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EX-31.2 - EXHIBIT 31.2 - BankFinancial CORPbfin2017311210-kex312cfo.htm
EX-32 - EXHIBIT 32 - BankFinancial CORPbfin-20173112x10xkxex32.htm
EX-31.1 - EXHIBIT 31.1 - BankFinancial CORPbfin2017311210-kex311ceo.htm
EX-23 - EXHIBIT 23 - BankFinancial CORPbfin-20173112x10xkxex23con.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from             to             
Commission File Number 0-51331
 
BANKFINANCIAL CORPORATION
(Exact Name of Registrant as Specified Its Charter)
 
Maryland
75-3199276
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification 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 share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the issuer is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 posted pursuant 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's knowledge, 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
 
x
Non-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 financial accounting 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, as quoted 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 REFERENCE
None




BANKFINANCIAL CORPORATION
Form 10-K Annual Report
Table of Contents
 
 
Page
Number
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
 
 
Item 15.
Item 16.
 
 
 



PART I
ITEM 1.
 BUSINESS
Forward Looking Statements
This Annual Report on Form 10-K contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial 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 and expectations, as well as our future revenues, expenses, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “continue,” “expect,” “estimate,” “intend,” “anticipate,” “project,” “plan,” or similar expressions. Forward looking statements are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.
Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) less than anticipated loan growth due to intense competition for high quality loans and leases, particularly in terms of pricing and credit underwriting, or a dearth of borrowers who meet our underwriting standards; (ii) the impact of re-pricing 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 increased delinquencies 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 that adversely impact the value of our loan collateral, Other real estate owned ("OREO"), asset dispositions and the level of borrower equity in their investments; (vi) borrowers that experience legal or financial difficulties that we do not currently foresee; (vii) results of supervisory monitoring or examinations by regulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (viii) changes, disruptions or illiquidity in national or global financial markets; (ix) the credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs or changes in estimates relating to the computation of our allowance for loan losses; (x) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; (xi) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors' pricing initiatives on our deposit products; (xii) legislative or regulatory changes that have an adverse impact on our products, services, operations and operating expenses; (xiii) higher federal deposit insurance premiums; (xiv) higher than expected overhead, infrastructure and compliance costs; (xv) changes in accounting principles, policies or guidelines; and (xvi) privacy and cybersecurity risks, including the risks of business interruption and the 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 and undue reliance should not be placed on such statements. Forward looking statements speak only as of the date they are made. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
BankFinancial Corporation
BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois (the “Company”), became the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”) on June 23, 2005, when we consummated a plan of conversion and reorganization that the Bank and 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 holding company 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 Office of 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. to BankFinancial, 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 to make operating and strategic decisions.


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BankFinancial, National Association
The Bank is a full-service, community-oriented national bank principally engaged in the business of commercial, family and personal banking. The Bank offers our customers a broad range of loan, deposit, and other financial products and services through 19 full-service Illinois based banking offices located in Cook, DuPage, Lake and Will Counties, and through our Internet Branch, www.bankfinancial.com.
The Bank’s primary business is making loans and accepting deposits. The Bank also offers our customers a variety of financial products and services that are related 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 the most significant portion of our revenues from these geographic areas. However, we also engage in multi-family lending activities in selected Metropolitan Statistical 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, competitive pricing, our Internet Branch and related deposit services such as cash management to attract and retain these deposits. While we accept certificates of deposit in excess of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limits, we generally do not solicit such deposits because they are more difficult to retain than core deposits and at times are more costly than wholesale deposits.
Lending Activities
Our loan portfolio consists primarily of multi-family real estate, nonresidential real estate, construction and land loans, commercial loans and commercial leases, 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, $588.4 million, 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 nonresidential real 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 portfolio consisted 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 loan portfolio 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 occupied residential properties, including home equity loans and lines of credit.
Deposit Activities
Our deposit accounts consist principally of savings accounts, NOW accounts, checking accounts, money market accounts, certificates of deposit, and IRAs and other retirement accounts. We provide commercial checking accounts and related services such as cash management. We also provide low-cost checking account services. We rely on our favorable locations, customer service, competitive pricing, our Internet Branch and related deposit services such as cash management 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, or 55.9% 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 or less.
Related Products and Services
The 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 estate acquired through foreclosure and collection actions, and recorded a net loss of $601,000 for the year ended December 31, 2017.


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Website and Stockholder Information
The website for the Company and the Bank is www.bankfinancial.com. Information on this website does not constitute part of this Annual Report on Form 10-K.
The Company makes available, free of charge, its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after such forms are filed with or furnished to the Securities and Exchange Commission (“SEC”). Copies of these documents are available to stockholders at the website for the Company and the Bank, www.bankfinancial.com, under “Investor Relations,” and through the EDGAR database on the SEC’s website, www.sec.gov.
Competition
We face significant competition in originating loans and attracting deposits. The Chicago Metropolitan Statistical Area and the other markets in which we operate generally have a high concentration of financial institutions, many of which are significantly larger institutions that have greater financial resources than we have, and many of which are our competitors to varying degrees. Our competition for loans and leases comes principally from commercial banks, savings banks, mortgage banking companies, the U.S. Government, credit unions, leasing companies, insurance companies, real estate conduits and other companies that provide financial services to businesses and individuals. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from online financial institutions and non-depository competitors such as 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 time to time reward long-standing relationships with preferred rates and terms on deposit products based on existing and prospective lending business. We do not rely on any individual, group or entity for a material portion of our loans or our deposits.
Employees
At December 31, 2017, we had 209 full-time employees and 50 part-time employees. The employees are not represented by a collective bargaining unit and we consider our working relationship with our employees to be good.
Supervision and Regulation
General
On 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 and supervised primarily by the OCC. The Bank is also subject to regulation by the FDIC in more limited circumstances because the Bank’s deposits are insured by 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 on any identified deficiencies, if any. After completing an examination, the OCC issues a report of examination and assigns a rating (known as an institution’s CAMELS rating). Under federal law and regulations, an institution may not disclose the contents of its reports of examination or its CAMELS ratings to the public.
The Bank is a member of, and owns stock in, the Federal Home Loan Bank of Chicago (“FHLB”) and the Federal Reserve Bank of Chicago. The Board of Governors 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 and state laws, especially in matters concerning the ownership of deposit accounts, and the form and content of the Bank’s consumer loan documents.
The 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 Company was previously a savings and loan holding company but became a bank holding company in connection with the Bank’s conversion to a national bank charter 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 more difficult 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,


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the Consumer Financial Protection Bureau (“CFPB”) or the United States ("U.S.") Congress could have a material adverse impact on the Company, the Bank and 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 by reference to the actual laws and regulations involved.
Federal Banking Regulation
Business Activities. As a national bank, the Bank derives its lending and investment powers from the National Bank Act, as amended, and the regulations of the OCC. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and nonresidential real estate, commercial business and consumer loans and leases, certain types of securities and certain other loans and assets. Unlike federal savings banks, national banks are not generally subject to specified percentage of assets on various types of lending. The Bank may also establish subsidiaries that engage in activities permitted for the Bank as well as certain other activities.
Capital Requirements. Federal regulations require FDIC-insured depository institutions, including national banks, to meet several minimum capital standards: 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-based assets 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 final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd Frank 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 retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale securities). 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-sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks 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 weight of 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 family residential mortgages and certain qualifying multi-family mortgage loans, a risk weight of 100% is assigned to commercial, commercial real estate and consumer 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 payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 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 conservation buffer 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 an appropriate 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 total risk-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 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


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or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels. In addition, in accordance with its Regulatory Capital Plan, the Company will 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 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% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2017, the Bank was in compliance with the loans-to-one-borrower limitations.
Dividends. Federal law and OCC regulations govern cash dividends by a national bank. A national bank is authorized to pay such dividends from undivided profits but must receive prior OCC approval if the total amount of dividends (including the proposed dividend) exceeds its net income in that year and the prior two years less dividends previously paid. A national bank may not pay a dividend if it does not comply with applicable regulatory capital requirements and 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”) and related federal regulations to help meet the credit needs of their communities, including low- and moderate- income neighborhoods. In connection with its examination 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 Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices based on the characteristics specified in those statutes. 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 activities such as branching or mergers. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. The Bank’s CRA performance has been rated as “Outstanding” by its primary 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 Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an insured depository institution, although operating subsidiaries of national banks are generally not considered affiliates for the purposes of Sections 23A and 23B of the Federal Reserve Act. The Company is an affiliate of the Bank. In general, transactions with 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 of these transactions are restricted to an aggregate percentage of the bank’s capital. Collateral in specified amounts must be provided by affiliates in order to receive 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 currently governed 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 extensions of 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 unfavorable features (subject to an exception for lending programs open to employees generally). In addition, there are limitations on the amount of credit extended to such 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 the prior approval of the Bank’s Board of Directors. Extensions of credit to executive officers are subject to additional restrictions. The Bank does not extend new 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 or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and 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, in which 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 with respect 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 under its jurisdiction. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth


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the standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address matters such as internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. A subsequent set of guidelines was issued for information security. If the OCC determines that a national bank fails to meet any standard prescribed by the guidelines, it may require the institution to submit to the agency an acceptable plan to achieve compliance 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 do not 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 previously mentioned 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 greater and 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, a Tier 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 than 4.0% 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 ratio of 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%. An institution 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 or less 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 capital restoration 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 the OCC, 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 has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collect payment 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 become adequately capitalized a requirement to reduce total assets, cease receipt of deposits from correspondent banks or dismiss officers or directors and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. The OCC may also take any one of a number of discretionary supervisory actions against 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 the Bank 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 were assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s rate depended upon the risk category to which it is assigned and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower FDIC assessments. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. 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 and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund's reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion in total 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 operating expenses and results of operations of the Bank. The Bank cannot predict what its insurance assessment rates will be in the future.


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An insured institution’s deposit insurance may be terminated by the FDIC upon an administrative finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980’s to recapitalize the former Federal Savings and Loan Insurance 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 the institution 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 the Federal Reserve System, the Bank is required to acquire and hold shares of capital stock in its regional Federal Reserve Bank, the Federal Reserve Bank of Chicago, in specified amounts. The Bank is also required to maintain noninterest-earning reserves against its transaction accounts, such as negotiable order of withdrawal and regular checking accounts. The balances maintained to meet the reserve requirements may be used to satisfy liquidity requirements imposed 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 backup source of funding to depository institutions through the regional Federal Reserve Banks pursuant to section 10B of the Federal Reserve Act and Regulation A. In general, eligible depository institutions have access to three types of discount window credit-primary credit, secondary credit, and seasonal credit. All discount 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 to acquire 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 Act
The USA PATRIOT Act and the Bank Secrecy Act require financial institutions to develop programs to detect and report money-laundering and terrorist activities, as well as suspicious activities. The USA PATRIOT Act also gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The federal banking agencies are required to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. In addition, non-compliance with these laws and regulations could result in fines, penalties and other enforcement measures. We have developed policies, procedures and systems designed to comply with these laws and regulations.
Holding Company Regulation
The 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 or prohibit 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 be closely related or a proper incident to banking or managing or controlling banks. A bank holding company that meets certain criteria may elect to be regulated 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 all of the assets of, another bank or bank holding company, without prior written approval of the FRB. In evaluating applications by bank holding companies to acquire banks, the FRB considers, among other things, the financial and managerial resources and future prospects of the parties, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and needs of the community, competitive factors and compliance with anti-money laundering laws.


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Capital. Bank holding companies such as the Company with greater than $1 billion in total consolidated assets are subject to consolidated regulatory capital requirements. The Dodd-Frank Act, required the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions. The previously discussed 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 the specified 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 depository institutions in the event the subsidiary depository institution experiences financial difficulty. The FRB has issued regulations requiring that all bank holding companies 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 policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior consultation with Federal Reserve Bank supervisory staff concerning dividends in certain circumstances, such as where the company’s net income for the past four 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 is inconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. FRB regulatory guidance also indicates that a bank holding company should inform Federal Reserve Bank staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. FRB regulations require prior approval for a bank holding company to redeem equity securities if the gross consideration, when combined with net consideration paid for all such redemptions during the preceding 12 months, will equal 10% 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 capital distributions.
Change in Control Regulations
Under 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 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquiror and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding 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’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, as is the case with the Company, the issuer has securities registered under Section 12 of the Exchange Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Exchange Act.
The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the SEC and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC.
Federal Securities Laws
The Company’s common stock is registered with the SEC under the Exchange Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act.


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Taxation
Federal Taxation. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive 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 recapture into 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 tax bad 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. This reserve 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 net operating losses may be carried forward to the succeeding 20 taxable years. At December 31, 2017, the Company had a federal net operating loss carryforward of $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 the State 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 these fees 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 begin to expire in 2022.
Deferred Income Taxes. The Company evaluates deferred taxes for recoverability using an approach that considers the relative impact of negative and positive 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-approved business plans and ongoing tax planning. Only those tax planning strategies that are both prudent and feasible, and which management has the ability and intent to implement, may be incorporated into the analysis and assessment.
ITEM 1A.    RISK FACTORS
An investment in our securities is subject to risks inherent in our business and the industry in which we operate. Before making an investment decision, you should carefully consider the risks and uncertainties described below and all other information included in this report. The risks described below may adversely 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 may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our 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 in future periods.
Our future growth and success will depend on our ability to compete effectively in a highly competitive environment
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, our competitive strategies have focused on attracting deposits in our local markets, and growing our loan and lease portfolio by emphasizing specific loan products in which we have significant experience and expertise, identifying and targeting markets in which we believe we can effectively compete with larger institutions and other competitors, and offering competitive pricing to commercial 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 our competitors offer products and services that we do not offer, and some offer loan structures and have underwriting standards that are not as restrictive as our required loan structures and underwriting standards. Some larger competitors have substantially greater resources and lending limits, name recognition and market presence that benefits them in attracting business. In addition, larger competitors may be able to price loans, leases and deposits more aggressively than we do, and because of their larger capital bases, their underwriting practices for smaller loans may be subject to less regulatory scrutiny than they would be for smaller banks. Newer competitors may be more aggressive in pricing loans, leases and deposits in order to increase their market share. Some of the financial institutions and financial services organizations with which we compete are not subject


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to the extensive regulations imposed on national banks and their holding companies. As a result, these nonbank competitors have certain advantages over us in accessing funding and in providing various financial services.
Changes in market interest rates could adversely affect our financial condition and results of operations
Our 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 the difference 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 and international 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 interest rates, but also by the shape of the yield curve and relationships between interest sensitive instruments and key driver rates, including credit risk spreads, and by balance sheet growth, customer loan and deposit preferences and the timing of changes in these variables which themselves are impacted by changes in market 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 our assets 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 of interest 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 interest bearing liabilities increase at a faster rate than the interest rates received on loans and other interest earning assets, our net interest income, and therefore earnings, 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 higher payment amounts we would receive on adjustable-rate or variable-rate loans in a rising interest rate environment may increase our interest income, some borrowers 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 the demand 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 utilize enhanced risk management techniques
A substantial portion of our loan portfolio is secured by real estate. Our commercial real estate loan portfolio generally consists of multi-family mortgage loans originated in selected geographic markets and nonresidential real estate loans originated in the Chicago market. At December 31, 2017, our loan portfolio included $588.4 million in multi-family mortgage loans, or 44.5% of total loans, and $131.2 million in non-owner occupied nonresidential real estate 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 at December 31, 2017, and thus are considered a concentration of credit for regulatory purposes. Concentrations of credit are pools of loans whose collective performance has the potential to affect a bank negatively even if each individual transaction within the pool is soundly underwritten. When loans in a pool are sensitive to the same economic, financial, or business development, that sensitivity, if triggered, could cause the sum of the transactions to perform as if it were 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 into account the potential impact on earnings and capital under stressed market conditions, economic downturns, and periods of general market illiquidity as well as 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 Bank has taken other specific steps to mitigate concentrations of credit risk, including the establishment of concentrations of credit limits based on loan type and geography, the maintenance of capital in excess of the minimum regulatory requirements, the establishment of appropriate underwriting standards for specific loan types and geographic markets, active portfolio management and an emphasis on originating multi-family loans that qualify for 50% risk-weighting under 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 loan portfolio, qualified for 50% risk-weighting under the regulatory capital rules. The Bank’s earnings and capital could be materially and adversely impacted if economic, financial, or business developments were to occur that materially and adversely impacted all or a material portion of the Bank’s commercial real estate 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 could negatively affect our financial condition or results of operations
Except for our commercial equipment leasing and healthcare lending activities, which we conduct on a nationwide basis, and our multi-family lending activities, which we conduct in selected Metropolitan Statistical Areas, including, but not limited to, the


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Metropolitan Statistical Areas for Chicago, Illinois, Dallas, Texas, Denver, Colorado, Tampa, Florida and Minneapolis, Minnesota, our loan and deposit activities are generally conducted in the Metropolitan Statistical Area for Chicago, Illinois. Our loan and deposit activities are directly affected by, and our financial success depends on, economic conditions within the local markets in which we do business, as well as conditions in the industries on which those markets are economically dependent. A deterioration in local economic conditions or in the condition of an industry on which a local market depends could adversely affect such factors as unemployment rates, business formations and expansions, housing demand, apartment vacancy rates and real estate values in the local market, and this could result in, among other things, a decline in loan and lease demand, a reduction in the number of creditworthy borrowers seeking loans, an increase in loan delinquencies, defaults and foreclosures, an increase in classified and nonaccrual loans, a decrease in the value of the collateral for our loans, and a decline in the net worth and liquidity of our borrowers and guarantors. Any of these factors could negatively affect our financial condition 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 local economic 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 may be 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, which could 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 and the economic vitality of the City and State
The City of Chicago and the State of Illinois are experiencing significant financial difficulties, including material pension funding shortfalls. These issues could impact the economic vitality of the City of Chicago and the State of Illinois and the businesses operating there, encourage businesses to leave the City of 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 the payment of accounts receivable owed to borrowers that conduct business with the State of Illinois and Medicaid payments to nursing homes and other healthcare providers in Illinois, and impair their ability to repay their loans when due.
Repayment of our commercial and commercial real estate loans typically depends on the cash flows of the borrower. If a borrower's cash flows weaken or 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 loss reserves or record a charge-off
We underwrite our commercial and commercial real estate loans primarily based on the historical and expected cash flows of the borrower. Although we consider 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. We follow 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 primary source 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 debt obligation. The OCC's loan risk-rating guidance typically does not consider secondary repayment sources until the strength of the primary repayment source weakens, 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 cash flows weaken or become uncertain, the loan may need to be classified, whether or not the loan is performing or fully secured. In addition, real estate appraisers typically place significant weight on the cash flows generated by income-producing real estate and the reliability of the cash flows in performing valuations. Thus, economic or borrower-specific conditions that cause a decline in a borrower's cash flows could cause our loan classifications to increase and the appraised value of the 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 loans may fluctuate in value
We lend money to small and mid-sized independent leasing companies to finance the debt portion of leases. A lease loan results when a leasing company discounts 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 our commercial loans. Lease loans generally are non-recourse to the leasing company, and, consequently, our recourse is limited to the lessee and the leased equipment. As with commercial loans secured by equipment, the equipment securing our lease loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We rely on the lessee’s continuing financial stability, rather than the value of the leased equipment, for the repayment of all required amounts under lease loans. In the event of a default on a lease loan, the proceeds from the sale of the leased equipment may not be sufficient


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to 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 total loan portfolio.
Our loan portfolio includes loans to healthcare providers, and the repayment of these loans is largely dependent upon the receipt of direct or indirect governmental reimbursements
At December 31, 2017, we had $118.6 million of loans and unused commitments to a variety of healthcare providers, including lines of credit secured by healthcare 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 to them 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 the services provided. The failure of a direct or indirect payor to make reimbursements owed to the operators of these facilities, or a significant delay in the making of such reimbursements, could adversely affect the ability of the operators of these facilities to repay their obligations to us. In addition, changes to national health care policy involving private health insurance policies may also affect the business prospects and financial condition or operations of commercial 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 impacted
In the event that our loan customers do not repay their loans according to their terms, and the collateral securing the repayment of these loans is insufficient to cover any remaining loan balance, including expenses of collecting the loan and managing and liquidating the collateral, we could experience significant loan 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, our allowance 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 the amount 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 of our 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 concerning our legal positions and the priority of our liens and interests in contested legal or bankruptcy proceedings, and at times, we may lack sufficient information to establish adequate specific reserves for loans involved in such proceedings. We base these estimates, assumptions and judgments on information that we consider reliable, but if an estimate, assumption or judgment that we make ultimately proves to be incorrect, additional provisions to our allowance for loan losses may become necessary. In addition, as an integral part of their supervisory and/or examination process, the OCC periodically reviews the methodology for 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 their inclusion, 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 condition and results of operations
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company and the Bank for our first fiscal year after December 15, 2019.  This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.  This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses. Accordingly, regardless of any actual changes to the composition or performance of our loan portfolio, the new accounting standard may require an increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses, and may therefore have a material adverse effect on our financial condition 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 additional capital, or constrain us from paying dividends or repurchasing shares
In July 2013, the federal banking agencies approved a new rule that substantially amends the regulatory risk-based capital rules applicable to the Bank and the 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 of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased


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from 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 gains and 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 the following 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 of 10.5%. The phase in of the new capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that 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 these new 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, the imposition 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 capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying 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, which may 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 risk of cyber-attack or cyber-theft
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, general ledger and virtually all other aspects of our business. We depend on the secure processing, storage and transmission of confidential and other information in our data processing systems, computers, networks and communications systems. Although we take numerous protective measures and otherwise endeavor to protect and maintain the privacy and security of confidential data, these systems may be vulnerable to unauthorized access, computer viruses, other malicious code, cyber-attacks, cyber-theft and other events that could have a security impact. If one or more of such events were to occur, this potentially could jeopardize confidential and other information processed and stored in, and transmitted through, our systems or otherwise cause interruptions or malfunctions in our or our customers' operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully covered by our insurance. Security breaches involving our network or Internet banking systems could expose us to possible liability and deter customers from using our systems. We rely on specific software and hardware systems to provide the security and authentication necessary to protect our network and Internet banking systems from compromises or breaches of our security measures. These precautions may not fully protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business. Although we perform most data processing functions internally, we outsource certain services to third parties. If our third-party providers encounter operational difficulties or security breaches, it could affect our ability to adequately process and account for customer transactions, which could significantly affect our business operations.
Our operations rely on numerous external vendors
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us.


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Our business and operations could be significantly impacted if we or our third-party vendors suffer failure or disruptions of information processing systems, systems failures or security breaches
We have become increasingly dependent on communications, data processing and other information technology systems to manage and conduct our business and support our day-to-day banking, investment, and trust activities, some of which are provided through third-parties. If we or our third-party vendors encounter difficulties or become the subject of a cyber-attack on or other breach of their operational systems, data or infrastructure, or if we have difficulty communicating with any such third-party system, our business and operations could suffer. Any failure or disruption to our systems, or those of a third-party vendor, could impede our transaction processing, service delivery, customer relationship management, data processing, financial reporting or risk management. Although we take ongoing monitoring, detection, and prevention measures and perform penetration testing and periodic risk assessments, our computer systems, software and networks and those of our third-party vendors may be or become vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses, denial of service attacks, malicious social engineering or other malicious code, or cyber-attacks beyond what we can reasonably anticipate and such events could result in material loss. If any of our financial, accounting or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Security breaches in our online banking systems could also have an adverse effect on our reputation and could subject us to possible liability. Additionally, we could suffer disruptions to our systems or damage to our network infrastructure from events that are wholly or partially beyond our control, such as electrical or telecommunications 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 of customer business, additional regulatory scrutiny, or exposure to civil litigation, additional costs and possible financial liability. In addition, our business is highly dependent on our ability to process, record and monitor, on a continuous basis, a large number of transactions. To do so, we are dependent on our employees and therefore, the potential for operational risk exposure exists throughout our organization, including losses resulting from human error. We could be materially adversely affected if one or more of our employees cause a significant operational breakdown or failure. If we fail to maintain adequate infrastructure, systems, controls and personnel relative to our size and products and services, our ability to effectively operate our business may be impaired and our business could be adversely affected.
We continually encounter technological change, and may have fewer resources than many of our larger competitors to continue to invest in technological improvements
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We also may not be able to effectively implement new technology-driven products and services or be successful in marketing 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 and results of operations
Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.
New lines of business or new products and services may subject us to additional risks
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business in our current markets or 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 the introduction and development


14



of 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 turn have a material negative effect on our operating results.
Our sources of funds are limited because of our holding company structure
The Company is a separate legal entity from its subsidiaries and does not have significant operations of its own. 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 and regulations. Under these statutes and regulations, the Bank is not permitted to pay dividends on its capital stock to the Company, its sole stockholder, if the dividend would reduce the stockholders' equity of the Bank below the amount of the liquidation account established in connection with the mutual-to-stock conversion. National banks may pay dividends without the approval of its primary federal regulator only if they meet applicable regulatory capital requirements before and after the payment 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 two years. 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 the future, the Company utilizes its available cash for other purposes and the Bank is unable to pay dividends to the Company, the Company may not have sufficient funds to pay dividends.
Trading activity in the Company's common stock could result in material price fluctuations
It is possible that trading activity in the Company's common stock, including short-selling or significant sales by our larger stockholders, could result in material price fluctuations of the price per share of the Company's common stock. In addition, such trading activity and the resultant volatility could make it more 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 as consideration 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 our common stock
Provisions of our articles of incorporation and bylaws, federal regulations, Maryland law and various other factors may make it more difficult for companies or persons to acquire control of the Company without the consent of our board of directors. You may want a takeover attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing price of our shares of common stock. Provisions of our articles of incorporation and 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 elected to be subject to the Maryland Business Combination Act, which places restrictions on mergers and other business combinations with large stockholders. In addition, our articles of incorporation provide that certain mergers and other similar transactions, as well as amendments to our articles of incorporation, must be 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, assuming no 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 with or 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 the voting 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, also contain 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 of operations, cash flows, and financial condition
The banking services industry is extensively regulated and the degree of regulation has increased due to the Dodd-Frank Act and regulatory initiatives precipitated by the Dodd-Frank Act and the most recent economic downturn and the disruptions that certain financial markets experienced. We also are directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards 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 composition of the U.S. Congress and the leadership of regulatory agencies and public sector boards change due to the outcomes of national elections.


15



Non-compliance with USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions
Financial institutions are required under the USA PATRIOT and Bank Secrecy Acts to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department's Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the U.S. Government has previously imposed laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations, but these policies may not be effective to provide such compliance.
FDIC deposit insurance could increase in the future
The Dodd-Frank Act established 1.35% as the minimum Designated Reserve Ratio (“DRR”) for the deposit insurance fund. The FDIC has determined that the DRR should be 2.0% and has adopted a plan 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 its deposits. The FDIC has adopted final regulations that base assessments on a combination of financial ratios and regulatory ratings. The FDIC also revised the assessment schedule and established adjustments that increase assessments so that the range of assessments is now 1.5 basis points to 30 basis points of total assets 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 could be adversely impacted.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.


16



ITEM 2.
PROPERTIES
We conduct our business at 19 banking offices located in the Chicago metropolitan area, and from a corporate office.  We own our corporate office and banking offices other than our Chicago-Lincoln Park and Northbrook offices, which are leased. We also operate four satellite loan and lease production offices, 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 of our 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 sales agreement to sell the property subject to certain contingencies exclusively in the control of the purchaser.  We believe that the transaction will not result in either 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 a net 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 to premises 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 PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, based on currently 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 DISCLOSURES
Not applicable.


17



PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol “BFIN.” The approximate number of holders of record of the Company’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, and accordingly, 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 information concerning the cash dividends paid for the years ended December 31, 2017 and 2016.
2016 and 2017 Quarterly Periods
 
High
 
Low
 
Close
 
Cash
Dividends
Paid
Quarter ended December 31, 2017
 
$
17.00

 
$
14.79

 
$
15.34

 
$
0.08

Quarter ended September 30, 2017
 
16.89

 
14.66

 
15.89

 
0.07

Quarter ended June 30, 2017
 
15.31

 
13.43

 
14.92

 
0.07

Quarter ended March 31, 2017
 
15.24

 
13.13

 
14.52

 
0.06

Quarter ended December 31, 2016
 
$
15.12

 
$
12.15

 
$
14.82

 
$
0.06

Quarter ended September 30, 2016
 
12.80

 
11.75

 
12.70

 
0.05

Quarter ended June 30, 2016
 
12.89

 
11.38

 
11.99

 
0.05

Quarter ended March 31, 2016
 
13.29

 
11.42

 
11.82

 
0.05

The Company is subject to federal regulatory limitations on the payment of dividends. Federal Reserve Board Supervisory Letter SR 09-4 provides that a bank holding company should, among other things, notify and make a submission to its local Federal Reserve Bank prior to declaring a dividend if its net income for the current quarter is not sufficient to fully fund the dividend, and consider eliminating, deferring or significantly reducing its dividends if its net income 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 paid during 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 excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving 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 amount necessary 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 which the distribution is made; (2) the Company’s net earnings for the preceding fiscal year; or (3) the sum of the Company’s net earnings for the preceding eight fiscal quarters.
Dividends from the Bank provide a significant source of cash for the Company. The availability of dividends from the Bank is limited by various statutes and regulations. For a discussion of the Bank’s ability to pay dividends, see Part I, Item 1, “Business — Supervision and Regulation — Federal Banking Regulation — Capital Distributions.”
Recent Sales of Unregistered Securities
The Company had no sales of unregistered stock during the year ended December 31, 2017.


18



Repurchases of Equity Securities
On 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, 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 the total number of shares authorized for repurchase 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 of common stock authorized under the above repurchase authorizations. Since its inception, the Company has repurchased 6,826,913 shares of its common stock.
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet be Purchased under the Plans or Programs
October 1, 2017 through October 31, 2017
 
17,200

 
$
16.19

 
17,200

 
330,676

November 1, 2017 through November 30, 2017
 
48,100

 
15.58

 
48,100

 
282,576

December 1, 2017 through December 31, 2017
 
39,600

 
16.14

 
39,600

 
242,976

 
 
104,900

 
 
 
104,900

 
 


19



Stock Performance Graph
The following line graph shows a comparison of the cumulative returns for the Company, the Russell 2000 Index, the NASDAQ Bank Index, the ABA Community Bank NASDAQ Index and the KBW Regional Banking Index for the period beginning December 31, 2012 and ending December 31, 2017. The information assumes that $100 was invested at the closing price on December 31, 2012 in the Common Stock and each index, and that all dividends were reinvested.
chart-2b9304252dd05119906.jpg
 
 
December 31,
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
BankFinancial Corporation
 
100.00

 
123.96

 
161.55

 
174.49

 
207.73

 
218.42

Russell 2000 Index
 
100.00

 
138.82

 
145.62

 
139.19

 
168.85

 
193.58

NASDAQ Bank Index
 
100.00

 
138.90

 
142.85

 
152.31

 
205.66

 
215.19

ABA Community Bank NASDAQ Index
 
100.00

 
139.24

 
143.15

 
153.81

 
209.16

 
210.69

KBW Bank Index
 
100.00

 
143.66

 
143.95

 
132.78

 
166.77

 
193.88



20



ITEM 6.
SELECTED FINANCIAL DATA
The 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 and related 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

 
$
1,453,594

Loans, net
1,314,651

 
1,312,952

 
1,232,257

 
1,172,356

 
1,098,077

Securities, at fair value
93,383

 
107,212

 
114,753

 
121,174

 
110,907

Core deposit intangible
286

 
782

 
1,305

 
1,855

 
2,433

Deposits
1,340,051

 
1,339,390

 
1,212,919

 
1,211,713

 
1,252,708

Borrowings
60,768

 
51,069

 
64,318

 
12,921

 
3,055

Equity
197,634

 
204,780

 
212,364

 
216,121

 
175,627

 
 
 
 
 
 
 
 
 
 
Selected Operating Data:
 
 
 
 
 
 
 
 
 
Interest and dividend income
$
56,179

 
$
50,928

 
$
48,962

 
$
49,349

 
$
49,392

Interest expense
6,089

 
3,970

 
2,814

 
3,046

 
3,653

Net interest income
50,090

 
46,958

 
46,148

 
46,303

 
45,739

Recovery of loan losses
(87
)
 
(239
)
 
(3,206
)
 
(736
)
 
(687
)
Net interest income after recovery of loan losses
50,177

 
47,197

 
49,354

 
47,039

 
46,426

Noninterest income
6,408

 
6,545

 
6,691

 
6,709

 
8,134

Noninterest expense 
40,391

 
41,542

 
41,945

 
44,451

 
51,262

Income before income taxes
16,194

 
12,200

 
14,100

 
9,297

 
3,298

Income tax expense (benefit) (1) (2)
7,190

 
4,698

 
5,425

 
(31,317
)
 

Net income
$
9,004

 
$
7,502

 
$
8,675

 
$
40,614

 
$
3,298

Basic earnings per common share
$
0.49

 
$
0.40

 
$
0.44

 
$
2.01

 
$
0.16

Diluted earnings per common share
$
0.49

 
$
0.39

 
$
0.44

 
$
2.01

 
$
0.16

(footnotes on following page)


21



 
At and For the Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Selected Financial Ratios and Other Data:
 
 
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
 
 
Return on assets (ratio of net income to average total assets)
0.56
%
 
0.49
 %
 
0.60
%
 
2.83
 %
 
0.23
 %
Return on equity (ratio of net income (loss) to average equity)
4.44

 
3.60

 
4.03

 
22.58

 
1.89

Net interest rate spread (3)
3.15

 
3.19

 
3.36

 
3.35

 
3.28

Net interest margin (4)
3.28

 
3.28

 
3.43

 
3.40

 
3.33

Efficiency ratio (5)
71.49

 
77.64

 
79.38

 
83.85

 
95.15

Noninterest expense to average total assets 
2.50

 
2.72

 
2.90

 
3.10

 
3.53

Average interest-earning assets to average interest-bearing liabilities
131.70

 
135.09

 
132.32

 
123.09

 
121.50

Dividends declared per share
$
0.28

 
$
0.21

 
$
0.20

 
$
0.08

 
$
0.04

Dividend payout ratio
57.23
%
 
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 loans
0.18

 
0.25

 
0.29

 
1.03

 
1.66

Allowance for loan losses to nonperforming loans
350.04

 
246.57

 
271.30

 
98.17

 
76.89

Allowance for loan losses to total loans
0.63

 
0.62

 
0.78

 
1.01

 
1.27

Net recoveries (charge-offs) to average loans outstanding
0.03

 
(0.11
)
 
0.08

 
(0.13
)
 
(0.31
)
Capital Ratios:
 
 
 
 
 
 
 
 
 
Equity to total assets at end of period
12.16
%
 
12.64
 %
 
14.04
%
 
14.75
 %
 
12.08
 %
Average equity to average assets
12.53

 
13.62

 
14.88

 
12.54

 
12.05

Tier 1 leverage ratio (Bank only)
11.08

 
10.27

 
11.33

 
11.45

 
10.16

Other Data:
 
 
 
 
 
 
 
 
 
Number of full-service offices (7)
19

 
19

 
19

 
19

 
20

Employees (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



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis that follows focuses on certain factors affecting our consolidated financial condition at December 31, 2017 and 2016, and our consolidated results of operations for the three years ended December 31, 2017. Our consolidated financial statements, the related notes and the discussion of our critical accounting policies appearing elsewhere in this Annual Report should be read in conjunction with this discussion and analysis.
Overview
The Company's banking subsidiary completed its first full year as a national bank and Federal Reserve System member bank in 2017. The results for 2017 results reflect the successful execution of key business plan objectives, including accelerating our growth in commercial loans, maintaining strong asset quality 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. Earnings per 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%) and middle-market commercial leases increased by $18.1 million (21.4%), offset by declines in the balances of residential mortgage loans, commercial real estate mortgage loans and investment-grade commercial leases due primarily to prepayment activity. Total commercial-related loan balances reached a new record level 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 total assets 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 expand relationships with existing customers. The Company’s liquid assets exceeded 13% of total assets at December 31, 2017. The Company intends to continue to develop new products, service delivery channels and marketing capabilities to further position it for future loan growth and the expansion of non-interest income.
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, the Company 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 the common 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 the Chicago metropolitan market and in our other selected markets. We believe that the combination of the Company’s current business strategies, the careful execution of the business plan and the favorable impact of changes in federal tax policy can be expected to produce further improvements to net income in 2018 compared to 2017.
Results of Operation
Net Income
Comparison 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 million for 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 per share 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 million for 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 there were $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 of three 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 ended December 31, 2016, compared to $0.44 per share of common stock for the year ended December 31, 2015.
Net Interest Income
Net interest income is our primary source of revenue. Net interest income equals the excess of interest income (including discount accretion on purchased impaired loans) plus fees earned on interest earning assets over interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net


23



interest income. Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-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 “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report on Form 10-K.


24



Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses, discounts and premiums, purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate
 
Average
Outstanding
Balance
 
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
%
Securities
106,534

 
1,474

 
1.38

 
108,467

 
1,228

 
1.13

 
109,834

 
1,141

 
1.04

Stock in FHLB and FRB
8,494

 
409

 
4.82

 
6,730

 
89

 
1.32

 
6,257

 
31

 
0.50

Other
88,548

 
1,069

 
1.21

 
83,901

 
586

 
0.70

 
64,434

 
302

 
0.47

Total interest-earning assets
1,526,952

 
56,179

 
3.68

 
1,431,046

 
50,928

 
3.56

 
1,344,183

 
48,962

 
3.64

Noninterest-earning assets
90,464

 
 
 
 
 
96,973

 
 
 
 
 
101,217

 
 
 
 
Total assets
$
1,617,416

 
 
 
 
 
$
1,528,019

 
 
 
 
 
$
1,445,400

 
 
 
 
Interest-bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
160,266

 
186

 
0.12

 
$
158,312

 
171

 
0.11

 
$
155,686

 
164

 
0.11

Money market accounts
304,868

 
1,204

 
0.39

 
318,248

 
989

 
0.31

 
336,179

 
1,054

 
0.31

NOW accounts
274,585

 
537

 
0.20

 
253,810

 
376

 
0.15

 
289,357

 
360

 
0.12

Certificates of deposit
364,792

 
3,511

 
0.96

 
304,194

 
2,329

 
0.77

 
225,990

 
1,216

 
0.54

Total deposits
1,104,511

 
5,438

 
0.49

 
1,034,564

 
3,865

 
0.37

 
1,007,212

 
2,794

 
0.28

Borrowings
54,899

 
651

 
1.19

 
24,764

 
105

 
0.42

 
8,674

 
20

 
0.23

Total interest-bearing liabilities
1,159,410

 
6,089

 
0.53

 
1,059,328

 
3,970

 
0.37

 
1,015,886

 
2,814

 
0.28

Noninterest-bearing deposits
233,200

 
 
 
 
 
239,361

 
 
 
 
 
192,528

 
 
 
 
Noninterest-bearing liabilities
22,127

 
 
 
 
 
21,142

 
 
 
 
 
21,882

 
 
 
 
Total liabilities
1,414,737

 
 
 
 
 
1,319,831

 
 
 
 
 
1,230,296

 
 
 
 
Equity
202,679

 
 
 
 
 
208,188

 
 
 
 
 
215,104

 
 
 
 
Total liabilities and equity
$
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-earning assets to interest-bearing liabilities
131.70
%
 
 
 
 
 
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



Comparison 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 interest rate 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 $46.1 million 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, from 3.36% 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 in the net interest rate spread and net interest margin resulted from increased interest-earning asset average balances at lower average yields and increased interest-bearing liabilities average balances at higher costs. Our average interest-earning assets increased $86.9 million to $1.431 billion for the year ended December 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 the year ended December 31, 2016, from $1.016 billion for 2015.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume that cannot be segregated 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
 
Total
Increase
(Decrease)
 
Volume
 
Rate
 
Total
Increase
(Decrease)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
3,701

 
$
501

 
$
4,202

 
$
2,726

 
$
(1,189
)
 
$
1,537

Securities
(22
)
 
268

 
246

 
(14
)
 
101

 
87

Stock in FHLB and FRB
29

 
291

 
320

 
3

 
55

 
58

Other
34

 
449

 
483

 
108

 
176

 
284

Total interest-earning assets
3,742

 
1,509

 
5,251

 
2,823

 
(857
)
 
1,966

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
2

 
13

 
15

 
7

 

 
7

Money market accounts
(41
)
 
256

 
215

 
(65
)
 

 
(65
)
NOW accounts
32

 
129

 
161

 
(52
)
 
68

 
16

Certificates of deposit
528

 
654

 
1,182

 
499

 
614

 
1,113

Borrowings
218

 
328

 
546

 
59

 
26

 
85

Total interest-bearing liabilities
739

 
1,380

 
2,119

 
448

 
708

 
1,156

Change in net interest income
$
3,003

 
$
129

 
$
3,132

 
$
2,375

 
$
(1,565
)
 
$
810



26



Provision for Loan Losses
We 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 to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and make provisions 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. The provision 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 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, or 3.3%, to $8.4 million at December 31, 2017, from $8.1 million at December 31, 2016. This increase occurred primarily because 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 ended December 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 performing loans 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 the allowance 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
)
 
$
6

Other fee income
2,029

 
2,052

 
2,143

 
(23
)
 
(91
)
Insurance commissions and annuities income
251

 
302

 
386

 
(51
)
 
(84
)
Gain on sale of loans, net
76

 
75

 
102

 
1

 
(27
)
Gain on sale of securities

 
46

 

 
(46
)
 
46

Gain (loss) on sale of other assets

 
38

 
(1
)
 
(38
)
 
39

Loan servicing fees
248

 
276

 
354

 
(28
)
 
(78
)
Amortization of servicing assets
(109
)
 
(128
)
 
(137
)
 
19

 
9

Recovery (impairment) of servicing assets

 
16

 
(3
)
 
(16
)
 
19

Earnings on bank owned life insurance
265

 
207

 
194

 
58

 
13

Trust income
720

 
674

 
712

 
46

 
(38
)
Other
678

 
733

 
693

 
(55
)
 
40

Total 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 million for the year ended December 31, 2016, primarily due to decreased NSF and uncollected funds fees from deposit accounts. Insurance commissions and annuities income declined by $51,000 due to lower sales of annuity products and property and casualty insurance, related in part to the consolidation of our Wealth Management Department with our Trust Department. Earnings on bank-owned life insurance increased by $58,000, or 28.0% to $265,000 for the year ended 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 under management. 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 ended December 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 $6.7 million 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 the year ended December 31, 2015, primarily due to increased fees from


27



deposit 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 ended December 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
)
 
$
533

Office occupancy and equipment
6,623

 
6,380

 
6,522

 
243

 
(142
)
Advertising and public relations
1,004

 
870

 
991

 
134

 
(121
)
Information technology
2,743

 
2,892

 
2,669

 
(149
)
 
223

Supplies, telephone and postage
1,366

 
1,364

 
1,586

 
2

 
(222
)
Amortization of intangibles
496

 
523

 
550

 
(27
)
 
(27
)
Nonperforming asset management
340

 
399

 
681

 
(59
)
 
(282
)
Loss (gain) on sale other real estate owned
45

 
(128
)
 
(58
)
 
173

 
(70
)
Valuation adjustments of other real estate owned
333

 
314

 
548

 
19

 
(234
)
Operations of other real estate owned
545

 
660

 
573

 
(115
)
 
87

FDIC insurance premiums
587

 
755

 
904

 
(168
)
 
(149
)
Other
4,542

 
4,758

 
4,757

 
(216
)
 
1

Total 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 ended December 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 year ended December 31, 2016, and none in 2017. Office occupancy expense increased by $243,000 due to increased real estate taxes and maintenance expenses on our office facilities. Advertising and marketing expense increased by $ 134,000 due to the creation of new marketing materials for new deposit products and expanded marketing for new loan and deposit customers. Information technology declined by $149,000 due to reduced costs from renewed or terminated vendor 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 OREO expenses, compared to $1.2 million for 2016. Nonperforming asset management expenses decreased $59,000, or 14.8%, to $340,000 for the year ended December 31, 2017, compared to $399,000 in 2016. The decrease was primarily due to a decline in nonperforming assets and a corresponding decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets. The most significant decreases in nonperforming asset management expense related to maintenance and repairs and real estate taxes, which totaled $395,000 for the year ended December 31, 2017, compared to $579,000 for 2016. OREO expenses for the year ended December 31, 2017 totaled $923,000, compared to $846,000 in 2016. 2017 activity included a $333,000 valuation adjustment to OREO properties, compared to a $314,000 valuation adjustment in 2016. Other noninterest expense decreased $216,000, or 4.5%, to $4.5 million 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 for mortgage 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 $41.9 million for the year ended December 31, 2015. Compensation and benefits expense increased $533,000, or 2.4%, to $22.8 million for the year ended December 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 year ended December 31, 2016, compared to $638,000 in 2015. The stock-based compensation was partially offset by a decrease in compensation costs due in part 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 expenses decreased $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 a decline in nonperforming assets and a corresponding decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets. The most significant decrease in nonperforming asset


28



management expense related to real estate taxes, which totaled $198,000 for the year ended December 31, 2016, compared to $247,000 for 2015. OREO expenses 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 mortgage representation and warranty reserve for mortgage loans sold, compared to a $80,000 provision for 2015.
Income Taxes
Comparison 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 million recorded 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 to an 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 was 44.77%.
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 million recorded 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, 2016
Total 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 assets was 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, or 12.9%, 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 commercial leases, 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 at December 31, 2017. Commercial loans increased $53.5 million, or 54.0%; multi-family mortgage loans increased by $45.5 million, or 8.4%; and construction and land loans increased by $56,000, or 4.3%. Commercial leases decreased by $46.4 million, or 13.0%; nonresidential real estate loans decreased $12.2 million, 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 increase reflected 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 proceeds from maturities of $75.5 million and repayments of $3.4 million on residential mortgage-backed securities and collateralized mortgage obligations. These repayments 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 to increases 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 increase in 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 at December 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 and 2016, 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 our declaration and payment of cash dividends totaling $5.2 million, during the year ended December 31, 2017. These items were partially 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 loan repayment that was made on March 29, 2017.


29



Securities
Our 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 affirmed its 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
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Securities:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposits
$
75,916

 
$
75,916

 
$
85,938

 
$
85,938

 
$
87,901

 
$
87,901

Equity mutual funds
500

 
499

 
500

 
499

 
500

 
507

SBA - guaranteed loan participation certificates
10

 
10

 
17

 
17

 
23

 
23

Total
76,426

 
76,425

 
86,455

 
86,454

 
88,424

 
88,431

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - residential
11,969

 
12,472

 
14,561

 
15,184

 
18,330

 
19,180

CMOs and REMICs - residential
4,481

 
4,486

 
5,587

 
5,574

 
7,111

 
7,142

Total mortgage-backed securities
16,450

 
16,958

 
20,148

 
20,758

 
25,441

 
26,322

 
$
92,876

 
$
93,383

 
$
106,603

 
$
107,212

 
$
113,865

 
$
114,753

The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security. If quoted market prices are 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. The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used 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. The fair value of a security is used to determine the amount of any unrealized losses that must be reflected in our other comprehensive income and the net book value of our securities.
We evaluate marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if 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



Portfolio Maturities and Yields
The composition and maturities of the securities portfolio and the mortgage-backed securities portfolio at December 31, 2017 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Municipal securities yields have not been adjusted to a tax-equivalent basis, as the amount is immaterial.
 
One Year or Less
 
More than One Year
through Five Years
 
More than Five Years
through Ten Years
 
More than Ten Years
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
(Dollars in thousands)
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
75,668

 
1.58
%
 
$
248

 
1.65
%
 
$

 
%
 
$

 
%
SBA - guaranteed loan participation certificates

 

 
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

 
3.80

Freddie Mac

 

 
17

 
3.03

 
39

 
2.85

 
778

 
4.36

Ginnie Mae

 

 
41

 
2.75

 

 

 
5,113

 
2.54

CMOs and REMICs

 

 

 

 
424

 
2.79

 
4,057

 
1.78

 

 

 
60

 
2.85

 
531

 
3.01

 
15,859

 
2.90

Total 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 to purchase 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 of common 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 of our 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 we purchased 34,000 and 120,000 shares of FHLB and FRB common stock, respectively. There were no purchases of FHLB and FRB common stock during 2016 and 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 of FHLB 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 to own to maintain our membership in the FHLB System and to be eligible to obtain advances.


31



Loan Portfolio
We 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 principal loan 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 family residential
$
97,814

 
7.40
%
 
$
135,218

 
10.25
%
 
$
159,501

 
12.86
%
 
$
180,337

 
15.24
%
 
$
201,382

 
18.12
%
Multi-family mortgage
588,383

 
44.52

 
542,887

 
41.15

 
506,026

 
40.80

 
480,349

 
40.60

 
396,058

 
35.64

Nonresidential real estate
169,971

 
12.86

 
182,152

 
13.81

 
226,735

 
18.28

 
234,500

 
19.82

 
263,567

 
23.72

Construction and land
1,358

 
0.10

 
1,302

 
0.09

 
1,313

 
0.10

 
1,885

 
0.16

 
6,570

 
0.59

Commercial loans
152,552

 
11.54

 
99,088

 
7.51

 
79,516

 
6.41

 
66,882

 
5.65

 
54,255

 
4.88

Commercial leases
310,076

 
23.46

 
356,514

 
27.02

 
265,405

 
21.40