BankFinancial
Annual Report 2017

Plain-text annual report

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, 2017or ¨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 Market LLCSecurities 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 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 postedpursuant to 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'sknowledge, in definitive 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, a smaller reporting company or an emerging growth company.See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on June 30, 2017, determined using a per share closing price on that date of $14.92, asquoted on The Nasdaq Global Select Market, was $227.7 million.At February 20, 2018, there were 17,932,223 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 Factors9Item 1B.Unresolved Staff Comments16Item 2.Properties17Item 3.Legal Proceedings17Item 4.Mine Safety Disclosures17 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 Disclosure95Item 9A.Controls and Procedures95Item 9B.Other Information95 PART III Item 10.Directors, Executive Officers and Corporate Governance95Item 11.Executive Compensation95Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters96Item 13.Certain Relationships and Related Transactions, and Director Independence96Item 14.Principal Accountant Fees and Services96 PART IV Item 15.Exhibits and Financial Statement Schedules96Item 16.Form 10-K Summary99 Signatures100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 ofBankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,which involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies andexpectations, as well as our future revenues, expenses, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects.Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “continue,” “expect,” “estimate,”“intend,” “anticipate,” “project,” “plan,” or similar expressions. Forward looking statements are frequently based on assumptions that may or may notmaterialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward lookingstatements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the PrivateSecurities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect ouroperating results, financial condition or future prospects include, but are not limited to: (i) less than anticipated loan growth due to intense competition forhigh quality loans and leases, particularly in terms of pricing and credit underwriting, or a dearth of borrowers who meet our underwriting standards; (ii) theimpact of re-pricing and competitors’ pricing initiatives on loan and deposit products; (iii) interest rate movements and their impact on the economy,customer behavior and our net interest margin; (iv) adverse economic conditions in general and in the markets in which we lend that could result in increaseddelinquencies in our loan portfolio or a decline in the value of our investment securities and the collateral for our loans; (v) declines in real estate values thatadversely impact the value of our loan collateral, Other real estate owned ("OREO"), asset dispositions and the level of borrower equity in their investments;(vi) borrowers that experience legal or financial difficulties that we do not currently foresee; (vii) results of supervisory monitoring or examinations byregulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses oradversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (viii) changes, disruptions orilliquidity in national or global financial markets; (ix) the credit risks of lending activities, including risks that could cause changes in the level and directionof loan delinquencies and charge-offs or changes in estimates relating to the computation of our allowance for loan losses; (x) monetary and fiscal policies ofthe 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' pricing initiatives on our deposit products; (xii) legislative or regulatory changes that have an adverseimpact 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 therisks of business interruption and the compromise of 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 andundue reliance should not be placed on such statements. Forward looking statements speak only as of the date they are made. We do not undertake anyobligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.BankFinancial CorporationBankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois (the “Company”), became the owner of all of the issued andoutstanding capital stock of BankFinancial, F.S.B. (the “Bank”) on June 23, 2005, when we consummated a plan of conversion and reorganization that theBank and its predecessor holding companies, BankFinancial MHC, Inc. and BankFinancial Corporation, a federal corporation, adopted on August 25, 2004.BankFinancial Corporation, the Maryland corporation, was organized in 2004 to facilitate the mutual-to-stock conversion and to become the holdingcompany for the Bank upon its completion.Following the approval of applications that the Company filed with the Board of Governors of the Federal Reserve System and the Bank filed with the Officeof the Comptroller of the Currency (“OCC”), the Company became a bank holding company and the Bank became a national bank on November 30, 2016.As a result of the Bank’s conversion from a federal savings bank charter to a national bank charter, the Bank changed its name from BankFinancial, F.S.B. toBankFinancial, National Association.We manage our operations as one unit, and thus do not have separate operating segments. Our chief operating decision-makers use consolidated results tomake operating and strategic decisions.1Table of ContentsBankFinancial, National AssociationThe Bank is a full-service, community-oriented national 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 inCook, 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,automated teller 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 themost significant portion of our revenues from these geographic areas. However, we also engage in multi-family lending activities in selected MetropolitanStatistical Areas 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 depositin excess of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limits, we generally do not solicit such deposits because they are moredifficult to retain than core deposits and at times are more costly than wholesale deposits.Lending ActivitiesOur loan portfolio consists primarily of multi-family real estate, nonresidential real estate, construction and land loans, commercial loans and commercialleases, which represented $1.222 billion, or 92.5%, of our gross loan portfolio of $1.322 billion at December 31, 2017. At December 31, 2017, $588.4million, or 44.5%, of our loan portfolio consisted of multi-family mortgage loans; $170.0 million, or 12.9%, of our loan portfolio consisted of nonresidentialreal estate loans; $1.4 million, or 0.1%, of our loan portfolio consisted of construction and land loans; $152.6 million, or 11.5%, of our loan portfolioconsisted of commercial loans; and $310.1 million, or 23.5%, of our loan portfolio consisted of commercial leases. $97.8 million, or 7.4%, of our loanportfolio consisted of one-to-four family residential mortgage loans, of which $21.2 million, or 1.6%, were loans to investors secured by non-owner occupiedresidential properties, 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 IRAsand other retirement accounts. We provide commercial checking accounts and related services such as cash management. We also provide low-cost checkingaccount services. We rely on our favorable locations, customer service, competitive pricing, our Internet Branch and related deposit services such as cashmanagement to attract and retain deposit accounts.At December 31, 2017, our deposits totaled $1.340 billion. Interest-bearing deposits totaled $1.106 billion, or 82.5% of total deposits, and noninterest-bearing demand deposits totaled $234.4 million, or 17.5% of total deposits. Savings, money market and NOW account deposits totaled $749.7 million, or55.9% of total deposits, and certificates of deposit totaled $356.0 million, or 26.6% of total deposits, of which $258.6 million had maturities of one year orless.Related Products and ServicesThe Bank provides trust and financial planning services through our Trust Department. The Bank’s wholly-owned subsidiary, Financial Assurance Services,Inc. (“Financial Assurance”), sells property and casualty insurance and other insurance products on an agency basis. For the year ended December 31, 2017,Financial Assurance recorded a net loss of $45,000. At December 31, 2017, Financial Assurance had two full-time employees. The Bank’s other wholly-owned subsidiary, BFIN Asset Recovery Company, LLC (formerly BF Asset Recovery Corporation), holds title to and sells certain Bank-owned real estateacquired through foreclosure and collection actions, and recorded a net loss of $601,000 for the year ended December 31, 2017.2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 Form10-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”), assoon as reasonably practicable after such forms are filed with or furnished to the Securities and Exchange Commission (“SEC”). Copies of these documentsare available to stockholders at the website for the Company and the Bank, www.bankfinancial.com, under “Investor Relations,” and through the EDGARdatabase 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 weoperate generally have a high concentration of financial institutions, many of which are significantly larger institutions that have greater financial resourcesthan 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 othercompanies that provide financial services to businesses and individuals. Our most direct competition for deposits has historically come from commercialbanks, savings banks and credit unions. We face additional competition for deposits from online financial institutions and non-depository competitors suchas the mutual fund industry, securities and 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 timeto time reward long-standing relationships with preferred rates and terms on deposit products based on existing and prospective lending business. We do notrely on any individual, group or entity for a material portion of our loans or our deposits.EmployeesAt December 31, 2017, we had 209 full-time employees and 50 part-time employees. The employees are not represented by a collective bargaining unit andwe consider our working relationship with our employees to be good.Supervision and RegulationGeneralOn November 30, 2016, the Bank converted from a federal savings bank charter to a national bank charter. As a national bank, the Bank is regulated andsupervised primarily by the OCC. The Bank is also subject to regulation by the FDIC in more limited circumstances because the Bank’s deposits are insuredby the FDIC. This regulatory and supervisory structure establishes a comprehensive framework of the activities in which a depository institution may engage,and is intended primarily for the protection of the FDIC’s deposit insurance fund, depositors and the banking system. Under this system of federal regulation,depository institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management,earnings, liquidity and sensitivity to market interest rates. The OCC examines the Bank and prepares reports for the consideration of its Board of Directors onany identified deficiencies, if any. After completing an examination, the OCC issues a report of examination and assigns a rating (known as an institution’sCAMELS rating). Under federal law and regulations, an institution may not disclose the contents of its reports of examination or its CAMELS ratings to thepublic.The Bank is a member of, and owns stock in, the Federal Home Loan Bank of Chicago (“FHLB”) and the Federal Reserve Bank of Chicago. The Board ofGovernors of the Federal Reserve System (“FRB”) has limited regulatory jurisdiction over the Bank with regard to reserves it must maintain against deposits,check processing and certain other matters. The Bank’s relationship with its depositors and borrowers also is regulated in some respects by both federal andstate laws, especially in matters concerning the ownership of deposit accounts, and the form and content of the Bank’s consumer loan documents.The Company is a bank holding company within the meaning of federal law. As such, it is subject to supervision and examination by the FRB. The Companywas previously a savings and loan holding company but became a bank holding company in connection with the Bank’s conversion to a national bankcharter on November 30, 2016.There can be no assurance that laws, rules and regulations, and regulatory policies will not change in the future. Such changes could make compliance moredifficult or expensive or otherwise adversely affect our business, financial condition, results of operations or prospects. Any change in the laws or regulations,or in regulatory policy, whether by the OCC, the FDIC, the FRB,3Table of Contentsthe Consumer Financial Protection Bureau (“CFPB”) or the United States ("U.S.") Congress could have a material adverse impact on the Company, the Bankand their respective operations.The following summary of laws and regulations applicable to the Bank and Company is not intended to be exhaustive and is qualified in its entirety byreference to the actual laws and regulations involved.Federal Banking RegulationBusiness Activities. As a national bank, the Bank derives its lending and investment powers from the National Bank Act, as amended, and the regulations ofthe OCC. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and nonresidential real estate, commercial businessand consumer loans and leases, certain types of securities and certain other loans and assets. Unlike federal savings banks, national banks are not generallysubject to specified percentage of assets on various types of lending. The Bank may also establish subsidiaries that engage in activities permitted for theBank as well as certain other activities.Capital Requirements. Federal regulations require FDIC-insured depository institutions, including national banks, to meet several minimum capitalstandards: a common equity Tier 1 capital 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-basedassets of 8% and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a finalrule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retainedearnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certainnoncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includesTier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and relatedsurplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertiblesecurities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximumof 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other ComprehensiveIncome (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that havenot exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-salesecurities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.In determining the amount of risk-weighted assets a bank has for purposes of calculating risk-based capital ratios, assets, including certain off-balance-sheetassets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on therisks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weightof 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four familyresidential mortgages and certain qualifying multi-family mortgage loans, a risk weight of 100% is assigned to commercial, commercial real estate andconsumer loans, a risk weight of 150% is assigned to certain past due loans and high volatility commercial real estate loans, and a risk weight of between 0%to 600% is assigned to permissible equity interests, depending on certain specified factors.In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus paymentsto management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assetsabove the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginningJanuary 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. The capital conservationbuffer was 1.25% in calendar 2017 and increased to 1.875% on January 1, 2018.At December 31, 2017, the Bank’s capital exceeded all applicable regulatory requirements, the Bank was considered well-capitalized and it had anappropriate capital conservation buffer.The Company and the Bank each have adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 7.5% and a totalrisk-based capital ratio of at least 10.5%. The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capitalrequirements will be established if and as necessary. In accordance with the Regulatory Capital Plans, neither the Company nor the Bank will pursue anyacquisition or growth opportunity, declare any dividend4Table of Contentsor conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the establishedminimum capital levels. In addition, in accordance with its Regulatory Capital Plan, the Company will continue to maintain its ability to serve as a source offinancial strength to the Bank by holding at least $5.0 million of cash or liquid assets for that purpose.Loans-to-One-Borrower. A national 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 readilymarketable collateral, which generally does not include real estate. As of December 31, 2017, the Bank was in compliance with the loans-to-one-borrowerlimitations.Dividends. Federal law and OCC regulations govern cash dividends by a national bank. A national bank is authorized to pay such dividends from undividedprofits but must receive prior OCC approval if the total amount of dividends (including the proposed dividend) exceeds its net income in that year and theprior two years less dividends previously paid. A national bank may not pay a dividend if it does not comply with applicable regulatory capital requirementsand may be further limited in payment of cash dividends if it does not maintain the capital conservation buffer described previously.Community Reinvestment Act and Fair Lending Laws. All national 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 national bank, the OCC is required to evaluate and rate the bank’s record of compliance with the CRA. In addition, the Equal CreditOpportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices based on the characteristics specified in thosestatutes. A national bank’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on certain of its activitiessuch as branching or mergers. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions bythe OCC, as well as other federal regulatory agencies and the Department of Justice. The Bank’s CRA performance has been rated as “Outstanding” by itsprimary federal regulatory agency since 1998.Transactions with Related Parties. A national 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 anycompany that controls or is under common control with an insured depository institution, although operating subsidiaries of national banks are generally notconsidered affiliates for the purposes of Sections 23A and 23B of the Federal Reserve Act. The Company is an affiliate of the Bank. In general, transactionswith affiliates must be on terms that are at least as favorable to the national bank as comparable transactions with non-affiliates. In addition, certain types ofthese transactions are restricted to an aggregate percentage of the bank’s capital. Collateral in specified amounts must be provided by affiliates in order toreceive loans or other forms of credit from the bank.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 FRB. These provisions require that extensionsof credit to insiders generally be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than,those prevailing for comparable transactions with unaffiliated persons and not involve more than the normal risk of repayment or present other unfavorablefeatures (subject to an exception for lending programs open to employees generally). In addition, there are limitations on the amount of credit extended tosuch persons, individually and in the aggregate based on a percentage of the Bank’s capital. Extensions of credit in excess of specified limits must receive theprior approval of the Bank’s Board of Directors. Extensions of credit to executive officers are subject to additional restrictions. The Bank does not extendnew credit to executive officers or members of the Board of Directors.Enforcement. The OCC has primary enforcement responsibility over national banks. This includes authority to bring enforcement actions against the Bank,its directors, officers and employees and all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants who knowingly orrecklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance ofa capital directive or cease and desist order to the removal of officers and/or directors, receivership, conservatorship or the termination of deposit insurance.Civil monetary penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, inwhich case penalties may be as high as $1 million per day. The FDIC has authority to recommend to the OCC that an enforcement action be taken withrespect to a particular insured bank. If action is not taken 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 insured depository institutions underits jurisdiction. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety andsoundness standards required under federal law. The guidelines set forth5Table of Contentsthe standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Theguidelines address matters such as internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest raterisk exposure, asset growth, compensation, fees and benefits. A subsequent set of guidelines was issued for information security. If the OCC determines that anational bank fails to meet any standard prescribed by the guidelines, it may require the institution to submit to the agency an acceptable plan to achievecompliance with the standard and take other appropriate action.Prompt Corrective Action Regulations. Federal law requires that federal bank regulators take “prompt corrective action” with respect to institutions that donot meet minimum capital requirements. For this purpose, the law establishes five capital categories: well-capitalized, adequately capitalized,undercapitalized, significantly undercapitalized and critically undercapitalized. The applicable OCC regulations were amended to incorporate the previouslymentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well-capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greaterand a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, aTier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratioof less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. Aninstitution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to orless than 2.0%.The regulations provide that a capital restoration plan must be filed with the OCC within 45 days of the date a national bank receives notice that it is“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the bank required to submit a capitalrestoration plan must guarantee the lesser of an amount equal to 5.0% of the bank’s assets at the time it was notified or deemed to be undercapitalized by theOCC, or the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the bank that it hasmaintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collectpayment under the guarantee. Various restrictions, including as to growth and capital distributions, also apply to “undercapitalized” institutions. If an“undercapitalized” institution fails to submit an acceptable capital plan, it is treated as “significantly undercapitalized.” “Significantly undercapitalized”institutions must comply with one or more additional restrictions including, but not limited to, an order by the OCC to sell sufficient voting stock to becomeadequately capitalized a requirement to reduce total assets, cease receipt of deposits from correspondent banks or dismiss officers or directors and restrictionson interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalizedinstitutions are subject to the appointment of a receiver or conservator. The OCC may also take any one of a number of discretionary supervisory actionsagainst undercapitalized institutions, including the issuance of a capital directive.At December 31, 2017, 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. Deposit accounts in theBank are insured up to $250,000 for each separately insured depositor.The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Until July 1, 2016, insured depository institutions wereassigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s rate depended upon the riskcategory to which it is assigned and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower FDIC assessments. TheDodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead ofdeposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories. Assessments for institutions are now based on financial measures andsupervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit InsuranceFund's reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion intotal assets to a range of 1.5 basis points to 30 basis points.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.6Table of ContentsAn insured institution’s deposit insurance may be terminated by the FDIC upon an administrative finding that the institution has engaged in unsafe orunsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatorycondition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead to termination of depositinsurance.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 LoanInsurance Corporation. The bonds issued by the FICO began maturing in 2017 and continue to mature through 2019.Prohibitions Against Tying Arrangements. National banks are prohibited, subject to some exceptions, from extending credit to or offering any other service,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 Reserve System. The Bank is a member of the Federal Reserve System, which consists of 12 regional Federal Reserve Banks. As a member of theFederal Reserve System, the Bank is required to acquire and hold shares of capital stock in its regional Federal Reserve Bank, the Federal Reserve Bank ofChicago, in specified amounts. The Bank is also required to maintain noninterest-earning reserves against its transaction accounts, such as negotiable orderof withdrawal and regular checking accounts. The balances maintained to meet the reserve requirements may be used to satisfy liquidity requirementsimposed by the OCC’s regulations. As of December 31, 2017, the Bank was in compliance with all of these requirements. The FRB also provides a backupsource of funding to depository institutions through the regional Federal Reserve Banks pursuant to section 10B of the Federal Reserve Act and RegulationA. In general, eligible depository institutions have access to three types of discount window credit-primary credit, secondary credit, and seasonal credit. Alldiscount window loans must be collateralized to the satisfaction of the lending regional Federal Reserve Bank.Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks.The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLB, the Bank is required toacquire and hold shares of capital stock in the FHLB in specified amounts. As of December 31, 2017, 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 terroristactivities, as well as suspicious activities. The USA PATRIOT Act also gives the federal government powers to address terrorist threats through enhanceddomestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The federalbanking agencies are required to take into consideration the effectiveness of controls designed to combat money-laundering activities in determiningwhether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controlsdesigned to combat money laundering would be considered as part of the application process. In addition, non-compliance with these laws and regulationscould result in fines, penalties and other enforcement measures. We have developed policies, procedures and systems designed to comply with these laws andregulations.Holding Company RegulationThe Company, as a company controlling a national bank, is a bank holding company subject to regulation and supervision by, and reporting to, the FRB.The FRB has enforcement authority over the Company and any nonbank subsidiaries. Among other things, this authority permits the FRB to restrict orprohibit activities that are determined to be a risk to the Bank.The Company's activities are limited to the activities permissible for bank holding companies, which generally include activities deemed by the FRB to beclosely related or a proper incident to banking or managing or controlling banks. A bank holding company that meets certain criteria may elect to beregulated as a financial holding company and thereby engage in a broader array of financial activities, such as underwriting equity securities and insurance.The Company has not elected to be regulated as a financial holding company, but may do so in the future.Federal law prohibits a bank holding company from acquiring, directly or indirectly, more than 5% of a class of voting securities of, or all or substantially allof the assets of, another bank or bank holding company, without prior written approval of the FRB. In evaluating applications by bank holding companies toacquire banks, the FRB considers, among other things, the financial and managerial resources and future prospects of the parties, the effect of the acquisitionon the risk to the Deposit Insurance Fund, the convenience and needs of the community, competitive factors and compliance with anti-money launderinglaws.7Table of ContentsCapital. Bank holding companies such as the Company with greater than $1 billion in total consolidated assets are subject to consolidated regulatory capitalrequirements. The Dodd-Frank Act, required the FRB to promulgate consolidated capital requirements for depository institution holding companies that areno less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions. The previouslydiscussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to bank holding companies. As of January 1, 2015,consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to bank holding companies of thespecified asset size. As is the case with institutions themselves, the capital conservation buffer is being phased in between 2016 and 2019.Source of Strength Doctrine. The “source of strength doctrine” requires bank holding companies to provide assistance to their subsidiary depositoryinstitutions in the event the subsidiary depository institution experiences financial difficulty. The FRB has issued regulations requiring that all bank holdingcompanies serve as a source of financial and managerial strength to their subsidiary depository institutions.Capital Distributions. The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the policyprovides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appearsconsistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for priorconsultation with Federal Reserve Bank supervisory staff concerning dividends in certain circumstances, such as where the company’s net income for the pastfour quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention isinconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if asubsidiary bank becomes undercapitalized. FRB regulatory guidance also indicates that a bank holding company should inform Federal Reserve Bank staffprior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or therepurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with thebeginning of the quarter in which the redemption or repurchase occurred. FRB regulations require prior approval for a bank holding company to redeemequity securities if the gross consideration, when combined with net consideration paid for all such redemptions during the preceding 12 months, will equal10% or more of the holding company’s consolidated net worth. There is an exception for bank holding companies that meet specified qualitative criteria.These regulatory policies may affect the ability of the Company to pay dividends, repurchase shares of its common stock or otherwise engage in capitaldistributions.Change in Control RegulationsUnder the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the FRB has been given 60days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financialand managerial resources of the acquiror and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of orholding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’sdirectors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, themanagement or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttablepresumption of control under the regulations under certain circumstances including where, as is the case with the Company, the issuer has securitiesregistered under Section 12 of the Exchange 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 accountingscandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditingimproprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to thesecurities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the ExchangeAct.The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the SEC and national securities exchanges to adopt extensiveadditional disclosure, 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, insidertrading restrictions and other requirements of the Exchange Act.8Table of ContentsTaxationFederal Taxation. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with someexceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not acomprehensive description of the tax rules applicable to the Company and the Bank.Taxable Distributions and Recapture. Prior to the Small Business Protection Act of 1996, bad debt reserves created prior to 1988 were subject to recaptureinto taxable income if the Bank failed to meet certain thrift asset and definition tests. The Small Business Protection Act of 1996 eliminated these thrift-related recapture rules. However, under current law, pre-1988 reserves remain subject to tax recapture should the Bank make certain distributions from its taxbad debt reserve or cease to maintain a financial institution charter. At December 31, 2017, the Bank’s total federal pre-1988 reserve was $14.9 million. Thisreserve reflects the cumulative effects of federal tax deductions by the Bank for which no federal income tax provision has been made.Federal Net Loss Carryovers. With the enactment of the Tax Cut and Jobs Act of 2017, net operating losses may no longer be carried back. Pre-2018 netoperating losses may be carried forward to the succeeding 20 taxable years. At December 31, 2017, the Company had a federal net operating loss carryforwardof $21.3 million that will begin to expire in 2029.State and Local Taxation. The Company pays income tax in the various states in which it does business with the majority of state income apportioned to theState of Illinois. As a Maryland business corporation, the Company is required to file annual returns and pay annual fees to the State of Maryland, but thesefees are not material in amount. At December 31, 2017, the Company had a state net operating loss for the State of Illinois of $70.2 million, which will beginto expire in 2022.Deferred Income Taxes. The Company evaluates deferred taxes for recoverability using an approach that considers the relative impact of negative andpositive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences,and tax-planning strategies. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on management-approvedbusiness plans and ongoing tax planning. Only those tax planning strategies that are both prudent and feasible, and which management has the ability andintent to implement, may be incorporated into the analysis and assessment.ITEM 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, youshould carefully consider the risks and uncertainties described below and all other information included in this report. The risks described below mayadversely affect our business, financial condition and operating results. In addition to these risks and the other risks and uncertainties described in Item 1,“Business–Forward Looking Statements,” and Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” there maybe additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affectour business, financial condition 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 may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends infuture 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 ourability to compete effectively in this highly competitive environment. To date, our competitive strategies have focused on attracting deposits in our localmarkets, and growing our loan and lease portfolio by emphasizing specific loan products in which we have significant experience and expertise, identifyingand targeting markets in which we believe we can effectively compete with larger institutions and other competitors, and offering competitive pricing tocommercial borrowers with appropriate risk profiles. We compete for loans, leases, deposits and other financial services with other commercial banks, thrifts,credit unions, brokerage houses, mutual funds, insurance companies, real estate conduits, mortgage brokers and specialized finance companies. Many of ourcompetitors offer products and services that we do not offer, and some offer loan structures and have underwriting standards that are not as restrictive as ourrequired loan structures and underwriting standards. Some larger competitors have substantially greater resources and lending limits, name recognition andmarket presence that benefits them in attracting business. In addition, larger competitors may be able to price loans, leases and deposits more aggressivelythan we do, and because of their larger capital bases, their underwriting practices for smaller loans may be subject to less regulatory scrutiny than they wouldbe for smaller banks. Newer competitors may be more aggressive in pricing loans, leases and deposits in order to increase their market share. Some of thefinancial institutions and financial services organizations with which we compete are not subject9Table of Contentsto the extensive regulations imposed on national banks and their holding companies. As a result, these nonbank competitors have certain advantages over usin accessing funding and in providing various financial services.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,and our liabilities, primarily deposits, are monetary in nature. Our results of operations depend substantially on our net interest income, which is thedifference between the 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 are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic andinternational events, and changes in the U.S. and other financial markets. Our net interest income is affected not only by the level and direction of interestrates, but also by the shape of the yield curve and relationships between interest sensitive instruments and key driver rates, including credit risk spreads, andby balance sheet growth, customer loan and deposit preferences and the timing of changes in these variables which themselves are impacted by changes inmarket interest rates. As a result, changes in market interest rates can significantly affect our net interest income as well as the fair market valuation of ourassets and liabilities, particularly if they occur more quickly or 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 deposit attrition due to those changes, or be sure that our protective measures are adequate. If the interest rates paid on deposits and other interestbearing liabilities increase at a faster rate than the interest rates received on loans and other interest earning assets, our net interest income, and thereforeearnings, could be adversely affected. We would also incur a higher cost of funds to retain our deposits in a rising interest rate environment. While the higherpayment amounts we would receive on adjustable-rate or variable-rate loans in a rising interest rate environment may increase our interest income, someborrowers may be unable to afford the higher payment amounts, and this could result in a higher rate of default. Rising interest rates also may reduce thedemand for loans and the value of fixed-rate investment securities.Our commercial real estate loans constitute a concentration of credit and thus are subject to enhanced regulatory scrutiny and require us to utilizeenhanced risk management techniquesA substantial portion of our loan portfolio is secured by real estate. Our commercial real estate loan portfolio generally consists of multi-family mortgageloans originated in selected geographic markets and nonresidential real estate loans originated in the Chicago market. At December 31, 2017, our loanportfolio included $588.4 million in multi-family mortgage loans, or 44.5% of total loans, and $131.2 million in non-owner occupied nonresidential realestate loans, or 9.9% of total loans. These commercial real estate loans represented 382.6% of the Bank’s $188.6 million total risk-based capital atDecember 31, 2017, and thus are considered a concentration of credit for regulatory purposes. Concentrations of credit are pools of loans whose collectiveperformance has the potential to affect a bank negatively even if each individual transaction within the pool is soundly underwritten. When loans in a poolare sensitive to the same economic, financial, or business development, that sensitivity, if triggered, could cause the sum of the transactions to perform as if itwere a single, large exposure. As such, concentrations of credit add a dimension of risk that compounds the risk inherent in individual loans.The OCC expects banks to implement board-approved policies and procedures to identify, measure, monitor, and control concentration risks, taking intoaccount the potential impact on earnings and capital under stressed market conditions, economic downturns, and periods of general market illiquidity as wellas normal market conditions. Enhanced risk management is required for commercial real estate concentrations exceeding 300.0% of total risk-based capital.The Bank has established board-approved policies and procedures to identify, measure, monitor, control and stress test its concentrations of credit. The Bankhas taken other specific steps to mitigate concentrations of credit risk, including the establishment of concentrations of credit limits based on loan type andgeography, the maintenance of capital in excess of the minimum regulatory requirements, the establishment of appropriate underwriting standards for specificloan types and geographic markets, active portfolio management and an emphasis on originating multi-family loans that qualify for 50% risk-weightingunder the regulatory capital rules. At December 31, 2017, $365.7 million of the Bank’s multi-family loans, or 62.2% of the Bank’s total multi-family loanportfolio, qualified for 50% risk-weighting under the regulatory capital rules. The Bank’s earnings and capital could be materially and adversely impacted ifeconomic, financial, or business developments were to occur that materially and adversely impacted all or a material portion of the Bank’s commercial realestate loans and caused them to perform as a single, large exposure.Adverse changes in local economic conditions and adverse conditions in an industry on which a local market in which we do business depends couldnegatively affect our financial condition or results of operationsExcept for our commercial equipment leasing and healthcare lending activities, which we conduct on a nationwide basis, and our multi-family lendingactivities, which we conduct in selected Metropolitan Statistical Areas, including, but not limited to, the10Table of ContentsMetropolitan Statistical Areas for Chicago, Illinois, Dallas, Texas, Denver, Colorado, Tampa, Florida and Minneapolis, Minnesota, our loan and depositactivities are generally conducted in the Metropolitan Statistical Area for Chicago, Illinois. Our loan and deposit activities are directly affected by, and ourfinancial success depends on, economic conditions within the local markets in which we do business, as well as conditions in the industries on which thosemarkets are economically dependent. A deterioration in local economic conditions or in the condition of an industry on which a local market depends couldadversely affect such factors as unemployment rates, business formations and expansions, housing demand, apartment vacancy rates and real estate values inthe local market, and this could result in, among other things, a decline in loan and lease demand, a reduction in the number of creditworthy borrowersseeking loans, an increase in loan delinquencies, defaults and foreclosures, an increase in classified and nonaccrual loans, a decrease in the value of thecollateral for our loans, and a decline in the net worth and liquidity of our borrowers and guarantors. Any of these factors could negatively affect our financialcondition or results of operations.In addition, our loan portfolio includes fixed- and adjustable-rate first mortgage loans, home equity loans and home equity lines of credit secured by one-to-four family residential properties primarily located in the Chicago metropolitan area. Residential real estate lending is sensitive to regional and localeconomic conditions that may significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict.Residential loans with high combined loan-to-value ratios generally are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers maybe unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, whichcould in turn adversely affect our financial condition and results of operations.The City of Chicago and the State of Illinois have experienced significant financial difficulties, and this could adversely impact certain borrowers andthe economic vitality of the City and StateThe City of Chicago and the State of Illinois are experiencing significant financial difficulties, including material pension funding shortfalls. These issuescould impact the economic vitality of the City of Chicago and the State of Illinois and the businesses operating there, encourage businesses to leave the Cityof Chicago or the State of Illinois, and discourage new employers from starting or moving businesses to there. These issues could also result in delays in thepayment of accounts receivable owed to borrowers that conduct business with the State of Illinois and Medicaid payments to nursing homes and otherhealthcare 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 weakenor become 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 weconsider collateral in the underwriting process, it is a secondary consideration that generally relates to the risk of loss in the event of a borrower default. Wefollow the OCC's published guidance for assigning risk-ratings to loans, which emphasizes the strength of the borrower's cash flow. The OCC's loan risk-rating guidance provides that the primary consideration in assigning risk-ratings to commercial and commercial real estate loans is the strength of the primarysource of repayment, which is defined as a sustainable source of cash under the borrower's control that is reserved, explicitly or implicitly, to cover the debtobligation. The OCC's loan risk-rating guidance typically does not consider secondary repayment sources until the strength of the primary repayment sourceweakens, and collateral values typically do not have a significant impact on a loan's risk rating until a loan is classified. Consequently, if a borrower's cashflows weaken or become uncertain, the loan may need to be classified, whether or not the loan is performing or fully secured. In addition, real estateappraisers typically place significant weight on the cash flows generated by income-producing real estate and the reliability of the cash flows in performingvaluations. Thus, economic or borrower-specific conditions that cause a decline in a borrower's cash flows could cause our loan classifications to increase andthe appraised value of the collateral securing our loans to decline, and require us to increase our loan loss reserves or record charge-offs.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 results when a leasing companydiscounts the equipment rental revenue stream owed to the leasing company by a lessee. Our lease loans entail many of the same types of risks as ourcommercial loans. Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the leasedequipment. As with commercial loans secured by equipment, the equipment securing our lease loans may depreciate over time, may be difficult to appraiseand 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 allrequired amounts under lease loans. In the event of a default on a lease loan, the proceeds from the sale of the leased equipment may not be sufficient11Table of Contentsto satisfy the outstanding unpaid amounts under the terms of the loan. At December 31, 2017, our lease loans totaled $310.1 million, or 23.5% of our totalloan portfolio.Our loan portfolio includes loans to healthcare providers, and the repayment of these loans is largely dependent upon the receipt of direct or indirectgovernmental reimbursementsAt December 31, 2017, we had $118.6 million of loans and unused commitments to a variety of healthcare providers, including lines of credit secured byhealthcare receivables. The repayment of these lines of credit is largely dependent on the borrower's receipt of payments and reimbursements under Medicaid,Medicare and in some cases private insurance contracts for the services they have provided. The ability of the borrowers to service loans we have made tothem may be adversely impacted by the financial ability of the federal government or individual state governments to make direct reimbursement payments,or, via managed care organizations operating under agreements with the federal government or individual states, to make indirect reimbursements for theservices provided. The failure of a direct or indirect payor to make reimbursements owed to the operators of these facilities, or a significant delay in themaking of such reimbursements, could adversely affect the ability of the operators of these facilities to repay their obligations to us. In addition, changes tonational health care policy involving private health insurance policies may also affect the business prospects and financial condition or operations ofcommercial loan customers and commercial lessees involved in health care-related businesses.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 insufficientto cover any remaining loan balance, including expenses of collecting the loan and managing and liquidating the collateral, we could experience significantloan losses or increase our provision for loan losses or both, which could have a material adverse effect on our operating results. At December 31, 2017, ourallowance for loan losses was $8.4 million, which represented 0.63% of total loans and 350.04% of nonperforming loans as of that date. In determining theamount of our allowance for loan losses, we rely on internal and external loan reviews, our historical experience and our evaluation of economic conditions,among other factors. In addition, we make various estimates and assumptions about the collectability of our loan portfolio, including the creditworthiness ofour borrowers and the value of the real estate and other assets, if any, serving as collateral for the repayment of our loans. We also make judgments concerningour legal positions and the priority of our liens and interests in contested legal or bankruptcy proceedings, and at times, we may lack sufficient information toestablish adequate specific reserves for loans involved in such proceedings. We base these estimates, assumptions and judgments on information that weconsider reliable, but if an estimate, assumption or judgment that we make ultimately proves to be incorrect, additional provisions to our allowance for loanlosses may become necessary. In addition, as an integral part of their supervisory and/or examination process, the OCC periodically reviews the methodologyfor and the sufficiency of the allowance for loan losses. The OCC has the authority to require us to recognize additions to the allowance based on theirinclusion, exclusion or modification of risk factors or differences in judgments of information available to them at the time of their examination.A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial conditionand results of operationsThe Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company and the Bank for our first fiscalyear after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodicestimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the currentmethod of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase thetypes of data we will need to collect and review to determine the appropriate level of the allowance for loan losses. Accordingly, regardless of any actualchanges to the composition or performance of our loan portfolio, the new accounting standard may require an increase in our allowance for loan losses orexpenses incurred to determine the appropriate level of the allowance for loan losses, and may therefore have a material adverse effect on our financialcondition and results of operations.We could become subject to more stringent capital requirements, which could adversely impact our return on equity, require us to raise additionalcapital, 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 andthe Company. 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 ofwhat constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased12Table of Contentsfrom 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized gainsand losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory 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 “capital conservation buffer” of 2.5%, and will result in thefollowing minimum ratios: (i) a common equity Tier 1 capital ratio of 7%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of10.5%. The phase in of the new capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each yearuntil fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and payingdiscretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained incomethat can be utilized for such actions.We have analyzed the effects of these new capital requirements, and as of December 31, 2017, we believe that the Bank and the Company met all of thesenew requirements, including the full 2.5% capital conservation buffer.The application of more stringent capital requirements from any source and for any reason could, among other things, result in lower returns on equity,require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, theimposition of liquidity requirements in connection with the implementation 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 liquid assets. Implementation of changes to asset risk weightings for risk-based capitalcalculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in managementmodifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares. Specifically,beginning in 2016, the Bank’s ability to pay dividends are limited if it does not have the capital conservation buffer required by the new capital rules, whichmay limit our ability to pay dividends to stockholders. See “Supervision and Regulation-Federal Banking Regulation-Capital Requirements.”We are subject to security and operational risks relating to our use of technology and our communications and information systems, including the riskof 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 inour data processing systems, computers, networks and communications systems. Although we take numerous protective measures and otherwise endeavor toprotect and maintain the privacy and security of confidential data, these systems may be vulnerable to unauthorized access, computer viruses, other maliciouscode, 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 couldjeopardize confidential and other information processed and stored in, and transmitted through, our systems or otherwise cause interruptions or malfunctionsin our or our customers' operations. We may be required to expend significant additional resources to modify our protective measures or to investigate andremediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully covered by our insurance. Securitybreaches involving our network or Internet banking systems could expose us to possible liability and deter customers from using our systems. We rely onspecific software and hardware systems to provide the security and authentication necessary to protect our network and Internet banking systems fromcompromises or breaches of our security measures. These precautions may not fully protect our systems from compromises or breaches of our securitymeasures that could result in damage to our reputation and our business. Although we perform most data processing functions internally, we outsource certainservices 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 operationsare exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of anexternal vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizationalstructure, 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 could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extentsuch an agreement is not renewed 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 ourbusiness and support our day-to-day banking, investment, and trust activities, some of which are provided through third-parties. If we or our third-partyvendors encounter difficulties or become the subject of a cyber-attack on or other breach of their operational systems, data or infrastructure, or if we havedifficulty communicating with any such third-party system, our business and operations could suffer. Any failure or disruption to our systems, or those of athird-party vendor, could impede our transaction processing, service delivery, customer relationship management, data processing, financial reporting or riskmanagement. Although we take ongoing monitoring, detection, and prevention measures and perform penetration testing and periodic risk assessments, ourcomputer systems, software and networks and those of our third-party vendors may be or become vulnerable to unauthorized access, loss or destruction ofdata (including confidential client information), account takeovers, unavailability of service, computer viruses, denial of service attacks, malicious socialengineering or other malicious code, or cyber-attacks beyond what we can reasonably anticipate and such events could result in material loss. If any of ourfinancial, accounting or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Securitybreaches in our online banking systems could also have an adverse effect on our reputation and could subject us to possible liability. Additionally, we couldsuffer disruptions to our systems or damage to our network infrastructure from events that are wholly or partially beyond our control, such as electrical ortelecommunications outages, natural disasters, widespread health emergencies 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 protective measures of our third-party vendors, will be effective. If significant failure,interruption or security breaches do occur in our processing systems or those of our third-party providers, we could suffer damage to our reputation, a loss ofcustomer business, additional regulatory scrutiny, or exposure to civil litigation, additional costs and possible financial liability. In addition, our business ishighly dependent on our ability to process, record and monitor, on a continuous basis, a large number of transactions. To do so, we are dependent on ouremployees and therefore, the potential for operational risk exposure exists throughout our organization, including losses resulting from human error. Wecould be materially adversely affected if one or more of our employees cause a significant operational breakdown or failure. If we fail to maintain adequateinfrastructure, systems, controls and personnel relative to our size and products and services, our ability to effectively operate our business may be impairedand our business could be adversely affected.We continually encounter technological change, and may have fewer resources than many of our larger competitors to continue to invest intechnological improvementsThe 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 willdepend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customerdemands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to investin technological improvements. We also may not be able to effectively implement new technology-driven products and services or be successful inmarketing these products and services 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 throughalternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems andlending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills andtransfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue toresult 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 revenuestreams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and resultsof operations.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 marketsor new markets. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for theintroduction and development14Table of Contentsof new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible, which could in turnhave 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 asignificant source of cash for the Company. The availability of dividends from the Bank is limited by various statutes and regulations. Under these statutesand regulations, the Bank is not permitted to pay dividends on its capital stock to the Company, its sole stockholder, if the dividend would reduce thestockholders' equity of the Bank below the amount of the liquidation account established in connection with the mutual-to-stock conversion. National banksmay pay dividends without the approval of its primary federal regulator only if they meet applicable regulatory capital requirements before and after thepayment of the dividends and total dividends do not exceed net income to date over the calendar year plus its retained net income over the preceding twoyears. The Company has also reserved $5.0 million of its available cash to maintain its ability to serve as a source of financial strength to the Bank. If in thefuture, the Company utilizes its available cash for other purposes and the Bank is unable to pay dividends to the Company, the Company may not havesufficient funds to pay dividends.Trading 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 inmaterial price fluctuations of the price per share of the Company's common stock. In addition, such trading activity and the resultant volatility could make itmore difficult for 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 asconsideration for an acquisition.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 companiesor persons to acquire control of the Company without the consent of our board of directors. You may want a takeover attempt to succeed because, forexample, a potential acquirer could offer a premium over the then prevailing price of our shares of common stock. Provisions of our articles of incorporationand bylaws also may make it difficult to remove our current board of directors or management if our board of directors opposes the removal. We have electedto be subject to the Maryland Business Combination Act, which places restrictions on mergers and other business combinations with large stockholders. Inaddition, our articles of incorporation provide that certain mergers and other similar transactions, as well as amendments to our articles of incorporation, mustbe approved by stockholders owning 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 authorized directors, assuming no vacancies. If approved by at least two-thirds of the number of our authorized directors, assumingno vacancies, the action must still be approved 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 is approved 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 of our authorized directors, assuming no vacancies, approves the removal of a director, the removal may be withor without cause, but must still be approved by a majority of our voting shares entitled to vote on the matter. Additional provisions include limitations on thevoting rights of any beneficial owners of more than 10% of our common stock. Our bylaws, which can only be amended by the board of directors, alsocontain provisions regarding the timing, content and procedural requirements for stockholder proposals and nominations.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 has increased due to the Dodd-Frank Act and regulatory initiativesprecipitated by the Dodd-Frank Act and the most recent economic downturn and the disruptions that certain financial markets experienced. We also aredirectly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, andindirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professionalpractice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professionalstandards in public company audits. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws,regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business,engage in strategic and tax planning and implement strategic initiatives, and govern financial reporting and disclosures. These laws, regulations, rules,standards, policies and interpretations are constantly evolving and may change significantly over time, particularly during periods in which the compositionof the U.S. Congress and the leadership of regulatory agencies and public sector boards change due to the outcomes of national elections.15Table of ContentsNon-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'sOffice of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures foridentifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations couldresult in fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additionalcontrols and systems. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. Inaddition, the U.S. Government has previously imposed laws and regulations relating to residential and consumer lending activities that create significant newcompliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance withthese laws and regulations, but these policies may not be effective to provide such compliance.FDIC deposit insurance could increase in the futureThe Dodd-Frank Act established 1.35% as the minimum Designated Reserve Ratio (“DRR”) for the deposit insurance fund. The FDIC has determined that theDRR should be 2.0% and has adopted a plan under which 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 base deposit insurance premiums on an institution's total assets minus its tangible equity instead of itsdeposits. The FDIC has adopted final regulations that base assessments on a combination of financial ratios and regulatory ratings. The FDIC also revised theassessment schedule and established adjustments that increase assessments so that the range of assessments is now 1.5 basis points to 30 basis points of totalassets less tangible equity. If there are any changes in the Bank’s financial ratios and regulatory ratings that require adjustments that increase its assessment,or, if circumstances require the FDIC to impose additional special assessments or further increase its quarterly assessment rates, our results of operations couldbe adversely impacted.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.16Table of ContentsITEM 2.PROPERTIESWe conduct our business at 19 banking offices located in the Chicago metropolitan area, and from a corporate office. We own our corporate office andbanking offices other than our Chicago-Lincoln Park and Northbrook offices, which are leased. We also operate four satellite loan and lease productionoffices, all of which are leased. We believe that all of our properties and equipment are well maintained, in good operating condition and adequate for all ofour present and anticipated needs.In December 2017, we agreed to a letter of intent to sell our corporate office building in Burr Ridge, Illinois. In January 2018, we executed a formal salesagreement to sell the property subject to certain contingencies exclusively in the control of the purchaser. We believe that the transaction will not result ineither a significant gain or loss on sale if consummated. The asset is recorded in our financial statements at December 31, 2017 as premises held-for-sale at anet cost of $5.7 million.We believe our facilities in the aggregate are suitable and adequate to operate our banking and related business. Additional information with respect topremises and equipment is presented in Note 6 of "Notes to Consolidated Financial Statements" in Item 8 of this Annual Report on Form 10-K.ITEM 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 oncurrently available 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.17Table of ContentsPART 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 January 31, 2018 was 1,228. 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 informationconcerning the cash dividends paid for the years ended December 31, 2017 and 2016.2016 and 2017 Quarterly Periods High Low Close CashDividendsPaidQuarter ended December 31, 2017 $17.00 $14.79 $15.34 $0.08Quarter ended September 30, 2017 16.89 14.66 15.89 0.07Quarter ended June 30, 2017 15.31 13.43 14.92 0.07Quarter ended March 31, 2017 15.24 13.13 14.52 0.06Quarter ended December 31, 2016 $15.12 $12.15 $14.82 $0.06Quarter ended September 30, 2016 12.80 11.75 12.70 0.05Quarter ended June 30, 2016 12.89 11.38 11.99 0.05Quarter ended March 31, 2016 13.29 11.42 11.82 0.05The Company is subject to federal regulatory limitations on the payment of dividends. Federal Reserve Board Supervisory Letter SR 09-4 provides that abank holding company should, among other things, notify and make a submission to its local Federal Reserve Bank prior to declaring a dividend if its netincome for the current quarter is not sufficient to fully fund the dividend, and consider eliminating, deferring or significantly reducing its dividends if its netincome for the current quarter is not sufficient to fully fund the dividends, or if its net income for the past four quarters, net of dividends previously paidduring that period, is not sufficient to fully 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 excessof our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to thosereceiving the dividend, and to an amount that would not make us insolvent provided, however, that even if the Company’s assets are less than the amountnecessary to satisfy the requirement set forth above, the Company may make a distribution from: (1) the Company’s net earnings for the fiscal year in whichthe 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 eightfiscal quarters.Dividends from the Bank provide a significant source of cash for the Company. The availability of dividends from the Bank is limited by various statutes andregulations. For a discussion of the Bank’s ability to pay dividends, see Part I, Item 1, “Business — Supervision and Regulation — Federal BankingRegulation — Capital Distributions.”Recent Sales of Unregistered SecuritiesThe Company had no sales of unregistered stock during the year ended December 31, 2017.18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, whichrepresented approximately 5% of the Company’s issued and outstanding shares of common stock. On December 28, 2015, the Board increased the number ofshares that can be repurchased in accordance with the authorization by an additional 1,046,868 shares. On October 27, 2016, the Board increased the totalnumber of shares authorized for repurchase by an additional 478,789 shares. On July 28, 2017, the Board increased the total number of shares authorized forrepurchase by an additional 250,000 shares. On October 26, 2017, the Board extended the expiration date of the repurchase authorization from December 31,2017 to June 30, 2018. As of December 31, 2017, the Company had repurchased 2,587,779 shares of its common stock out of the 2,830,755 shares ofcommon stock authorized under the above repurchase authorizations. Since its inception, the Company has repurchased 6,826,913 shares of its commonstock.Period Total Number ofShares Purchased Average Price Paidper Share Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms Maximum Number ofShares that May Yetbe Purchased underthe Plans or ProgramsOctober 1, 2017 through October 31, 2017 17,200 $16.19 17,200 330,676November 1, 2017 through November 30, 2017 48,100 15.58 48,100 282,576December 1, 2017 through December 31, 2017 39,600 16.14 39,600 242,976 104,900 104,900 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 ABACommunity Bank NASDAQ Index and the KBW Regional Banking Index for the period beginning December 31, 2012 and ending December 31, 2017. Theinformation assumes that $100 was invested at the closing price on December 31, 2012 in the Common Stock and each index, and that all dividends werereinvested. December 31, 2012 2013 2014 2015 2016 2017BankFinancial Corporation 100.00 123.96 161.55 174.49 207.73 218.42Russell 2000 Index 100.00 138.82 145.62 139.19 168.85 193.58NASDAQ Bank Index 100.00 138.90 142.85 152.31 205.66 215.19ABA Community Bank NASDAQ Index 100.00 139.24 143.15 153.81 209.16 210.69KBW Bank Index 100.00 143.66 143.95 132.78 166.77 193.8820Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following information is derived from the audited consolidated financial statements of the Company. For additional information, please refer 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, 2017 2016 2015 2014 2013 (Dollars in thousands, except per share data)Selected Financial Condition Data: Total assets$1,625,558 $1,620,037 $1,512,443 $1,465,410 $1,453,594Loans, net1,314,651 1,312,952 1,232,257 1,172,356 1,098,077Securities, at fair value93,383 107,212 114,753 121,174 110,907Core deposit intangible286 782 1,305 1,855 2,433Deposits1,340,051 1,339,390 1,212,919 1,211,713 1,252,708Borrowings60,768 51,069 64,318 12,921 3,055Equity197,634 204,780 212,364 216,121 175,627 Selected Operating Data: Interest and dividend income$56,179 $50,928 $48,962 $49,349 $49,392Interest expense6,089 3,970 2,814 3,046 3,653Net interest income50,090 46,958 46,148 46,303 45,739Recovery of loan losses(87) (239) (3,206) (736) (687)Net interest income after recovery of loan losses50,177 47,197 49,354 47,039 46,426Noninterest income6,408 6,545 6,691 6,709 8,134Noninterest expense 40,391 41,542 41,945 44,451 51,262Income before income taxes16,194 12,200 14,100 9,297 3,298Income tax expense (benefit) (1) (2)7,190 4,698 5,425 (31,317) —Net income$9,004 $7,502 $8,675 $40,614 $3,298Basic earnings per common share$0.49 $0.40 $0.44 $2.01 $0.16Diluted earnings per common share$0.49 $0.39 $0.44 $2.01 $0.16(footnotes on following page)21Table of Contents At and For the Years Ended December 31, 2017 2016 2015 2014 2013Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to averagetotal assets)0.56% 0.49 % 0.60% 2.83 % 0.23 %Return on equity (ratio of net income (loss) toaverage equity)4.44 3.60 4.03 22.58 1.89Net interest rate spread (3)3.15 3.19 3.36 3.35 3.28Net interest margin (4)3.28 3.28 3.43 3.40 3.33Efficiency ratio (5)71.49 77.64 79.38 83.85 95.15Noninterest expense to average total assets 2.50 2.72 2.90 3.10 3.53Average interest-earning assets to averageinterest-bearing liabilities131.70 135.09 132.32 123.09 121.50Dividends declared per share$0.28 $0.21 $0.20 $0.08 $0.04Dividend payout ratio57.23% 55.07 % 47.80% 4.20 % 25.59 %Asset Quality Ratios: Nonperforming assets to total assets (6)0.29% 0.44 % 0.70% 1.27 % 1.70 %Nonperforming loans to total loans0.18 0.25 0.29 1.03 1.66Allowance for loan losses to nonperforming loans350.04 246.57 271.30 98.17 76.89Allowance for loan losses to total loans0.63 0.62 0.78 1.01 1.27Net recoveries (charge-offs) to average loansoutstanding0.03 (0.11) 0.08 (0.13) (0.31)Capital Ratios: Equity to total assets at end of period12.16% 12.64 % 14.04% 14.75 % 12.08 %Average equity to average assets12.53 13.62 14.88 12.54 12.05Tier 1 leverage ratio (Bank only)11.08 10.27 11.33 11.45 10.16Other Data: Number of full-service offices (7)19 19 19 19 20Employees (full-time equivalents)236 246 251 269 301 (1)Income tax expense (benefit) for the year ended December 31, 2017 includes a $2.5 million increase to expense related to the Tax Cuts and Job Act of 2017.(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.(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 the period.(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 divided by the sum of net interest income and noninterest income.(6)Nonperforming assets include nonperforming loans and other real estate owned.(7)The Bank's Hyde Park East branch was closed on January 2, 2014.22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, 2017 and 2016, and ourconsolidated results of operations for the three years ended December 31, 2017. Our consolidated financial statements, the related notes and the discussion ofour critical accounting policies appearing elsewhere in this Annual Report should be read in conjunction with this discussion and analysis.OverviewThe Company's banking subsidiary completed its first full year as a national bank and Federal Reserve System member bank in 2017. The results for 2017results reflect the successful execution of key business plan objectives, including accelerating our growth in commercial loans, maintaining strong assetquality and improving our overall efficiency.The Company recorded net income of $9.0 million for the year ended December 31, 2017, a 20% increase compared to the previous year's results. Earningsper share for the year ended December 31, 2017 were $0.49 on a basic and diluted basis.In 2017, commercial and industrial loans increased by $53.5 million (54.0%), multi-family residential real estate loans increased by $45.5 million (8.4%) andmiddle-market commercial leases increased by $18.1 million (21.4%), offset by declines in the balances of residential mortgage loans, commercial real estatemortgage loans and investment-grade commercial leases due primarily to prepayment activity. Total commercial-related loan balances reached a new recordlevel of $1.222 billion, and now comprise 92.5% of total loans, compared to 89.6% at the end of 2016.The Company’s asset quality remained favorable. The ratio of nonperforming loans to total loans was 0.18% and the ratio of non-performing assets to totalassets was 0.29% at December 31, 2017. Non-performing commercial-related loans represented 0.03% of total commercial-related loans.Total retail and commercial deposits were stable in 2017. The Company introduced several new deposit account types to attract new customers and expandrelationships with existing customers. The Company’s liquid assets exceeded 13% of total assets at December 31, 2017. The Company intends to continue todevelop new products, service delivery channels and marketing capabilities to further position it for future loan growth and the expansion of non-interestincome.The Company’s capital position remained strong with a Tier 1 leverage ratio of 11.49% and a Tier 1 risk-based capital ratio of 16.33%. During 2017, theCompany increased its quarterly dividend rate by 33% to $0.08 per share from $0.06 per share and repurchased 719,573 common shares (or 3.7% of thecommon shares that were outstanding at the beginning of 2017).The actions and results in 2017 positioned the Company well for 2018. We look forward to further expansion of our commercial banking operations in theChicago metropolitan market and in our other selected markets. We believe that the combination of the Company’s current business strategies, the carefulexecution of the business plan and the favorable impact of changes in federal tax policy can be expected to produce further improvements to net income in2018 compared to 2017.Results of OperationNet IncomeComparison of Year 2017 to 2016. We recorded net income of $9.0 million for the year ended December 31, 2017, compared to net income of $7.5 millionfor 2016. The increase in net income was due to a combination of an increase in net interest income and a reduced noninterest expense. Our basic earnings pershare of common stock was $0.49 for the year ended December 31, 2017, compared to $0.40 per share of common stock for the year ended December 31,2016.Comparison of Year 2016 to 2015. We recorded net income of $7.5 million for the year ended December 31, 2016, compared to net income of $8.7 millionfor 2015. The decrease in net income was primarily due to the fact that we had net charge-offs of $1.3 million for the year ended December 31, 2016 and therewere $907,000 of recoveries for the year ended December 31, 2015. The net charge-offs for 2016 included a $1.6 million charge-off resulting from the sale ofthree performing loans to a single borrower with a carrying value of $16.2 million. Our basic earnings per share of common stock was $0.40 for the year endedDecember 31, 2016, compared to $0.44 per share of common stock for the year ended December 31, 2015.Net Interest IncomeNet interest income is our primary source of revenue. Net interest income equals the excess of interest income (including discount accretion on purchasedimpaired loans) plus fees earned on interest earning assets over interest expense incurred on interest-bearing liabilities. The level of interest rates and thevolume and mix of interest-earning assets and interest-bearing liabilities impact net23Table of Contentsinterest income. Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is thedifference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin isexpressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread becausenoninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders' equity, also support interest-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 “Notesto Consolidated Financial Statements” in Item 8 of this Annual Report on 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 weremade, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in thecomputation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferredfees and expenses, discounts and premiums, purchase accounting adjustments that are amortized or accreted to interest income or expense. Years Ended December 31, 2017 2016 2015 AverageOutstandingBalance Interest Yield/Rate AverageOutstandingBalance Interest Yield/Rate AverageOutstandingBalance Interest Yield/Rate (Dollars in thousands)Interest-earning Assets: Loans$1,323,376 $53,227 4.02% $1,231,948 $49,025 3.98% $1,163,658 $47,488 4.08%Securities106,534 1,474 1.38 108,467 1,228 1.13 109,834 1,141 1.04Stock in FHLB and FRB8,494 409 4.82 6,730 89 1.32 6,257 31 0.50Other88,548 1,069 1.21 83,901 586 0.70 64,434 302 0.47Total interest-earningassets1,526,952 56,179 3.68 1,431,046 50,928 3.56 1,344,183 48,962 3.64Noninterest-earning assets90,464 96,973 101,217 Total assets$1,617,416 $1,528,019 $1,445,400 Interest-bearingLiabilities: Savings deposits$160,266 186 0.12 $158,312 171 0.11 $155,686 164 0.11Money market accounts304,868 1,204 0.39 318,248 989 0.31 336,179 1,054 0.31NOW accounts274,585 537 0.20 253,810 376 0.15 289,357 360 0.12Certificates of deposit364,792 3,511 0.96 304,194 2,329 0.77 225,990 1,216 0.54Total deposits1,104,511 5,438 0.49 1,034,564 3,865 0.37 1,007,212 2,794 0.28Borrowings54,899 651 1.19 24,764 105 0.42 8,674 20 0.23Total interest-bearingliabilities1,159,410 6,089 0.53 1,059,328 3,970 0.37 1,015,886 2,814 0.28Noninterest-bearingdeposits233,200 239,361 192,528 Noninterest-bearingliabilities22,127 21,142 21,882 Total liabilities1,414,737 1,319,831 1,230,296 Equity202,679 208,188 215,104 Total liabilities andequity$1,617,416 $1,528,019 $1,445,400 Net interest income $50,090 $46,958 $46,148 Net interest rate spread (1) 3.15% 3.19% 3.36%Net interest-earning assets (2)$367,542 $371,718 $328,297 Net interest margin (3) 3.28% 3.28% 3.43%Ratio of interest-earningassets to interest-bearingliabilities131.70% 135.09% 132.32% _________________(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 2017 to 2016. Net interest income increased by $3.1 million, or 6.7%, to $50.1 million for the year ended December 31, 2017, from$47.0 million for the year ended December 31, 2016. Our net interest rate spread decreased four basis points to 3.15% for the year ended December 31, 2017,from 3.19% for 2016. Our net interest margin remained constant at 3.28% for the years ended December 31, 2017 and 2016. The decrease in the net interestrate spread resulted from increased average balances of interest-bearing liabilities at higher costs, partially offset by increased average balances of interest-earning asset at increased average yields. Our average interest-earning assets increased $95.9 million to $1.527 billion for the year ended December 31, 2017,from $1.431 billion for 2016. Our average interest-bearing liabilities increased $100.1 million to $1.159 billion for the year ended December 31, 2017, from$1.059 billion for 2016.Comparison of Year 2016 to 2015. Net interest income increased by $810,000, or 1.8%, to $47.0 million for the year ended December 31, 2016, from $46.1million for the year ended December 31, 2015. Our net interest rate spread decreased 17 basis points to 3.19% for the year ended December 31, 2016, from3.36% for 2015. Our net interest margin decreased by 15 basis points to 3.28% for the year ended December 31, 2016, from 3.43% for 2015. The decreases inthe net interest rate spread and net interest margin resulted from increased interest-earning asset average balances at lower average yields and increasedinterest-bearing liabilities average balances at higher costs. Our average interest-earning assets increased $86.9 million to $1.431 billion for the year endedDecember 31, 2016, from $1.344 billion for the year ended 2015. Our average interest-bearing liabilities increased $43.4 million to $1.059 billion for theyear ended December 31, 2016, from $1.016 billion for 2015.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 changesattributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changesin average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume that cannot besegregated have been allocated proportionately to the change due to volume and the change due to rate. Years Ended December 31, 2017 vs. 2016 2016 vs. 2015 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate TotalIncrease(Decrease) Volume Rate TotalIncrease(Decrease) (Dollars in thousands)Interest-earning assets: Loans$3,701 $501 $4,202 $2,726 $(1,189) $1,537Securities(22) 268 246 (14) 101 87Stock in FHLB and FRB29 291 320 3 55 58Other34 449 483 108 176 284Total interest-earning assets3,742 1,509 5,251 2,823 (857) 1,966Interest-bearing liabilities: Savings deposits2 13 15 7 — 7Money market accounts(41) 256 215 (65) — (65)NOW accounts32 129 161 (52) 68 16Certificates of deposit528 654 1,182 499 614 1,113Borrowings218 328 546 59 26 85Total interest-bearing liabilities739 1,380 2,119 448 708 1,156Change in net interest income$3,003 $129 $3,132 $2,375 $(1,565) $81026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 lossexperience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’sability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate lossesmay vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and makeprovisions for loan losses in order to maintain the allowance.We recorded recoveries of loan losses of $87,000, $239,000 and $3.2 million, respectively, for the years ended December 31, 2017, 2016 and 2015. Theprovision or recovery for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance forinherent loan losses after net charge-offs have been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated forimpairment increased $265,000, or 3.3%, to $8.4 million at December 31, 2017, from $8.1 million at December 31, 2016. This increase occurred primarilybecause the growth in our loan portfolio focused on loan types with higher risk factors, primarily commercial-related loans. Net recoveries were $326,000 and$907,000 for the years ended December 31, 2017 and December 31, 2015, respectively, and there were $1.3 million of net charge-offs for the year endedDecember 31, 2016. Charge-off activity for the year ended December 31, 2016 included a $1.6 million charge-off resulting from the sale of three performingloans to a single borrower with a carrying value of $16.2 million. For further analysis and information on how we determine the appropriate level for theallowance for loan losses and analysis of credit quality, see “Critical Accounting Policies,” “Risk Classification of Loans” and “Allowance for Loan Losses.”Noninterest Income Years Ended December 31, Change 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 (Dollars in thousands)Deposit service charges and fees$2,250 $2,254 $2,248 $(4) $6Other fee income2,029 2,052 2,143 (23) (91)Insurance commissions and annuities income251 302 386 (51) (84)Gain on sale of loans, net76 75 102 1 (27)Gain on sale of securities— 46 — (46) 46Gain (loss) on sale of other assets— 38 (1) (38) 39Loan servicing fees248 276 354 (28) (78)Amortization of servicing assets(109) (128) (137) 19 9Recovery (impairment) of servicing assets— 16 (3) (16) 19Earnings on bank owned life insurance265 207 194 58 13Trust income720 674 712 46 (38)Other678 733 693 (55) 40Total noninterest income$6,408 $6,545 $6,691 $(137) $(146)Comparison of Year 2017 to 2016. Our noninterest income decreased by $137,000, or 2.1%, to $6.4 million for the years ended December 31, 2017, from$6.5 million in 2016. Deposit service charges and fees decreased $4,000, or 0.2%, to $2.3 million for the year ended December 31, 2017, from $2.3 millionfor the year ended December 31, 2016, primarily due to decreased NSF and uncollected funds fees from deposit accounts. Insurance commissions andannuities income declined by $51,000 due to lower sales of annuity products and property and casualty insurance, related in part to the consolidation of ourWealth Management Department with our Trust Department. Earnings on bank-owned life insurance increased by $58,000, or 28.0% to $265,000 for the yearended December 31, 2017, from $207,000 for the year ended December 31, 2016 due to higher market yields on invested assets. Trust income increased by$46,000, or 6.8%, to $720,000 for the year ended December 31, 2017 from $674,000 for the year ended December 31, 2016 due to higher net assets undermanagement. Other fee income decreased $23,000, or 1.1%, to $2.0 million for the year ended December 31, 2017, from $2.1 million for the year endedDecember 31, 2016.Comparison of Year 2016 to 2015. Our noninterest income decreased by $146,000, or 2.2%, to $6.5 million for the year ended December 31, 2016, from $6.7million in 2015. Deposit service charges and fees increased $6,000, or 0.3%, to $2.3 million for the year ended December 31, 2016, from $2.2 million for theyear ended December 31, 2015, primarily due to increased fees from27Table of Contentsdeposit accounts. Other fee income decreased $91,000, or 4.2%, to $2.1 million for the year ended December 31, 2016, from $2.1 million for the year endedDecember 31, 2015. The decrease in other fee income reflects decreased ATM and visa debit card charges and other loan fees in 2016 compared to 2015.Bank-owned life insurance produced earnings of $207,000 for 2016, an increase of $13,000, or 6.7%, compared to $194,000 for 2015.Noninterest Expense Years Ended December 31, Change 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 (Dollars in thousands)Compensation and benefits$21,767 $22,755 $22,222 $(988) $533Office occupancy and equipment6,623 6,380 6,522 243 (142)Advertising and public relations1,004 870 991 134 (121)Information technology2,743 2,892 2,669 (149) 223Supplies, telephone and postage1,366 1,364 1,586 2 (222)Amortization of intangibles496 523 550 (27) (27)Nonperforming asset management340 399 681 (59) (282)Loss (gain) on sale other real estate owned45 (128) (58) 173 (70)Valuation adjustments of other real estate owned333 314 548 19 (234)Operations of other real estate owned545 660 573 (115) 87FDIC insurance premiums587 755 904 (168) (149)Other4,542 4,758 4,757 (216) 1Total noninterest expense$40,391 $41,542 $41,945 $(1,151) $(403)Comparison of Year 2017 to 2016. For the year ended December 31, 2017, noninterest expense decreased by $1.2 million, or 2.8%, to $40.4 million, from$41.5 million for the year ended December 31, 2016. Compensation and benefits expense decreased $988,000, or 4.3%, to $21.8 million for the year endedDecember 31, 2017, from $22.8 million in 2016. The decrease was due in substantial part to stock-based compensation expense of $982,000 for the yearended December 31, 2016, and none in 2017. Office occupancy expense increased by $243,000 due to increased real estate taxes and maintenance expenseson our office facilities. Advertising and marketing expense increased by $ 134,000 due to the creation of new marketing materials for new deposit productsand expanded marketing for new loan and deposit customers. Information technology declined by $149,000 due to reduced costs from renewed or terminatedvendor contracts, partially offset by increased expenses for cyber-and information-security related enhancements. FDIC insurance expense decreased by$168,000 due to a lower assessment rate on deposits. Noninterest expense for 2017 included $1.3 million of nonperforming asset management and OREOexpenses, compared to $1.2 million for 2016. Nonperforming asset management expenses decreased $59,000, or 14.8%, to $340,000 for the year endedDecember 31, 2017, compared to $399,000 in 2016. The decrease was primarily due to a decline in nonperforming assets and a corresponding decline inexpenses relating to resolutions and accelerated dispositions of nonperforming assets. The most significant decreases in nonperforming asset managementexpense related to maintenance and repairs and real estate taxes, which totaled $395,000 for the year ended December 31, 2017, compared to $579,000 for2016. OREO expenses for the year ended December 31, 2017 totaled $923,000, compared to $846,000 in 2016. 2017 activity included a $333,000 valuationadjustment to OREO properties, compared to a $314,000 valuation adjustment in 2016. Other noninterest expense decreased $216,000, or 4.5%, to $4.5million for the year ended December 31, 2017, from $4.8 million for the year ended December 31, 2016, primarily due to a provision of $174,000 formortgage representation and warranty reserve for mortgage loans sold recorded in 2016.Comparison of Year 2016 to 2015. For the year ended December 31, 2016, noninterest expense decreased by $403,000, or 1.0%, to $41.5 million, from $41.9million for the year ended December 31, 2015. Compensation and benefits expense increased $533,000, or 2.4%, to $22.8 million for the year endedDecember 31, 2016, from $22.2 million in 2015. The increase was due in substantial part to stock-based compensation expense of $982,000 for the yearended December 31, 2016, compared to $638,000 in 2015. The stock-based compensation was partially offset by a decrease in compensation costs due inpart to the reduction in full time equivalent employees to 246 at December 31, 2016, from 251 at December 31, 2015. Noninterest expense for 2016 included$1.2 million of nonperforming asset management and OREO expenses, compared to $1.7 million for 2015. Nonperforming asset management expensesdecreased $282,000, or 41.4%, to $399,000 for the year ended December 31, 2016, compared to $681,000 in 2015. The decrease was primarily due to adecline in nonperforming assets and a corresponding decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets. Themost significant decrease in nonperforming asset28Table of Contentsmanagement expense related to real estate taxes, which totaled $198,000 for the year ended December 31, 2016, compared to $247,000 for 2015. OREOexpenses for the year ended December 31, 2016 totaled $846,000, and included a $314,000 valuation adjustment to OREO properties, compared to a$548,000 valuation adjustment in 2015. Noninterest expense for the year ended December 31, 2016 included a provision of $174,000 for mortgagerepresentation and warranty reserve for mortgage loans sold, compared to a $80,000 provision for 2015.Income TaxesComparison of Year 2017 to 2016. For the year ended December 31, 2017 we recorded income tax expense of $7.2 million, compared to $4.7 millionrecorded in 2016. The income tax expense for 2017 included a $2.5 million expense related to the Tax Cuts and Job Act of 2017 and $879,000 benefit due toan increase in the deferred tax asset related to our Illinois net operating loss carryforward. The effective tax rate for the year ended December 31, 2017 was44.77%.Comparison of Year 2016 to 2015. For the year ended December 31, 2016 we recorded income tax expense of $4.7 million, compared to $5.4 millionrecorded in 2015. The effective tax rate for the year ended December 31, 2016 was 38.51%.Comparison of Financial Condition at December 31, 2017 and December 31, 2016Total assets increased $5.5 million, or 0.3%, to $1.626 billion at December 31, 2017, from $1.620 billion at December 31, 2016. The increase in total assetswas primarily due to increases in cash and cash equivalents and loans receivable, which were partially offset by a decrease in securities. Net loans increased$1.7 million, or 0.1%, to $1.315 billion at December 31, 2017, from $1.313 billion at December 31, 2016. Net securities decreased by $13.8 million, or12.9%, to $93.4 million at December 31, 2017, from $107.2 million at December 31, 2016.Our loan portfolio consists primarily of multi-family real estate, nonresidential real estate, construction and land loans, commercial loans and commercialleases, which together totaled 92.5% of gross loans at December 31, 2017. Net loans receivable increased $1.7 million, or 0.1%, to $1.315 billion atDecember 31, 2017. Commercial loans increased $53.5 million, or 54.0%; multi-family mortgage loans increased by $45.5 million, or 8.4%; and constructionand land loans increased by $56,000, or 4.3%. Commercial leases decreased by $46.4 million, or 13.0%; nonresidential real estate loans decreased $12.2million, or 6.7%; and one-to-four family residential mortgage loans decreased by $37.4 million, or 27.7%.Our allowance for loan losses increased by $239,000, or 2.9%, to $8.4 million at December 31, 2017, from $8.1 million at December 31, 2016. The increasereflected the combined impact of an $87,000 recovery of provision for loan losses and $326,000 of net recoveries of loans previously charged-off.Securities decreased $13.8 million, or 12.9%, to $93.4 million at December 31, 2017, from $107.2 million at December 31, 2016, due primarily to proceedsfrom maturities of $75.5 million and repayments of $3.4 million on residential mortgage-backed securities and collateralized mortgage obligations. Theserepayments were partially offset by investments in FDIC-insured certificates of deposit issued by other insured depository institutions of $65.1 million.Total liabilities increased $12.7 million, or 0.9%, to $1.428 billion at December 31, 2017, from $1.415 billion at December 31, 2016, primarily due toincreases in FHLB advances. Total deposits increased $661,000, to $1.340 billion at December 31, 2017, from $1.339 billion at December 31, 2016.Certificates of deposit increased $4.3 million, or 1.2%, to $356.0 million at December 31, 2017, from $351.6 million at December 31, 2016 due to an increasein retail products. Interest-bearing NOW accounts increased $22.6 million, or 8.5%, to $289.7 million at December 31, 2017, from $267.1 million atDecember 31, 2016. Savings accounts increased $499,000, or 0.3%, to $160.5 million at December 31, 2017, from $160.0 million at December 31, 2016.Noninterest-bearing demand deposits decreased $15.2 million, or 6.1%, to $234.4 million at December 31, 2017, from $249.5 million at December 31, 2016.Money market accounts decreased $11.6 million, or 3.7% to $299.6 million at December 31, 2017, from $311.2 million at December 31, 2016. Core deposits(which consist of savings, money market, noninterest-bearing demand and NOW accounts) were 73.4% and 73.7% of total deposits at December 31, 2017 and2016, respectively.Total stockholders’ equity was $197.6 million at December 31, 2017, compared to $204.8 million at December 31, 2016. The decrease in total stockholders’equity was primarily due to the combined impact of our repurchase of 719,573 shares of our common stock at a total cost of $10.8 million, and ourdeclaration and payment of cash dividends totaling $5.2 million, during the year ended December 31, 2017. These items were partially offset by net incomeof $9.0 million that we recorded for the year ended December 31, 2017 and the $1.1 million impact of the ESOP loan repayment that was made on March 29,2017.29Table of ContentsSecuritiesOur investment policy is established by our Board of Directors. The policy emphasizes safety of the investment, liquidity requirements, potential returns,cash flow targets, and consistency with our interest rate risk management strategy.At December 31, 2017, 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 affirmedits commitment to support. All securities reflected in the table were classified as available-for-sale at December 31, 2017, 2016 and 2015.The following table sets forth the composition, amortized cost and fair value of our securities. At December 31, 2017 2016 2015 AmortizedCost Fair Value AmortizedCost Fair Value AmortizedCost Fair Value (Dollars in thousands)Securities: Certificates of deposits$75,916 $75,916 $85,938 $85,938 $87,901 $87,901Equity mutual funds500 499 500 499 500 507SBA - guaranteed loan participationcertificates10 10 17 17 23 23Total76,426 76,425 86,455 86,454 88,424 88,431Mortgage-backed Securities: Mortgage-backed securities - residential11,969 12,472 14,561 15,184 18,330 19,180CMOs and REMICs - residential4,481 4,486 5,587 5,574 7,111 7,142Total mortgage-backed securities16,450 16,958 20,148 20,758 25,441 26,322 $92,876 $93,383 $106,603 $107,212 $113,865 $114,753The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security. If quoted market pricesare not 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. Thefair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debtsecurities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmarkquoted securities. The fair value of a security is used to determine the amount of any unrealized losses that must be reflected in our other comprehensiveincome 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 consideredother-than-temporarily impaired under current accounting guidance, which generally provides that if a marketable security is in an unrealized loss position,whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary.30Table of ContentsPortfolio Maturities and YieldsThe composition and maturities of the securities portfolio and the mortgage-backed securities portfolio at December 31, 2017 are summarized in thefollowing table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that mayoccur. Municipal securities 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$75,668 1.58% $248 1.65% $— —% $— —%SBA - guaranteed loan participationcertificates— — 10 2.75 — — — — 75,668 1.58 258 1.69 — — — —Mortgage-backed Securities: Pass-through securities: Fannie Mae— — 2 3.48 68 4.43 5,911 3.80Freddie Mac— — 17 3.03 39 2.85 778 4.36Ginnie Mae— — 41 2.75 — — 5,113 2.54CMOs and REMICs— — — — 424 2.79 4,057 1.78 — — 60 2.85 531 3.01 15,859 2.90Total securities$75,668 1.58% $318 1.91% $531 3.01% $15,859 2.90%The Bank is a member of the Federal Reserve System as a result of its conversion to a national bank charter on November 30, 2016. The Bank was required topurchase stock in the FRB in 2016 in connection with the charter conversion. The aggregate cost of our FRB common stock as of December 31, 2017 was$5.5 million based on its par value. The Bank is also a member of the FHLB System. Members of the FHLB System are required to hold a certain amount ofcommon stock to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB’s advance program. The aggregate cost ofour FHLB common stock as of December 31, 2017 was $2.8 million based on its par value. There is no market for FRB and FHLB common stock. In 2017 wepurchased 34,000 and 120,000 shares of FHLB and FRB common stock, respectively. There were no purchases of FHLB and FRB common stock during 2016and 2015. In 2017 we redeemed $3.5 million of excess FHLB common stock, there was no redemption of FRB common stock. There were no redemptions ofFHLB and FRB common stock during 2016 and 2015. At December 31, 2017, we did not own any excess shares of FHLB common stock, we were required toown to maintain our membership in the FHLB System and to be eligible to obtain advances.31Table of ContentsLoan PortfolioWe originate multi-family mortgage loans, nonresidential real estate loans, commercial loans, commercial leases and construction and land loans. In addition,we originate one-to-four family residential mortgage loans and consumer loans, and purchase and sell loan participations from time-to-time. Our principalloan products are discussed in Note 4 of the "Notes to Consolidated Financial Statements" in Item 8 of this Annual Report on 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, 2017 2016 2015 2014 2013 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands)One-to-four familyresidential$97,814 7.40% $135,218 10.25% $159,501 12.86% $180,337 15.24% $201,382 18.12%Multi-family mortgage588,383 44.52 542,887 41.15 506,026 40.80 480,349 40.60 396,058 35.64Nonresidential real estate169,971 12.86 182,152 13.81 226,735 18.28 234,500 19.82 263,567 23.72Construction and land1,358 0.10 1,302 0.09 1,313 0.10 1,885 0.16 6,570 0.59Commercial loans152,552 11.54 99,088 7.51 79,516 6.41 66,882 5.65 54,255 4.88Commercial leases310,076 23.46 356,514 27.02 265,405 21.40 217,143 18.36 187,112 16.84Consumer1,597 0.12 2,255 0.17 1,831 0.15 2,051 0.17 2,317 0.21 1,321,751 100.00% 1,319,416 100.00% 1,240,327 100.00% 1,183,147 100.00% 1,111,261 100.00%Net deferred loanorigination costs1,266 1,663 1,621 1,199 970 Allowance for loan losses(8,366) (8,127) (9,691) (11,990) (14,154) Total loans, net$1,314,651 $1,312,952 $1,232,257 $1,172,356 $1,098,077 We engage in multi-family lending activities in the Chicago Metropolitan Statistical Areas and in other carefully selected Metropolitan Statistical Areasoutside of our primary lending area and engage in healthcare lending and commercial leasing activities on a nationwide basis. At December 31, 2017, $282.8million, or 48.0%, or our multi-family loans were in the Metropolitan Statistical Area for Chicago, Illinois, while $73.4 million, or 12.5%, were in theMetropolitan Statistical Area for Dallas, Texas, $56.2 million, or 9.6%, were in the Metropolitan Statistical Area for Denver, Colorado, $32.9 million, or5.6%, were in the Metropolitan Statistical Area for Tampa, Florida and $17.7 million, or 3.0%, were in the Metropolitan Statistical Area for Minneapolis,Minnesota.32Table of ContentsLoan Portfolio MaturitiesThe following table summarizes the scheduled repayments of our loan portfolio at December 31, 2017. Demand loans, loans having no stated repaymentschedule or 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$12,564 $23,118 $62,132 $97,814Multi-family mortgage38,071 87,554 462,758 588,383Nonresidential real estate48,021 109,041 12,909 169,971Construction and land923 435 — 1,358Commercial loans and leases246,868 210,269 5,491 462,628Consumer434 861 302 1,597 $346,881 $431,278 $543,592 $1,321,751 TotalLoans Maturing After One Year: Predetermined (fixed) interest rates $374,320Adjustable interest rates 600,550 $974,87033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,the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the timea loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with oursignificant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of paymentperformance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally,we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and thereare no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliancewith the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. AtDecember 31, 2017, we had no loans in this 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 foreclosureprocess concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third-party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assetssold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidatedfinancial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Becauseappraisals and updated valuations utilize historical or “ask-side” data in reaching valuation conclusions, the appraised or updated valuation may or may notreflect the actual sales price that we will receive 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) andthe cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize oneapproach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level ofoccupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the useor condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standardor achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment formarket conditions or the schedule of improvements.As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the currentuse and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stableincome stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as-is,” “as-stabilized” or“as-improved” basis is most likely to produce the highest net realizable value. If we determine that the “as-stabilized” or “as-improved” basis is appropriate,we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporatedinto our estimates of the expected costs to sell. As of December 31, 2017, 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 fromthe cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosureprocess, we apply 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 estatetaxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expectedresolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any othermaterial holding costs in the expected costs to sell the collateral. For OREO, we apply a 7.0% deduction to determine the expected costs to sell, as expensesfor real estate taxes and repairs are expensed 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, 2017 2016 2015 2014 2013 (Dollars in thousands)Nonaccrual loans One-to-four family residential$2,027 $2,851 $2,455 $4,408 $4,741Multi-family mortgage363 185 821 4,481 7,098Nonresidential real estate— 260 296 3,245 5,847Construction and land— — — — 382Commercial— — — 76 100Consumer— — — 3 12 2,390 3,296 3,572 12,213 18,180Loans Past Due Over 90 Days, still accruing— — — — 228 Other real estate owned One-to-four family residential827 1,565 2,621 1,263 1,077Multi-family mortgage— 370 951 2,307 1,921Nonresidential real estate1,520 1,066 1,747 885 1,181Land4 894 1,692 1,903 2,127 2,351 3,895 7,011 6,358 6,306Total nonperforming assets$4,741 $7,191 $10,583 $18,571 $24,714 Ratios Nonperforming loans to total loans0.18% 0.25% 0.29% 1.03% 1.66%Nonperforming assets to total assets0.29 0.44 0.70 1.27 1.7035Table of ContentsNonperforming AssetsNonperforming assets decreased by $2.5 million in 2017, due in substantial part to the execution of the Company's plan to materially reduce nonperformingasset expenses. Nonperforming assets totaled $4.7 million at December 31, 2017, and $7.2 million at December 31, 2016. The decrease in nonperformingassets for the year ended December 31, 2017 reflected the disposition of $4.0 million of OREO and other nonperforming asset resolutions.Approximately $2.8 million of nonaccrual loans were transferred to OREO during the year ended December 31, 2017. These were primarily residential, multi-family and nonresidential loans, comprising the majority of the decrease in nonaccrual loans for the period. We continue to experience modest quantities ofdefaults on residential loans principally due either to the borrower’s personal financial condition or death, and/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 documentation, 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, whichare typically 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 TDRsand the FFIEC workout guidance to determine the required treatment for nonaccrual status and risk classification purposes. In general, if we grant a loanmodification or extension that involves either the absence of principal amortization (other than for revolving lines of credit which are customarily granted oninterest-only terms), or if we grant a material extension of an existing loan amortization period in excess of our underwriting standards, the loan will beplaced on nonaccrual status and impairment testing conducted to determine whether a specific valuation allowance or loss classification / charge-off isrequired. If the loan is well secured by an abundance of collateral and the collectability of both interest and principal is probable, the loan may remain onaccrual status, but it will be classified as a TDR due to the concession made in the loan principal amortization payment component. A loan in full compliancewith the payment requirements specified in a loan modification will not be considered as past due, but may nonetheless be placed on nonaccrual status or beclassified as a TDR, as appropriate under the circumstances.In accordance with the FFIEC workout guidance, the Company will restructure a note into two separate notes (A/B structure), charging off the entire Bportion of the 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 is classified as a nonperforming note until the borrower has displayed a historical payment performance for a reasonable time prior to andsubsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided thatmanagement has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performingor nonperforming) through the calendar year of the restructuring that the historical payment performance has been established.Troubled Debt RestructuringsThe Company had $17,000 of TDRs at December 31, 2017, compared to $341,000 at December 31, 2016, with no specific valuation allowances allocated tothose loans at December 31, 2017 and 2016. The Company had no outstanding commitments to borrowers whose loans are classified as TDRs.The following table presents the Company's TDRs by class. At December 31, 2017 2016 (Dollars in thousands)One-to-four family residential real estate$— $205Accrual troubled debt restructured loans— 205One-to-four family residential real estate17 136Nonaccrual troubled debt restructured loans17 136Total troubled debt restructured loans$17 $34136Table of ContentsRisk 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 assubstandard, 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 soclassified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibilitythat the Bank will sustain 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 not have to present a probability of default for the loan to be rated substandard, and that an individual loan’s loss potential does nothave to be distinct for the loan to be rated substandard. An asset classified as doubtful has all the weaknesses inherent in one classified as substandard withthe added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highlyquestionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is notwarranted; such balances are promptly charged-off as required by applicable federal regulations. A special mention asset has potential weaknesses thatdeserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or inthe institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk towarrant adverse classification.Based on a review of our loans at December 31, 2017, classified loans consisted of $2.9 million performing substandard loans and $2.4 million ofnonperforming loans. As of December 31, 2017, we had $4.5 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 lossexperience, trends in nonaccrual loans, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations thatmay affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimatesand the ultimate losses 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 toit. 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 tomaintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The allowancefor loan losses consists of two components:•specific allowances established for any impaired residential non-owner occupied mortgage, multi-family mortgage, nonresidential real estate,construction and land, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of theloan; 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.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;levels of, and trends in, charge-offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience,and ability of 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 portfolioincreases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses thanwould be the case without the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodologygenerally results in a lower dollar 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 futurecash flow projections to determine if a specific reserve is necessary. The37Table of Contentsallowance for loan losses represents amounts that have been established to recognize incurred credit losses in the loan portfolio that are both probable andreasonably estimable at the date of the consolidated financial statements. When we classify problem loans 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 mustbe segmented 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 Annual Report on Form 10-K. To maintain consistency, the loan class segmentation was also applied within the 12-quarter losshistory that we use to calculate the general component of the allowance for loan losses, inherent risk factor weightings were adjusted based on our evaluationof their relevance to the new 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 substantiallyfrom the information that we used in making the evaluations. Our determinations as to the risk classification of our loans and the amount of our allowance forloan losses are 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, 2017 2016 2015 2014 2013 (Dollars in thousands)Balance at beginning of year$8,127 $9,691 $11,990 $14,154 $18,035Charge-offs One-to-four family residential(318) (539) (386) (873) (1,505)Multi-family mortgage(10) (79) (198) (1,230) (1,832)Nonresidential real estate(165) (1,718) (391) (1,727) (577)Construction and land— — — (1) (943)Commercial loans— — (152) (123) (425)Commercial leases— — — (8) —Consumer(10) (25) (16) (12) (55) (503) (2,361) (1,143) (3,974) (5,337)Recoveries One-to-four family residential145 321 702 418 447Multi-family mortgage70 162 182 100 236Nonresidential real estate17 200 509 423 519Construction and land— 35 44 377 463Commercial loans594 309 611 1,225 470Commercial leases2 7 1 — —Consumer1 2 1 3 8 829 1,036 2,050 2,546 2,143Net recoveries (charge-offs)326 (1,325) 907 (1,428) (3,194)Recovery of loan losses(87) (239) (3,206) (736) (687)Balance at end of year$8,366 $8,127 $9,691 $11,990 $14,154 Ratios Net recoveries (charge-offs) to average loans outstanding0.03% (0.11)% 0.08% (0.13)% (0.31)%Allowance for loan losses to nonperforming loans350.04 246.57 271.30 98.17 76.89Allowance for loan losses to total loans0.63 0.62 0.78 1.01 1.27We had a net recovery of loan losses of $87,000 in 2017, compared to a recovery of $239,000 in 2016. The provision for or recovery of loan losses is afunction of 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 been deducted. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment increased $265,000, or3.3%, to $8.4 million at December 31, 2017, from $8.1 million at December 31, 2016. The reserve established for loans individually evaluated for impairmentdecreased $26,000, or 100.0%, to $0 at December 31, 2017, from $26,000 at December 31, 2016. Net recoveries were $326,000 and $907,000 for the yearsended December 31, 2017 and December 31, 2015, respectively, and we had $1.3 million of charge-offs for the year ended December 31, 2016. Although ourloan portfolio increased by $2.3 million for the year ended December 31, 2017, the combined impact of these factors and a two basis point reduction in ourweighted average historical loss rates was sufficient to fully fund the allowance to reflect the growth in our loan portfolio.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 thatis classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probabilityof repayment upon sale of the collateral, the final disposition of39Table of Contentscollateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral withincertain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legallydischarged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds inexcess 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 notnecessarily indicative 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, 2017 2016 2015 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$850 $97,814 7.40% $1,168 $135,218 10.25% $1,704 $159,501 12.86%Multi-family mortgage3,849 588,383 44.52 3,647 542,887 41.15 3,610 506,026 40.80Nonresidential realestate1,605 169,971 12.86 1,794 182,152 13.81 2,582 226,735 18.28Construction and land32 1,358 0.10 32 1,302 0.09 43 1,313 0.10Commercial loans1,357 152,552 11.54 733 99,088 7.51 654 79,516 6.41Commercial leases655 310,076 23.46 714 356,514 27.02 1,073 265,405 21.40Consumer18 1,597 0.12 39 2,255 0.17 25 1,831 0.15 $8,366 $1,321,751 100.00% $8,127 $1,319,416 100.00% $9,691 $1,240,327 100.00% At December 31, 2014 2013 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$2,148 $180,337 15.24% $3,848 $201,382 18.12%Multi-family mortgage5,205 480,349 40.60 4,444 396,058 35.64Nonresidential realestate2,940 234,500 19.82 3,735 263,567 23.72Construction and land80 1,885 0.16 393 6,570 0.59Commercial loans554 66,882 5.65 731 54,255 4.88Commercial leases1,009 217,143 18.36 946 187,112 16.84Consumer54 2,051 0.17 57 2,317 0.21 $11,990 $1,183,147 100.00% $14,154 $1,111,261 100.00%40Table of ContentsSources of FundsDeposits. At December 31, 2017, our deposits totaled $1.340 billion. Interest-bearing deposits totaled $1.106 billion and noninterest-bearing demanddeposits totaled $234.4 million. NOW, savings and money market accounts totaled $749.7 million. Noninterest-bearing demand deposits at December 31,2017 included $47,000 in internal checking accounts. At December 31, 2017, we had $356.0 million of certificates of deposit outstanding, of which $258.6million had maturities of one year or less and $86.1 million were brokered deposits. Although a significant portion of our certificates of deposit are shorter-term certificates of deposit, we believe, based on historical experience and our current pricing strategy, that we will retain a significant portion of the non-brokered accounts upon maturity.The following table sets forth the distribution of total deposit accounts, by account type. Years Ended December 31, 2017 2016 2015 AverageBalance Percent WeightedAverageRate AverageBalance Percent WeightedAverageRate AverageBalance Percent WeightedAverageRate (Dollars in thousands)Noninterest-bearing demand: Retail$136,214 10.18% —% $139,974 10.99% —% $99,839 8.32% —%Commercial96,986 7.25 — 99,387 7.80 — 92,689 7.73 —Total noninterest-bearingdemand233,200 17.43 — 239,361 18.79 — 192,528 16.05 —Savings deposits160,266 11.98 0.12 158,312 12.43 0.11 155,686 12.97 0.11Money market accounts304,868 22.79 0.39 318,248 24.98 0.31 336,179 28.02 0.31Interest-bearing NOWaccounts274,585 20.53 0.20 253,810 19.92 0.15 289,357 24.12 0.12Certificates of deposit364,792 27.27 0.96 304,194 23.88 0.77 225,990 18.84 0.54 $1,337,711 100.00% $1,273,925 100.00% $1,199,740 100.00% The following table sets forth certificates of deposit by time remaining until maturity at December 31, 2017: 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$63,323 $63,313 $52,619 $49,903 $229,158Certificates of deposit of $100,000 or more32,969 17,173 29,170 47,488 126,800Total certificates of deposit$96,292 $80,486 $81,789 $97,391 $355,958Borrowings. 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, 2017 2016 2015 (Dollars in thousands)Balance at end of year$60,768 $51,069 $64,318Average balance during year54,899 24,764 8,674Maximum outstanding at any month end61,162 86,878 64,318Weighted average interest rate at end of year1.33% 0.66% 0.28%Average interest rate during year1.19 0.42 0.2341Table of ContentsAt December 31, 2017, we had the capacity to borrow an additional $322.2 million under our credit facilities with the FHLB. Furthermore, we had unpledgedsecurities that could be used to support in excess of $13.8 million of additional FHLB borrowings.At December 31, 2017, we had a line of credit with the FRB. At December 31, 2017, there were no outstanding federal funds borrowings and there was nooutstanding 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 GAAP. GAAP generally requires themeasurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of moneyover time due to inflation. The impact of inflation, if any, is reflected in the increased cost of our operations. Unlike industrial companies, our assets andliabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact 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 inthe behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across thespectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest ratescan also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings,the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that riskin a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. OurAsset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent incertain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gatheringstrategies accordingly. The Board of Directors’ Asset/Liability Management Committee then reviews the ALCO’s activities and strategies, the effect of thosestrategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securitiesportfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest rate risk, we havede-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, wegenerally sell all 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 byincreasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interestrates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified ourentire investment portfolio as available-for-sale so as to provide flexibility in liquidity management.We utilize a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model thatestimates the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows fromassets, liabilities and off-balance-sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and depositdecay rates that seem most 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,including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the U.S. Treasury yield curve as of thebalance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if thetheoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes inprepayment rates resulting from the parallel yield curve shifts.Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging fromovernight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed42Table of Contentssecurities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type.This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate riskbecause it omits the factors incorporated into the net interest income analysis.Quantitative Analysis. The following table sets forth, as of December 31, 2017, 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 ratechanges are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be reliedupon as indicative 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$(27,048) (10.27)% $3,054 5.85 %+300(15,054) (5.72) 2,417 4.63+200(6,648) (2.53) 1,758 3.37+100(1,084) (0.41) 1,062 2.040 -100(9,302) (3.53) (2,467) (4.73)The table set forth above indicates that at December 31, 2017, in the event of an immediate 100 basis point decrease in interest rates, the Bank would beexpected to experience a 3.53% decrease in NPV and a $2.5 million decrease in net interest income. In the event of an immediate 200 basis point increase ininterest rates, the Bank would be expected to experience a 2.53% decrease in NPV and a $1.8 million increase in net interest income. This data does notreflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on localcompetitive factors, which could reduce the actual impact on NPV and net interest income, if any.Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest 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.The NPV and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at thebeginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake inresponse to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes thata particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics ofspecific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes ata particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on ournet interest income and will differ from 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 contractualmaturity, 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 proceedsfrom maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortizations of loans andsecurities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgageprepayments and mortgage loan sales 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 inour Consolidated Financial Statements. Our primary investing activities are the origination for investment of one-to-four family residential mortgage loans,multi-family mortgage loans, nonresidential real estate loans, commercial leases, construction and land loans, and commercial loans and the purchase ofinvestment securities and mortgage-43Table of Contentsbacked securities. During the years ended December 31, 2017, 2016 and 2015, our loans originated or purchased for investment totaled $663.8 million,$598.7 million and $509.0 million, respectively. Purchases of securities totaled $65.1 million, $65.6 million and $60.7 million for the years endedDecember 31, 2017, 2016, and 2015, respectively. These activities were funded primarily by principal repayments on loans and securities, and the sale ofloans and securities.During the years ended December 31, 2017, 2016 and 2015, principal repayments on loans totaled $654.7 million, $495.4 million, and $441.8 million,respectively. During the years ended December 31, 2017, 2016 and 2015, principal repayments on securities totaled $3.4 million, $5.1 million, and $7.0million, respectively. During the years ended December 31, 2017, 2016 and 2015, proceeds from maturities and sales of securities totaled $75.5 million,$67.8 million, and $59.8 million, respectively. During the years ended December 31, 2017, 2016 and 2015, the proceeds from the sale of loans held-for-saletotaled $1.4 million, $2.4 million and $3.9 million, respectively.Loan origination commitments totaled $46.6 million at December 31, 2017, and consisted of $19.2 million of fixed-rate loans and $27.4 million ofadjustable-rate loans. Unused lines of credit and standby letters of credit granted to customers totaled $129.2 million and $6.8 million, respectively, atDecember 31, 2017. At December 31, 2017, there were no commitments to sell mortgages.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 net deposit increases of $661,000, $126.5 million and $1.2 million for the years ended December 31, 2017,2016 and 2015, respectively. Certificates of deposit that are scheduled to mature in one year or less from December 31, 2017 totaled $258.6 million.We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that arenot renewed or extended. We generally remain fully invested and may utilize additional sources of funds through FHLB advances, of which $60.0 millionwere outstanding at December 31, 2017. At December 31, 2017 we had the ability to borrow an additional $322.2 million under our credit facilities with theFHLB. Furthermore, we have unpledged securities that could be used to support borrowings in excess of $13.8 million. Finally, at December 31, 2017, we hada line of credit available with the FRB. At December 31, 2017, 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 $6.4 million of cash and cash equivalents and any cashdividends it may receive from the Bank.During 2017, we paid $10.8 million to repurchase shares of our common stock and paid $5.2 million in cash dividends to stockholders, using the dividendsreceived from the Bank.As of December 31, 2017, 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, 2017, 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, depositand other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risksassociated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve anadequate return on the capital invested by our stockholders.The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements cantrigger certain mandatory, and possibly additional discretionary, actions by the OCC that, if undertaken, could have a direct material effect on the Bank’sfinancial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capitalguidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accountingpractices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and otherfactors.The 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 capitalizedinstitutions require regulatory approval to accept brokered deposits. If undercapitalized, a financial institution’s capital distributions, asset growth andexpansion 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 7.5% and a totalrisk-based capital ratio of at least 10.5%. The minimum capital ratios set forth in the Regulatory Capital44Table of ContentsPlans will be increased and other minimum capital requirements will be established if and as necessary. In accordance with the Regulatory Capital Plans,neither the Company nor the Bank will pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that wouldcause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels. In addition, the Companywill continue to maintain 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 thatpurpose.At December 31, 2017, actual and required capital ratios were: ConsolidatedActual Ratio BankFinancial NAActual Ratio Required for CapitalAdequacy Purposes To be Well-Capitalized underPrompt CorrectiveAction ProvisionsTotal capital (to risk-weighted assets)17.06% 16.48% 8.00% 10.00%Tier 1 (core) capital (to risk-weighted assets)16.33 15.74 6.00 8.00Common Tier 1 (CET1)16.33 15.74 4.50 6.50Tier 1 (core) capital (to adjusted total assets)11.49 11.08 4.00 5.00As of December 31, 2017 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. Total stockholders’ equity was $197.6 million at December 31, 2017, compared to $204.8 million at December 31, 2016.The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 719,573 shares of our common stock at a total costof $10.8 million, and our declaration and payment of cash dividends totaling $5.2 million, during the year ended December 31, 2017. These items werepartially offset by net income of $9.0 million that we recorded for the year ended December 31, 2017 and the $1.1 million impact of the ESOP loanrepayment that was made on March 29, 2017.Cash Dividends. Our Board of Directors declared four quarterly cash dividends totaling $5.2 million during 2017, consisting of a cash dividend of $0.06 pershare for the first quarter of 2017 and two cash dividends of $0.07 per share for the second and third quarters of 2017 and a $0.08 per share cash dividend forthe final quarter of 2017.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 represented approximately 5% of the Company’s issued and outstanding shares of common stock. On December 28, 2015,the Board increased the number of shares that can be repurchased in accordance with the authorization by an additional 1,046,868 shares. On October 27,2016, the Board increased the total number of shares authorized for repurchase by an additional 478,789 shares. On July 28, 2017, the Board increased thetotal number of shares authorized for repurchase by an additional 250,000 shares. On October 26, 2017, the Board extended the expiration date of therepurchase authorization from December 31, 2017 to June 30, 2018. As of December 31, 2017, the Company had repurchased 2,587,779 shares of its commonstock out of the 2,830,755 shares of common stock authorized under the above repurchase authorizations. Since its inception, the Company has repurchased6,826,913 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. While these contractual obligations represent our future cashrequirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same creditpolicies and approval process afforded to loans that we make. Although we consider commitments to extend credit in determining our allowance for loanlosses, at December 31, 2017, we had made no provision for losses on commitments to extend credit, and had no specific or general allowance for losses onsuch commitments, as we have had no historical loss experience with commitments to extend credit and we believed that no probable and reasonablyestimable losses were inherent in our portfolio as a result of our commitments to extend credit. For additional information, see Note 14 of the "Notes toConsolidated Financial Statements" in Item 8 of this Annual Report on Form 10-K.45Table of ContentsContractual 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 31,2017. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similarcarrying amount adjustments. Payments Due by Period Less thanOne Year One toThreeYears Three toFive Years More thanFive Years Total (Dollars in thousands)Contractual Obligations Certificates of deposit$258,567 $85,177 $12,214 $— $355,958Borrowings60,000 — — — 60,000Standby letters of credit6,747 10 — — 6,757Operating leases497 930 955 3,753 6,135Total$325,811 $86,117 $13,169 $3,753 $428,850Commitments to extend credit$175,822 $— $— $— $175,822Critical Accounting PoliciesCritical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materiallydifferent results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition andresults of operation 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 aquarterly basis and establish the provision for loan losses based upon historical loan loss experience, the nature and volume of the loan portfolio, informationabout specific borrower situations, estimated collateral values, economic conditions and other factors to assess the adequacy of the allowance for loan losses.Among the material estimates that we must make to establish the allowance are loss exposure at default; the amount and timing of future cash flows onaffected loans; the value of collateral; and a determination of loss factors to be applied to the various elements of the loan portfolio. All of these estimates aresusceptible to significant change. Although we believe that we use the best information available to us to establish the allowance for loan losses, futureadjustments to the allowance may be necessary if borrower financial, collateral valuation or economic conditions differ substantially from the informationand assumptions used in making the evaluation. In addition, as an integral part of their supervisory and/or examination process, our regulatory agenciesperiodically review the methodology and sufficiency of the allowance for loan losses. These agencies may require us to recognize additions to the allowancebased on their inclusion, exclusion or modification of risk factors or differences in judgments of information available to them at the time of theirexamination. A large loss could deplete the allowance and 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 isrequired to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferredtax assets is dependent upon judgments made following management’s evaluation of all available positive and negative evidence, including prior pre-taxlosses and the events or conditions that caused them, forecasts of future taxable income, and current and future economic and business conditions. TheCompany reversed its deferred tax asset (“DTA”) valuation allowance as of December 31, 2014 due to management’s determination that it was more likelythan not that the Company’s DTA would be realized. The determination resulted from management’s consideration of all available negative and positiveevidence.46Table of ContentsAlthough we determined a valuation allowance was not required for any deferred tax assets at December 31, 2017 and 2016, there is no guarantee that avaluation allowance 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 - Managementof Interest 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 aprogram of ongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that acontrol can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions,internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance withrespect to financial statement preparation.The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States ofAmerica. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the UnitedStates of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors ofthe Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.Management assessed the Company’s internal control over financial reporting as of December 31, 2017, as required by Section 404 of the Sarbanes-OxleyAct of 2002, based on the criteria for effective internal control over financial reporting described in the “2013 Internal Control-Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission.” Based on this assessment, management concludes that, as of December 31,2017, the Company’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 FIRMStockholders and the Board of DirectorsBankFinancial CorporationBurr Ridge, IllinoisOpinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of BankFinancial Corporation (the "Company") as of December 31, 2017 and 2016, therelated consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internalcontrol over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017 in conformity withaccounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued byCOSO.Basis for OpinionsThe 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 the Company’s financial statements and an opinion on the Company’s internal controlover financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control overfinancial reporting was maintained in all material respects.Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due toerror or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amountsand disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.49Table of ContentsBecause 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 compliancewith the policies or procedures may deteriorate./s/ Crowe Horwath LLPWe have served as the Company's auditor since 1989Oak Brook, IllinoisFebruary 23, 201850Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(In thousands, except share and per share data) December 31, 2017 2016Assets Cash and due from other financial institutions$13,572 $13,053Interest-bearing deposits in other financial institutions114,020 83,631Cash and cash equivalents127,592 96,684Securities, at fair value93,383 107,212Loans receivable, net of allowance for loan losses:December 31, 2017, $8,366 and December 31, 2016, $8,1271,314,651 1,312,952Other real estate owned, net2,351 3,895Stock in Federal Home Loan Bank and Federal Reserve Bank, at cost8,290 11,650Premises held-for-sale5,667 —Premises and equipment, net24,856 31,413Accrued interest receivable4,619 4,381Core deposit intangible286 782Bank owned life insurance22,859 22,594Deferred taxes12,563 22,411Other assets8,441 6,063Total assets$1,625,558 $1,620,037 Liabilities Deposits Noninterest-bearing$234,354 $249,539Interest-bearing1,105,697 1,089,851Total deposits1,340,051 1,339,390Borrowings60,768 51,069Advance payments by borrowers for taxes and insurance11,645 11,041Accrued interest payable and other liabilities15,460 13,757Total liabilities1,427,924 1,415,257Commitments 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; 17,958,723 shares issued at December 31, 2017and 19,233,760 shares issued at December 31, 2016179 192Additional paid-in capital153,811 173,047Retained earnings43,274 39,483Unearned Employee Stock Ownership Plan shares— (8,318)Accumulated other comprehensive income370 376Total stockholders’ equity197,634 204,780Total liabilities and stockholders’ equity$1,625,558 $1,620,037See accompanying notes to the consolidated financial statements51Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except share and per share data) For the years ended December 31, 2017 2016 2015Interest and dividend income Loans, including fees$53,227 $49,025 $47,488Securities1,474 1,228 1,141Other1,478 675 333Total interest income56,179 50,928 48,962Interest expense Deposits5,438 3,865 2,794Borrowings651 105 20Total interest expense6,089 3,970 2,814Net interest income50,090 46,958 46,148Recovery of loan losses(87) (239) (3,206)Net interest income after recovery of loan losses50,177 47,197 49,354Noninterest income Deposit service charges and fees2,250 2,254 2,248Other fee income2,029 2,052 2,143Insurance commissions and annuities income251 302 386Gain on sale of loans, net76 75 102Gain on sale of securities (includes $46 accumulated other comprehensive incomereclassifications for unrealized net gains on available for sale securities for the yearended December 31, 2016)— 46 —Loan servicing fees248 276 354Amortization and impairment of servicing assets(109) (112) (140)Earnings on bank owned life insurance265 207 194Trust720 674 712Other678 771 692Total noninterest income6,408 6,545 6,691Noninterest expense Compensation and benefits21,767 22,755 22,222Office occupancy and equipment6,623 6,380 6,522Advertising and public relations1,004 870 991Information technology2,743 2,892 2,669Supplies, telephone, and postage1,366 1,364 1,586Amortization of intangibles496 523 550Nonperforming asset management340 399 681Operations of other real estate owned923 846 1,063FDIC insurance premiums587 755 904Other4,542 4,758 4,757Total noninterest expense40,391 41,542 41,945Income before income taxes16,194 12,200 14,100Income tax expense7,190 4,698 5,425Net income$9,004 $7,502 $8,675Basic earnings per common share$0.49 $0.40 $0.44Diluted earnings per common share$0.49 $0.39 $0.44Weighted average common shares outstanding18,279,899 18,987,951 19,918,003Diluted weighted average common shares outstanding18,280,336 19,047,139 19,921,519See accompanying notes to the consolidated financial statements52Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) For the years ended December 31, 2017 2016 2015Net income$9,004 $7,502 $8,675Unrealized holding loss on securities arising during the period(102) (233) (339)Tax effect36 90 129Net of tax(66) (143) (210)Reclassification adjustment for gain included in net income— (46) —Tax effect, included in income tax expense— 18 —Reclassification adjustment for (gain) included in net income, net oftax— (28) —Other comprehensive loss(66) (171) (210)Comprehensive income$8,938 $7,331 $8,465See accompanying notes to the consolidated financial statements53Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(In thousands, except shares and per share data) CommonStock AdditionalPaid-inCapital RetainedEarnings UnearnedEmployeeStockOwnershipPlanShares AccumulatedOtherComprehen-siveIncome TotalBalance at January 1, 2015$211 $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, 2015203 184,797 36,114 (9,297) 547 212,364Net income— — 7,502 — — 7,502Other comprehensive loss, net of tax effect— — — — (171) (171)Repurchase and retirement of common stock (1,063,557shares)(11) (13,204) — — — (13,215)Nonvested stock awards-stock-based compensationexpense— 982 — — — 982Cash dividends declared on common stock ($0.21 pershare)— — (4,133) — — (4,133)ESOP shares earned— 472 — 979 — 1,451Balance at December 31, 2016192 173,047 39,483 (8,318) 376 204,780Net income— — 9,004 — — 9,004Other comprehensive loss, net of tax effect— — — — (66) (66)Reclassification for the Tax Cuts and Jobs Act— — (60) — 60 —Net exercise of stock options (198,026 shares)2 (1,239) — — — (1,237)Prepayment of ESOP Share Acquisition Loan(8) (7,185) — 8,318 — 1,125Repurchase and retirement of common stock (719,573shares)(7) (10,812) — — — (10,819)Cash dividends declared on common stock ($0.28 pershare)— — (5,153) — — (5,153)Balance at December 31, 2017$179 $153,811 $43,274 $— $370 $197,634See accompanying notes to the consolidated financial statements54Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the years ended December 31, 2017 2016 2015Cash flows from operating activities Net income$9,004 $7,502 $8,675Adjustments to reconcile to net income to net cash from operating activities Recovery of loan losses(87) (239) (3,206)Prepayment of ESOP Share Acquisition Loan1,125 — —ESOP shares earned— 1,451 1,236Stock–based compensation expense— 982 657Depreciation and amortization3,789 3,777 3,682Amortization and accretion on securities and loans(123) (280) (312)Amortization of intangibles496 523 550Amortization and impairment of servicing assets109 112 140Net change in net deferred loan origination costs397 (42) (422)Net (gain) loss on sale of other real estate owned45 (128) (59)Net gain on sale of loans(76) (75) (102)Net gain on sale of securities— (46) —Net (gain) loss on disposition of premises and equipment— (38) 1Loans originated for sale(1,288) (2,310) (3,838)Proceeds from sale of loans1,364 2,385 3,940Other real estate owned valuation adjustments333 314 548Net change in: Deferred income tax9,848 4,390 5,079Accrued interest receivable(238) (155) (300)Earnings on bank owned life insurance(265) (207) (194)Other assets(3,406) (1,418) 659Accrued interest payable and other liabilities1,703 2,443 (1,852)Net cash from operating activities22,730 18,941 14,882Cash flows from investing activities Securities Proceeds from maturities75,460 67,734 59,804Proceeds from principal repayments3,388 5,102 6,984Proceeds from sales of securities— 46 —Purchases of securities(65,128) (65,617) (60,744)Loans receivable Loan participations sold3,615 6,195 3,350Principal payments on loans receivable654,702 495,391 441,820Purchases of loans(23,451) (54,970) —Originated for investment(640,340) (543,740) (509,018)Proceeds from sale of loans— 14,746 —Proceeds of redemption of Federal Home Loan Bank stock3,514 — —Purchase of Federal Home Loan Bank and Federal Reserve Bank stock(154) (5,393) —Proceeds from sale of other real estate owned3,932 4,181 4,733Purchase of premises and equipment, net(1,133) (696) (542)Net cash from (used in) investing activities14,405 (77,021) (53,613)(Continued)55Table of ContentsBANKFINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the years ended December 31, 2017 2016 2015Cash flows from financing activities Net change in deposits$661 $126,471 $1,206Net change in borrowings9,699 (13,249) 51,397Net change in advance payments by borrowers for taxes and insurance604 (487) 39Repurchase and retirement of common stock(10,819) (13,215) (9,970)Cash dividends paid on common stock(5,153) (4,133) (4,145)Shares retired for tax liability(1,219) — —Net cash from (used in) financing activities(6,227) 95,387 38,527Net change in cash and cash equivalents30,908 37,307 (204)Beginning cash and cash equivalents96,684 59,377 59,581Ending cash and cash equivalents$127,592 $96,684 $59,377 Supplemental disclosures of cash flow information: Interest paid$6,044 $3,907 $2,844Income taxes paid427 289 363Income taxes refunded6 9 7Loans transferred to other real estate owned2,766 1,251 5,875Premises transferred to held-for-sale5,667 — —See accompanying notes to the consolidated financial statements56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, National Association (the “Bank”). BankFinancial Corporation is a registered Bank HoldingCompany and its wholly-owned bank subsidiary is operating as BankFinancial, National Association.Principles of Consolidation: The consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, andthe Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BFIN Asset Recovery Company, LLC (formerly BF Asset RecoveryCorporation) (collectively, “the Company”) and have been prepared in conformity with accounting principles generally accepted in the United States ofAmerica (“GAAP”). All significant intercompany 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 isconcentrated in loans that are primarily secured by real estate.Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information.These estimates and assumptions affect the amounts reported in the financial statements 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 atcost.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 cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, borrowings, and advancepayments by borrowers 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 valuesare classified as available-for-sale. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in othercomprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities areamortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains andlosses on sales are based on the amortized cost of the security sold. Declines in the fair value of securities below their cost that are other-than-temporary arereflected as realized losses. In determining if losses are other-than-temporary, management considers: (1) the length of time and extent that fair value has beenless than cost or adjusted cost, as applicable, (2) the financial condition and near term prospects of the issuer, and (3) whether the Company has the intent tosell the debt security or it is more likely than 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 (“FHLB”) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on thelevel of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodicallyevaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.Federal Reserve Bank (“FRB”) Stock: The Bank is a member of its regional Federal Reserve Bank. FRB stock is carried at cost, classified as a restrictedsecurity, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.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 incomeon loans 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 originationfees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments.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)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 receivefull payment 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 loansis accounted for on the cash–basis or cost–recovery method until qualifying for return to accrual status. Once a loan is placed on nonaccrual status, theborrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. Generally, theCompany 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 secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and isotherwise in substantial compliance with the terms of the loan, but the processing of payments actually received or the renewal of a loan has not occurred foradministrative 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 tothe original contractual terms of the loan agreement. Once a loan is determined to be impaired, the amount of impairment is measured based on the loan'sobservable fair value, the fair value of the underlying collateral less selling costs if the loan is collateral-dependent, or the present value of expected futurecash flows discounted 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'sallowance for the impaired 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 appraised value. The remaining recorded investment in the loan after the charge-off will have a loan loss allowance for the amount by whichthe estimated fair value 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 adetermination has been made that the economic value is permanently reduced is charged-off against the allowance for loan losses to reflect its currenteconomic value in the period 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 isgreater than a year old, a new appraisal is obtained on the underlying collateral. Appraisals are updated with a new independent appraisal at least annuallyand are formally reviewed by our internal appraisal department upon receipt of a new appraisal. All impaired loans and their related reserves are reviewed andupdated each quarter. With an immaterial number of exceptions, all appraisals and internal reviews are current under this methodology at December 31, 2017.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 concessionsmay include 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 paymentdefault in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that thedebtor will continue as a going concern, the debtor has securities that have been or are in the process of being delisted, the debtor's entity-specific projectedcash flows will not be sufficient to service any of its debt, or the debtor cannot obtain funds from sources other than the existing creditors at a market rate fordebt with similar risk characteristics.In determining whether the Company has granted a concession, the Company assesses, if it does not expect to collect all amounts due, whether the currentvalue of the collateral will satisfy the amounts owed, whether additional collateral or guarantees from the debtor will serve as adequate compensation forother terms of the restructuring, and whether the debtor otherwise has access to funds at a market rate for debt with similar risk characteristics.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 isstructured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as anonperforming note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. Aperiod of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined thatthe performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through thecalendar year of the restructuring that the historical payment performance has been established.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)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, theCompany considers past and current loss experience, trends in classified loans, evaluations of real estate collateral, current economic conditions, volume andtype 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 amountof the allowance is based 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 losseson a quarterly 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 and land, 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.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;levels of, and trends in, charge–offs and recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experienceand ability of lending management and other relevant staff; and national and local economic trends and conditions.The Company evaluates the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loanportfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred creditlosses than would be the case without the increase. Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan lossmethodology generally results in a lower 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 factorassigned to the specific loan class and (iv) the actual concentration of risk factor assigned to the specific loan class (collectively, the “Specific Loan ClassRisk Factors”). The Specific Loan Class Risk Factors are weighted equally in the calculation. In addition, two additional quantitative factors, the NationalEconomic risk factor and the Local Economic risk factor, are also components of the computation but are given different weightings in their computation dueto their relative applicability to the specific loan class in the context of the effect of national and local economic conditions on their risk profile andperformance.Mortgage Servicing Rights: Mortgage servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans aresold, 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 marketprices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value ofestimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicingincome, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default ratesand losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions.All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterestincome in proportion to, and over the period of, 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 avaluation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or aportion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes invaluation allowances are reported59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)with amortization and impairment of servicing assets on the statement of operations. The fair values of servicing rights are subject to significant fluctuationsas 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 ona contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees relatedto loan servicing are not material.First mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balancesof these loans were $90.7 million and $106.4 million at December 31, 2017 and 2016, respectively. Custodial escrow balances maintained in connectionwith the foregoing loan servicing activities were $2.6 million and $2.7 million at at December 31, 2017 and 2016, respectively. Capitalized mortgageservicing rights are included in the other assets in the accompanying consolidated statement of financial condition. Servicing rights were $513,000 and$612,000 at December 31, 2017 and 2016, respectively, with no valuation allowance at December 31, 2017 and 2016.Other Real Estate Owned ("OREO"): Foreclosed assets are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis.Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when the legal title is obtained upon completion offoreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through asimilar legal agreement. These assets are subsequently accounted for at a lower of cost or fair value less estimated cost to sell. If fair value declines subsequentto foreclosure, a valuation allowance is recorded through expense. Operating expenses, gains and losses on disposition, and changes in the valuationallowance are reported in noninterest expense as operations of other real estate owned.Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is included innoninterest expense 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 yearsfor buildings and improvements that extend the life of the original building, ten to 20 years for routine building improvements, five to 15 years for furnitureand equipment, two to five years for computer hardware and software and no greater than four years on automobiles. The cost of maintenance and repairs ischarged to expense as incurred and significant repairs are capitalized.In December 2017, we agreed to a letter of intent to sell our corporate office building in Burr Ridge, Illinois. In January 2018, we executed a formal salesagreement to sell the property subject to certain contingencies exclusively in the control of the purchaser. The asset is recorded in our financial statements atDecember 31, 2017 as premises held-for-sale at a net cost of $5.7 million.Other Intangible Assets: Intangible assets acquired in a purchase business combination with definite useful lives are amortized over their estimated usefullives to their estimated residual values. Core deposit intangible assets (“CDI”), are recognized at the time of acquisition based on valuations prepared byindependent third parties or other estimates of fair value. In preparing such valuations, variables such as deposit servicing costs, attrition rates, and marketdiscount rates are considered. CDI assets are amortized to expense over their useful lives.Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. The Company owned life insurance is recordedat the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or otheramounts due 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 makeloans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, beforeconsidering customer 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. UnderGAAP, 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. Thedetermination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of bothpositive and negative evidence, the forecasts of future taxable income, applicable tax planning strategies, and assessments of current and future economicand business conditions. The Company considers both positive and negative evidence regarding the ultimate realizability of our deferred tax assets.Examples60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)of positive evidence may include the existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated infuture periods. Examples of negative evidence may include a cumulative loss in the current year and prior two years and negative general business andeconomic trends. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in incomein the period of the enactment date.This analysis is updated quarterly and adjusted as necessary. At December 31, 2017, the Company had a net deferred tax asset of $12.6 million.A tax position is recognized as a benefit only if it is "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 taxpositions not 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 contributionmade at the 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, was shown as a reduction ofstockholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends onallocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstandingduring the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share is net income divided bythe weighted average number of common shares outstanding during the period plus the dilutive effect of restricted stock shares and the additional potentialshares 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 willhave a material effect on the financial statements as of December 31, 2017.Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank that is required to meet regulatory reserve and clearing requirements.Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market value information and other assumptions, asmore fully 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 couldsignificantly affect the estimates.Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includesunrealized 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 ofthese awards 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’scommon stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined asthe vesting period.Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control overtransferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions thatconstrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over thetransferred assets through 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 financialperformance is evaluated on a Company-wide basis. Operating results are not reviewed by senior61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)management to make resource allocation or performance decisions. Accordingly, all of the financial service operations are considered by management to beaggregated 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 May 2014, the FASB issued an update (ASU No. 2014-09, “Revenue from Contracts with Customers”) creating FASB Topic 606, Revenue from Contractswith Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters intocontracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or leasecontracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers inan amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps tofollow 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 and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contractswith customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in thisupdate become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We have evaluated theimpact of adopting the update and have concluded that it will not have a significant impact to our consolidated financial statements. The Company’srevenue streams that are in-scope of the update include: financed OREO sales; deposit fees, including ATM fees, overdraft fees, maintenance fees anddormancy fees; credit and debit card fees, and trust fees. For the in-scope revenue streams, our current revenue recognition would not be different thanrevenue recognition under the update. The Company has infrequently financed an OREO sale. Our customer contracts generally do not have performanceobligations and fees are assessed and collected as the transaction occurs. The Company’s fee income is not material for any individual income stream. Theconsolidated financial statements will be impacted by new disclosures required by the update.In January 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 equitymethod or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit pricenotion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities bymeasurement category and form of financial assets (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financialstatements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not publicbusiness entities; eliminating the requirement for non-public business entities to disclose the method(s) and significant assumptions used to estimate the fairvalue that is to be required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organizationto present separately in other comprehensive income the portion 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 the organization has elected to measure the liability at fair value in accordance with the fair valueoption for financial instruments. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2017. We haveevaluated the impact of adopting the new guidance on the consolidated financial statements. Our finding is that the new pronouncement will not have asignificant impact on our Statement of Operations as we only have one equity security that was valued at $499,000 at December 31, 2017.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires a lessee to recognize assets andliabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within thoseyears, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact that the standard will have on ourconsolidated financial statements. Our preliminary finding is that the new pronouncement will not have a significant impact on our consolidated financialstatements as the projected minimum lease payments under existing leases subject to the new pronouncement are less than one percent of our current totalassets.In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting” (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including theincome tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective January 1, 2017. This new pronouncement affectsthe effective tax rate reported as existing vested stock options are exercised. The amount of the impact on the effective tax rate is determined by the numberof stock options62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)exercised and the stock price of the Company when the stock options are exercised. Excess tax benefits and deficiencies are recorded in the tax expense.In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments” (“ASU 2016-13”). These amendments require the measurement of all expected credit losses for financial assets held at the reporting date basedon historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although theinputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for SEC filers for fiscal years, and interimperiods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted forall organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impactthat the standard will have on our consolidated financial statements. Our initial review indicates that we have maintained sufficient historical loan data tosupport the requirements of this pronouncement. In addition, we have begun tracking the average life of the various segments of our loan portfolio. We arecurrently evaluating various loss methodologies to determine their correlation to our various loan categories' historical performance.In March of 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization onPurchased Callable Debt Securities” (“ASU 2017-08”). This guidance shortens the amortization period for premiums on certain callable debt securities to theearliest call date (with an explicit, noncontingent call feature that is callable at a fixed price and on a preset dates), rather than contractual maturity date ascurrently required under GAAP. The ASU does not impact instruments without preset call dates such as mortgage-backed securities. For instruments withcontingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of theASU. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption ispermitted. Effective January 2017, we early adopted the pronouncement. Adoption of the new pronouncement was immaterial to the consolidated financialstatements.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 sharesof common stock outstanding during the period, exclusive of unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stockare regarded 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, 2017 2016 2015Net income available to common stockholders$9,004 $7,502 $8,675Average common shares outstanding18,429,018 19,673,416 20,708,775Less: Unearned ESOP shares(148,179) (682,362) (780,227)Unvested restricted stock shares(940) (3,103) (10,545)Weighted average common shares outstanding18,279,899 18,987,951 19,918,003Add - Net effect of dilutive stock options and unvested restricted stock437 59,188 3,516Weighted average dilutive common shares outstanding18,280,336 19,047,139 19,921,519Basic earnings per common share$0.49 $0.40 $0.44Diluted earnings per common share$0.49 $0.39 $0.44Number of antidilutive stock options excluded from the diluted earnings per sharecalculation— 536,459 536,459Weighted average exercise price of anti-dilutive option shares$— $12.99 $12.99 63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, 2017 Certificates of deposit$75,916 $— $— $75,916Equity mutual fund500 — (1) 499Mortgage-backed securities - residential11,969 520 (17) 12,472Collateralized mortgage obligations - residential4,481 16 (11) 4,486SBA-guaranteed loan participation certificates10 — — 10 $92,876 $536 $(29) $93,383December 31, 2016 Certificates of deposit$85,938 $— $— $85,938Equity mutual fund500 — (1) 499Mortgage-backed securities - residential14,561 644 (21) 15,184Collateralized mortgage obligations - residential5,587 15 (28) 5,574SBA-guaranteed loan participation certificates17 — — 17 $106,603 $659 $(50) $107,212Mortgage-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 securitiesreflected in the preceding table were classified as available-for-sale at December 31, 2017 and 2016.The amortized cost and fair values of securities at December 31, 2017 by contractual maturity are shown below. Securities not due at a single maturity dateare shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with orwithout call or prepayment penalties. December 31, 2017 AmortizedCost FairValueDue in one year or less$75,916 $75,916Mortgage-backed securities - residential11,969 12,472Collateralized mortgage obligations - residential4,481 4,486SBA-guaranteed loan participation certificates10 10 $92,376 $92,884Investment securities available for sale with carrying amounts of $3.7 million and $4.7 million at December 31, 2017 and 2016, respectively, were pledged ascollateral on customer repurchase agreements and for other purposes as required or permitted by law.64Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 3 – SECURITIES (continued)Sales of securities were as follows: For the years ended December 31, 2017 2016 2015Proceeds$— $46 $—Gross gains— 46 —Gross losses— — —Securities with unrealized losses at December 31, 2017 and 2016 not recognized in income are as follows: Less than 12 Months 12 Months or More Total FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLossDecember 31, 2017 Equity mutual fund$499 $(1) $— $— $499 $(1)Mortgage-backed securities - residential— — 1,149 (17) 1,149 (17)Collateralized mortgage obligations -residential— — 2,083 (11) 2,083 (11) $499 $(1) $3,232 $(28) $3,731 $(29) December 31, 2016 Equity mutual fund$499 $(1) $— $— $499 $(1)Mortgage-backed securities - residential1,187 (21) — — 1,187 (21)Collateralized mortgage obligations -residential3,691 (18) 1,028 (10) 4,719 (28) $5,377 $(40) $1,028 $(10) $6,405 $(50)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 isother-than-temporary.An equity mutual fund and certain residential mortgage-backed securities and collateralized mortgage obligations that the Company holds in its investmentportfolio were in an unrealized loss position at December 31, 2017, but the unrealized loss was not considered significant under the Company’s impairmenttesting methodology. In addition, the Company does not intend to sell these securities, and it is not likely that the Company will be required to sell thesecurities before their anticipated recovery occurs.65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, 2017 2016One-to-four family residential real estate$97,814 $135,218Multi-family mortgage588,383 542,887Nonresidential real estate169,971 182,152Construction and land1,358 1,302Commercial loans152,552 99,088Commercial leases310,076 356,514Consumer1,597 2,255 1,321,751 1,319,416Net deferred loan origination costs1,266 1,663Allowance for loan losses(8,366) (8,127)Loans, net$1,314,651 $1,312,952Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income withinan acceptable level of risk. The Company reviews and approves these policies and procedures on a periodic basis. A reporting system supplements the reviewprocess by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies andnonperforming and potential problem loans via trend and risk rating migration. The Company requires title insurance insuring the priority of our lien on realestate collateral, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlyingreal property.The majority of the loans the Company originates are commercial-related loans, such as multi-family, nonresidential real estate, commercial, construction andland loans, and commercial leases. In addition, we originated one-to-four family residential mortgage loans and consumer loans until December 31, 2017. Wealso occasionally purchase and sell loan participations. The following briefly describes our principal loan products.The Company originates real estate loans principally secured by first liens both non-owner occupied and owner occupied commercial real estate. The non-owner occupied commercial real estate properties are predominantly multi-family apartment buildings, office buildings, light industrial buildings, shoppingcenters and mixed-use developments and, to a much lesser extent, more specialized properties such as nursing homes and other healthcare facilities.Multi-family mortgage loans generally are secured by multi-family rental properties such as apartment buildings, including subsidized apartment units. Ingeneral, loan amounts range between $500,000 and $5.0 million. Approximately 46.5% of the collateral is located outside of our primary market area;however, we do not have a concentration in any single market in excess of 25% of our loan portfolio outside of our primary market area. In underwritingmulti-family mortgage loans, the Company considers a number of 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 condition of the collateral, the financial resources and income level of the borrower, theborrower’s experience in owning or managing similar properties and, proximity to diverse employment opportunities. Multi-family mortgage loans aregenerally originated in amounts up to 80% of the appraised value of the property securing the loan. Personal guarantees are usually obtained on multi-familymortgage loans if the borrower/property owner is a legal entity.Loans secured by multi-family mortgages generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry largerloan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, theeffects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans.Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. Ifthe cash flow from the project is reduced below acceptable thresholds, the borrower’s ability to repay the loan may be impaired.66Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)The Company emphasizes nonresidential real estate loans with initial principal balances between $250,000 and $5.0 million. Substantially all of ournonresidential real estate loans are secured by properties located in our primary market area. The Company’s nonresidential real estate loans are generallywritten as three- or five-year adjustable-rate mortgages or mortgages with balloon maturities of three or five years. Amortization on these loans is typicallybased 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 basedon the economic viability of the property as the primary source of repayment and the creditworthiness of the borrower. In evaluating a proposed commercialreal estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratioof 120%), computed after deduction for a vacancy factor and property expenses we deem appropriate. Personal guarantees are usually pursued and obtainedfrom nonresidential real estate borrowers.Nonresidential real estate loans generally carry higher interest rates and have shorter terms than one-to-four family residential mortgage loans. Nonresidentialreal estate loans, however, entail significant additional credit risks compared to one-to-four family residential mortgage loans, as they typically involve largerloan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing propertiestypically 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 equipmentacquisition, 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 either negotiated 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 assessment of the borrower’s cash flow, proposed collateral, business and credit history and any additionalpositive or negative credit risk factors.. The Company determines the borrower’s ability to repay in accordance with the proposed terms of the loans and weassess the risks involved. An evaluation is made of the borrower to determine character and capacity to manage. Personal guarantees of the principals arepursued and usually obtained. In addition to evaluating the loan borrower’s financial statements, we consider the adequacy of the primary and secondarysources of repayment for the loan. Independent reports of the borrower’s credit history supplement our analysis of the borrower’s creditworthiness and at timesare supplemented with inquiries to other banks and trade investigations. Moreover, certain assets listed on personal financial statements are verified.Proposed collateral for 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 dueconsideration given 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 examiningthe creditworthiness 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 capitalequipment. Lessees tend to be publicly-traded companies with investment-grade rated debt or companies that have not issued public debt and therefore donot have a public debt rating. The Company requires that a minimum of 50% of our commercial lessees have an investment-grade public debt rating byMoody’s or Standard & Poors, or the equivalent. Commercial leases to these entities have a maximum outstanding credit exposure of $15.0 million to anysingle 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 $10.0 million to any single entity.In addition, the Company will originate commercial leases to lessees with below investment-grade public debt ratings and have a maximum outstandingcredit exposure of $10.0 million to any single entity. Lease loans are almost always fully amortizing, with fixed interest rates.67Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)Although the Company does not actively originate construction and land loans presently, construction and land loans generally consist of land acquisitionloans to help finance the purchase of land intended for further development, including single-family homes, multi-family housing and commercial incomeproperty, development loans to builders in our market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typicallyto finance the cost of utilities, roads, sewers and other development costs. These builders generally rely on the sale of single-family homes to repaydevelopment loans, although in some cases the improved building lots may be sold to another builder, often in conjunction with development loans.Construction and land loans typically involve a higher degree of credit risk than financing on improved, owner occupied real estate. The risk of loss onconstruction and land loans is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction ordevelopment; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. In the event thatthe Company were to make any new construction and development loans, it would seek to minimize these risks by maintaining consistent lending policiesand underwriting standards. However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, the length of time tocomplete and/or sell or lease the collateral property is greater than anticipated, or if there is a downturn in the local economy or real estate market, theproperty could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the qualityof the construction and land loan portfolio, and could result in significant losses or delinquencies if that portfolio were ever to increase in size.Up through December 31, 2017, the Company offered conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans withmaturities of up to 30 years and maximum loan amounts generally of up to $2.5 million. One-to-four family residential mortgage loans were generallyunderwritten according to Fannie Mae guidelines, and loans that conformed to such guidelines are referred to as “conforming loans.” The Company generallyoriginated both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which is currently$424,100 for single-family homes. Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 80%.The Company also occasionally originated loans above conforming limits, sometimes referred to as “jumbo loans,” that were underwritten to the creditstandards of Fannie Mae. These loans were generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans.The ability of the Company’s borrowers to repay their loans, and the value of the collateral securing such loans, could be adversely impacted by economicweakness in its local markets as a result of unemployment, declining real estate values, or increased residential, office, industrial and retail shoppingvacancies due to changes in business conditions. This not only could result in the Company experiencing charge-offs and/or nonperforming assets, but alsocould necessitate an increase in the provision for loan losses. These events, if they were to recur, would have an adverse impact on the Company’s results ofoperations and its capital.68Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method: Allowance for loan losses Loan Balances Individuallyevaluated forimpairment Collectivelyevaluated forimpairment Total Individuallyevaluated forimpairment Collectivelyevaluated forimpairment TotalDecember 31, 2017 One-to-four family residentialreal estate$— $850 $850 $4,265 $93,549 $97,814Multi-family mortgage— 3,849 3,849 949 587,434 588,383Nonresidential real estate— 1,605 1,605 — 169,971 169,971Construction and land— 32 32 — 1,358 1,358Commercial loans— 1,357 1,357 — 152,552 152,552Commercial leases— 655 655 — 310,076 310,076Consumer— 18 18 — 1,597 1,597 $— $8,366 $8,366 $5,214 $1,316,537 1,321,751Net deferred loan origination costs 1,266Allowance for loan losses (8,366)Loans, net $1,314,651 Allowance for loan losses Loan Balances Individuallyevaluated forimpairment Collectivelyevaluated forimpairment Total Individuallyevaluated forimpairment Collectivelyevaluated forimpairment TotalDecember 31, 2016 One-to-four family residential realestate$— $1,168 $1,168 $4,962 $130,256 $135,218Multi-family mortgage— 3,647 3,647 787 542,100 542,887Nonresidential real estate26 1,768 1,794 260 181,892 182,152Construction and land— 32 32 — 1,302 1,302Commercial loans— 733 733 — 99,088 99,088Commercial leases— 714 714 — 356,514 356,514Consumer— 39 39 — 2,255 2,255 $26 $8,101 $8,127 $6,009 $1,313,407 1,319,416Net deferred loan origination costs 1,663Allowance for loan losses (8,127)Loans, net $1,312,95269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, 2017 2016 2015Beginning balance$8,127 $9,691 $11,990Loans charged off: One-to-four family residential real estate(318) (539) (386)Multi-family mortgage(10) (79) (198)Nonresidential real estate(165) (1,718) (391)Commercial loans— — (152)Consumer(10) (25) (16) (503) (2,361) (1,143)Recoveries: One-to-four family residential real estate145 321 702Multi-family mortgage70 162 182Nonresidential real estate17 200 509Construction and land— 35 44Commercial loans594 309 611Commercial leases2 7 1Consumer1 2 1 829 1,036 2,050Net recoveries (charge-off)326 (1,325) 907Recovery of loan losses(87) (239) (3,206)Ending balance$8,366 $8,127 $9,691Impaired 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 notnet of a valuation allowance, but which does reflect any direct write-down of the investment.” The following represents the components of recordedinvestment: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 investment70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 loans individually evaluated for impairment by class of loans: LoanBalance RecordedInvestment Partial Charge-off Allowancefor LoanLossesAllocated AverageInvestmentin ImpairedLoans InterestIncomeRecognizedDecember 31, 2017 With no related allowance recorded One-to-four family residential real estate$5,049 $4,248 $806 $— $4,212 $197Multi-family mortgage958 948 — — 847 41 $6,007 $5,196 $806 $— $5,059 $238 LoanBalance RecordedInvestment PartialCharge-off Allowancefor LoanLossesAllocated AverageInvestmentin ImpairedLoans InterestIncomeRecognizedDecember 31, 2016 With no related allowance recorded One-to-four family residential real estate$5,379 $4,548 $886 $— $2,947 $70One-to-four family residential real estate - non-owner occupied503 386 119 — 251 9Multi-family mortgage787 787 — — 980 41 6,669 5,721 1,005 — 4,178 120 With an allowance recorded - Nonresidential real estate262 260 21 26 164 — $6,931 $5,981 $1,026 $26 $4,342 $120Nonaccrual 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, 2017 One-to-four family residential real estate$3,413 $1,918 $—One-to-four family residential real estate – non owner occupied308 109 —Multi-family mortgage376 363 —Nonresidential real estate— — — $4,097 $2,390 $—December 31, 2016 One-to-four family residential real estate$2,861 $2,483 $—One-to-four family residential real estate – non owner occupied428 368 —Multi-family mortgage187 185 —Nonresidential real estate262 260 — $3,738 $3,296 $—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 onecategory. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classifiedimpaired loans.The Company’s reserve for uncollected loan interest was $103,000 and $199,000 at December 31, 2017 and 2016, respectively. 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 principal under the costrecovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractualinterest 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 allcases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to theprovisions of 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, 2017 by class of loans: 30-59 DaysPast Due 60-89 DaysPast Due Greater Than89 DaysPast Due Total PastDue Loans NotPast Due TotalOne-to-four family residential real estate$86 $99 $1,801 $1,986 $74,216 $76,202One-to-four family residential real estate - non-owneroccupied10 3 86 99 20,944 21,043Multi-family mortgage - Illinois172 — 364 536 287,171 287,707Multi-family mortgage - Other— — — — 296,440 296,440Nonresidential real estate608 — — 608 166,071 166,679Construction— — — — 1,103 1,103Land— — — — 259 259Commercial loans: Regional Commercial Banking— — — — 40,935 40,935Health Care— — — — 71,738 71,738Direct Commercial Lessor— — — — 40,237 40,237Commercial leases: — Investment-grade934 — — 934 207,747 208,681Other288 — — 288 102,873 103,161Consumer— — — — 1,605 1,605Total$2,098 $102 $2,251 $4,451 $1,311,339 $1,315,790 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, 2016 by class of loans: 30-59 DaysPast Due 60-89 DaysPast Due GreaterThan89 DaysPast Due Total PastDue Loans NotPast Due TotalOne-to-four family residential real estate$984 $335 $2,235 $3,554 $92,665 $96,219One-to-four family residential real estate - non-owneroccupied664 114 368 1,146 37,179 38,325Multi-family mortgage - Illinois605 439 184 1,228 294,223 295,451Multi-family mortgage - Other— — — — 243,944 243,944Nonresidential real estate— — 260 260 178,644 178,904Construction— — — — 950 950Land— — — — 349 349Commercial loans: Regional Commercial Banking— — — — 26,480 26,480Health Care— — — — 41,086 41,086Direct Commercial Lessor— — — — 31,847 31,847Commercial leases: — Investment-grade51 — — 51 273,405 273,456Other— — — — 84,988 84,988Consumer— — — — 2,263 2,263 $2,304 $888 $3,047 $6,239 $1,308,023 $1,314,262Troubled 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. Ingeneral, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–marketinterest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension orloan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then dueand payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.The Company had $17,000 of TDRs at December 31, 2017, compared to $341,000 at December 31, 2016, with no specific valuation reserves allocated atDecember 31, 2017 and 2016. The Company had no outstanding commitments to borrowers whose loans are classified as TDRs at either date.The following table presents loans classified as TDRs: December 31, 2017 2016One-to-four family residential real estate - Accrual$— $205One-to-four family residential real estate - Nonaccrual17 136 $17 $341During the year ending December 31, 2017, there were no loans modified and classified as TDRs. During the year ending December 31, 2016, the terms ofcertain loans were modified and classified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reductionof the stated interest rate of the loan; an extension of the maturity date73Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)at a stated rate of interest lower 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, 2017 2016 Numberof loans Pre-Modificationoutstandingrecordedinvestment Post-Modificationoutstandingrecordedinvestment Numberof loans Pre-Modificationoutstandingrecordedinvestment Post-ModificationoutstandingrecordedinvestmentOne-to-four family residential real estate— $— $— 1 $63 $63 Due toreduction ininterest rate Due toextension ofmaturity date Due topermanentreduction inrecordedinvestment TotalFor the year ended December 31, 2016 One-to-four family residential real estate$— $63 $— $63The TDRs described above had no impact on interest income, resulted in no change to the allowance for loan losses and resulted in no charge-offs for the yearended December 31, 2016.The following table presents TDRs for which there was a payment default within twelve months following the modification: For the years ended December 31, 2017 2016 Numberof loans Recordedinvestment Numberof loans RecordedinvestmentOne-to-four family residential real estate— $— 2 $87A 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 year ending December 31, 2016.The terms of certain other loans were modified during the year ending December 31, 2017 in circumstances that did not meet the definition of a TDR. Theseloans have a total recorded investment of $149,000 and $868,000 at December 31, 2017 and 2016, respectively. The modification of these loans involvedeither a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to beinsignificant.In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be inpayment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internalunderwriting 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 currentfinancial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. TheCompany analyzes loans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial andcommercial real estate loans. 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 the74Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 4 – LOANS RECEIVABLE (continued)institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk towarrant 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 weaknessdoes not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to bedistinct for the loan to be rated Substandard.Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified substandard with the added characteristic that theweaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.The loans were placed 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.As of December 31, 2017, 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$74,437 $— $255 $1,914 $76,606One-to-four family residential real estate - non-owneroccupied21,059 — 40 109 21,208Multi-family mortgage - Illinois290,765 — 225 368 291,358Multi-family mortgage - Other297,025 — — — 297,025Nonresidential real estate169,817 — 154 — 169,971Construction1,099 — — — 1,099Land259 — — — 259Commercial loans: Regional commercial banking36,373 4,528 — — 40,901Health care69,480 — 2,248 — 71,728Direct commercial lessor39,923 — — — 39,923Commercial leases: Investment-grade207,460 — — — 207,460Other102,616 — — — 102,616Consumer1,597 — — — 1,597 $1,311,910 $4,528 $2,922 $2,391 $1,321,751 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, 2016, 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 $93,514 $— $629 $2,486 $96,629One-to-four family residential real estate - non-owneroccupied 38,179 — 41 369 38,589Multi-family mortgage - Illinois 297,826 122 1,048 187 299,183Multi-family mortgage - Other 243,704 — — — 243,704Nonresidential real estate 180,047 — 1,845 260 182,152Construction 946 — — — 946Land 356 — — — 356Commercial loans: Regional commercial banking 26,365 — 66 — 26,431Health care 41,001 — — — 41,001Direct commercial lessor 30,881 800 — — 31,681Commercial leases: Investment-grade 271,972 — — — 271,972Other 84,356 161 — — 84,517Consumer 2,255 — — — 2,255 $1,311,402 $1,083 $3,629 $3,302 $1,319,416NOTE 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 theloan balance, 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, 2017 2016Beginning balance $3,895 $7,011New foreclosed properties 2,766 1,251Valuation adjustments (333) (314)Sales (3,977) (4,053)Ending balance $2,351 $3,89576Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 5 - OTHER REAL ESTATE OWNED (continued) December 31, 2017 December 31, 2016 Balance ValuationAllowance Net OREOBalance Balance ValuationAllowance Net OREOBalanceOne–to–four family residential$836 $(9) $827 $1,702 $(137) $1,565Multi-family mortgage— — — 370 — 370Nonresidential real estate1,772 (252) 1,520 1,171 (105) 1,066Land48 (44) 4 1,101 (207) 894 $2,656 $(305) $2,351 $4,344 $(449) $3,895Activity in the valuation allowance is as follows: At and For the Years Ended December 31, 2017 2016Beginning of year $449 $1,042Additions charged to expense 333 314Reductions from sales of other real estate owned (477) (907)End of year $305 $449At December 31, 2017, the balance of OREO includes $352,000 foreclosed residential real estate properties recorded as a result of obtaining physicalpossession of the property without title. At December 31, 2016 the balance of OREO included no foreclosed residential real estate properties recorded as aresult of obtaining physical possession of the property without title. At December 31, 2017 and 2016, the recorded investment of consumer mortgage loanssecured by residential real estate properties for which formal foreclosure proceeds are in process was $926,000 and $1.6 million, respectively.NOTE 6 – PREMISES AND EQUIPMENTYear-end premises and equipment are as follows: December 31, 2017 2016Land and land improvements$12,265 $13,820Buildings and improvements29,556 37,416Furniture and equipment9,678 9,660Computer equipment3,983 4,058 55,482 64,954Accumulated depreciation(30,626) (33,541) $24,856 $31,413Depreciation of premises and equipment was $2.0 million, $2.0 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015,respectively.In December 2017, we agreed to a letter of intent to sell our corporate office building in Burr Ridge, Illinois. In January 2018, we executed a formal salesagreement to sell the property subject to certain contingencies exclusively in the control of the purchaser. We believe that the transaction will not result ineither a significant gain or loss on sale if consummated. The asset is recorded in our financial statements at December 31, 2017 as premises held-for-sale at anet cost of $5.7 million.77Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 6 – PREMISES AND EQUIPMENT (continued)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 $477,000, $399,000, and $393,000 in 2017, 2016, and 2015, respectively, excluding taxes, insurance, and maintenance.The projected minimum rental expense under existing leases, not including taxes, insurance, and maintenance, as of December 31, 2017 is as follows:2018$4972019471202045920214642022491Thereafter3,753 $6,135The Company has subleased some of its branch facilities and currently is entitled to receive income as follows:2018$220192202022021120221 $8NOTE 7 – DEPOSITSComposition of deposits is as follows: December 31, 2017 2016Noninterest-bearing demand deposits$234,354 $249,539Interest-bearing NOW accounts289,657 267,054Money market accounts299,581 311,183Savings deposits160,501 160,002Certificates of deposit355,958 351,612 $1,340,051 $1,339,390Time deposits that meet or exceed the FDIC Insurance limit of $250,000 were $50.3 million and $18.7 million at December 31, 2017 and 2016, respectively.Scheduled maturities of certificates of deposit for the next five years are as follows:2018$258,567201968,756202016,42120218,69720223,51778Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 8 – FEDERAL HOME LOAN BANK ADVANCESAt year-end, advances from the FHLB were as follows: December 31, 2017 2016 ContractualRate Amount ContractualRate AmountFixed-rate advance from FHLB, due within 1 year1.34% $60,000 0.67% $50,000The Company maintains a collateral pledge agreement covering secured advances whereby the Company has agreed to keep on hand, free of all otherpledges, liens, and encumbrances, specifically identified whole first mortgages on improved residential property not more than 90-days delinquent to secureadvances from the FHLB. All of the Bank’s FHLB common stock is pledged as additional collateral for these advances. At December 31, 2017, $63.7 millionand $376.5 million of first mortgage and multi-family mortgage loans, respectively, collateralized potential advances. At December 31, 2017, we had theability to borrow an additional $322.2 million under our credit facilities with the FHLB. The Company also had available pre-approved overnight federalfunds borrowing. At December 31, 2017 and 2016, there was no outstanding balance on these lines.NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASESecurities sold under agreements to repurchase are shown below. December 31, 2017 Overnight andContinuous Up to 30days 30 - 90 days Greater Than 90days TotalRepurchase agreements and repurchase-to-maturity transactions $768 $— $— $— $768Gross amount of recognized liabilities for repurchase agreements in Statement of Condition $768 December 31, 2016 Overnight andContinuous Up to 30days 30 - 90 days Greater Than 90days TotalRepurchase agreements and repurchase-to-maturity transactions $1,069 $— $— $— $1,069Gross amount of recognized liabilities for repurchase agreements in Statement of Condition $1,069Securities sold under agreements to repurchase were secured by mortgage-backed securities with a carrying amount of $3.7 million and $4.7 million atDecember 31, 2017 and 2016, respectively. Also included in total borrowings were advances from the FHLB of $60.0 million and $50.0 million atDecember 31, 2017 and 2016, respectively.As the securities’ values fluctuate due to market conditions, the Company has no control over the market value. The Company is obligated to promptlytransfer additional securities if the market value of the securities falls below the repurchase price, per the agreement.79Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 10 – INCOME TAXESThe income tax expense is as follows: For the years ended December 31, 2017 2016 2015Current expense (benefit)$(2,658) $308 $346Deferred expense7,361 4,390 5,079Expense due to enactment of federal tax reform2,487 — —Total income tax expense$7,190 $4,698 $5,425A reconciliation of the provision for income taxes computed at the statutory federal corporate tax rate of 34% for 2017, 2016 and 2015 to the income taxexpense in the consolidated statements of operations follows: For the years ended December 31, 2017 2016 2015Expense computed at the statutory federal tax rate$5,506 $4,148 $4,794State taxes and other, net(204) 464 626Bank owned life insurance(90) (70) (66)ESOP/Share based compensation(509) 156 71Expense due to enactment of federal tax reform2,487 — — $7,190 $4,698 $5,425Effective income tax rate44.77% 38.51% 38.48%Retained earnings at December 31, 2017 and 2016 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, 2017 2016Gross Deferred tax assets Allowance for loan losses$2,258 $3,117Alternative minimum tax, general business credit and net operating loss carryforwards11,864 20,857Tax deductible goodwill and core deposit intangible801 1,466Other1,395 2,540 16,318 27,980Gross Deferred tax liabilities Net deferred loan origination costs(1,255) (1,874)Purchase accounting adjustments(1,744) (2,644)Other(619) (817)Unrealized gain on securities(137) (234) (3,755) (5,569) $12,563 $22,411As of December 31, 2017 and 2016, the Company’s net deferred tax asset (“DTA”) was $12.6 million and $22.4 million, respectively.On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Job Act (the "Act"), was signed into law. Among other things, the Act reduces ourcorporate federal tax rate from 34% to 21% effective January 1, 2018. As a result, we were required80Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 10 – INCOME TAXES (continued)to re-measure, through income tax expense our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled.The re-measurement of our net deferred tax asset resulted in additional tax expense of $2.5 million.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 thannot” (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 consideredto determine whether, based on the weight of that evidence, a valuation allowance against the net DTA is required. Objectively verifiable evidence isassigned greater weight than evidence that is not objectively verifiable. The valuation allowance is analyzed quarterly for changes affecting the DTA.The Company’s ability to realize the DTA is dependent upon the generation of future taxable income during the periods in which the tax attributesunderlying the DTA become deductible. The amount of the DTA that will ultimately be realized will be impacted by the Company’s future taxable income,any changes to the many variables that could impact future taxable income and the then applicable corporate tax rate. As of December 31, 2017 and 2016,management determined that it is more likely than not that the Company will be able to utilize the entire DTA.At December 31, 2017, the Company had a federal net operating loss carryforward of $21.3 million, which will begin to expire in 2032 and a federal taxcredit carryforward of $1.3 million, which will begin to expire in 2022. In addition, the Company had a $3.1 million alternative minimum tax creditcarryforward that can be carried forward indefinitely, which is now carried as tax receivables since under new federal law of the Company expects to recoverthe entire amount by the end of 2021 via reduction of regular tax liability or refund. In addition, at December 31, 2017, the Company had a federal netoperating loss carryforward of $7.6 million relating to its acquisition of Downers Grove National Bank, which is subject to utilization limitations underSection 382 of the Internal Revenue Code, and will begin to expire in 2030, and $225,000 of alternative minimum tax credit carryforward that does notexpire and is subject to utilization limitations under Section 382 of the Internal Revenue Code. At December 31, 2017, the Company had a state netoperating loss carryforward for the State of Illinois of $70.2 million, which will begin to expire in 2022.At December 31, 2017, the Company early adopted ASU 2018-02and reclassified out of retained earnings and into accumulated other comprehensive income$60,000 of tax (benefit) that was recorded to income tax expense at December 22, 2017 due to re-measuring to 21% deferred taxes on available for salesecurities.Unrecognized Tax BenefitsA reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2017 2016Beginning of year$57 $108Additions based on tax positions related to the current year60 —Additions for tax positions of prior years12 —Reductions due to the statute of limitations and reductions for tax positions of prior years— (51)End of year$129 $57The 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, 2017 and 2016, the Company has immaterialamounts accrued 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 various states where the Company does business. TheCompany is no longer subject to examination by the federal taxing authorities for years before 2014 and the Illinois taxing authorities for years before 2014.81Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 11 – REGULATORY MATTERSThe Bank and the Company are subject to regulatory capital requirements administered by the federal banking agencies. The capital adequacy guidelinesand, additionally for banks, prompt corrective action regulations, involve the quantitative measurement of assets, liabilities, and certain off-balance-sheetitems calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Thefailure to meet minimum capital requirements can result in regulatory actions. The final rules implementing Basel Committee on Banking Supervision'scapital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015, with full compliance with all of the requirementsbeing phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is notincluded in computing regulatory capital.Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized,and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approvalis required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plansare required. As of December 31, 2017 and 2016, the OCC categorized the Bank as well–capitalized under the regulatory framework for prompt correctiveaction. There are no conditions or events since those notifications that management believes have changed the institution’s well–capitalized status.82Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 11– REGULATORY MATTERS (continued)Actual and required capital amounts and ratios were: Actual Required for Capital AdequacyPurposes To be Well-Capitalized under PromptCorrective Action Provisions Amount Ratio Amount Ratio Amount RatioDecember 31, 2017 Total capital (to risk-weighted assets): Consolidated$195,371 17.06% $91,590 8.00% N/A N/ABankFinancial, NA188,582 16.48 91,572 8.00 $114,466 10.00%Tier 1 (core) capital (to risk-weighted assets): Consolidated187,005 16.33 68,692 6.00 N/A N/ABankFinancial, NA180,216 15.74 68,679 6.00 91,572 8.00Common Tier 1 (CET1) Consolidated187,005 16.33 51,519 4.50 N/A N/ABankFinancial, NA180,216 15.74 51,509 4.50 74,403 6.50Tier 1 (core) capital (to adjusted average total assets): Consolidated187,005 11.49 65,085 4.00 N/A N/ABankFinancial, NA180,216 11.08 65,045 4.00 81,307 5.00December 31, 2016 Total capital (to risk-weighted assets): Consolidated$193,845 16.96% $91,414 8.00% N/A N/ABankFinancial, NA168,113 14.72 91,386 8.00 $114,232 10.00%Tier 1 (core) capital (to risk-weighted assets): Consolidated185,718 16.25 68,560 6.00 N/A N/ABankFinancial, NA159,986 14.01 68,539 6.00 91,386 8.00Common Tier 1 (CET1) Consolidated185,718 16.25 51,420 4.50 N/A N/ABankFinancial, NA159,986 14.01 51,404 4.50 74,251 6.50Tier 1 (core) capital (to adjusted average total assets): Consolidated185,718 11.92 62,306 4.00 N/A N/ABankFinancial, NA159,986 10.27 62,303 4.00 77,879 5.00The Company and the Bank have each adopted Regulatory Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 7.5% and a totalrisk-based capital ratio of at least 10.5% (including the Capital Conservation Buffer ("CCB")).The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirements will be established if and asnecessary. In accordance with the Regulatory Capital Plans, neither the Company nor the Bank will pursue any acquisition or growth opportunity, declareany dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below theestablished minimum capital levels or the capital levels required for capital adequacy plus the CCB. The minimum CCB in 2017 is 1.25% and will increase0.625% annually through 2019 to 2.5%. 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. As of December 31, 2017, the Bank and the Company were well-capitalized, with allcapital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s promptcorrective action capitalization category.The Bank is subject to regulatory restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval, and toregulatory notification requirements for dividends that do not require prior regulatory approval.83Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 12 – EMPLOYEE BENEFIT PLANSEmployee Stock Ownership Plan. On March 29, 2017, the ESOP was terminated and the ESOP repaid all amounts owing under the ESOP’s Term LoanAgreement with the Company (the “Share Acquisition Loan”). The ESOP repaid the Share Acquisition Loan by transferring 753,490 unallocated shares of theCompany’s common stock to the Company in exchange for the full satisfaction of the Share Acquisition Loan, using the valuation method provided for inthe ESOP. A total of 78,362 unallocated shares remained in the ESOP after the Share Acquisition Loan was repaid, and these shares were released and will beallocated to the accounts of eligible ESOP participants who were actively employed by the Bank as of March 29, 2017, based on their account balances.These transactions resulted in the recording of one-time, non-cash, non-tax deductible equity compensation expense of $1.1 million in the first quarter of2017. The Share Acquisition Loan had no outstanding principal balance at December 31, 2017 and an outstanding principal balance of $10.8 million atDecember 31, 2016.The Company made the Share Acquisition Loan to the ESOP in the original principal amount of $19.6 million in connection with the Company’s mutual tostock conversion in June of 2005. The proceeds of the Share Acquisition Loan were used by the ESOP to purchase 1,957,300 shares of the Company’scommon stock issued in the subscription offering at a price of $10.00 per share. The Share Acquisition Loan was secured by a pledge of the acquired sharesand the ESOP made annual loan payments with funds it received from the Bank’s discretionary contributions to the ESOP in subsequent years and dividendsit received on unallocated shares. As loan payments were made, the Company recorded compensation expense based on the allocation of shares released.Contributions to the ESOP were $1.1 million and $1.5 million for the years ended December 31, 2017 and 2016, including dividends and interest received onunallocated shares of $50,000 and $195,000 in 2017 and 2016, respectively.Expense related to the ESOP, net of dividends and interest received on unallocated ESOP shares, was $1.1 million, $1.3 million and $1.0 million for the yearsended December 31, 2017, 2016 and 2015, respectively.Shares held by the ESOP were as follows: December 31, 2017 2016Allocated to participants1,203,810 1,125,448Distributed to participants(317,914) (313,223)Unearned— 831,852Total ESOP shares885,896 1,644,077Fair value of unearned shares$— $12,328Profit 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 oneach $1.00 of contribution up to 6% of eligible compensation beginning April 1, 2007. The Company may also contribute an additional amount annually atthe discretion of the Board of Directors. Contributions totaling $328,000, $330,000, and $308,000 were made for the years ended December 31, 2017, 2016and 2015, respectively.NOTE 13 – EQUITY INCENTIVE PLANSOn June 27, 2006, the Company’s stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan, which authorized the HumanResources Committee of the Board of Directors of the Company to grant a variety of cash- and equity-based incentive awards, including stock options, stockappreciation rights, restricted stock, performance shares and other incentive awards, to employees and directors aggregating up to 3,425,275 shares of theCompany’s common stock. The Plan provided that no awards may be granted under the Plan after the ten-year anniversary of the Effective Date.Consequently, no further awards will be granted under this Plan.As of December 31, 2016, there were 1,752,156 stock options outstanding. During the year ended December 31, 2017, all 1,752,156 stock options wereexercised. All stock options were exercised on a net settlement basis, using a portion of the shares obtained upon exercise to pay the exercise price of thestock option. The net settlements resulted in the issuance of 280,554 shares of the Company's common stock. Certain employees also chose to use a portionof the net shares received upon the exercise to pay required tax withholdings. This reduced the net shares issued by 82,528 shares to 198,026 shares. Thereare no stock options available for grant at December 31, 2017.84Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 13 – EQUITY INCENTIVE PLANS (continued)For the years ended December 31, 2017, 2016 and 2015 the Company recognized zero, $979,000 and $568,000, respectively, of stock-based compensationexpenses relating to the granting of stock options.A summary of the activity in the stock option plan for 2017 follows:Stock Options Number ofShares WeightedAverageExercise Price WeightedAverageRemainingContractualTerm(in years) AggregateIntrinsicValue (1)Stock options outstanding at January 1, 2016 1,752,156 $12.30 1.48 $778Stock options granted — — Stock options exercised — — Stock options outstanding at December 31, 2016 1,752,156 $12.30 0.48 $4,422Stock options granted — — Stock options exercised (1,752,156) 12.30 Stock options outstanding at December 31, 2017 — $— 0.00 $—(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 stockunderlying the options on the date shown and the weighted average exercise price.The Human Resources Committee of the Board of Directors may grant shares of restricted stock to certain employees and directors of the Company. Theawards generally vest annually over varying periods from three to five years and vesting is subject to acceleration in certain circumstances. The cost of suchawards will be accrued ratably as compensation expense over such respective periods based on expected vesting dates. The Company recognized zero,$3,000, and $70,000 of expenses relating to the grant of shares of restricted stock during the years ended December 31, 2017, 2016 and 2015, respectively.As of December 31, 2017, the total unrecognized compensation cost related to unvested shares of restricted stock was $8,000. The cost is expected to berecognized over a weighted average period of 9.1 months. There are no shares of restricted stock available for grant at December 31, 2017.Restricted Stock Number ofShares (1) WeightedAverage FairValue at Grant Date WeightedAverageTerm to Vest(in years) AggregateIntrinsicValue (2)Shares outstanding at January 1, 2016 7,934 $8.14 0.31 $100Shares granted — — Shares vested (6,994) — Shares forfeited — — Shares outstanding at December 31, 2016 940 $8.14 0.74 $14Shares granted — — Shares vested — — Shares forfeited — — Shares outstanding at December 31, 2017 940 $8.14 0.00 $14(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 outstandingshares on the date shown.85Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 14 – 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 ofbusiness to meet the financing needs of customers and to effectively manage exposure to interest rate risk. These financial instruments include commitmentsto extend credit, standby letters of credit, unused lines of credit, and commitments to sell loans. When viewed in terms of the maximum exposure, thoseinstruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements offinancial condition. Credit risk is the possibility that a counterparty to a financial instrument will be unable to perform its contractual obligations. Interestrate risk is the possibility that, due to 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. TheCompany’s exposure to credit loss in the event of nonperformance by the counterparty for commitments to extend credit, standby letters of credit, and unusedlines of credit is represented by the contractual notional amount of these instruments.The contractual or notional amounts are as follows: December 31, 2017 2016Financial instruments wherein contractual amounts represent credit risk Commitments to extend credit$46,615 $91,172Standby letters of credit6,757 1,305Unused lines of credit129,207 125,332Commitments to sell mortgages— —Commitments to extend credit are generally made for periods of 60 days or less. The fixed-rate loans commitment totaled $19.2 million with interest ratesranging from 3.00% to 6.00% and maturities ranging from 1 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 necessaryby the 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 publicoffering in 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 its retrospective responsibility plan. The retroactive responsibility plan obligates all former Visa USA members to indemnify Visa USA, inproportion to their equity interests in Visa USA, for certain litigation losses and expenses, including settlement expenses, for the lawsuits covered by theretrospective responsibility plan. The primary method for discharging the indemnification obligations under the retrospective responsibility plan is fundingthe litigation escrow through a reduction of the ratio at which the Visa, Inc. Class B shares can be converted into publicly traded Class A common shares ofVisa, Inc. Since the Class B shares were issued, Visa, Inc. has reduced the conversion ratio to provide additional funding for the litigation escrow. Class Bshares can only be transferred to other financial institutions until the underlying litigation is finally resolved, and the transfers that have occurred to datehave involved material discounts. Due to the restrictions that the retrospective responsibility plan imposes on the Company’s Visa, Inc. Class B shares, theCompany has not recorded the Class B shares as an asset.NOTE 15 – 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 forthe asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used tomeasure fair values:•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurementdate.•Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in marketsthat are not active; or other inputs that are observable or can be corroborated by observable market data.86Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – FAIR VALUE (continued)•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use inpricing an asset or liability.The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:Securities: The fair 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 securitytraded in an active market (Level 2). The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widelyused in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’relationship to other benchmark quoted securities (Level 2).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. Adjustmentsare routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data availablefor similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financialstatements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of thevaluation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans areevaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance 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 a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonlybased on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or acombination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made inthe appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Real estate ownedproperties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.87Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – FAIR VALUE (continued)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 levelof input that is significant to the fair value measurement. Fair Value Measurements Using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Fair ValueDecember 31, 2017 Securities: Certificates of deposit$— $75,916 $— $75,916Equity mutual fund499 — — 499Mortgage-backed securities – residential— 12,472 — 12,472Collateralized mortgage obligations – residential— 4,486 — 4,486SBA-guaranteed loan participation certificates— 10 — 10 $499 $92,884 $— $93,383December 31, 2016 Securities: Certificates of deposit$— $85,938 $— $85,938Equity mutual fund499 — — 499Mortgage-backed securities - residential— 15,184 — 15,184Collateralized mortgage obligations – residential— 5,574 — 5,574SBA-guaranteed loan participation certificates— 17 — 17 $499 $106,713 $— $107,21288Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – FAIR VALUE (continued)The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis: Fair Value Measurement Using Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) FairValueDecember 31, 2017 Other real estate owned: One–to–four family residential real estate$— $— $102 $102Nonresidential real estate— — 814 814Other real estate owned$— $— $916 $916 December 31, 2016 Impaired loans: Nonresidential real estate$— $— $234 $234Impaired loans$— $— $234 $234Other real estate owned: One–to–four family residential real estate$— $— $1,282 $1,282Nonresidential real estate— — 553 553Land— — 47 47Other real estate owned$— $— $1,882 $1,882At December 31, 2017 there were no impaired loans that were measured for impairment using the fair value of the collateral for collateral–dependent loansand which had specific valuation allowance, compared to one impaired loan with a carrying amount of $260,000 and a valuation allowance of $26,000 atDecember 31, 2016, resulting in a decrease in the provision for loan losses of $26,000 for the year ended December 31, 2017, compared to an decrease in theprovision for loan losses of $18,000 for the year ended December 31, 2016.OREO is carried at the lower of cost or fair value less costs to sell, had a carrying value of $1.2 million less a valuation allowance of $261,000, or $916,000,at December 31, 2017, compared to $2.3 million less a valuation allowance of $434,000, or $1.9 million at December 31, 2016. There were $333,000 and$314,000 of valuation allowance additions charged to expense of OREO recorded for the years ended December 31, 2017 and 2016, respectively.The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financialinstruments measured at fair value on a non-recurring basis at December 31, 2017: Fair Value ValuationTechnique UnobservableInput Range(WeightedAverage)Other real estate owned One-to-four family residential real estate$102 Sales comparison Discount applied tovaluation 5.6%Nonresidential real estate814 Sales comparison Comparison betweensales and incomeapproaches -3.66% to15.22%(11.0%) $916 89Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – FAIR VALUE (continued)The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financialinstruments measured at fair value on a non-recurring basis at December 31, 2016: Fair Value ValuationTechnique UnobservableInput Range(WeightedAverage)Impaired loans Nonresidential real estate$234 Sales comparison Comparisonbetween salesand incomeapproaches -10.2% Income approach Cap Rate 8.5% $234 Other real estate owned One-to-four family residential real estate$1,282 Sales comparison Discount appliedto valuation 8.62% to 20.04%(11.9%)Nonresidential real estate553 Sales comparison Comparisonbetween salesand incomeapproaches -3.22% to 4.58%(3.7%)Land47 Sales comparison Discount appliedto valuation 5.74% to 31.60%(25.2%) $1,882 The carrying amount and estimated fair value of financial instruments is as follows: Fair Value Measurements at December 31, 2017 Using: CarryingAmount Level 1 Level 2 Level 3 TotalFinancial assets Cash and cash equivalents$127,592 $13,572 $114,020 $— $127,592Securities93,383 499 92,884 — 93,383Loans receivable, net of allowance for loan losses1,314,651 — 1,323,139 — 1,323,139FHLB and FRB stock8,290 — — — N/AAccrued interest receivable4,619 — 4,619 — 4,619Financial liabilities Noninterest-bearing demand deposits$234,354 $— $234,354 $— $234,354NOW and money market accounts589,238 589,238 589,238Savings deposits160,501 — 160,501 — 160,501Certificates of deposit355,958 — 353,969 — 353,969Borrowings60,768 — 60,627 — 60,627Accrued interest payable147 — 147 — 14790Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 15 – FAIR VALUE (continued) Fair Value Measurements at December 31, 2016 Using: CarryingAmount Level 1 Level 2 Level 3 TotalFinancial assets Cash and cash equivalents$96,684 $13,053 $83,631 $— $96,684Securities107,212 499 106,713 — 107,212Loans receivable, net of allowance for loanlosses1,312,952 — 1,322,713 234 1,322,947FHLB and FRB stock11,650 — — — N/AAccrued interest receivable4,381 — 4,381 — 4,381Financial liabilities Noninterest-bearing demand deposits$249,539 $— $249,539 $— $249,539NOW and money market accounts578,237 578,237 578,237Savings deposits160,002 — 160,002 — 160,002Certificates of deposit351,612 — 350,593 — 350,593Borrowings51,069 — 50,015 — 50,015Accrued interest payable102 — 102 — 102For 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 theseassets.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 Companywould charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid. The methodsutilized to estimate fair value of loans do not necessarily represent an exit price. The estimated fair values of loans held-for-sale are based on outstandingcommitments from third-party investors.FHLB and FRB Stock: It is not practicable to determine the fair value of FHLB and FRB 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-bearingdemand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at alevel that approximates the local market area. Additionally, these deposits can be withdrawn on demand.Borrowings: The estimated fair values of advances from the FHLB and notes payable are based on current market rates for similar financing. The estimatedfair value 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 ofcredit. 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 onthe various circumstances. The estimated fair values would also not apply to subsequent dates.In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.91Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 16 – COMPANY ONLY CONDENSED FINANCIAL INFORMATIONCondensed financial information of BankFinancial Corporation as of December 31, 2017 and 2016 and for the three years ended December 31, 2017 follows:Condensed Statements of Financial Condition December 31, 2017 2016Assets Cash in subsidiary$6,393 $14,543Loan receivable from ESOP— 10,767Investment in subsidiary188,873 176,756Deferred tax asset2,076 2,367Other assets3,307 347 $200,649 $204,780Liabilities and Stockholders' Equity Accrued expenses and other liabilities$3,015 $—Total stockholders’ equity197,634 204,780 $200,649 $204,780Condensed Statements of Operations For the years ended December 31, 2017 2016 2015Interest income$110 $503 $544Dividends from subsidiary10,629 16,888 19,710Other expense1,693 1,846 1,536Income before income tax and undistributed subsidiary income9,046 15,545 18,718Income tax expense (benefit)290 (502) (783)Income before equity in undistributed subsidiary income8,756 16,047 19,501Equity in undistributed subsidiary income (excess distributions)248 (8,545) (10,826)Net income$9,004 $7,502 $8,67592Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 16 – COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)Condensed Statements of Cash Flows For the years ended December 31, 2017 2016 2015Cash flows from operating activities Net income$9,004 $7,502 $8,675Adjustments: Equity in undistributed subsidiary excess distributions(248) 8,545 10,826Change in other assets(2,712) (497) (793)Change in accrued expenses and other liabilities3,015 — —Net cash from operating activities9,059 15,550 18,708Cash flows from investing activities Principal payments received on ESOP loan— 1,032 992Net cash from investing activities— 1,032 992Cash flows from financing activities Net exercise of stock options(1,237) — —Repurchase and retirement of common stock(10,819) (13,215) (9,970)Cash dividends paid on common stock(5,153) (4,133) (4,145)Net cash used in financing activities(17,209) (17,348) (14,115)Net change in cash in subsidiary(8,150) (766) 5,585Beginning cash in subsidiary14,543 15,309 9,724Ending cash in subsidiary$6,393 $14,543 $15,309NOTE 17 – SELECTED QUARTERLY FINANCIAL DATA (unaudited) For the year ended December 31, 2017 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterInterest income$13,362 $13,649 $14,121 $15,047Interest expense1,276 1,456 1,615 1,742Net interest income12,086 12,193 12,506 13,305Provision for (recovery of) loan losses161 49 (225) (72)Net interest income11,925 12,144 12,731 13,377Noninterest income1,544 1,607 1,623 1,634Noninterest expense11,266 9,607 10,200 9,318Income before income taxes2,203 4,144 4,154 5,693Income tax expense322 1,572 594 4,702Net income$1,881 $2,572 $3,560 $991Basic earnings per common share$0.10 $0.14 $0.20 $0.06Diluted earnings per common share0.10 0.14 0.20 0.06The Company recorded net income of $1.0 million, or $0.06 per common share, for the fourth quarter of 2017. The Company’s net interest income beforeprovision for loan losses was $13.3 million due to stronger loan originations and improved asset quality, which was offset by increased interest bearingliabilities at higher cost of funds. The Company’s fourth quarter 2017 operating results included a $2.5 million provision for taxes related to Tax Cuts andJobs Act of 2017.93Table of ContentsBANKFINANCIAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Table amounts in thousands, except share and per share data)NOTE 17 – SELECTED QUARTERLY FINANCIAL DATA (unaudited) (continued) For the year ended December 31, 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterInterest income$12,759 $12,581 $12,845 $12,743Interest expense856 952 1,014 1,148Net interest income11,903 11,629 11,831 11,595Provision for (recovery of) loan losses(490) 1,315 (525) (539)Net interest income12,393 10,314 12,356 12,134Noninterest income1,594 1,537 1,637 1,777Noninterest expense10,930 10,506 9,912 10,194Income before income taxes3,057 1,345 4,081 3,717Income tax expense1,153 514 1,573 1,458Net income$1,904 $831 $2,508 $2,259Basic earnings per common share$0.10 $0.04 $0.13 $0.12Diluted earnings per common share0.10 0.04 0.13 0.12The Company recorded net income of $2.3 million, or $0.12 per common share, for the fourth quarter of 2016. The Company’s net interest income beforeprovision for loan losses was $11.6 million due to stronger loan originations and improved asset quality. The Company’s fourth quarter 2016 operatingresults included a $539,000 recovery of loan losses. Noninterest expense included gains on OREO sales of $113,000 and $177,000 of nonperforming assetmanagement and OREO expense.94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 evaluatedthe effectiveness 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 the end of the period covered by this report (“Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal FinancialOfficer concluded that, as of the Evaluation 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 ourindependent registered public accounting firm are set forth under “Report of Management on Internal Control Over Financial Reporting” and “Report ofIndependent Registered Public Accounting Firm on Internal Control Over Financial Reporting” under Item 8 “Financial Statements and SupplementaryData.”(c) Changes in internal controls.There were no changes made in our internal controls during the fourth quarter of 2017 or, to our knowledge, in other factors that have materially affected, orare reasonably likely to materially affect, these controls.See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 included as Exhibits 31.1 and 31.2 to this Annual Report.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 byamendment to this Annual Report on 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, officersand 10 percent stockholders required by this item will be filed with the Securities and Exchange Commission by amendment to this Annual Report on Form10-K, not later than 120 days after 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, principalaccounting officer, and persons performing similar functions. A copy of our Code of Ethics was attached as Exhibit 14 to our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 27, 2006. We have also adopted a Code of Business Conduct, pursuant to NASDAQrequirements, that applies generally 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 AnnualReport on Form 10-K, not later than 120 days after the end of our fiscal year.95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 andExchange Commission by amendment to this Annual Report on 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 31,2017: 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 940 $12.30 —Equity compensation plans not approved by stockholders — — —Total 940 $12.30 — Column (A) represents stock options and restricted stock outstanding under the Company’s 2006 Equity Incentive Plan. Column (B) represents the weighted-average exercise price ofthe outstanding stock options only; the outstanding restricted stock awards are not included in this calculation. Column (C) represents the maximum aggregate number of future equityawards that can be made under the 2006 Equity Incentive Plan as of December 31, 2017.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information concerning certain relationships and related transactions required by this item will be filed with the Securities and Exchange Commission byamendment to this Annual Report on 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 AnnualReport on 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 Statementsand Supplementary Data.”(A)Report of Independent Registered Accounting Firm(B)Consolidated Statements of Financial Condition at December 31, 2017 and 2016(C)Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015(D)Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015(E)Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015(F)Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015(G)Notes to Consolidated Financial Statements(a)(2) Financial Statement SchedulesNone.96Table of Contents(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 November4, 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 Exhibit 10.1 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities andExchange Commission 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,originally filed with the Securities and Exchange Commission onSeptember 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,originally filed with the Securities and Exchange Commission onSeptember 5, 200610.8 Form of Non-Qualified Stock Option Award Terms Exhibit 10.3 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onSeptember 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,originally filed with the Securities and Exchange Commission onSeptember 5, 200610.10 Form of Restricted Stock Unit Award Agreement Exhibit 10.5 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onSeptember 5, 200610.11 Form of Performance Based Restricted Stock Award Agreement Exhibit 10.6 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onSeptember 5, 200610.12 Form of Restricted Stock Award Agreement Exhibit 10.7 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onSeptember 5, 200697Table of Contents Exhibit Location10.13 Form of Stock Appreciation Rights Agreement Exhibit 10.8 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onSeptember 5, 200610.14 BankFinancial Corporation Employment Agreement with F. Morgan Gasior Exhibit 10.1 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onOctober 20, 200810.15 BankFinancial Corporation Employment Agreement with Paul A. Cloutier Exhibit 10.2 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onOctober 20, 200810.16 BankFinancial Corporation Employment Agreement with James J. Brennan Exhibit 10.3 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onOctober 20, 2008.10.17 BankFinancial Corporation Employment Agreement with Elizabeth A.Doolan Exhibit 10.28 to the Annual Report on Form 10-K of theCompany, originally filed with the Securities and ExchangeCommission on February 23, 2009.10.18 BankFinancial FSB Employment Agreement with Elizabeth A. Doolan Exhibit 10.29 to the Annual Report on Form 10-K of theCompany, originally filed with the Securities and ExchangeCommission on February 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 theCompany, originally filed with the Securities and ExchangeCommission on March 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 theCompany, originally filed with the Securities and ExchangeCommission on March 11, 201310.23 Form of Amendment No. 1 to BankFinancial Corporation EmploymentAgreement Exhibit 10.35 to the Annual Report on Form 10-K of theCompany, originally filed with the Securities and ExchangeCommission on March 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,originally filed with the Securities and Exchange Commission onMay 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,originally filed with the Securities and Exchange Commission onApril 29, 201610.26 Form of Extension of Term of Employment Period, for Named ExecutiveOfficers of BankFinancial FSB (pursuant to terms of existing agreements) Exhibit 10.2 to the Report on Form 8-K of the Company,originally filed with the Securities and Exchange Commission onApril 29, 201614 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 herewith31.1 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 theSarbanes-Oxley Act of 2002 Filed herewith98Table of Contents Exhibit Location32 Certification of Chief Executive Officer and Chief Financial Officer pursuantto Section 906 of the Sarbanes-Oxley Act of 2002* Furnished herewith101 The following financial statements from the BankFinancial CorporationAnnual Report on Form 10-K for the year ended December 31, 2017,formatted in Extensive Business Reporting Language (XBRL):(i) consolidated statements of financial condition, (ii) consolidatedstatements of operations, (iii) consolidated statements of comprehensiveincome, (iv)consolidated statements of changes in stockholders' equity,(v)consolidated statements of cash flows and (vi) the notes to consolidatedfinancial 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 andfurnished to the Securities and Exchange Commission or its staff upon request.ITEM 16.FORM 10-K SUMMARYNot Applicable.99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 itsbehalf by the undersigned, thereunto duly authorized. BANKFINANCIAL CORPORATIONDate:February 23, 2018By:/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 andin the capacities and on the dates indicated.Signatures Title Date /s/ F. Morgan Gasior Chairman of the Board, Chief Executive Officer and President February 23, 2018F. Morgan Gasior (Principal Executive Officer) /s/ Paul A. Cloutier Executive Vice President and Chief Financial Officer February 23, 2018Paul A. Cloutier (Principal Financial Officer) /s/ Elizabeth A. Doolan Senior Vice President and Controller February 23, 2018Elizabeth A. Doolan (Principal Accounting Officer) /s/ Cassandra J. Francis Director February 23, 2018Cassandra J. Francis /s/ John M. Hausmann Director February 23, 2018John M. Hausmann /s/ Thomas F. O'Neill Director February 23, 2018Thomas F. O'Neill /s/ John W. Palmer Director February 23, 2018John W. Palmer /s/ Terry R. Wells Director February 23, 2018Terry R. Wells /s/ Glen R. Wherfel Director February 23, 2018Glen R. Wherfel 100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 23, 2018, 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 23, 2018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 thisreport;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 inExchange Act 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 the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially 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 arereasonably likely 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 internalcontrol over financial reporting.Date:February 23, 2018 /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 thisreport;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 inExchange Act 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 the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially 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 arereasonably likely 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 internalcontrol over financial reporting.Date:February 23, 2018 /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”)and Paul A. Cloutier, Executive Vice President and Chief Financial Officer of the Company, each certify in his capacity as an officer of the Company that hehas reviewed the Annual Report on Form 10-K for the year ended December 31, 2017 (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 23, 2018 /s/ F. Morgan Gasior F. Morgan Gasior Chairman of the Board, Chief Executive Officerand PresidentDate:February 23, 2018 /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 tothe Securities and Exchange Commission or its staff upon request.

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