiency of the allowance for loan losses. These agencies may require us to recognize additions to the allowance based on their inclusion, exclusion ormodification of risk factors or differences in judgments of information available to them at the time of their examination. A large loss could deplete the allowanceand require increased provisions to replenish the allowance, which would negatively affect earnings.Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates that are involved in thecalculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporarydifferences between the financial reporting basis and the tax basis of our assets and liabilities. Under GAAP, a deferred tax asset valuation allowance is required tobe recognized if it is “more likely than not”46Table of Contentsthat the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is dependent upon judgments made followingmanagement’s evaluation of all available positive and negative evidence, including prior pre-tax losses and the events or conditions that caused them, forecasts offuture taxable income, and current and future economic and business conditions. In assessing the realization of deferred tax assets at December 31, 2011, theCompany concluded that it was more likely than not that the Company will not realize the benefits of these deductible differences at December 31, 2011, andtherefore, a full valuation allowance for deferred tax assets in the amount of $22.6 million was recorded for the ending December 31, 2011. The Companyreversed its DTA valuation allowance as of December 31, 2014 due to management’s determination that it was more likely than not that the Company’s DTAwould be realized. The determination resulted from management’s consideration of all available negative and positive evidence.Although we determined a valuation allowance was not required for any deferred tax assets at December 31, 2015 and 2014, there is no guarantee that a valuationallowance will not be required in the future.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKFor information regarding market risk see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Management ofInterest Rate Risk.”47Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGManagement of BankFinancial Corporation is responsible for establishing and maintaining effective internal control over financial reporting.Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial information through a program ofongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can becircumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal controleffectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financialstatement preparation.The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. TheCompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and thatreceipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a materialeffect on the financial statements.Management assessed the Company’s internal control over financial reporting as of December 31, 2015 , as required by Section 404 of the Sarbanes-Oxley Act of2002, based on the criteria for effective internal control over financial reporting described in the “2013 Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2015 , theCompany’s internal control over financial reporting is effective.The Company’s independent registered public accounting firm has issued their report on the effectiveness of the Company’s internal control over financialreporting. That report follows under the heading, Report of Independent Registered Public Accounting Firm./s/ F. Morgan Gasior /s/ Paul A. CloutierF. Morgan Gasior Paul A. CloutierChairman of the Board, Chief Executive Officer and President Executive Vice President and Chief Financial Officer48Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have audited the accompanying consolidated statements of financial condition of BankFinancial Corporation (the “Company”) as of December 31, 2015 and2014 , and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in thethree-year period ended December 31, 2015 . We also have audited the Company’s internal control over financial reporting as of December 31, 2015 , based oncriteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financialreporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design, and operating effectiveness of internal controlbased on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our auditsprovide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BankFinancial Corporation asof December 31, 2015 and 2014 , and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2015 , based on criteria established in the 2013 Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission./s/ Crowe Horwath LLPOak Brook, IllinoisFebruary 10, 201649Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(In thousands, except share and per share data) December 31, 2015 2014Assets Cash and due from other financial institutions$13,192 $9,693Interest-bearing deposits in other financial institutions46,185 49,888Cash and cash equivalents59,377 59,581Securities, at fair value114,753 121,174Loans receivable, net of allowance for loan losses: December 31, 2015, $9,691 and December 31, 2014, $11,9901,232,257 1,172,356Other real estate owned, net7,011 6,358Stock in Federal Home Loan Bank, at cost6,257 6,257Premises and equipment, net32,726 34,286Accrued interest receivable4,226 3,926Core deposit intangible1,305 1,855Bank owned life insurance22,387 22,193Deferred taxes26,695 31,643Other assets5,449 5,781Total assets$1,512,443 $1,465,410 Liabilities Deposits Noninterest-bearing$254,830 $134,129Interest-bearing958,089 1,077,584Total deposits1,212,919 1,211,713Borrowings64,318 12,921Advance payments by borrowers for taxes and insurance11,528 11,489Accrued interest payable and other liabilities11,314 13,166Total liabilities1,300,079 1,249,289Commitments and contingent liabilities 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; 20,297,317 shares issued at December 31, 2015 and21,101,966 shares issued at December 31, 2014203 211Additional paid-in capital184,797 193,845Retained earnings36,114 31,584Unearned Employee Stock Ownership Plan shares(9,297) (10,276)Accumulated other comprehensive income547 757Total stockholders’ equity212,364 216,121Total liabilities and stockholders’ equity$1,512,443 $1,465,410See accompanying notes to the consolidated financial statements50Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except share and per share data) For the years ended December 31, 2015 2014 2013Interest and dividend income Loans, including fees$47,488 $47,802 $47,691Securities1,141 1,154 981Other333 393 720Total interest income48,962 49,349 49,392Interest expense Deposits2,794 3,038 3,639Borrowings20 8 14Total interest expense2,814 3,046 3,653Net interest income46,148 46,303 45,739Provision for (recovery of) loan losses(3,206) (736) (687)Net interest income after provision for (recovery of) loan losses49,354 47,039 46,426Noninterest income Deposit service charges and fees2,248 1,977 2,005Other fee income2,143 2,238 2,250Insurance commissions and annuities income386 431 474Gain on sale of loans, net102 158 1,469Loss on sale of securities (includes $7 accumulated other comprehensive incomereclassifications for unrealized net losses on available for sale securities for the yearended December 31, 2014)— (7) —Gain (loss) on disposition of premises and equipment, net(1) 5 (43)Loan servicing fees354 418 461Amortization and impairment of servicing assets(140) (143) (168)Earnings on bank owned life insurance194 235 313Trust712 683 711Other693 714 662Total noninterest income6,691 6,709 8,134Noninterest expense Compensation and benefits22,222 22,874 26,195Office occupancy and equipment6,522 6,878 7,547Advertising and public relations991 1,107 925Information technology2,669 2,676 3,091Supplies, telephone, and postage1,586 1,579 1,697Amortization of intangibles550 578 605Nonperforming asset management681 838 2,638Operations of other real estate owned1,063 1,408 1,613FDIC insurance premiums904 1,416 1,913Other4,757 5,097 5,038Total noninterest expense41,945 44,451 51,262Income before income taxes14,100 9,297 3,298Income tax expense (benefit)5,425 (31,317) —Net income$8,675 $40,614 $3,298Basic earnings per common share$0.44 $2.01 $0.16Diluted earnings per common share$0.44 $2.01 $0.16Weighted average common shares outstanding19,918,003 20,177,271 20,020,838Diluted weighted average common shares outstanding19,921,519 20,186,376 20,025,321See accompanying notes to the consolidated financial statements51Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) For the years ended December 31, 2015 2014 2013Net income$8,675 $40,614 $3,298Unrealized holding gain (loss) on securities arising during the period(339) 118 (699)Tax effect129 213 —Unrecognized holding gain (loss) on securities arising during the period,net of tax(210) 331 (699)Reclassification adjustment for losses included in net income— 7 —Other comprehensive income (loss)(210) 338 (699)Comprehensive income$8,465 $40,952 $2,599See accompanying notes to the consolidated financial statements52Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(In thousands, except shares and per share data) CommonStock AdditionalPaid-inCapital RetainedEarnings(Deficit) UnearnedEmployeeStockOwnershipPlanShares AccumulatedOtherComprehen-siveIncome (Loss) TotalBalance at January 1, 2013$211 $193,590 $(9,796) $(12,233) $1,118 $172,890Net income— — 3,298 — — 3,298Other comprehensive loss, net of tax effect— — — — (699) (699)Nonvested stock awards-stock-based compensationexpense— 86 — — — 86Cash dividends declared on common stock ($0.04 pershare)— — (844) — — (844)ESOP shares earned— (82) — 978 — 896Balance at December 31, 2013211 193,594 (7,342) (11,255) 419 175,627Net income— — 40,614 — — 40,614Other comprehensive income, net of tax effect— — — — 338 338Nonvested stock awards-stock-based compensationexpense— 70 — — — 70Cash dividends declared on common stock ($0.08 pershare)— — (1,688) — — (1,688)ESOP shares earned— 181 — 979 — 1,160Balance at December 31, 2014211 193,845 31,584 (10,276) 757 216,121Net income— — 8,675 — — 8,675Other comprehensive loss, net of tax effect— — — — (210) (210)Repurchase and retirement of common stock (804,649shares)(8) (9,962) — — — (9,970)Nonvested stock awards-stock-based compensationexpense— 657 — — — 657Cash dividends declared on common stock ($0.20 pershare)— — (4,145) — — (4,145)ESOP shares earned— 257 — 979 — 1,236Balance at December 31, 2015$203 $184,797 $36,114 $(9,297) $547 $212,364See accompanying notes to the consolidated financial statements53Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the years ended December 31, 2015 2014 2013Cash flows from operating activities Net income$8,675 $40,614 $3,298Adjustments to reconcile to net income to net cash from operating activities Recovery of loan losses(3,206) (736) (687)ESOP shares earned1,236 1,160 896Stock–based compensation expense657 70 86Depreciation and amortization3,682 3,811 4,453Amortization and accretion on securities and loans(312) (438) (736)Amortization of core deposit and other intangible assets550 578 605Amortization and impairment of servicing assets140 143 168Net change in net deferred loan origination costs(422) (229) (225)Net loss on sale of other real estate owned(59) 35 148Net gain on sale of loans(102) (158) (1,469)Net loss on sale of securities— 7 —Net (gain) loss on disposition of premises and equipment1 (5) 43Loans originated for sale(3,838) (5,323) (10,771)Proceeds from sale of loans3,940 5,481 11,670Other real estate owned valuation adjustments548 438 550Net change in: Deferred income tax5,079 (31,643) —Accrued interest receivable(300) 7 213Earnings on bank owned life insurance(194) (235) (313)Other assets659 2,874 (243)Accrued interest payable and other liabilities(1,852) 1,394 2,093Net cash from operating activities14,882 17,845 9,779Cash flows from investing activities Securities Proceeds from maturities59,804 52,103 26,813Proceeds from principal repayments6,984 7,179 13,492Proceeds from sales of securities— 3,663 —Purchases of securities(60,744) (73,142) (74,220)Loans receivable Loan participations sold3,350 — —Principal payments on loans receivable441,820 432,571 453,153Originated for investment(509,018) (513,384) (524,592)Proceeds from sale of loans— — 2,868Proceeds of redemption of Federal Home Loan Bank of Chicago stock— — 2,344Purchase of Federal Home Loan Bank of Chicago stock— (189) —Proceeds from sale of other real estate owned4,733 4,914 8,838Purchase of premises and equipment, net(542) (1,176) (10)Net cash used in investing activities(53,613) (87,461) (91,314)(Continued)54Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the years ended December 31, 2015 2014 2013Cash flows from financing activities Net change in deposits$1,206 $(40,995) $(29,643)Net change in borrowings51,397 9,866 (2,512)Net change in advance payments by borrowers for taxes and insurance39 1,057 (273)Repurchase and retirement of common stock(9,970) — —Cash dividends paid on common stock(4,145) (1,688) (844)Net cash from (used in) financing activities38,527 (31,760) (33,272)Net change in cash and cash equivalents(204) (101,376) (114,807)Beginning cash and cash equivalents59,581 160,957 275,764Ending cash and cash equivalents$59,377 $59,581 $160,957 Supplemental disclosures of cash flow information: Interest paid$2,844 $3,070 $3,697Income taxes paid363 114 —Income taxes refunded7 — 461Loans transferred to other real estate owned5,875 5,449 5,512See accompanying notes to the consolidated financial statements55Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation : BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois (the “Company”), is the owner of all of theissued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”).Principles of Consolidation : The consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, and theBank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BF Asset Recovery Corporation (collectively, “the Company”). All significantintercompany accounts and transactions have been eliminated.Nature of Business : The Company’s revenues, operating income, and assets are primarily from the banking industry. Loan origination customers are mainlylocated in the greater Chicago metropolitan area. To supplement loan originations, the Company purchases mortgage loans. The loan portfolio is concentrated inloans that are primarily secured by real estate.Use of Estimates : To prepare financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”),management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financialstatements and the disclosures provided, and actual results could differ.Interest-bearing Deposits in Other Financial Institutions : Interest-bearing deposits in other financial institutions maturing in less than 90 days are carried at cost.Cash Flows : Cash and cash equivalents include cash, deposits with other financial institutions maturing in less than 90 days, and daily federal funds sold. Net cashflows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, borrowings, and advance payments byborrowers for taxes and insurance.Securities : Debt securities are classified as available-for-sale when they might be sold before maturity. Equity securities with readily determinable fair values areclassified as available-for-sale. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensiveincome (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are based onthe amortized cost of the security sold. Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. Indetermining if losses are other-than-temporary, management considers: (1) the length of time and extent that fair value has been less than cost or adjusted cost, asapplicable, (2) the financial condition and near term prospects of the issuer, and (3) whether the Company has the intent to sell the debt security or it is more likelythan not that the Company will be required to sell the debt security before the anticipated recovery.Securities also include investments in certificates of deposit with maturities of greater than 90 days. These certificates of deposit are placed with insuredinstitutions for varying maturities and amounts that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”).Federal Home Loan Bank Stock : The Bank is a member of the Federal Home Loan Bank system. Members are required to own a certain amount of stock basedon the level of borrowings and other factors, and may invest in additional amounts. Federal Home Loan Bank of Chicago (“FHLBC”) stock is carried at cost andclassified as a restricted security. Accounting guidance for FHLBC stock provides that, for impairment testing purposes, the value of long term investments such asour FHLBC common stock is based on the “ultimate recoverability” of the par value of the security without regard to temporary declines in value. Both cash andstock dividends are reported as income.Loans Held–for–Sale : Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair marketvalue, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.Mortgage loans held–for–sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the fair value of theservicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.Held for investment loans that have been transferred to held-for-sale are carried at the lower of cost or fair value. For held-for-sale loans, any decreases in valuebelow cost after transfer are recognized in mortgage banking revenue in the Consolidated Statements of Operations and increases in fair value above cost are notrecognized until the loans are sold. The credit component of any write down upon transfer to held-for-sale is reflected in charge-offs to the allowance for loanlosses.Fair market value is determined based on quoted market rates and our judgment of relevant market conditions. Gains and losses on the disposition of loans held-for-sale are determined on the specific identification method. Transferred mortgage loans sold in the secondary market are sold without retaining servicing rights.56Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Loans and Loan Income : Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at theprincipal balance outstanding, net of the allowance for loan losses, premiums and discounts on loans purchased, and net deferred loan costs. Interest income onloans is recognized in income over the term of the loan based on the amount of principal outstanding.Premiums and discounts associated with loans purchased are amortized over the contractual term of the loan using the level–yield method. Loan origination fees,net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments.Interest income is reported on the interest method. Interest income is discontinued at the time a loan is 90 days past due or when we do not expect to receive fullpayment of interest or principal. Past due status is based on the contractual terms of the loan.All interest accrued but not received for loans that have been placed on nonaccrual status is reversed against interest income. Interest received on such loans isaccounted for on the cash–basis or cost–recovery method until qualifying for return to accrual status. Once a loan is placed on non-accrual status, the borrowermust generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. Generally, the Company utilizes the“90 days delinquent, still accruing” category of loan classification when: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well securedand there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantialcompliance with the terms of the loan, but the processing of payments actually received or the renewal of a loan has not occurred for administrative reasons.Impaired Loans: Impaired loans consist of nonaccrual loans and troubled debt restructurings (“TDRs”). A loan is considered impaired when, based on currentinformation and events, management believes that it is probable that we will be unable to collect all amounts due (both principal and interest) according to theoriginal contractual terms of the loan agreement. Once a loan is determined to be impaired, the amount of impairment is measured based on the loan's observablefair value, the fair value of the underlying collateral less selling costs if the loan is collateral-dependent, or the present value of expected future cash flowsdiscounted at the loan's effective interest rate. If the measurement of the impaired loan is less than the recorded investment in the loan, the bank's allowance for theimpaired collateral dependent loan under ASC 310-10-35 is based on fair value (less costs to sell), but the charge-off (the confirmed “loss”) is based on the higherappraised value. The remaining recorded investment in the loan after the charge-off will have a loan loss allowance for the amount by which the estimated fairvalue of the collateral (less costs to sell) is less than its appraised value.Impaired loans with specific reserves are reviewed quarterly for any changes that would affect the specific reserve. Any impaired loan for which a determinationhas been made that the economic value is permanently reduced is charged-off against the allowance for loan losses to reflect its current economic value in theperiod in which the determination has been made.At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater thana year old, a new appraisal is obtained on the underlying collateral. Appraisals are updated with a new independent appraisal at least annually and are formallyreviewed by our internal appraisal department upon receipt of a new appraisal. All impaired loans and their related reserves are reviewed and updated each quarter.With an immaterial number of exceptions, all appraisals and internal reviews are current under this methodology at December 31, 2015 .Purchased Impaired Loans: Purchased impaired loans are recorded at their estimated fair values on the respective purchase dates and are accounted forprospectively based on expected cash flows. No allowance for credit losses is recorded on these loans at the acquisition date. In determining the acquisition datefair value of purchased impaired loans, and in subsequent accounting, the Company reviews these loans on an individual basis. Expected future cash flows inexcess of the fair value of loans at the purchase date (''accretable yield'') are recorded as interest income over the life of the loans if the timing and amount of thefuture cash flows can be reasonably estimated. The non-accretable yield represents estimated losses in the portfolio and is equal to the difference betweencontractually required payments and the cash flows expected to be collected at acquisition.Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The presentvalue of any decreases in expected cash flows after the purchase date is recognized by r ecording a charge-off through the allowance for loan losses.57Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Troubled Debt Restructurings : A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to arestructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions mayinclude rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses.In determining whether a debtor is experiencing financial difficulties, the Company considers if the debtor is in payment default or would be in payment default inthe foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor willcontinue as a going concern, the debtor has securities that have been or are in the process of being delisted, the debtor's entity-specific projected cash flows will notbe sufficient to service any of its debt, or the debtor cannot obtain funds from sources other than the existing creditors at a market rate for debt with similar riskcharacteristics.In determining whether the Company has granted a concession, the Company assesses, if it does not expect to collect all amounts due, whether the current value ofthe collateral will satisfy the amounts owed, whether additional collateral or guarantees from the debtor will serve as adequate compensation for other terms of therestructuring, and whether the debtor otherwise has access to funds at a market rate for debt with similar risk characteristics.A loan that is modified at a market rate of interest will not be classified as troubled debt restructuring in the calendar year subsequent to the restructuring if it is incompliance with the modified terms. Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that theborrower can meet the new terms. This may result in the loan being returned to accrual at the time of restructuring. A period of sustained repayment for at least sixmonths generally is required for return to accrual status.Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structuredwith appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing noteuntil the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustainedrepayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance isreasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of therestructuring that the historical payment performance has been established.Allowance for Loan Losses: The Company establishes provisions for loan losses, which are charged to the Company’s results of operations to maintain theallowance for loan losses to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, the Companyconsiders past and current loss experience, trends in classified loans, evaluations of real estate collateral, current economic conditions, volume and type of lending,adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance isbased on estimates and the ultimate losses may vary from the estimates as more information becomes available or events change.The Company provides for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries arecredited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors that, in our judgment, deserve currentrecognition in estimating probable incurred credit losses. The Company reviews the loan portfolio on an ongoing basis and makes provisions for loan losses on aquarterly basis to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists of two components:•specific allowances established for any impaired residential non-owner occupied mortgage, multi-family mortgage, nonresidential real estate, construction andland, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of the loan; and•general allowances for loan losses for each loan class based on historical loan loss experience; and adjustments to historical loss experience (generalallowances), maintained to cover uncertainties that affect our estimate of probable incurred credit losses for each loan class. If the remaining unamortizeddiscount related to a specific pool of purchased performing loans exceeds the estimated credit losses associated with these loans, no general valuationallowance is recorded against the loans.The adjustments to historical loss experience are based on our evaluation of several factors, including levels of, and trends in, past due and classified loans; levelsof, and trends in, charge–offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience and abilityof lending management and other relevant staff; and national and local economic trends and conditions.58Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)The Company evaluates the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan portfolioincreases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses than would bethe case without the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology generally results in alower dollar amount of estimated probable losses than would be the case without the decrease.The loss ratio used in computing the required general loan loss reserve allowance for a given class of loan consists of (i) the actual loss ratio (measured on aweighted, rolling twelve-quarter basis), (ii) the change in credit quality within the specific loan class during the period, (iii) the actual inherent risk factor assignedto the specific loan class and (iv) the actual concentration of risk factor assigned to the specific loan class (collectively, “the Specific Loan Class Risk Factors”).The Specific Loan Class Risk Factors are weighted equally in the calculation. In addition, two additional quantitative factors, the National Economic risk factorand the Local Economic risk factor, are also components of the computation but are given different weightings in their computation due to their relativeapplicability to the specific loan class in the context of the effect of national and local economic conditions on their risk profile and performance.Mortgage Servicing Rights : Mortgage servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold,servicing rights are initially recorded at fair value and gains on sales of loans are recorded in the statement of operations. Fair value is based on market prices forcomparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future netservicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicingcost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company comparesthe valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets aresubsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the periodof, the estimated future net servicing income of the underlying loans.Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifyingrights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuationallowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of theimpairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances arereported with amortization and impairment of servicing assets on the statement of operations. The fair values of servicing rights are subject to significantfluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.Servicing fee income that is reported on the statement of operations as loan servicing fees is recorded for fees earned for servicing loans. The fees are based on acontractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loanservicing are not material.Other Real Estate Owned : Foreclosed assets are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. Physical possessionof residential real estate property collateralizing a consumer mortgage loan occurs when the legal title is obtained upon completion of foreclosure or when theborrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Theseassets are subsequently accounted for at a lower of cost or fair value less estimated cost to sell. If fair value declines subsequent to foreclosure, a valuationallowance is recorded through expense. Operating expenses, gains and losses on disposition, and changes in the valuation allowance are reported in noninterestexpense as operations of other real estate owned ("OREO").Premises and Equipment : Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is included in noninterestexpense and is computed on the straight-line method over the estimated useful lives of the assets. Useful lives are estimated to be 25 to 40 years for buildings andimprovements that extend the life of the original building, ten to 20 years for routine building improvements, five to 15 years for furniture and equipment, two tofive years for computer hardware and software and no greater than four years on automobiles. The cost of maintenance and repairs is charged to expense asincurred and significant repairs are capitalized.Other Intangible Assets : Intangible assets acquired in a purchase business combination with definite useful lives are amortized over their estimated useful lives totheir estimated residual values. Core deposit intangible assets (“CDI”), are recognized at the time of acquisition based on valuations prepared by independent thirdparties or other estimates of fair value. In preparing such59Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)valuations, variables such as deposit servicing costs, attrition rates, and market discount rates are considered. CDI assets are amortized to expense over their usefullives.Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. The Company owned life insurance is recorded at theamount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amountsdue that are probable at settlement.Long-Term Assets : Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when eventsindicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.Loan Commitments and Related Financial Instruments : Financial instruments include off-balance-sheet credit instruments, such as commitments to make loansand commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before consideringcustomer collateral or ability to repay. Such financial instruments are recorded when they are funded.Income Taxes : Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Under GAAP,a deferred tax asset valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determinationof the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negativeevidence, the forecasts of future taxable income, applicable tax planning strategies, and assessments of current and future economic and business conditions. TheCompany considers both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Examples of positive evidence may includethe existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated in future periods. Examples of negativeevidence may include a cumulative loss in the current year and prior two years and negative general business and economic trends. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoveredor settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date.This analysis is updated quarterly and adjusted as necessary. At December 31, 2015 , the Company had a net deferred tax asset of $26.7 million , after recording afull recovery of the valuation allowance in 2014.A tax position is recognized as a benefit only if it "more likely than not" that the tax position would be sustained in a tax examination, presuming that a taxexamination will occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positionsnot meeting the more likely than not" test, no tax benefit is recorded.Retirement Plans : Employee 401(k) and profit sharing plan expense is the amount of matching contributions and any annual discretionary contribution made atthe discretion of the Company’s Board of Directors. Deferred compensation expense allocates the benefits over years of service.Employee Stock Ownership Plan (“ESOP”) : The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders’equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOPshares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.Earnings (Loss) Per Common Share : Basic earnings (loss) per common share is net income (loss) divided by the weighted average number of common sharesoutstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings (loss) per common share is netincome (loss) divided by the weighted average number of common shares outstanding during the period plus the dilutive effect of restricted stock shares and theadditional potential shares issuable under stock options.Loss Contingencies : Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when thelikelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are such matters that will have amaterial effect on the financial statements as of December 31, 2015 .Restrictions on Cash : Cash on hand or on deposit with the Federal Reserve Bank which is required to meet regulatory reserve and clearing requirements.60Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Fair Values of Financial Instruments : Fair values of financial instruments are estimated using relevant market value information and other assumptions, as morefully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments,and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect theestimates.Comprehensive Income (Loss) : Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income(loss) includes unrealized gains and losses on securities, net of tax, which are also recognized as separate components of stockholders’ equity.Stock-based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of theseawards at the date of grant. The Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stockat the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period.Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferredassets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it fromtaking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assetsthrough an agreement to repurchase them before their maturity.Operating Segments: While management monitors the revenue streams of the various products and services, operations are managed and financial performance isevaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly,all of the financial service operations are considered by management to be aggregated in one reportable operating segment.Reclassifications : Certain reclassifications have been made in the prior year’s financial statements to conform to the current year’s presentation.Recent Accounting PronouncementsIn January 2014, the FASB amended existing guidance to clarify when a creditor should derecognize a loan receivable and recognized collateral asset. An insubstance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing aconsumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrowerconveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through asimilar legal agreement. Additionally, the amendment requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate propertyheld by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process offoreclosure according to local requirements of the applicable jurisdiction. This amendment is effective for interim and annual reporting periods beginning afterDecember 15, 2014. The adoption of this standard did not have a material impact on the Company’s results of operation or financial position but did requireexpansion of the Company’s disclosures.In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts withCustomers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts forthe transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The coreprinciple of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle.An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue andcash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments andchanges in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update originally were to become effective forannual periods and interim periods within those annual periods beginning after December 15, 2016. During 2015, FASB delayed the effectiveness by one year toannual periods and interim periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidatedfinancial statements.61Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)On January 5, 2016, the FASB issued an update (ASU No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities).The new guidance is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method orconsolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuringthe fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and formof financial assets (i.e. securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirementto disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement fornon-public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is to be required to be disclosed for financialinstruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income theportion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when theorganization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective forpublic business entities for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on theconsolidated financial statements.NOTE 2 - EARNINGS PER SHAREAmounts reported in earnings per share reflect net income available to common stockholders for the period divided by the weighted average number of shares ofcommon stock outstanding during the period, exclusive of unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stock areregarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect ifconverted to common stock. For the years ended December 31, 2015 2014 2013Net income available to common stockholders$8,675 $40,614 $3,298Average common shares outstanding20,708,775 21,101,966 21,091,399Less: Unearned ESOP shares(780,227) (905,235) (1,054,140)Unvested restricted stock shares(10,545) (19,460) (16,421)Weighted average common shares outstanding19,918,003 20,177,271 20,020,838Add - Net effect of dilutive stock options and unvested restricted stock3,516 9,105 4,483Weighted average dilutive common shares outstanding19,921,519 20,186,376 20,025,321Basic earnings per common share$0.44 $2.01 $0.16Diluted earnings per common share$0.44 $2.01 $0.16Number of antidilutive stock options excluded from the diluted earnings per share calculation536,459 — —Weighted average exercise price of anti-dilutive option shares$12.99 $— $— 62Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 3 – SECURITIESThe fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income is as follows: AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses Fair ValueDecember 31, 2015 Certificates of deposit$87,901 $— $— $87,901Equity mutual fund500 7 — 507Mortgage-backed securities - residential18,330 880 (30) 19,180Collateralized mortgage obligations - residential7,111 41 (10) 7,142SBA-guaranteed loan participation certificates23 — — 23 $113,865 $928 $(40) $114,753December 31, 2014 Certificates of deposit$86,049 $— $— $86,049Equity mutual fund500 9 — 509Mortgage-backed securities - residential23,433 1,218 (40) 24,611Collateralized mortgage obligations - residential9,936 53 (13) 9,976SBA-guaranteed loan participation certificates29 — — 29 $119,947 $1,280 $(53) $121,174Mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities andagencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support. All securities reflected inthe preceding table were classified as available-for-sale at December 31, 2015 and 2014 .The amortized cost and fair values of securities at December 31, 2015 by contractual maturity are shown below. Securities not due at a single maturity date areshown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or withoutcall or prepayment penalties. December 31, 2015 AmortizedCost FairValueDue in one year or less$87,901 $87,901Equity mutual fund500 507Mortgage-backed securities - residential18,330 19,180Collateralized mortgage obligations - residential7,111 7,142SBA-guaranteed loan participation certificates23 23 $113,865 $114,753Investment securities available for sale with carrying amounts of $6.0 million and $6.8 million at December 31, 2015 and 2014 , respectively, were pledged ascollateral on customer repurchase agreements and for other purposes as required or permitted by law.63Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 3 – SECURITIES (continued)Sales of securities were as follows: For the years ended December 31, 2015 2014 2013Proceeds$— $3,663 $—Gross gains— — —Gross losses— 7 —Securities with unrealized losses at December 31, 2015 and 2014 not recognized in income are as follows: Less than 12 Months 12 Months or More Total FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLossDecember 31, 2015 Mortgage-backed securities - residential$— $— $1,724 $(30) $1,724 $(30)Collateralized mortgage obligations -residential— — 1,299 (10) 1,299 (10) $— $— $3,023 $(40) $3,023 $(40) December 31, 2014 Mortgage-backed securities - residential— — 2,126 (40) 2,126 (40)Collateralized mortgage obligations -residential— — 1,847 (13) 1,847 (13) $— $— $3,973 $(53) $3,973 $(53)The Company evaluates marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should beconsidered other-than-temporarily impaired under current accounting guidance, which generally provides that if a marketable security is in an unrealized lossposition, whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary.Certain residential mortgage-backed securities and collateralized mortgage obligations that the Company holds in its investment portfolio were in an unrealizedloss position at December 31, 2015 , but the unrealized loss was not considered significant under the Company’s impairment testing methodology. In addition, theCompany does not intend to sell these securities, and it is not likely that the Company will be required to sell the securities before their anticipated recovery occurs.64Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLELoans receivable are as follows: December 31, 2015 2014One-to-four family residential real estate$159,501 $180,337Multi-family mortgage506,026 480,349Nonresidential real estate226,735 234,500Construction and land1,313 1,885Commercial loans79,516 66,882Commercial leases265,405 217,143Consumer1,831 2,051 1,240,327 1,183,147Net deferred loan origination costs1,621 1,199Allowance for loan losses(9,691) (11,990)Loans, net$1,232,257 $1,172,356Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within anacceptable level of risk. The Company reviews and approves these policies and procedures on a periodic basis. A reporting system supplements the review processby providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming andpotential problem loans via trend and risk rating migration. The Company requires title insurance insuring the priority of our lien, fire and extended coveragecasualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.The majority of the loans the Company originates are investment and business loans (multi-family, nonresidential real estate, commercial, construction and landloans, and commercial leases). In addition, we originate one-to-four family residential mortgage loans and consumer loans, and purchase and sell loanparticipations from time-to-time. The following briefly describes our principal loan products.The Company originates real estate loans principally secured by first liens on nonresidential real estate. The nonresidential real estate properties are predominantlyoffice buildings, light industrial buildings, shopping centers and mixed-use developments and, to a lesser extent, more specialized properties such as nursing homesand other healthcare facilities. The Company may, from time to time, purchase commercial real estate loan participations.Multi-family mortgage loans generally are secured by multi-family rental properties such as apartment buildings, including subsidized apartment units. In general,loan amounts range between $250,000 and $3.0 million . Approximately 38.7% of the collateral is located outside of our primary market area; however, we do nothave a concentration in any single market outside of our primary market territory. In underwriting multi-family mortgage loans, the Company considers a numberof factors, which include the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120% ), the age and conditionof the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties and, proximityto diverse employment opportunities. Multi-family mortgage loans are generally originated in amounts up to 80% of the appraised value of the property securingthe loan. Personal guarantees are usually obtained from multi-family mortgage borrowers.Loans secured by multi-family mortgages generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loanbalances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects ofgeneral economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, therepayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from theproject is reduced below acceptable thresholds, the borrower’s ability to repay the loan may be impaired.The Company emphasizes nonresidential real estate loans with initial principal balances between $250,000 and $3.0 million . Substantially all of our nonresidentialreal estate loans are secured by properties located in our primary market area. The Company’s65Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)nonresidential real estate loans are generally written as three - or five -year adjustable-rate mortgages or mortgages with balloon maturities of three or five years.Amortization on these loans is typically based on 20 - to 30 -year schedules. The Company also originates some 15 -year fixed-rate, fully amortizing loans.In the underwriting of nonresidential real estate loans, the Company generally lends up to 80% of the property’s appraised value. Decisions to lend are based on theeconomic viability of the property as the primary source of repayment and the creditworthiness of the borrower. In evaluating a proposed commercial real estateloan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120% ),computed after deduction for a vacancy factor and property expenses we deem appropriate. Personal guarantees are pursued and usually obtained fromnonresidential real estate borrowers.Nonresidential real estate loans generally carry higher interest rates and have shorter terms than those on one- to four-family residential mortgage loans.Nonresidential real estate loans, however, entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typicallyinvolve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producingproperties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the realestate market and in the general economy.The Company makes various types of secured and unsecured commercial loans to customers in our market area for the purpose of financing equipment acquisition,expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to five years. The loans are eithernegotiated on a fixed-rate basis or carry adjustable interest rates indexed to (i) a lending rate that is determined internally, or (ii) a short-term market rate index.Commercial credit decisions are based upon our credit assessment of the loan applicant. The Company determines the applicant’s ability to repay in accordancewith the proposed terms of the loans and we assess the risks involved. An evaluation is made of the applicant to determine character and capacity to manage.Personal guarantees of the principals are pursued and usually obtained. In addition to evaluating the loan applicant’s financial statements, we consider the adequacyof the primary and secondary sources of repayment for the loan. Credit agency reports of the applicant’s credit history supplement our analysis of the applicant’screditworthiness and at times are supplemented with inquiries to other banks and trade investigations. Moreover, assets listed on personal financial statements areverified. Collateral supporting a secured transaction also is analyzed to determine its marketability. Commercial business loans generally have higher interest ratesthan residential loans of like duration because they have a higher risk of default since their repayment generally depends on the successful operation of theborrower’s business and the sufficiency of any collateral. Pricing of commercial loans is based primarily on the credit risk of the borrower, with due considerationgiven to borrowers with appropriate deposit relationships.The Company also lends money to small and mid-size leasing companies for equipment financing leases. Generally, commercial leases are secured by anassignment by the leasing company of the lease payments and by a secured interest in the equipment being leased. In most cases, the lessee acknowledges oursecurity interest in the leased equipment and agrees to send lease payments directly to us. Consequently, the Company underwrites lease loans by examining thecreditworthiness of the lessee rather than the lessor. Lease loans generally are non-recourse to the leasing company.The Company’s commercial leases are secured primarily by technology equipment, medical equipment, material handling equipment and other capital equipment.Lessees tend to be publicly-traded companies with investment-grade rated debt or companies that have not issued public debt and therefore do not have a publicdebt rating. The Company requires that a minimum of 50% of our commercial lessees have an investment grade public debt rating by Moody’s or Standard &Poors, or the equivalent. Commercial leases to these entities have a maximum maturity of seven years and a maximum outstanding credit exposure of $15.0 millionto any single entity. If the lessee does not have a public debt rating, they are subject to the same internal credit analysis as any other customer. Typically,commercial leases to these lessees have a maximum maturity of five years and a maximum outstanding credit exposure of $5.0 million to any single entity. Inaddition, the Company will originate commercial leases to lessees with below-investment grade public debt ratings and have a maximum outstanding creditexposure of $10.0 million to any single entity. Lease loans are almost always fully amortizing, with fixed interest rates.Although the Company does not actively originate construction and land loans presently, construction and land loans generally consist of land acquisition loans tohelp finance the purchase of land intended for further development, including single-family homes, multi-family housing and commercial income property,development loans to builders in our market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance thecost of utilities, roads, sewers66Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)and other development costs. These builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improvedbuilding lots may be sold to another builder, often in conjunction with development loans. Construction and land loans typically involve a higher degree of creditrisk than financing on improved, owner-occupied real estate. The risk of loss on construction and land loans is largely dependent upon the accuracy of the initialappraisal of the property’s value upon completion of construction or development; the estimated cost of construction, including interest; and the estimated time tocomplete and/or sell or lease such property. The Company seeks to minimize these risks by maintaining consistent lending policies and underwriting standards.However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, the length of time to complete and/or sell or lease thecollateral property is greater than anticipated, or if there is a downturn in the local economy or real estate market, the property could have a value upon completionthat is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the construction and land loan portfolio, andcould result in significant losses or delinquencies.The Company offers conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximumloan amounts generally of up to $2.5 million . The Company currently offers fixed-rate conventional mortgage loans with terms of 10 to 30 years that are fullyamortizing with monthly payments, and adjustable-rate conventional mortgage loans with initial terms of between one and five years that amortize up to 30 years.One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae guidelines, and loans that conform to such guidelines arereferred to as “conforming loans.” The Company generally originates both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limitsas established by Fannie Mae, which is currently $417,000 for single-family homes. Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 80% .The Company also originates loans above conforming limits, sometimes referred to as “jumbo loans,” that have been underwritten to the credit standards of FannieMae. These loans are generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans. In the Chicago metropolitan area,larger residential loans are not uncommon. The Company also originates loans at higher rates that do not fully meet the credit standards of Fannie Mae but aredeemed to be acceptable risks.The primary markets served by the Company have seen gradually broadening signs of stability amid widespread economic weakness and high unemployment. Theability of the Company’s borrowers to repay their loans, and the value of the collateral securing such loans, could be adversely impacted by a return to economicweakness in its local markets as a result of unemployment, declining real estate values, or increased residential and office vacancies. This not only could result inthe Company experiencing charge-offs and/or nonperforming assets, but also could necessitate an increase in the provision for loan losses. These events, if theywere to recur, would have an adverse impact on the Company’s results of operations and its capital.67Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method: Allowance for loan losses Loan Balances Individuallyevaluated forimpairment Collectivelyevaluated forimpairment Total Individuallyevaluated forimpairment Collectivelyevaluated forimpairment TotalDecember 31, 2015 One-to-four family residential realestate$— $1,704 $1,704 $2,672 $156,829 $159,501Multi-family mortgage41 3,569 3,610 2,879 503,147 506,026Nonresidential real estate3 2,579 2,582 2,099 224,636 226,735Construction and land— 43 43 — 1,313 1,313Commercial loans— 654 654 — 79,516 79,516Commercial leases— 1,073 1,073 — 265,405 265,405Consumer— 25 25 — 1,831 1,831 $44 $9,647 $9,691 $7,650 $1,232,677 1,240,327Net deferred loan origination costs 1,621Allowance for loan losses (9,691)Loans, net $1,232,257 Allowance for loan losses Loan Balances Individuallyevaluatedforimpairment Collectivelyevaluatedforimpairment Total Individuallyevaluatedforimpairment Collectivelyevaluatedforimpairment TotalDecember 31, 2014 One-to-four family residential realestate$8 $2,140 $2,148 $4,174 $176,163 $180,337Multi-family mortgage226 4,979 5,205 5,282 475,067 480,349Nonresidential real estate236 2,704 2,940 4,690 229,810 234,500Construction and land— 80 80 — 1,885 1,885Commercial loans— 554 554 76 66,806 66,882Commercial leases— 1,009 1,009 — 217,143 217,143Consumer— 54 54 — 2,051 2,051 $470 $11,520 $11,990 $14,222 $1,168,925 1,183,147Net deferred loan origination costs 1,199Allowance for loan losses (11,990)Loans, net $1,172,35668Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)Activity in the allowance for loan losses is as follows: For the years ended December 31, 2015 2014 2013Beginning balance$11,990 $14,154 $18,035Loans charged off: One-to-four family residential real estate(386) (873) (1,505)Multi-family mortgage(198) (1,230) (1,832)Nonresidential real estate(391) (1,727) (577)Construction and land— (1) (943)Commercial loans(152) (123) (425)Commercial leases— (8) —Consumer(16) (12) (55) (1,143) (3,974) (5,337)Recoveries: One-to-four family residential real estate702 418 447Multi-family mortgage182 100 236Nonresidential real estate509 423 519Construction and land44 377 463Commercial loans611 1,225 470Commercial leases1 — —Consumer1 3 8 2,050 2,546 2,143Net recoveries (charge-off)907 (1,428) (3,194)Recovery of loan losses(3,206) (736) (687)Ending balance$9,691 $11,990 $14,154Purchased Impaired LoansAs a result of its acquisition of Downers Grove National Bank, the Company holds purchased loans for which there was evidence of deterioration of credit qualitysince origination and for which it was probable that all contractually required payments would not be collected as of the date of the acquisition. The Company heldno purchased impaired loans at December 31, 2015 and one purchased impaired loan at December 31, 2014 , with a recorded investment value of $52,000 .69Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)Impaired loansSeveral of the following disclosures are presented by “recorded investment,” which the FASB defines as “the amount of the investment in a loan, which is not netof a valuation allowance, but which does reflect any direct write-down of the investment.” The following represents the components of recorded investment:Loan principal balanceLess unapplied paymentsPlus negative unapplied balanceLess escrow balancePlus negative escrow balancePlus unamortized net deferred loan costsLess unamortized net deferred loan feesPlus unamortized premiumLess unamortized discountLess previous charge-offsPlus recorded accrued interestLess reserve for uncollected interest= Recorded investmentThe following tables present loans individually evaluated for impairment by class of loans: LoanBalance RecordedInvestment Partial Charge-off Allowancefor LoanLossesAllocated AverageInvestmentin ImpairedLoans InterestIncomeRecognizedDecember 31, 2015 With no related allowance recorded One-to-four family residential real estate$3,203 $2,637 $637 $— $2,708 $24One-to-four family residential real estate - non-owner occupied23 21 2 — 859 —Multi-family mortgage1,863 1,837 — — 1,962 78Wholesale commercial lending511 507 — — 514 34Nonresidential real estate2,066 2,049 — — 1,877 102 7,666 7,051 639 — 7,920 238With an allowance recorded Multi-family mortgage518 518 — 41 1,181 —Nonresidential real estate62 39 27 3 1,439 — 580 557 27 44 2,620 — $8,246 $7,608 $666 $44 $10,540 $23870Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued) LoanBalance RecordedInvestment Partial Charge-off Allowancefor LoanLossesAllocated AverageInvestmentin ImpairedLoans InterestIncomeRecognizedDecember 31, 2014 With no related allowance recorded One-to-four family residential real estate$3,246 $2,656 $649 $— $2,777 $44One-to-four family residential real estate - non-owner occupied1,481 1,425 57 — 745 76Multi-family mortgage3,174 2,593 481 — 3,419 120Wholesale commercial lending519 513 — — 401 —Nonresidential real estate2,118 2,068 6 — 4,175 72Commercial loans - secured76 76 — — 93 3 10,614 9,331 1,193 — 11,610 315With an allowance recorded One-to-four family residential real estate - non-owner occupied115 78 37 8 202 —Multi-family mortgage2,713 2,131 624 226 2,343 48Nonresidential real estate2,950 2,605 326 236 1,718 67 5,778 4,814 987 470 4,263 115 $16,392 $14,145 $2,180 $470 $15,873 $430Nonaccrual loansThe following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans: Loan Balance RecordedInvestment Loans PastDue Over 90Days, stillaccruingDecember 31, 2015 One-to-four family residential real estate$2,704 $2,263 $—One-to-four family residential real estate – non owner occupied92 192 —Multi-family mortgage829 821 —Nonresidential real estate324 296 — $3,949 $3,572 $—December 31, 2014 One-to-four family residential real estate$4,793 $4,210 $—One-to-four family residential real estate – non owner occupied291 198 —Multi-family mortgage5,638 4,481 —Nonresidential real estate4,023 3,245 —Commercial loans – secured76 76 —Consumer loans3 3 — $14,824 $12,213 $—71Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category.Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.The Company’s reserve for uncollected loan interest was $181,000 and $464,000 at December 31, 2015 and 2014 , respectively. Except for purchased impairedloans, when a loan is on non-accrual status and the ultimate collectability of the total principal of an impaired loan is in doubt, all payments are applied to principalunder the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest,contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable.In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisionsof FASB ASC 310–10, as applicable.Past Due LoansThe following tables present the aging of the recorded investment in past due loans at December 31, 2015 by class of loans: 30-59 DaysPast Due 60-89 DaysPast Due 90 Days orGreaterPast Due Total PastDue Loans NotPast Due TotalOne-to-four family residential real estate$2,000 $572 $1,997 $4,569 $109,893 $114,462One-to-four family residential real estate - non-owneroccupied299 164 192 655 43,557 44,212Multi-family mortgage - Illinois651 283 821 1,755 312,620 314,375Multi-family mortgage - Other— — — — 188,178 188,178Nonresidential real estate— — 296 296 223,018 223,314Construction— — — — 21 21Land— — — — 1,279 1,279Commercial loans: Regional Commercial Banking4 150 — 154 29,890 30,044Health Care— — — — 31,862 31,862Direct Commercial Lessor— — — — 17,873 17,873Commercial leases: — Investment rated commercial leases50 363 — 413 170,859 171,272Other commercial leases— — — — 95,800 95,800Consumer21 — — 21 1,819 1,840Total$3,025 $1,532 $3,306 $7,863 $1,226,669 $1,234,532 72Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)The following tables present the aging of the recorded investment in past due loans as December 31, 2014 by class of loans: 30-59 DaysPast Due 60-89 DaysPast Due Greater than90 Days PastDue Total PastDue Loans NotPast Due TotalOne-to-four family residential real estate$1,415 $276 $3,844 $5,535 $126,054 $131,589One-to-four family residential real estate - non-owneroccupied320 165 198 683 47,350 48,033Multi-family mortgage2,314 1,187 3,363 6,864 328,516 335,380Wholesale commercial lending— — — — 141,052 141,052Nonresidential real estate376 444 3,245 4,065 227,078 231,143Construction— — — — 63 63Land— — — — 1,814 1,814Commercial loans: Regional Commercial Banking— 1 76 77 24,777 24,854Health Care— — — — 24,799 24,799Direct Commercial Lessor— — — — 17,380 17,380Commercial leases: — Investment rated commercial leases426 — — 426 160,830 161,256Other commercial leases144 — — 144 57,098 57,242Consumer18 1 3 22 2,038 2,060 $5,013 $2,074 $10,729 $17,816 $1,158,849 $1,176,665Troubled Debt RestructuringsThe Company evaluates loan extensions or modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a TDR. In general,if the Company grants a loan extension or modification to a borrower 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 isclassified 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, managementmeasures any impairment on the restructured loan in the same manner as for impaired loans as noted above.The Company had $2.7 million of TDRs at December 31, 2015 , compared to $3.0 million at December 31, 2014 , with zero and $38,000 in specific valuationreserves allocated at December 31, 2015 and 2014 , respectively. The Company had no outstanding commitments to borrowers whose loans are classified as TDRs.The following table presents loans classified as TDRs: December 31, 2015 2014One-to-four family residential real estate$1,385 $1,917Multi-family mortgage1,119 510Accrual troubled debt restructured loans2,504 2,427One-to-four family residential real estate174 230Multi-family mortgage— 346Nonaccrual troubled debt restructured loans174 576 $2,678 $3,00373Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)During the years ending December 31, 2015 and 2014 , the terms of certain loans were modified and classified as TDRs. The modification of the terms of suchloans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interestlower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.The following tables present TDRs that occurred during the year: For the years ended December 31, 2015 2014 Numberof loans Pre-Modificationoutstandingrecordedinvestment Post-Modificationoutstandingrecordedinvestment Numberof loans Pre-Modificationoutstandingrecordedinvestment Post-ModificationoutstandingrecordedinvestmentOne-to-four family residential real estate6 $401 $274 4 $485 $444Multi-family mortgage1 615 615 — — —Commercial loans - secured— — — 1 210 5 7 $1,016 $889 5 $695 $449 Due toreduction ininterest rate Due toextension ofmaturity date Due topermanentreduction inrecordedinvestment TotalFor the year ended December 31, 2015 One-to-four family residential real estate$— $142 $132 $274Multi-family mortgage— 615 — 615 $— $757 $132 $889For the year ended December 31, 2014 One-to-four family residential real estate$19 $373 $52 $444Commercial loans - secured— — 5 5 $19 $373 $57 $449The TDRs described had no material impact on interest income, resulted in no change to the allowance for loan losses allocated and resulted in charge offs of$127,000 for the year ended December 31, 2015 . The TDRs described above decreased interest income by $2,000 , resulted in no change to the allowance for loanlosses and resulted in charge offs of $248,000 for the year ended December 31, 2014 .The following table presents TDRs for which there was a payment default within twelve months following the modification: For the years ended December 31, 2015 2014 Numberof loans Recordedinvestment Numberof loans RecordedinvestmentOne-to-four family residential real estate2 $43 2 $78A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.The TDRs that subsequently defaulted described above had no material impact on the allowance for loans losses during the years ending December 31, 2015 and2014.The terms of certain other loans were modified during the year ending December 31, 2015 that did not meet the definition of a TDR. These loans have a totalrecorded investment of $1.9 million and $1.0 million at December 31, 2015 and 2014 . The74Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in apayment that was considered to be insignificant.In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in paymentdefault on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.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 financialinformation, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzesloans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estateloans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potentialweaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mentionassets 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 theliquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within areasonable time. The risk rating guidance published by the Office of the Comptroller of the Currency clarifies that a loan with a well-defined weakness doesnot 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 theloan to be rated Substandard.Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknessesmake collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The loans wereplaced on nonaccrual status.Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans.75Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)As of December 31, 2015 , and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Pass SpecialMention Substandard Nonaccrual TotalOne-to-four family residential real estate$112,449 $— $576 $1,936 $114,961One-to-four family residential real estate - non-owneroccupied43,858 219 271 192 44,540Multi-family mortgage - Illinois312,329 344 4,656 828 318,157Multi-family mortgage - Other187,358 — 511 — 187,869Nonresidential real estate219,859 1,600 4,981 295 226,735Construction21 — — — 21Land450 — 842 — 1,292Commercial loans: Regional commercial banking29,377 — 614 — 29,991Health care31,809 — — — 31,809Direct commercial lessor17,716 — — — 17,716Commercial leases: Investment rated commercial leases170,100 — — — 170,100Other commercial leases95,305 — — — 95,305Consumer1,831 — — — 1,831 $1,222,462 $2,163 $12,451 $3,251 $1,240,327 As of December 31, 2014 , and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Pass SpecialMention Substandard Nonaccrual TotalOne-to-four family residential real estate $126,102 $615 $1,046 $4,228 $131,991One-to-four family residential real estate - non-owneroccupied 46,253 931 964 198 48,346Multi-family mortgage - Illinois 330,878 609 3,430 4,515 339,432Multi-family mortgage - Other 140,398 — 519 — 140,917Nonresidential real estate 223,385 1,170 6,698 3,247 234,500Construction 60 — — — 60Land 1,212 — 613 — 1,825Commercial loans: Regional commercial banking 23,978 40 705 76 24,799Health care 24,770 — — — 24,770Direct commercial lessor 17,313 — — — 17,313Commercial leases: Investment rated commercial leases 160,208 — — — 160,208Other commercial leases 56,935 — — — 56,935Consumer 2,048 — — 3 2,051 $1,153,540 $3,365 $13,975 $12,267 $1,183,14776Table of ContentsNOTE 5 – OTHER REAL ESTATE OWNEDReal estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired throughforeclosure 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 loanbalance, the difference is charged against the allowance for loan losses.The following represents the roll forward of OREO and the composition of OREO properties. At and For the Years Ended December 31, 2015 2014 (Dollars in thousands)Beginning balance $6,358 $6,306New foreclosed properties 5,875 5,449Valuation adjustments (548) (448)Sales (4,674) (4,949)Ending balance $7,011 $6,358 December 31, 2015 December 31, 2014 Balance ValuationAllowance Net OREOBalance Balance ValuationAllowance Net OREOBalance (Dollars in thousands)One–to–four family residential$2,684 $(63) $2,621 $1,318 $(55) $1,263Multi-family mortgage1,025 (74) 951 2,530 (223) 2,307Nonresidential real estate1,986 (239) 1,747 964 (79) 885Land2,358 (666) 1,692 2,442 (539) 1,903 8,053 (1,042) 7,011 7,254 (896) 6,358Activity in the valuation allowance is as follows: At and For the Years Ended December 31, 2015 2014 (Dollars in thousands)Beginning of year $896 $902Additions charged to expense 548 438Reductions from sales of other real estate owned (402) (444)End of year $1,042 $896NOTE 6 – SECONDARY MORTGAGE MARKET ACTIVITIESFirst mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances ofthese loans were $132.4 million and $148.3 million at December 31, 2015 , and 2014 , respectively. Custodial escrow balances maintained in connection with theforegoing loan servicing activities were $3.4 million at December 31, 2015 , and 2014 .77Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 6 – SECONDARY MORTGAGE MARKET ACTIVITIES (continued)Capitalized mortgage servicing rights are included in other assets in the accompanying consolidated statements of financial condition. Activity for capitalizedmortgage servicing rights and the related valuation allowance was as follows. December 31, 2015 2014Servicing rights Beginning of year$834 $931Additions27 38Amortized to expense(137) (135)End of year$724 $834Valuation allowance Beginning of year$13 $5Additions expensed3 8Reductions credited to expense— —End of year$16 $13Carrying value of mortgage servicing rights$708 $821Fair value of mortgage servicing rights$815 $1,190The estimated fair value of mortgage servicing rights is the present value of the expected future cash flows over the projected life of the loan. Assumptions used inthe present value calculation are based on actual performance of the underlying servicing along with general market consensus. The expected cash flow is the netamount of all mortgage servicing income and expense items. The expected cash flows are discounted at an interest rate appropriate for the associated risk given thecurrent market conditions. Significant assumptions are as follows: December 31, 2015 2014Prepayment speed13.92% 13.69%Discount rate12.00% 12.00%Average servicing cost per loan$60.00 $63.00Escrow float rate0.25% 1.83%Key economic assumptions used in measuring the fair value of the Company’s mortgage servicing rights as of December 31, 2015 and the effect on the fair valueof our mortgage servicing rights from adverse changes in those assumptions, are as follows:Fair value of mortgage servicing rights$815Weighted average annual prepayment speed13.92%Decrease in fair value from 10% adverse change(22)Decrease in fair value from 20% adverse change(41)Weighted-average annual discount rate12.00%Decrease in fair value from 10% adverse change(28)Decrease in fair value from 20% adverse change(54)These sensitivities are hypothetical and should be used with caution. As the above table indicates, changes in fair value based on variations in individualassumptions generally cannot be used to predict changes in fair value based upon further variations of the same assumptions. Also, the effect of a variation in aparticular assumption on the fair value of the retained interest is calculated in the above table independently, without changing any other assumption. In reality,changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities.78Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 6 – SECONDARY MORTGAGE MARKET ACTIVITIES (continued)The weighted average amortization period is 62 months . The estimated amortization expense for each of the next five years is as follows:2016$1422017115201892201972202058NOTE 7 – PREMISES AND EQUIPMENTYear end premises and equipment are as follows: December 31, 2015 2014Land and land improvements$13,594 $13,569Buildings and improvements37,316 37,181Furniture and equipment9,693 9,487Computer equipment7,224 7,232 67,827 67,469Accumulated depreciation(35,101) (33,183) $32,726 $34,286Depreciation of premises and equipment was $2.1 million , $2.2 million and $2.9 million for the years ended December 31, 2015 , 2014 and 2013 , respectively.The Company leases certain branch facilities under non-cancelable operating lease agreements expiring in various years through 2032. Rent expense, net ofsublease income, for facilities was $393,000 , $387,000 , and $476,000 in 2015 , 2014 , and 2013 , respectively, excluding taxes, insurance, and maintenance. Theprojected minimum rental expense under existing leases, not including taxes, insurance, and maintenance, as of December 31, 2015 is as follows:2016$4482017469201847920194712020459Thereafter4,708 $7,034The Company has subleased some of its branch facilities and currently is entitled to receive income as follows:2016$4320177 $5079Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 8 – CORE DEPOSIT INTANGIBLEThe following table presents the changes in the carrying amount of core deposit intangible, gross carrying amount, accumulated amortization, and net book value: December 31, 2015 2014Balance at the beginning of the year$1,855 $2,433Amortization(550) (578)Additions— —Net Carrying Value$1,305 $1,855Gross carrying amount$5,932 $5,932Accumulated amortization(4,627) (4,077)Net Carrying Value$1,305 $1,855Aggregate amortization expense was $550,000 , $578,000 and $605,000 for 2015 , 2014 and 2013 , respectively.Estimated amortization expense for each of the next five years is as follows:2016$52320174962018184201961202034NOTE 9 – DEPOSITSComposition of deposits are as follows: December 31, 2015 2014Noninterest-bearing demand deposits$254,830 $134,129Savings deposits156,752 154,532Money market accounts329,654 338,246Interest-bearing NOW accounts248,982 351,947Certificates of deposit222,701 232,859 $1,212,919 $1,211,713Time deposits that meet or exceed the FDIC Insurance limit of $250,000 were $15.2 million and $13.1 million at December 31, 2015 and 2014 , respectively.Scheduled maturities of certificates of deposit for the next five years are as follows:2016$151,545201744,515201815,71620193,65020207,27580Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 10 – BORROWINGSYear-end borrowed funds are as follows: December 31, 2015 2014 ContractualRate Amount ContractualRate AmountFixed-rate advance from FHLBC, due within 1 year0.29% $62,000 0.13% $10,000Securities sold under agreements to repurchase0.25 2,318 0.25 2,921 0.28% $64,318 0.16% $12,921The Company maintains a collateral pledge agreement covering secured advances whereby the Company has agreed to keep on hand, free of all other pledges,liens, and encumbrances, specifically identified whole first mortgages on improved residential property not more than 90-days delinquent to secure advances fromthe FHLBC. All of the Bank’s FHLBC common stock is pledged as additional collateral for these advances. At December 31, 2015 , $94.3 million and $303.0million of first mortgage and multi-family mortgage loans, respectively, collateralized potential advances. At December 31, 2015 , we had the ability to borrow anadditional $307.8 million under our credit facilities with the FHLBC. The Company also had available pre-approved overnight federal funds borrowing. AtDecember 31, 2015 and 2014 , there was no outstanding balance on these lines.NOTE 11 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASESecurities sold under agreements to repurchase are shown below. December 31, 2015 Overnight andContinuous Up to 30days 30 - 90 days Greater Than 90days TotalRepurchase agreements and repurchase-to-maturity transactions $2,318 $— $— $— $2,318Gross amount of recognized liabilities for repurchase agreements in Statement of Condition $2,318 December 31, 2014 Overnight andContinuous Up to 30days 30 - 90 days Greater Than 90days TotalRepurchase agreements and repurchase-to-maturity transactions $2,921 $— $— $— $2,921Gross amount of recognized liabilities for repurchase agreements in Statement of Condition $2,921Securities sold under agreements to repurchase were secured by mortgage-backed securities with a carrying amount of $6.0 million and $6.8 million atDecember 31, 2015 and December 31, 2014 , respectively. Also included in total borrowings were advances from the FHLBC of $62.0 million and $10.0 million atDecember 31, 2015 and December 31, 2014 , respectively.As the securities’ values fluctuate due to market conditions, the Company has no control over the market value. The Company is obligated to promptly transferadditional securities if the market value of the securities fall below the repurchase price, per the agreement.81Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 12 – INCOME TAXESThe income tax expense (benefit) is as follows: For the years ended December 31, 2015 2014 2013Current$346 $363 $—Deferred expense (benefit)5,079 3,437 (1,310)Deferred tax valuation allowance— (35,117) 1,310Total income tax expense (benefit)$5,425 $(31,317) $—A reconciliation of the provision for income taxes computed at the statutory federal corporate tax rate of 34% for 2015 , 2014 and 2013 to the income tax expense(benefit) in the consolidated statements of operations follows: For the years ended December 31, 2015 2014 2013Expense computed at the statutory federal tax rate$4,794 $3,161 $1,121State taxes and other, net626 664 92Tax adjustments— — (2,390)Bank owned life insurance(66) (80) (106)ESOP/Share based compensation71 55 (27)Deferred tax valuation allowance— (35,117) 1,310 $5,425 $(31,317) $—Effective income tax rate38.48% N.M. —%N.M. Not MeaningfulRetained earnings at December 31, 2015 and 2014 include $14.9 million for which no deferred federal income tax liability has been recorded. This amountrepresents an allocation of income to bad debt deductions for tax purposes alone.The net deferred tax asset is as follows: December 31, 2015 2014Gross Deferred tax assets Allowance for loan losses$3,716 $4,598Alternative minimum tax, general business credit and net operating loss carryforwards24,799 28,842Tax deductible goodwill and core deposit intangible1,783 2,091Other2,237 1,703 32,535 37,234Gross Deferred tax liabilities Net deferred loan origination costs(1,811) (1,587)Purchase accounting adjustments(2,801) (2,728)Other(888) (805)Unrealized gain on securities(340) (471) (5,840) (5,591) $26,695 $31,643As of December 31, 2015 and 2014 , the Company’s net deferred tax asset (“DTA”) was $26.7 million and $31.6 million , respectively. The Company previouslyestablished a full valuation allowance against the DTA effective December 31, 2011, based on the82Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 12 – INCOME TAXES (continued)Company’s cumulative pre-tax operating losses for the previous three years and other factors, including then existing local and national economic conditions andthe Company’s then elevated level of nonperforming assets and corresponding credit costs (i.e., charge-offs, loan loss provisions, non-performing asset and otherreal estate owned management expenses, and gains and losses on sales of other real estate owned and bulk loan sales).A DTA valuation allowance is required under ASC 740 when the realization of a DTA is assessed and the assessment indicates that it is “more likely than not” (i.e.more than 50% likely) that all or a portion of the DTA will not be realized. All available evidence, both positive and negative must be considered to determinewhether, based on the weight of that evidence, a valuation allowance against the net DTA is required. Objectively verifiable evidence is assigned greater weightthan evidence that is not objectively verifiable. The valuation allowance is analyzed quarterly for changes affecting the DTA.The Company reversed its DTA valuation allowance as of December 31, 2014 based on management’s determination that it is more likely than not that theCompany will be able to utilize the entire DTA and that maintaining a valuation allowance for the DTA was no longer warranted under ASC 740. Accordingly, thevaluation allowance for the DTA was reversed and the Company recorded an associated tax benefit of $35.1 million in 2014.The recovery of the DTA valuation allowance was supported by numerous positive factors, including eight consecutive quarters of sustained pre-tax income,strengthened asset quality trends, the absence of other previously-existing negative factors, the length of the Company’s net operating loss carryforward periodsand financial projections indicating that the DTA will be realized before the underlying tax attributes begin to expire. The Company’s ability to realize the DTA isdependent upon the generation of future taxable income during the periods in which the tax attributes underlying the DTA become deductible. The amount of theDTA that will ultimately be realized will be impacted by the Company’s future taxable income and any changes to the many variables that could impact futuretaxable income.As of December 31, 2015 , management determined that it is more likely than not that the Company will be able to utilize the entire DTA.At December 31, 2015 , the Company had a federal net operating loss carryforward of $45.2 million , which will begin to expire in 2032, a federal tax creditcarryforward of $1.3 million which will begin to expire in 2022, a $2.9 million alternative minimum tax credit carryforward that can be carried forwardindefinitely, and a $39.7 million federal alternative minimum tax net operating loss carryforward which will begin to expire in 2032. In addition, at December 31,2015 the Company had a federal net operating loss carryforward relating to its acquisition of Downers Grove National Bank, which is subject to utilizationlimitations under Section 382 of the Internal Revenue Code, of $7.9 million which will begin to expire in 2030. At December 31, 2015 , the Company had a statenet operating loss carryforward for the State of Illinois of $85.2 million , which will begin to expire in 2022.Unrecognized Tax BenefitsA reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2015 2014Beginning of year$79 $65Additions based on tax positions related to the current year— 63Additions for tax positions of prior years29 1Reductions due to the statute of limitations and reductions for tax positions of prior years— (50)End of year$108 $79The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Companyrecognizes interest and/or penalties related to income tax matters in income tax expense. At December 31, 2015 and 2014 , the Company has immaterial amountsaccrued for potential interest and penalties.The Company and its subsidiary are subject to U.S. federal income tax as well as income tax of the States of Illinois, Indiana, Wisconsin, New Jersey, Colorado,Minnesota, Florida and Texas. The Company is no longer subject to examination by the federal taxing authorities for years before 2012 and the Illinois taxingauthorities for years before 2012.83Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 13 – REGULATORY MATTERSThe Bank and bank holding company are subject to regulatory capital requirements administered by the federal banking agencies. capital adequacy guidelines and,additionally for banks, prompt corrective action regulations, involve quantitative measure of assets, liabilities, and certain off-balance-sheet items calculated underregulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capitalrequirements can initiate regulatory actions. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel IIIrules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fullyphased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Capital amounts andratios for December 31, 2014 are calculated using Basel I rules.Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, andcritically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required toaccept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As ofDecember 31, 2015 and 2014 , the OCC categorized the Bank as well–capitalized under the regulatory framework for prompt corrective action. There are noconditions or events since those notifications that management believes have changed the institution’s well–capitalized status.Actual and required capital amounts and ratios were: Actual Required for Capital Adequacy Purposes To be Well-Capitalized under PromptCorrective Action Provisions Amount Ratio Amount Ratio Amount RatioDecember 31, 2015 Total capital (to risk-weighted assets): Consolidated$198,738 17.89% $88,898 8.00% N/A N/ABankFinancial, F.S.B.171,239 15.41 88,881 8.00 $111,102 10.00%Tier 1 (core) capital (to risk-weighted assets): Consolidated189,044 17.01 66,674 6.00 N/A N/ABankFinancial, F.S.B.161,545 14.54 66,661 6.00 88,881 8.00Common Tier 1 (CET1) Consolidated189,044 17.01 50,005 4.50 N/A N/ABankFinancial, F.S.B.161,545 14.54 49,996 4.50 72,216 6.50Tier 1 (core) capital (to adjusted average total assets): Consolidated189,044 13.26 57,043 4.00 N/A N/ABankFinancial, F.S.B.161,545 11.33 57,039 4.00 71,299 5.00December 31, 2014 Total capital (to risk-weighted assets): Consolidated$199,284 18.31% $87,084 8.00% N/A N/ABankFinancial, F.S.B.176,414 16.21 87,058 8.00 $108,822 10.00%Tier 1 (core) capital (to risk-weighted assets): Consolidated187,290 17.21 43,542 4.00 N/A N/ABankFinancial, F.S.B.164,420 15.11 43,529 4.00 65,293 6.00Tier 1 (core) capital (to adjusted average total assets): Consolidated187,290 13.04 57,363 4.00 N/A N/ABankFinancial, F.S.B.164,420 11.45 57,431 4.00 71,789 5.00 84Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 13 – REGULATORY MATTERS (continued)The Company and the Bank have adopted Capital Plans that requires the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratioof at least 12%. The minimum capital ratios set forth in the Capital Plans will be increased and other minimum capital requirements will be established if and asnecessary to comply with the Basel III requirements as such requirements become applicable to the Company and the Bank. In accordance with the Capital Plans,neither the Company nor the Bank will pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause theBank’s total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels. In addition, the Company will continue tomaintain its ability to serve as a source of financial strength to the Bank by holding at least $5.0 million of cash or liquid assets for that purpose. At December 31,2015 , management believes the Company and the Bank's Basel III capital calculations exceed requirements.Federal regulations require the Bank to comply with a Qualified Thrift Lender (“QTL”) test, which generally requires that 65% of assets be maintained in housing-related finance and other specified assets. If the QTL test is not met, limits are placed on growth, branching, new investment, FHLBC advances, and dividends orthe institution must convert to a commercial bank charter. Management considers the QTL test to have been met as of December 31, 2015 .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 toregulatory notification requirements for dividends that do not require prior regulatory approval.NOTE 14 – EMPLOYEE BENEFIT PLANSEmployee Stock Ownership Plan . Employees are eligible to participate in the ESOP after attainment of age 21 and completion of one year of service. Inconnection with the conversion and reorganization, the ESOP borrowed $19.6 million from the Company, and used the proceeds of the loan to purchase 1,957,300shares of common stock issued in the subscription offering at $10.00 per share. The loan is secured by the shares and will be repaid by the ESOP with funds fromthe Bank’s discretionary contributions to the ESOP and earnings on ESOP assets. The Bank has committed to make discretionary contributions to the ESOPsufficient to service the loan over a period not to exceed 20 years . When loan payments are made, ESOP shares are allocated to participants based on relativecompensation and expense is recorded. Participants receive their earned shares at the end of employment.Contributions to the ESOP were $1.5 million for the years ended December 31, 2015 and 2014 , including dividends and interest received on unallocated shares of$206,000 and $90,000 in 2015 and 2014 , respectively.Expense related to the ESOP, net of dividends and interest received on unallocated ESOP shares, was $1.0 million , $1.1 million and $847,000 for the years endedDecember 31, 2015 , 2014 and 2013 , respectively.Shares held by the ESOP were as follows: December 31, 2015 2014Allocated to participants1,027,583 929,718Distributed to participants(281,387) (202,235)Unearned929,717 1,027,582Total ESOP shares1,675,913 1,755,065Fair value of unearned shares$11,742 $12,187Profit Sharing Plan/401(k) Plan . The Company has a defined contribution plan (“profit sharing plan”) covering all of its eligible employees. Employees areeligible to participate in the profit sharing plan after attainment of age 21 and completion of one year of service. The Company provides a match of $ 0.50 on each$1.00 of contribution up to 6% of eligible compensation beginning April 1, 2007. The Company may also contribute an additional amount annually at thediscretion of the Board of Directors. Contributions totaling $308,000 , $348,000 , and $346,000 were made for the years ended December 31, 2015 , 2014 and 2013, respectively.85Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – EQUITY INCENTIVE PLANSOn June 27, 2006, the Company’s stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan, which authorized the Human ResourcesCommittee of the Board of Directors of the Company to grant a variety of cash- and equity-based incentive awards, including stock options, stock appreciationrights, restricted stock, performance shares and other incentive awards, to employees and directors aggregating up to 3,425,275 shares of the Company’s commonstock.The Human Resources Committee may grant stock options to purchase shares of the Company’s common stock to certain employees and directors of theCompany. The exercise price for the stock options is the fair market value of the common stock on the dates of the grants.The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted inthe table below. The risk-free interest rate was determined using the yield available on the option grant date for a zero-coupon U.S. Treasury security with a termequivalent to the expected life of the option. The expected life for options granted represents the period the option is expected to be outstanding and wasdetermined by applying the simplified method as allowed by SAB 107. The expected volatility for options issued in 2015 was determined using the Company’shistorical data. Estimated forfeitures were assumed to be zero due to the lack of historical experience for the Company. During 2015, the Company awarded a totalof 1,752,156 stock options to officers and directors.The Company estimated the grant date fair value of options awarded in 2015 using Black-Scholes Option-Pricing model with the following assumptions: 2015 AssumptionsRisk-free interest rate 0.60%Expected option life (years) 1.27Expected stock price volatility 17.28%Dividend yield 1.299%The stock options generally vest annually over a one year period; vesting is subject to acceleration in certain circumstances. The stock options will expire if notexercised within two years from the date of grant. The Company recognized $568,000 of stock-based compensation expenses relating to the granting of stockoptions for the year ended December 31, 2015 . There was no expense for the years ended December 31, 2014 and 2013 . As of December 31, 2014 , there were nostock options outstanding. There are 694,469 stock options available for grant at December 31, 2015 .A summary of the activity in the stock option plan for 2015 follows:Stock Options Number ofShares WeightedAverageExercise Price WeightedAverageRemainingContractualTerm(in years) AggregateIntrinsicValue (1)Stock options outstanding at December 31, 2014 — $— $—Stock options granted 1,752,156 12.30 Stock options exercised — — Stock options expired — — Stock options forfeited — — Stock options outstanding at December 31, 2015 1,752,156 $12.30 1.48 778Stock options exercisable at December 31, 2015 607,849 12.30 1.48 389Fully vested and expected to vest 607,849 12.30 1.48 389(1) Stock option aggregate intrinsic value represents the number of shares subject to options multiplied by the difference (if positive) in the closing market price of the common stock underlyingthe options on the date shown and the weighted average exercise price.86Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – EQUITY INCENTIVE PLANSThe weighted average fair value of the options granted is $0.88 per option. As of December 31, 2015 , there was $980,000 of total unrecognized compensation costrelated to the nonvested stock options granted under the Plan. The cost is expected to be recognized in 2016.The Human Resources Committee of the Board of Directors may grant shares of restricted stock to certain employees and directors of the Company. The awardsgenerally vest annually over varying periods from three to five years and vesting is subject to acceleration in certain circumstances. The cost of such awards will beaccrued ratably as compensation expense over such respective periods based on expected vesting dates. The Company recognized $70,000 , $70,000 , and $86,000of expenses relating to the grant of shares of restricted stock during the years ended December 31, 2015 , 2014 and 2013 , respectively. As of December 31, 2015 ,the total unrecognized compensation cost related to unvested shares of restricted stock was $11,000 . The cost is expected to be recognized over a weightedaverage period of 5.2 months. There are 103,800 shares of restricted stock available for grant at December 31, 2015 .Restricted Stock Number ofShares (1) WeightedAverage FairValue at Grant Date WeightedAverageTerm to Vest(in years) AggregateIntrinsicValue (2)Shares outstanding at January 1, 2014 25,750 $8.14 1.27 $236Shares granted — — Shares vested (8,928) — Shares forfeited — — Shares outstanding at December 31, 2014 16,822 $8.14 0.44 $199Shares granted — — Shares vested (8,888) — Shares forfeited — — Shares outstanding at December 31, 2015 7,934 $8.14 0.31 $100(1)The end of period balances consist only of unvested shares.(2)Restricted stock aggregate intrinsic value represents the number of shares of restricted stock multiplied by the market price of the common stock underlying the outstanding shares onthe date shown.NOTE 16 – LOAN COMMITMENTS AND OTHER OFF-BALANCE SHEET ACTIVITIESThe Company is party to various financial instruments with off-balance-sheet risk. The Company uses these financial instruments in the normal course of businessto meet the financing needs of customers and to effectively manage exposure to interest rate risk. These financial instruments include commitments to extendcredit, standby letters of credit, unused lines of credit, and commitments to sell loans. When viewed in terms of the maximum exposure, those instruments mayinvolve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Creditrisk is the possibility that a counterparty to a financial instrument will be unable to perform its contractual obligations. Interest rate risk is the possibility that, dueto changes in economic conditions, the Company’s net interest income will be adversely affected.The following is a summary of the contractual or notional amount of each significant class of off-balance-sheet financial instruments outstanding. The Company’sexposure to credit loss in the event of nonperformance by the counterparty for commitments to extend credit, standby letters of credit, and unused lines of credit isrepresented by the contractual notional amount of these instruments.87Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 16 – LOAN COMMITMENTS AND OTHER OFF-BALANCE SHEET ACTIVITIES (continued)The contractual or notional amounts are as follows: December 31, 2015 2014Financial instruments wherein contractual amounts represent credit risk Commitments to extend credit$52,322 $30,477Standby letters of credit1,075 1,095Unused lines of credit126,333 109,580Commitments to sell mortgages64 —Commitments to extend credit are generally made for periods of 60 days or less. The fixed-rate loans commitment totaled $29.4 million with interest rates rangingfrom 2.25% to 6.65% and maturities ranging from 1.5 to 30 years.Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cashrequirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary bythe Company upon extension of credit, is based on management’s credit evaluation of the customers.The Bank, as a member of Visa USA, received 51,404 unrestricted shares of Visa, Inc. Class B common stock in connection with Visa, Inc.’s initial public offeringin 2007, and 32,398 additional shares of Class B common stock, due to a stock split, that were deposited into a litigation escrow that Visa, Inc. established under itsretrospective responsibility plan. The retroactive responsibility plan obligates all former Visa USA members to indemnify Visa USA, in proportion to their equityinterests in Visa USA, for certain litigation losses and expenses, including settlement expenses, for the lawsuits covered by the retrospective responsibility plan.The primary method for discharging the indemnification obligations under the retrospective responsibility plan is a reduction of the ratio at which the Visa, Inc.Class B shares held in the litigation escrow can be converted into publicly traded Class A common shares of Visa, Inc. Due to the restrictions that the retrospectiveresponsibility plan imposes on the Company’s Visa, Inc. Class B shares, the Company has not recorded the Class B shares as an asset.NOTE 17 – FAIR VALUEFair 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 theasset 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 fairvalues:•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 thatare 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 pricingan asset or liability.The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:Securities : The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security (Level 1). IfLevel 1 measurement inputs are not available for a marketable equity security, we determine its fair value based on the quoted price of a similar security traded inan active market (Level 2). The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in theindustry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to otherbenchmark quoted securities (Level 2).Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals.These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments areroutinely made in the appraisal process by the independent appraisers88Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – FAIR VALUE (continued)to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateralmay be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’shistorical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business,resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with theallowance policy.Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing anew 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 realestate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approachesincluding comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by theindependent appraisers to adjust for differences between the comparable sales and income data available. Real estate owned properties are evaluated on a quarterlybasis for additional impairment and adjusted accordingly.Mortgage Servicing Rights : On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared tocarrying amount. The fair values of mortgage servicing rights are based on a valuation model that calculates the present value of estimated net servicing income.The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare thevaluation model inputs and results to widely available published industry data for reasonableness (Level 2).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 ofinput that is significant to the fair value measurement. Fair Value Measurements Using QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) SignificantObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Fair ValueDecember 31, 2015 Securities: Certificates of deposit$— $87,901 $— $87,901Equity mutual fund507 — — 507Mortgage-backed securities – residential— 19,180 — 19,180Collateralized mortgage obligations – residential— 7,142 — 7,142SBA-guaranteed loan participation certificates— 23 — 23 $507 $114,246 $— $114,753December 31, 2014 Securities: Certificates of deposit$— $86,049 $— $86,049Equity mutual fund509 — — 509Mortgage-backed securities - residential— 24,611 — 24,611Collateralized mortgage obligations – residential— 9,976 — 9,976SBA-guaranteed loan participation certificates— 29 — 29 $509 $120,665 $— $121,17489Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – FAIR VALUE (continued)The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis: Fair Value Measurement Using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) FairValueDecember 31, 2015 Impaired loans: Multi-family mortgage$— $— $477 $477Nonresidential real estate— — 36 36Impaired loans$— $— $513 $513Other real estate owned: One–to–four family residential real estate$— $— $42 $42Multi-family mortgage— — 354 354Nonresidential real estate— — 474 474Land— — 794 794Other real estate owned$— $— $1,664 $1,664 Mortgage servicing rights$— $281 $— $281 December 31, 2014 Impaired loans: One–to–four family residential real estate$— $— $70 $70Multi-family mortgage— — 1,905 1,905Nonresidential real estate— — 2,369 2,369Impaired loans$— $— $4,344 $4,344Other real estate owned: One–to–four family residential real estate$— $— $55 $55Multi-family mortgage— — 1,265 1,265Nonresidential real estate— — 126 126Land— — 753 753Other real estate owned$— $— $2,199 $2,199 Mortgage servicing rights$— $160 $— $16090Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – FAIR VALUE (continued)Impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans, had a carrying amount of $557,000 , with avaluation allowance of $44,000 at December 31, 2015 , compared to a carrying amount of $4.8 million and a valuation allowance of $470,000 at December 31,2014 , resulting in a decrease in the provision for loan losses of $426,000 for the year ended December 31, 2015 , compared to an increase in the provision for loanlosses of $95,000 for the year ended December 31, 2014 .OREO is carried at the lower of cost or fair value less costs to sell, had a carrying value of $2.5 million less a valuation allowance of $881,000 , or $1.7 million , atDecember 31, 2015 , compared to $3.0 million less a valuation allowance of $803,000 , or $2.2 million at December 31, 2014 . There were $548,000 and $438,000of valuation allowance additions charged to expense of other real estate owned recorded for the years ended December 31, 2015 and 2014, respectively.Mortgage servicing rights, which are carried at lower of cost or fair value, had a carrying amount of $281,000 at December 31, 2015 , and $160,000 atDecember 31, 2014 . A pretax impairment of $3,000 on our mortgage servicing rights portfolio was included in noninterest income for the year endedDecember 31, 2015 , compared to an $8,000 impairment for the same period in 2014 .The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instrumentsmeasured at fair value on a non-recurring basis at December 31, 2015 : Fair Value ValuationTechnique UnobservableInput Range(WeightedAverage)Impaired loans Multi-family mortgage$477 Sales comparison Comparison betweensales and incomeapproaches 39.3% Income approach Cap Rate 8.75%Nonresidential real estate36 Sales comparison Comparison betweensales and incomeapproaches 1.2% $513 Other real estate owned One-to-four family residential real estate42 Sales comparison Discount applied tovaluation -0.35% to2.8% (0.03%)Multi-family mortgage354 Sales comparison Comparison betweensales and incomeapproaches -67.74% to10.37% (-13%)Nonresidential real estate474 Sales comparison Comparison betweensales and incomeapproaches -15.6% to1.46%(-5%)Land794 Sales comparison Discount applied tovaluation -7.7%-17.24% (6%) $1,664 91Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – FAIR VALUE (continued)The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instrumentsmeasured at fair value on a non-recurring basis at December 31, 2014 : Fair Value ValuationTechnique UnobservableInput Range(WeightedAverage)Impaired loans One-to-four family residential real estate$70 Sales comparison Discountapplied tovaluation 4.8%Multi-family mortgage1,905 Sales comparison Comparisonbetween salesand incomeapproaches -2.1%-43.7% (41%) Income approach Cap Rate 9.6% to 13.8% (10%)Nonresidential real estate2,369 Sales comparison Comparisonbetween salesand incomeapproaches -2.1%-33.9% (24%) Income approach Cap Rate 10%-11% (10%) $4,344 Other real estate owned One-to-four family residential real estate$55 Sales comparison Discountapplied tovaluation 6.3%-7.7% (7%)Multi-family mortgage1,265 Sales comparison Comparisonbetween salesand incomeapproaches -6.6%-13.5% (0.4%)Nonresidential real estate126 Sales comparison Comparisonbetween salesand incomeapproaches 32.3%Land753 Sales comparison Discountapplied tovaluation -21.9%-4.2% (-10%) $2,199 92Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – FAIR VALUE (continued)The carrying amount and estimated fair value of financial instruments is as follows: Fair Value Measurements at December 31, 2015 Using: CarryingAmount Level 1 Level 2 Level 3 TotalFinancial assets Cash and cash equivalents$59,377 $13,192 $46,185 $— $59,377Securities114,753 507 114,246 — 114,753Loans receivable, net of allowance for loan losses1,232,257 — 1,240,791 513 1,241,304FHLBC stock6,257 — — — N/AAccrued interest receivable4,226 — 4,226 — 4,226Financial liabilities Noninterest-bearing demand deposits$254,830 $— $254,830 $— $254,830Savings deposits156,752 — 156,752 — 156,752NOW and money market accounts578,636 — 578,636 — 578,636Certificates of deposit222,701 — 222,026 — 222,026Borrowings64,318 — 64,318 — 64,318Accrued interest payable39 — 39 — 39 Fair Value Measurements at December 31, 2014 Using: CarryingAmount Level 1 Level 2 Level 3 TotalFinancial assets Cash and cash equivalents$59,581 $9,693 $49,888 $— $59,581Securities121,174 509 120,665 — 121,174Loans receivable, net of allowance for loanlosses1,172,356 — 1,166,181 4,344 1,170,525FHLBC stock6,257 — — — N/AAccrued interest receivable3,926 — 3,926 — 3,926Financial liabilities Noninterest-bearing demand deposits$134,129 $— $134,129 $— $134,129Savings deposits154,532 — 154,532 — 154,532NOW and money market accounts690,193 — 690,193 — 690,193Certificates of deposit232,859 — 232,588 — 232,588Borrowings12,921 — 12,908 — 12,908Accrued interest payable89 — 89 — 89For purposes of the above, the following assumptions were used:Cash and Cash Equivalents : The estimated fair values for cash and cash equivalents are based on their carrying value due to the short-term nature of these assets.93Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – FAIR VALUE (continued)Loans : The estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company wouldcharge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid. The methods utilized toestimate fair value of loans do not necessarily represent an exit price. The estimated fair values of loans held-for-sale are based on outstanding commitments fromthird party investors.FHLBC Stock : It is not practicable to determine the fair value of FHLBC stock due to the restrictions placed on its transferability.Deposit Liabilities : The estimated fair value for certificates of deposit has been determined by calculating the present value of future cash flows based onestimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of noninterest-bearing demand,NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level thatapproximates the local market area. Additionally, these deposits can be withdrawn on demand.Borrowings : The estimated fair values of advances from the FHLBC and notes payable are based on current market rates for similar financing. The estimated fairvalue of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.Accrued Interest : The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.Off - Balance-Sheet Instruments : Off-balance-sheet items consist principally of unfunded loan commitments, standby letters of credit, and unused lines of credit.The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.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 theestimated 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 thevarious circumstances. The estimated fair values would also not apply to subsequent dates.In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.NOTE 18 – COMPANY ONLY CONDENSED FINANCIAL INFORMATIONCondensed financial information of BankFinancial Corporation as of December 31, 2015 and 2014 and for the three years ended December 31, 2015 follows:Condensed Statements of Financial Condition December 31, 2015 2014Assets Cash in subsidiary$15,309 $9,724Loan receivable from ESOP11,799 12,791Investment in subsidiary183,039 192,182Deferred tax asset1,865 1,082Other assets352 342 $212,364 $216,121Liabilities and Stockholders' Equity Total stockholders’ equity$212,364 $216,12194Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 18 – COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)Condensed Statements of Operations For the years ended December 31, 2015 2014 2013Interest income$544 $584 $623Dividends from subsidiary19,710 — —Other expense1,536 1,451 1,473Income (loss) before income tax and undistributed subsidiary income18,718 (867) (850)Income tax benefit(783) (1,082) —Income (loss) before equity in undistributed subsidiary income19,501 215 (850)Equity in undistributed subsidiary excess distributions(10,826) 40,399 4,148Net income$8,675 $40,614 $3,298Condensed Statements of Cash Flows For the years ended December 31, 2015 2014 2013Cash flows from operating activities Net income$8,675 $40,614 $3,298Adjustments: Equity in undistributed subsidiary excess distributions10,826 (40,399) (4,148)Change in other assets(793) (1,172) 373Change in accrued expenses and other liabilities— (23) 2Net cash from (used in) operating activities18,708 (980) (475)Cash flows from investing activities Principal payments received on ESOP loan992 951 912Net cash from investing activities992 951 912Cash flows from financing activities Repurchase and retirement of common stock(9,970) — —Cash dividends paid on common stock(4,145) (1,688) (844)Net cash used in financing activities(14,115) (1,688) (844)Net change in cash in subsidiary5,585 (1,717) (407)Beginning cash in subsidiary9,724 11,441 11,848Ending cash in subsidiary$15,309 $9,724 $11,44195Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 19 – SELECTED QUARTERLY FINANCIAL DATA (unaudited) For the year ended December 31, 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterInterest income$12,211 $12,193 $12,147 $12,411Interest expense686 691 699 738Net interest income11,525 11,502 11,448 11,673Recovery of loan losses(724) (488) (956) (1,038)Net interest income12,249 11,990 12,404 12,711Noninterest income1,536 1,689 1,709 1,757Noninterest expense10,513 10,031 10,232 11,169Income before income taxes3,272 3,648 3,881 3,299Income tax expense1,286 1,424 1,532 1,183Net income$1,986 $2,224 $2,349 $2,116Basic earnings per common share$0.10 $0.11 $0.12 $0.11Diluted earnings per common share$0.10 $0.11 $0.12 $0.11The Company recorded net income of $2.1 million , or $0.11 per common share, for the fourth quarter of 2015 . The Company’s net interest income beforeprovision for loan losses increased to $11.7 million due to stronger loan originations and improved asset quality. The Company’s fourth quarter 2015 operatingresults included a $1.0 million recovery of loan losses. The primary reasons for this decrease was the growth in our loan portfolio focused on loan types with lowerloss ratios based on our historical loss experience, and improvements in the historical loan loss factors that occurred as the losses incurred in earlier periods agedand thus were either eliminated from the calculation or assigned a lower weight. Noninterest expense included $522,000 of nonperforming asset management andOREO expense. For the year ended December 31, 2014 First Quarter Second Quarter Third Quarter Fourth QuarterInterest income$12,086 $12,482 $12,368 $12,413Interest expense812 774 746 714Net interest income11,274 11,708 11,622 11,699Provision for (recovery of) loan losses476 957 (1,413) (756)Net interest income10,798 10,751 13,035 12,455Noninterest income1,532 1,660 1,748 1,769Noninterest expense11,371 10,982 11,157 10,941Income before income taxes959 1,429 3,626 3,283Income tax expense (benefit)17 25 36 (31,395)Net income$942 $1,404 $3,590 $34,678Basic earnings per common share$0.05 $0.07 $0.17 $1.72Diluted earnings per common share$0.05 $0.07 $0.17 $1.72The Company recorded net income of $34.7 million , or $1.72 per common share, for the fourth quarter of 2014 . The Company’s fourth quarter 2014 operatingresults include a full recovery of the deferred tax valuation allowance of $35.1 million . The Company’s net interest income before provision for loan lossesincreased to $11.7 million due to stronger loan originations and improved asset quality. The Company’s fourth quarter 2014 operating results included a $756,000recovery of loan losses. Noninterest expense included $467,000 of nonperforming asset management and OREO expense.96Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES(a) Evaluation of disclosure controls and procedures.Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of theend of the fiscal year ( “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective.(b) Management’s Annual Report on Internal Control Over Financial Reporting.The annual report of management on the effectiveness of our internal control over financial reporting and the attestation report thereon issued by our independentregistered public accounting firm are set forth under “Report of Management on Internal Control Over Financial Reporting” and “Report of IndependentRegistered Public Accounting Firm on Internal Control Over Financial Reporting” under Item 8 “Financial Statements and Supplementary Data.”(c) Changes in internal controls.There were no changes made in our internal controls during the fourth quarter of 2015 or, to our knowledge, in other factors that have materially affected, or arereasonably likely to materially affect, these controls.See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.ITEM 9B.OTHER INFORMATIONNot Applicable.PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDirectors and Executive OfficersThe information concerning our directors and executive officers required by this item will be filed with the Securities and Exchange Commission by amendment tothis Form 10-K, not later than 120 days after the end of our fiscal year.Section 16(a) Beneficial Ownership Reporting ComplianceThe information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by our directors, officers and 10percent stockholders required by this item will be filed with the Securities and Exchange Commission by amendment to this Form 10-K, not later than 120 daysafter the end of our fiscal year.Code of EthicsWe have adopted a Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial officer, principal accountingofficer, and persons performing similar functions. A copy of our Code of Ethics was attached as Exhibit 14 to our Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 27, 2006. We have also adopted a Code of Business Conduct, pursuant to NASDAQ requirements, that appliesgenerally to our directors, officers, and employees.ITEM 11.EXECUTIVE COMPENSATIONThe information concerning compensation required by this item will be filed with the Securities and Exchange Commission by amendment to this Form 10-K, notlater than 120 days after the end of our fiscal year.97Table of ContentsITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information concerning security ownership of certain beneficial owners and management required by this item will be filed with the Securities and ExchangeCommission by amendment to this Form 10-K, not later than 120 days after the end of our fiscal year.Securities Authorized for Issuance under Equity Compensation PlansThe following table sets forth information regarding the securities that were authorized for issuance under our 2006 Equity Incentive Plan as of December 31, 2015: Column (A) Column (B) Column (C)Plan Category Number of Securities to beIssued Upon Exercise ofOutstanding Options,Warrants and Rights Weighted-Average ExercisePrice of OutstandingOptions, Warrants andRights Number of SecuritiesRemaining Available forFuture Issuance under2006 Equity Incentive Plan(Excluding SecuritiesReflected in Column (A))Equity compensation plans approved by stockholders 1,760,090 $12.30 798,269Equity compensation plans not approved by stockholders — — —Total 1,760,090 $12.30 798,269 Column (A) represents stock options and restricted stock outstanding under the Company’s 2006 Equity Incentive Plan. Future equity awards under the 2006 Equity Incentive Plan may take theform of stock options, stock appreciation rights, performance unit awards, restricted stock, restricted performance stock, restricted stock units, stock awards or cash. Column (B) represents theweighted-average exercise price of the outstanding stock options only; the outstanding restricted stock awards are not included in this calculation. Column (C) represents the maximumaggregate number of future equity awards that can be made under the 2006 Equity Incentive Plan as of December 31, 2015 .ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information concerning certain relationships and related transactions required by this will be filed with the Securities and Exchange Commission byamendment to this Form 10-K, not later than 120 days after the end of our fiscal year.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information concerning principal accountant fees and services will be filed with the Securities and Exchange Commission by amendment to this Form 10-K,not later than 120 days after the end of our fiscal year.PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial StatementsThe following consolidated financial statement of the registrant and its subsidiaries are filed as part of this document under Item 8 - “Financial Statements andSupplementary Data.”(A)Report of Independent Registered Accounting Firm(B)Consolidated Statements of Financial Condition at December 31, 2015 and 2014(C)Consolidated Statements of Operations for the years ended December 31, 2015 , 2014 and 2013(D)Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 , 2014 and 2013(E)Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015 , 2014 and 2013(F)Consolidated Statements of Cash Flows for the years ended December 31, 2015 , 2014 and 2013(G)Notes to Consolidated Financial Statements(a)(2) Financial Statement Schedules98Table of ContentsNone.(a)(3) ExhibitsThe documents set forth below are filed herewith or incorporated herein by reference to the location indicated. Exhibit Location3.1 Articles of Incorporation of BankFinancial Corporation Exhibit 3.1 to the Registration Statement on Form S-1 of theCompany, originally filed with the Securities and ExchangeCommission on September 23, 20043.2 Bylaws of BankFinancial Corporation Exhibit 3.2 to the Registration Statement on Form S-1 of theCompany, originally filed with the Securities and ExchangeCommission on September 23, 20043.3 Articles of Amendment to Charter of BankFinancial Corporation Exhibit 3.3 to the Registration Statement on Form S-1 of theCompany, originally filed with the Securities and ExchangeCommission on September 23, 20043.4 Restated Bylaws of BankFinancial Corporation Exhibit 3.1 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on November 4,20144 Form of Common Stock Certificate of BankFinancial Corporation Exhibit 4 to the Registration Statement on Form S-1 of theCompany, originally filed with the Securities and ExchangeCommission on September 23, 200410.1 Employee Stock Ownership Plan Exhib it 10.1 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and ExchangeCommission on September 23, 200410.2 BankFinancial FSB Employment Agreement with F. Morgan Gasior Exhibit 10.1 to the Current Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onMay 5, 200810.3 BankFinancial FSB Employment Agreement with James J. Brennan Exhibit 10.3 to the Current Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onMay 5, 2008.10.4 BankFinancial FSB Employment Agreement with Paul A. Cloutier Exhibit 10.2 to the Current Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onMay 5, 200810.5 Form of Incentive Stock Option Award Terms Exhibit 10.1 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.6 2006 BankFinancial Corporation Equity Incentive Plan Appendix C to the Definitive Form 14A, originally filed with theSecurities and Exchange Commission on May 25, 2006 (File No.000-51331)10.7 Form of Performance Based Incentive Stock Option Award Terms Exhibit 10.2 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.8 Form of Non-Qualified Stock Option Award Terms Exhibit 10.3 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.9 Form of Performance Based Non-Qualified Stock Option Award Terms Exhibit 10.4 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.10 Form of Restricted Stock Unit Award Agreement Exhibit 10.5 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.11 Form of Performance Based Restricted Stock Award Agreement Exhibit 10.6 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200699Table of Contents Exhibit Location10.12 Form of Restricted Stock Award Agreement Exhibit 10.7 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.13 Form of Stock Appreciation Rights Agreement Exhibit 10.8 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on September 5,200610.14 BankFinancial Corporation Employment Agreement with F. Morgan Gasior Exhibit 10.1 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on October 20,200810.15 BankFinancial Corporation Employment Agreement with Paul A. Cloutier Exhibit 10.2 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on October 20,200810.16 BankFinancial Corporation Employment Agreement with James J. Brennan Exhibit 10.3 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on October 20,2008.10.17 BankFinancial Corporation Employment Agreement with Elizabeth A. Doolan Exhibit 10.28 to the Annual Report on Form 10-K of the Company,originally filed with the Securities and Exchange Commission onFebruary 23, 2009.10.18 BankFinancial FSB Employment Agreement with Elizabeth A. Doolan Exhibit 10.29 to the Annual Report on Form 10-K of the Company,originally filed with the Securities and Exchange Commission onFebruary 23, 2009.10.19 BankFinancial FSB Employment Agreement with Gregg T. Adams Exhibit 10.30 to the Annual Report on Form 10-K/A of theCompany originally filed with the Securities and ExchangeCommission on April 30, 2010.10.20 BankFinancial FSB Employment Agreement with John G. Manos Exhibit 10.31 to the Annual Report on Form 10-K/A of theCompany originally filed with the Securities and ExchangeCommission on April 30, 2010.10.21 Form of Amendment No. 1 to BankFinancial FSB Employment Agreement Exhibit 10.33 to the Annual Report on Form 10-K of the Company,originally filed with the Securities and Exchange Commission onMarch 11, 201310.22 Form of Amendment No. 1 to BankFinancial FSB Employment Agreement Exhibit 10.34 to the Annual Report on Form 10-K of the Company,originally filed with the Securities and Exchange Commission onMarch 11, 201310.23 Form of Amendment No. 1 to BankFinancial Corporation EmploymentAgreement Exhibit 10.35 to the Annual Report on Form 10-K of the Company,originally filed with the Securities and Exchange Commission onMarch 11, 201310.24 Amended and Restated BankFinancial FSB Employment Agreement withWilliam J. Deutsch, Jr. Exhibit 10.3 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on May 20,201310.25 Form of Extension of Term of Employment Period, for Named ExecutiveOfficers of BankFinancial Corporation (pursuant to terms of existingagreements) Exhibit 10.1 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on June 25,201410.26 Form of Extension of Term of Employment Period, for Named ExecutiveOfficers of BankFinancial FSB (pursuant to terms of existing agreements) Exhibit 10.1 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on November 4,201410.27 Consulting Agreement with former Executive Christa N. Calabrese, effectiveMarch 31, 2014, lasts 12 months Exhibit 10.2 to the Report on Form 8-K of the Company, originallyfiled with the Securities and Exchange Commission on April 2, 201414 Code of Ethics for Senior Financial Officers Exhibit 14 to the Annual Report on Form 10-K of the Company,originally filed with the Securities and Exchange Commission onMarch 27, 200621 Subsidiaries of Registrant Exhibit 21 to the Registration Statement on Form S-1 of theCompany, originally filed with the Securities and ExchangeCommission on September 23, 200423 Consent of Crowe Horwath LLP Filed herewith100Table of Contents Exhibit Location31.1 Certification of Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002 Filed herewith31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith32 Certification of Chief Executive Officer and Chief Financial Officer pursuant toSection 906 of the Sarbanes-Oxley Act of 2002* Furnished herewith101 The following financial statements from the BankFinancial CorporationQuarterly Report on Form 10-K for the year ended December 31, 2015,formatted in Extensive Business Reporting Language (XBRL): (i) consolidatedstatements of financial condition, (ii) consolidated statements of operations,(iii) consolidated statements of comprehensive income, (iv)consolidatedstatements of changes in stockholders' equity, (v)consolidated statements of cashflows and (vi) the notes to consolidated financial statements. Filed herewith*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 tothe Securities and Exchange Commission or its staff upon request.101Table of ContentsSIGNATURESPursuant 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 bythe undersigned, thereunto duly authorized. BANKFINANCIAL CORPORATIONDate:February 10, 2016By:/s/ F. Morgan Gasior F. Morgan Gasior Chairman of the Board, Chief Executive Officer and President (Duly Authorized Representative)Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.Signatures Title Date /s/ F. Morgan Gasior Chairman of the Board, Chief Executive Officer and President February 10, 2016F. Morgan Gasior (Principal Executive Officer) /s/ Paul A. Cloutier Executive Vice President and Chief Financial Officer February 10, 2016Paul A. Cloutier (Principal Financial Officer) /s/ Elizabeth A. Doolan Senior Vice President and Controller February 10, 2016Elizabeth A. Doolan (Principal Accounting Officer) /s/ Cassandra J. Francis Director February 10, 2016Cassandra J. Francis /s/ John M. Hausmann Director February 10, 2016John M. Hausmann /s/ Thomas F. O'Neill Director February 10, 2016Thomas F. O'Neill /s/ John W. Palmer Director February 10, 2016John W. Palmer /s/ Terry R. Wells Director February 10, 2016Terry R. Wells /s/ Glen R. Wherfel Director February 10, 2016Glen R. Wherfel 102Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements No. 333-127737 and No. 333-137082 on Form S-8 of BankFinancialCorporation, of our report dated February 10, 2016 , relating to the consolidated financial statements and the effectiveness of internal control over financialreporting, appearing in this Annual Report on Form 10-K./s/ Crowe Horwath LLPOak Brook, IllinoisFebruary 10, 2016Exhibit 31.1Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, F. Morgan Gasior, certify that:1.I have reviewed this Annual Report on Form 10-K of BankFinancial Corporation, a Maryland corporation;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date:February 10, 2016 /s/ F. Morgan Gasior F. Morgan Gasior Chairman of the Board,Chief Executive Officer and PresidentExhibit 31.2Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Paul A. Cloutier, certify that:1.I have reviewed this Annual Report on Form 10-K of BankFinancial Corporation, a Maryland corporation;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date:February 10, 2016 /s/ Paul A. Cloutier Paul A. Cloutier Executive Vice President andChief Financial OfficerExhibit 32Certification of Chief Executive Officer and Chief Financial OfficerPursuant to Section 906 of the Sarbanes- Oxley Act of 2002F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President of BankFinancial Corporation, a Maryland corporation (the “Company”) andPaul A. Cloutier, Executive Vice President and Chief Financial Officer of the Company, each certify in his capacity as an officer of the Company that he hasreviewed the annual report on Form 10-K for the year ended December 31, 2015 (the “Report”) and that to the best of his knowledge:1.the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date:February 10, 2016 /s/ F. Morgan Gasior F. Morgan Gasior Chairman of the Board, Chief Executive Officerand PresidentDate:February 10, 2016 /s/ Paul A. Cloutier Paul A. CloutierExecutive Vice President and Chief FinancialOfficerA 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 theSecurities and Exchange Commission or its staff upon request.

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