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, 2010

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 in 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)         |  | (Zip Code)

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   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x.

The
aggregate market value of the registrants outstanding voting common stock held by non-affiliates on June 30, 2010, determined using a per share closing price on that date of $8.31, as quoted on The Nasdaq Stock Market, was $165.6 million.

At March 7, 2011, there were 21,072,966 shares of common stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None









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PART I



|ITEM 1. | BUSINESS
|------- | --------

Forward Looking
Statements

This Annual Report on Form 10-K contains, and other periodic and current reports and press releases of BankFinancial
Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. We intend such 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. Forward-looking statements are
based on certain assumptions or describe our future plans, strategies and expectations, and are generally identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, plan, or similar expressions. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain, and actual results or effects may differ from those predicted. Factors that could have
a material adverse effect on operations and could affect managements outlook or our future prospects include, but are not limited to: higher than expected overhead, infrastructure and compliance costs, changes in market interest rates, changes
in the yield curve, balance sheet shrinkage or less than anticipated balance sheet growth, lack of demand for loan products, illiquidity and changes in financial markets, including the market for mortgage backed securities and other debt
obligations, declining demand for real estate and real estate valuations, increasing unemployment levels, deposit flows, pricing, underwriting and other forms of competition, adverse federal or state legislative or regulatory developments, monetary
and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, adverse economic conditions 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, the quality or composition of our loan or investment portfolios, demand for financial services and multi-family, commercial and residential real estate loans in our market areas, the possible dilutive
effect of potential acquisitions or de novo branches, if any, changes in accounting principles, policies and guidelines, increased costs of federal deposit insurance, our failure to integrate an acquired institution successfully or achieve expected
synergies and cost savings, and future adverse developments concerning the Federal Home Loan Bank of Chicago. 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. 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.

As part of the mutual-to-stock conversion, BankFinancial Corporation, the Maryland corporation, sold 24,466,250 shares of common stock in a subscription
offering for $10.00 per share. The separate corporate existences of BankFinancial MHC and BankFinancial Corporation, the federal corporation, ceased upon the completion of the mutual-to-stock conversion. For a further discussion of the
mutual-to-stock conversion, see our Prospectus as filed on April 29, 2005 with the Securities and Exchange Commission (SEC) pursuant to Rule 424(b)(3) of the Rules and Regulations of the Securities Act of 1933 (File Number
333-119217).

We manage our operations as one unit, and thus do not have separate operating segments. Our chief operating decision-makers use
consolidated results to make operating and strategic decisions.

BankFinancial, F.S.B.

The Bank is a full-service, community-oriented federal savings bank principally engaged in the business of commercial, family and personal banking, and
offers our customers a broad range of loan, deposit, and other financial products and services through 18 full-service banking offices and three Express Branch facilities located in Cook, DuPage, Lake and Will Counties, Illinois, and through our
Internet Branch, www.bankfinancial.com.



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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 banking transactions, automated teller machines, safe deposit boxes, 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. Through our Wholesale Commercial Lending and National Commercial Leasing Departments, we also engage in
multi-family lending activities in selected metropolitan areas outside our primary lending area and in commercial leasing activities on a nationwide basis. The Banks primary market for deposits is concentrated around the areas where our
full-service banking offices and Express Branch facilities are located.

Lending Activities

Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, commercial, construction and land loans,
and commercial leases), which represented 75.9% of our total loan portfolio at December 31, 2010. At December 31, 2010, $296.9 million, or 27.7%, of our total loan portfolio consisted of multi-family mortgage loans; $282.0 million, or
26.3%, of our total loan portfolio consisted of nonresidential real estate loans; $64.7 million, or 6.0%, of our total loan portfolio consisted of commercial loans; $151.1 million, or 14.1%, of our total loan portfolio consisted of commercial
leases; and $18.4 million, or 1.7%, of our total loan portfolio consisted of construction and land loans. $256.3 million, or 23.9%, of our total loan portfolio consisted of one-to-four family residential mortgage loans (of which $76.0 million, or
7.1%, were loans to investors in non-owner-occupied single-family homes), 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 qualified plan 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, 2010, our deposits totaled $1.235 billion. Interest-bearing deposits totaled $1.123 billion and noninterest-bearing demand deposits totaled $112.5 million, which included $6.0 million
in internal checking accounts such as bank cashier checks and money orders. Savings, money market and NOW account deposits totaled $742.8 million, and certificates of deposit totaled $380.1 million, of which $271.2 million had maturities of one year
or less.

Related Products and Services

The Banks Wealth Management Group provides investment, financial planning and other wealth management services to our customers through arrangements with a third-party broker-dealer. The Banks
wholly-owned subsidiary, Financial Assurance Services, Inc. (Financial Assurance), sells life insurance, fixed annuities, property and casualty insurance and other insurance products on an agency basis. Financial Assurance was engaged in
the sale of title insurance on an agency basis until March 15, 2008. On that date, Financial Assurance completed the sale of its title insurance agency business to a newly formed, third-party title insurance agency. The sale of the title
insurance agency business did not affect Financial Assurances other insurance businesses. During the year ended December 31, 2010, Financial Assurance reported net income of $209,000. At December 31, 2010, Financial Assurance had
four full-time employees. The Banks other wholly-owned subsidiary, BF Asset Recovery Corporation, is in the business of holding title to and selling certain Bank-owned real estate, and reported a loss of $2.2 million for the year ended
December 31, 2010.



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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 Quarterly Report 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 SEC. Copies of these documents are available to stockholders at BankFinancials web site, www.bankfinancial.com, under Stockholder Information, and at the SECs web site, www.sec.gov.

Competition

We face significant
competition in both originating loans and attracting deposits. The Chicago metropolitan area and some other areas in which we operate 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, 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 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, 2010, we
had 310 full-time employees and 27 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

As a federally chartered savings bank, the Bank is currently regulated and supervised primarily by the Office of Thrift Supervision (
OTS). The Bank is also subject to regulation by the Federal Deposit Insurance Corporation ( 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 activities in which a financial institution may engage, and is intended primarily for the protection of the FDICs deposit insurance funds, depositors and the banking system. Under this system
of federal regulation, financial 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. After
completing an examination, the OTS critiques the financial institutions operations in a report of examination and assigns it a rating (known as an institutions CAMELS rating). Under federal law, an institution may not disclose its CAMELS
rating to the public.

The Bank is a member of, and owns stock in, the Federal Home Loan Bank of Chicago ( FHLBC), which is one of
the 12 regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System with regard to reserves it must maintain against deposits and other matters. The OTS
examines the Bank and prepares reports for the consideration of its Board of Directors on any identified operating deficiencies. 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.



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The Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act), which was
signed by the President on July 21, 2010, provides for the transfer of the authority for regulating and supervising federal savings banks from the OTS to the Office of the Comptroller of the Currency (OCC), and the authority for
regulating and supervising savings and loan holding companies and their non-depository subsidiaries from the OTS to the Board of Governors of the Federal Reserve Board ( FRB). The transfer is currently scheduled to occur July 21,
2011. The Dodd-Frank Act also creates a new federal agency, the Consumer Financial Protection Bureau ( CFPB), as an independent bureau of the Federal Reserve Board, to conduct rule-making, supervision, and enforcement of federal consumer
financial protection and fair lending laws and regulations. The CFPB will have examination and primary enforcement authority in connection with these laws and regulations for depository institutions with total assets of more than $10 billion.
Depository institutions with $10 billion or less in total assets will continue to be examined for compliance with these laws and regulations by their primary federal regulators, and will remain subject to their enforcement authority. Because of
these changes, the OCC will become the primary federal regulator of the Bank and the FRB will become the primary federal regulator of the Company on the transfer date. The Bank will not be subject to the examination or the primary enforcement
authority of the CFPB.

There can be no assurance that laws, rules and regulations will not change in the future, which could make compliance
more difficult or expensive or otherwise adversely affect our business, financial condition, results of operations or prospects. Any change in these laws or regulations, or in regulatory policy, whether by the OCC, FDIC, the FRB, the OTS, the CFPB
or Congress, could have a material adverse impact on the Company, the Bank and their respective operations.

Federal Banking Regulation

Business Activities.As a federal savings bank, the Bank derives its lending and investment powers from the Home
Owners Loan Act, as amended, and the regulations of the OTS. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and nonresidential real estate, commercial business and consumer loans, certain types
of securities and certain other loans and assets. Specifically, the Bank may originate, invest in, sell, or purchase unlimited loans on the security of residential real estate, while loans on nonresidential real property generally may not, on a
combined basis, exceed 400% of the Banks total capital. In addition, secured and unsecured commercial loans and certain types of commercial personal property leases may not exceed 20% of the Banks assets; however, amounts in excess of
10% of assets may only be used for small business loans. Further, the Bank may generally invest up to 35% of its assets in consumer loans, corporate debt securities and commercial paper on a combined basis, and up to the greater of its capital or 5%
of its assets in unsecured construction loans. The Bank may invest up to 10% of its assets in tangible personal property, for rental or sale. Certain leases on tangible personal property are not aggregated with commercial or consumer loans for the
purposes of determining compliance with the limitations set forth for those investment categories. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank directly, including real estate
investment and insurance agency activities. A violation of the lending and investment limitations may be subject to the same enforcement mechanisms of the primary federal regulator as other violations of a law or regulation.

Capital Requirements. The regulations of the OTS require federal savings banks to meet three minimum capital standards: a ratio of tangible
capital to adjusted total assets of 1.5%; a ratio of Tier 1 (core) capital to adjusted total assets of 4.0% (3% for institutions receiving the highest rating on the CAMELS rating system); and a ratio of total capital to total risk-adjusted assets of
8.0%. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.

The risk-based
capital standard for federal savings banks requires the maintenance of Tier 1, or core capital, and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In
determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks inherent in the type of asset.
Core capital is defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative perpetual preferred stock, long-term preferred stock, mandatory convertible securities, subordinated
debt and intermediate-term preferred stock, allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.



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At December 31, 2010, the Banks capital exceeded all applicable regulatory requirements.

Loans-to-One-Borrower.A federal savings bank generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% 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, 2010, the Bank was in compliance with the loans-to-one-borrower limitations.

Qualified Thrift Lender
Test.As a federal savings bank, the Bank is subject to a qualified thrift lender, or QTL, test. Under the QTL test, the Bank must maintain at least 65% of its portfolio assets in qualified thrift
investments in at least nine months of the most recent 12-month period. Portfolio assets generally means the total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and
other intangible assets, and the value of property used in the conduct of the federal savings banks business.

Qualified thrift
investments include various types of loans made for residential and housing purposes, investments related to those purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other
purposes up to a limit of 20% of portfolio assets. Qualified thrift investments also include 100% of an institutions credit card loans, education loans and small business loans. The Bank also may satisfy the QTL test by qualifying
as a domestic building and loan association as defined in the Internal Revenue Code of 1986. At December 31, 2010, the Bank maintained approximately 76.95% of its portfolio assets in qualified thrift investments, and as of that
date, satisfied the QTL test. A federal savings bank that fails the QTL test must operate under specified restrictions, including limits on growth, branching, new investment and dividends. As a result of the Dodd-Frank Act, noncompliance with the
QTL test is subject to regulatory enforcement action as a violation of law.

Capital Distributions.The regulations of
the OTS govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the institutions capital account. A federal savings bank must file an application for approval of
a capital distribution if:



| |  |  | the total capital distributions for the applicable calendar year exceed the sum of the institutions net income for that year to date plus the
federal savings banks retained net income for the preceding two years;
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| |  |  | the institution would not be at least adequately capitalized following the distribution;
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| |  |  | the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition; or
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| |  |  | the institution is not eligible for expedited treatment of its filings.
| | - |  | -----------------------------------------------------------------------

Even if an application is not otherwise required, every federal savings bank that is a subsidiary of a holding company must still file a notice with the OTS at least 30 days before the board of directors
declares a dividend or approves a capital distribution. At December 31, 2010, the Bank would be required to file an application for approval of a capital distribution to the Company.

The OTS may disapprove a notice or application if:



| |  |  | the federal savings bank would be undercapitalized following the distribution;
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| |  |  | the proposed capital distribution raises safety and soundness concerns; or
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| |  |  | the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
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Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets
to ensure its safe and sound operation.

Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a
responsibility under the Community Reinvestment Act (CRA) and related regulations of the OTS to help meet the credit needs of their communities, including low and moderate income neighborhoods. In connection with its examination of a
federal savings bank, the OTS is required to evaluate and rate the federal savings banks record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their
lending practices based on the characteristics specified in those statutes. A federal savings banks failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. The failure to
comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The OTS has rated the Banks CRA performance as
Outstanding, the highest possible rating, in the CRA Performance Evaluations the OTS has completed on the Bank since 1999.

Privacy Standards. Financial institutions are subject to regulations implementing the privacy protection provisions of the
Gramm-Leach-Bliley Act. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares nonpublic personal information to customers at the time of establishing the customer relationship and
annually thereafter. In addition, the Bank is required to provide its customers with the ability to opt-out of or consent to having the Bank share their nonpublic personal information with unaffiliated third parties before it can
disclose such information, subject to certain exceptions. The implementation of these regulations did not have a material adverse effect on the Bank. The Gramm-Leach-Bliley Act also allows each state to enact legislation that is more protective of
consumers personal information.

The OTS and other federal banking agencies have adopted guidelines establishing standards for
safeguarding customer information to implement certain provisions of the Gramm-Leach-Bliley Act. The guidelines describe the agencies expectations for the creation, implementation and maintenance of an information security program, which would
include administrative, technical and physical safeguards appropriate to the size and complexity of a financial institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and
confidentiality of customer records and information, to protect against any anticipated threats or hazards to the security or integrity of such records, and to protect against unauthorized access to or use of such records or other information that
could result in substantial harm or inconvenience to any customer. The Bank has implemented these guidelines, and such implementation has not had a material adverse effect on our operations.

Transactions with Related Parties. A federal savings banks authority to engage in transactions with its affiliates is limited by OTS 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
subsidiaries of federal savings 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 as favorable to the federal savings bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the federal savings banks capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive loans from the federal savings bank. OTS regulations also prohibit a federal savings bank from lending to any of its affiliates that are engaged in activities that are not
permissible for bank holding companies, and from purchasing the securities of any affiliate, other than a subsidiary.

The Banks
authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation
O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders 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 that do not involve more than the normal risk of repayment or present other unfavorable features, and not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on the amount of the Banks capital. In addition, extensions of credit in excess of certain limits must receive the prior approval of the Banks Board of
Directors.



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Enforcement. The OTS has primary enforcement responsibility over federal savings banks, and
has the authority to bring enforcement action against the Bank 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 also
has the authority to recommend to the Director of the OTS that an enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take action under specified
circumstances. The OTS enforcement authority over federal savings banks is currently scheduled to be transferred to the OCC on July 21, 2011 pursuant to the Dodd-Frank Act.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among
other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate.
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 the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan
documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Prompt Corrective Action
Regulations. Under the prompt corrective action regulations, the OTS is required and authorized to take supervisory actions against undercapitalized federal savings banks. For this purpose, a federal savings bank is placed in one of
the following five categories based on the federal savings banks capital:



| |  |  | well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital);
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| |  |  | adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based capital and 8% total risk-based capital);
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| |  |  | undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based capital or 8% total risk-based capital);
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| |  |  | significantly undercapitalized (less than 3% leverage capital, 3% tier 1 risk-based capital or 6% total risk-based capital); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | critically undercapitalized (less than 2% tangible capital).
| | - |  | ------------------------------------------------------------

Generally, the banking regulator is required to appoint a receiver or conservator for a federal savings bank that is critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a bank receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. In addition, numerous
mandatory supervisory actions become immediately applicable to the federal savings bank, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. The OTS may also take any one of
a number of discretionary supervisory actions against undercapitalized federal savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2010, the Bank met the criteria for being considered well-capitalized.

Interest on Deposits.Federal laws and regulations currently prohibits depository institutions from paying interest on commercial checking
accounts. The Dodd-Frank Act authorizes the payment of interest on commercial checking accounts effective July 21, 2011.



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Insurance of Deposit Accounts.The Banks deposits are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC. Under the FDICs risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other
factors, with less risky institutions paying lower assessments. An institutions assessment rate depends upon the category to which it is assigned, subject to certain adjustments specified by the FDICs. Assessment rates currently range
from seven to 77.5 basis points of assessable deposits. The FDIC may adjust the scale uniformly, except that no adjustment can deviate by more than three basis points from the base scale without notice and comment. No institution may pay a dividend
if it is in default of the federal deposit insurance assessment.

The Dodd-Frank Act requires the FDIC to revise its procedures to base its
assessments upon total assets less tangible equity instead of on deposits. The FDIC recently issued a final rule that will implement that change beginning the second quarter of 2011.

The FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital (as of June 30, 2009), capped at ten basis points of an
institutions deposit assessment base, in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009.

The FDIC provided for similar assessment authority during the final two quarters of 2009, if deemed necessary. In lieu of further special assessments, the FDIC required insured institutions to prepay
estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments which included an assumed annual base increase of 5%, were recorded as a prepaid expense asset as of
December 31, 2009, and each quarter thereafter, a charge to earnings is recorded for each regulator assessment with an offsetting credit to the prepaid asset.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio
by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving the ratio to the discretion of the FDIC. The FDIC
recently exercised that discretion by establishing a long-range fund ratio of 2%.

The FDIC has authority to increase insurance assessments. A
significant increase in insurance premiums would be likely have an adverse effect on the operating expenses and results of operations of the Bank. The Bank cannot predict what the insurance assessment rates will be in the future.

An insured institutions deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in 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 are due to mature in 2017 through 2019. For the quarter ended December 31, 2010, the annualized FICO assessment was equal to 1.04 basis points for each $100 in domestic deposits
maintained at an insured institution.

Temporary Liquidity Guarantee Program. On October 14, 2008, the FDIC announced the
Temporary Liquidity Guarantee Program. This program has two components  The Debt Guarantee Program and the Transaction Account Guarantee Program. The Debt Guarantee Program guarantees newly issued senior unsecured debt of a participating
organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009, later extended to October 31, 2010. The Bank and the Company opted not to participate in the Debt Guarantee
Program.

The Transaction Account Guarantee Program provides, for a fee, full federal deposit insurance coverage for non-interest bearing
transaction deposit accounts, regardless of dollar amount, until June 30, 2010, later extended to December 31, 2010. The Bank participated in the Transaction Account Guarantee Program. The Dodd-Frank Act extended unlimited federal deposit
insurance coverage for certain non-interest bearing transaction accounts until December 31, 2012, without opportunity for opt out.



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U.S. Treasurys Troubled Asset Relief Program Capital Purchase Program.The Emergency
Economic Stabilization Act of 2008 (EESA) provided the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the
legislation is the Troubled Asset Relief Program Capital Purchase Program (TARP), which provides direct equity investment by the U.S. Treasury Department in qualified financial institutions. The TARP program was voluntary. The Company
did not participate in TARP.

Prohibitions Against Tying Arrangements. Federal savings 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 Home Loan Bank System. The Bank is a member of
the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLBC, the Bank is required to
acquire and hold shares of capital stock in the FHLBC in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from
the FHLBC, whichever is greater. As of December 31, 2010, 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 and continue to augment procedures and systems designed to comply with these laws and regulations.

Federal Reserve System

The
FRBs regulations require federal savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, 2010, the Bank was in
compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS.

Holding Company Regulation

The Company is a unitary savings and loan holding company, and
is currently subject to regulation and supervision by the OTS. The OTS also currently has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a risk to the Bank. The Dodd-Frank Act provides for the transfer of the authority for supervising and regulating savings and loan holding companies and their non-depository subsidiaries from the OTS to the FRB.
The transfer is presently scheduled to occur on July 21, 2011.

The Companys activities are limited to the activities permissible
for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial
activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c) (8) of the Bank Holding Company Act, subject to
the prior approval of the OTS, and certain additional activities authorized by OTS regulations.



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Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring control of another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity
securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the savings institution, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community
and competitive factors.

Capital. Savings and loan holding companies are not currently subject to specific regulatory capital
requirements. The Dodd-Frank Act, however, requires 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. As is currently the case with bank holding companies, instruments such as cumulative preferred stock and trust-preferred securities will no longer be includable as Tier 1 capital.
However, instruments issued by May 19, 2010 will be grandfathered for holding companies with assets of $15 billion or less. There is a five-year transition period from the July 21, 2010 effective date of the Dodd-Frank Act before the
capital requirements will apply to savings and loan holding companies.

Source of Strength Doctrine. The source of
strength doctrine requires bank holding companies to provide financial assistance to their subsidiary depository institutions in the event the subsidiary depository institution experiences financial distress. The Dodd-Frank Act extends the
source of strength doctrine to savings and loan holding companies. The applicable regulatory agencies must issue regulations requiring that all bank holding companies and savings and loan holding companies serve as a source of strength to their
subsidiary depository institutions by providing capital, liquidity and other support in times of financial distress.

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 Securities and Exchange
Commission, under the Exchange Act.

The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the Securities and
Exchange Commission and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the Securities and Exchange Commission.

Federal Securities Laws

The
Companys common stock is registered with the Securities and Exchange Commission under the Exchange Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act.

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.

Method of
Accounting. For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its consolidated federal income tax returns.

Bad Debt Reserves. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad
debt reserves by federal savings banks, effective for taxable years beginning after 1995. Prior to the enactment of this law, the Bank was permitted to establish a reserve for bad debts for tax purposes and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving at the Banks taxable income. Because of the Small Business Protection Act of 1996, the Bank must use the specific charge-off method in computing its bad debt
deduction for tax purposes.



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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, 2010, 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.

Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences,
referred to as alternative minimum taxable income. The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90%
of alternative minimum taxable income unless resulting from a loss carryback from 2008 or 2009 pursuant to the special provisions of the Worker, Homeownership & Business Assistance Act of 2009.

Net Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years (up to five years for
losses incurred in 2008 or 2009 pursuant to the special provisions of the Worker, Homeownership & Business Assistance Act of 2009) and forward to the succeeding 20 taxable years. At December 31, 2010, the Company had a federal net
operating loss carryforward of $5.9 million that will begin to expire in 2029. At December 31, 2010, the Company had a state net operating loss carryforward for the State of Illinois of $32.0 million that will expire in 2025. The net operating
losses have resulted in the recording of deferred taxes.

Corporate Dividends. The Company may exclude from its income 100% of
the dividends it receives from the Bank as a member of the same affiliated group of corporations.

State and Local Taxation. The
Company pays income tax 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, 2010,
the Company had a state net operating loss for the State of Illinois of $32.0 million, which will expire in 2025. Beginning in 2010 and 2009, the Company and the Bank became subject to income taxes in the States of Colorado and New Jersey,
respectively, due to the physical presence of regional National Commercial Leasing bankers in these jurisdictions.

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, tax-planning strategies and any available carryback capacity. 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.

The Companys historical financial performance includes a cumulative loss over a three-year period consisting of the current year and the previous
two years. The most significant component of the cumulative loss was impairment losses that the Company recorded on Freddie Mac preferred stocks that it previously held in its investment portfolio. The Company sold these securities in 2009 so the
impairment losses will not recur. The most significant component of the Companys net loss in 2010 was the combined effects of specific valuation allowances on classified loans and write-downs on other real estate owned (OREO),
together with the expenses incurred to resolve collection litigation and manage the related collateral. In 2011, we expect to further deploy our excess liquidity to generate additional loan-related interest income and we expect the negative effects
from classified loans and assets to diminish over time. In addition, we expect further pre-tax net income contributions from our acquisition of Downers Grove National Bank (see Note 13  Subsequent Events of the Consolidated Financial
Statements). After taking these factors into account, we believe it more likely than not that the Company will return to profitability during 2011 and maintain profitability in subsequent years such that it will fully realize the benefit of the
deferred tax assets recorded at December 31, 2010. Should the Company not return to profitability in 2011 or in subsequent years, it may become necessary to record a valuation allowance for all or a portion of the deferred tax asset.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

The risks set forth
below may adversely affect our business, financial condition and operating results. In addition to the risks set forth below and the other risks 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 also 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. As a result, 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.

Current Economic Conditions Present Higher Risks to Our Loan Portfolio

At December 31, 2010, our loan portfolio included $296.9 million in multi-family mortgage loans, or 27.7% of total loans; $282.0 million in
nonresidential real estate loans, or 26.3% of total loans; $151.1 million in commercial leases, or 14.1% of total loans; $64.7 million in commercial loans, or 6.0% of total loans; and $76.0 million in non owner occupied residential real estate
loans, or 7.1% of total loans; $103.3 million in residential real estate loans, or 16.7% of total loans; and $18.4 million in construction and land loans, or 1.7% of total loans. Current economic conditions, including high unemployment rates,
weakened consumer and business spending and materially declining real estate values, all present risks to our loan portfolio. Our historical loan underwriting standards presumed a reasonable range of economic and operating conditions for our
borrowers and their underlying business or personal circumstances. The depth and speed of the decline in economic activity exceeded, and will continue to exceed, the financial and management capabilities of certain borrowers to meet their credit
obligations. Furthermore, the decline in real estate values in all market segments not only diminishes an important source of repayment, but also diminishes the economic interest of borrowers in investing additional financial resources into their
businesses or residences. Though the risk of a sudden and catastrophic event in financial markets appears to have receded, persistently weak economic growth in the U.S. and certain of its trading partners will continue to depress the operating
results of certain commercial lessees. These factors and conditions and prudent loan portfolio management have also combined to reduce the overall level of acceptable credit exposures available in the market, resulting in lower loan portfolio
balances and reduced interest income from the loan portfolio.

If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan
Losses, Our Earnings Could Decrease

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, 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, 2010, our allowance for loan losses was $22.2 million, representing 2.07% of total loans and 48.5% of nonperforming loans as of that date. In determining the amount of our allowance for loan losses, we rely on
our loan quality reviews, our 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 interests in contested legal or bankruptcy
proceedings, and at times, we may lack sufficient information to establish 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.

We Have a Goodwill Asset that Could Be Classified as Impaired in the Future. If the Goodwill Asset Is Considered to Be Partially or Fully Impaired in the Future, Our Earnings and the Book Values of
This Asset Would Decrease

As of December 31, 2010, we maintained goodwill as an asset in the amount of $22.6 million. We assess our
goodwill asset for impairment at least annually. In fourth quarter, 2010, we engaged an independent third-party valuation firm to assist us in our most recent goodwill impairment testing as of December 31, 2010. In its valuation analysis, the
third-party valuation firm determined that the fair value of BankFinancial, F.S.B., the reporting unit pursuant to ASC 350-20-35-36, was sufficient to support the carrying value of our goodwill asset. However, if our market capitalization remains
below its tangible book value or if the fair value of the reporting unit were to decline, future goodwill impairment testing could result in a partial or full impairment of the value of the Banks goodwill asset. If we determine that an
impairment of our goodwill asset exists at a given point in time, our earnings and the book value of our goodwill asset will be reduced by the amount of the impairment. An impairment of our goodwill asset would have little or no impact on our
tangible book value or regulatory capital levels.



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If the Companys Deferred Tax Assets Require a Valuation Allowance in the Future, Earnings Will Be
Negatively Impacted

We periodically evaluate our deferred tax assets to determine whether a valuation allowance is needed for some
portion or all of our deferred tax assets. A valuation allowance must be recognized for a deferred tax asset if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be
realized. We concluded from our most recent evaluation of our deferred tax assets that it is more likely than not that we will realize the $17.6 million in gross deferred tax assets that were recorded at December 31, 2010. However, if
we record net losses in 2011 or in future years, this could call into question our ability to realize some portion or all of the deferred tax assets that we have recorded and require us to recognize a valuation allowance. The recognition of a
valuation allowance would have a corresponding impact on our earnings in the period it is recognized.

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 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. We are unable to predict changes in market interest rates that are affected by many factors
beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. Our net interest income is affected not only by the level and direction
of interest rates, but also by the shape of the 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 impact our net interest income as well as the fair market valuation of our assets
and liabilities.

The Risks Presented by the Acquisition of Other Institutions Could Adversely Affect Our Financial Condition and Results
of Operations

If we acquire other institutions, we will be presented with many risks that could have a material adverse effect on our
financial condition and results of operations. An institution that we acquire may have unknown asset quality issues or unknown or contingent liabilities that we did not discover or fully recognize in the due diligence process, thereby resulting in
unanticipated losses, particularly in the case of FDIC-assisted transactions due to the highly restrictive due diligence available to potential bidders. The acquisition of other institutions typically requires the integration of different corporate
cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operational processes, policies, procedures and internal controls, marketing
programs and personnel of the acquired institution in order to make the transaction economically advantageous. The integration process is complicated and time consuming, and could divert our attention from other business concerns and be disruptive
to our customers and the customers of the acquired institution. Our failure to integrate an acquired institution successfully could result in the loss of key customers and employees, and prevent us from achieving expected synergies and cost savings.
Acquisitions also result in professional fees, purchase price adjustments, the amortization of core deposit intangibles and other expenses that could adversely affect our earnings, and in goodwill that could become impaired, requiring us to
recognize further charges. We may finance acquisitions with borrowed funds, thereby increasing our leverage and reducing our liquidity, or with potentially dilutive issuances of equity securities.



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Since Our Business is Concentrated in the Chicago Metropolitan Area, Local Economic Conditions May
Adversely Affect Our Business

Although we make certain types of loans and leases to borrowers located in other states, our lending and
deposit gathering activities are concentrated primarily in the Chicago metropolitan area. Our success can be affected by the general economic conditions of this area and surrounding areas. In addition, many of the loans in our loan portfolio are
secured by real estate located in the Chicago metropolitan area. Negative conditions in the real estate markets where collateral for a mortgage loan is located could adversely affect the borrowers ability to repay the loan and the value of the
collateral securing the loan. Real estate values are affected by various other factors beyond our control, including real estate supply and demand, the impact of mortgage foreclosures and short sales, changes in general or regional economic
conditions and unemployment rates, interest rates, governmental rules or policies and natural disasters. The value of real estate located in many segments of the Chicago metropolitan area has been and continues to be adversely impacted by many of
these factors, and this has had, and may continue to have, a negative impact on our loan growth, our ability to collect certain loans according to their terms, and our results of operations.

Difficult Economic Conditions Have Adversely Affected the Banking Industry

National and
local economic conditions have been difficult in recent years, and this has resulted in declining real estate values, a tightening of the availability of credit, illiquidity in certain securities markets, increasing loan delinquencies, mortgage
foreclosures, personal and business bankruptcies, rising unemployment rates, declining consumer confidence and spending, significant write-downs of asset values by financial institutions and government-sponsored entities, and a reduction of
manufacturing and service business activity and international trade. These conditions have contributed to significant declines in the trading prices of certain financial institution stocks, many of which have not fully recovered. We do not expect
that the national and local economies will fully recover over the short term, and a continuation or worsening of these conditions could exacerbate their adverse effects. The adverse effects of these conditions could include increases in loan
delinquencies and charge-offs, increases to the portion of our loan loss reserve that we base on national or local economic factors, increases to our specific loan loss reserves due to the impact of these conditions on specific borrowers or the
collateral for their loans, declines in the value of our investment securities, increases in regulatory and compliance costs, and declines in the trading price of our common stock.

If Our Investment in the Federal Home Loan Bank of Chicago is Classified as Other-Than-Temporarily Impaired, Our Earnings Could Decrease

We own FHLBC common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLBCs advance program. The aggregate cost of our FHLBC common
stock as of December 31, 2010 was $15.6 million based on its par value. There is no market for our FHLBC common stock. Due to our receipt of stock dividends and a reduction of our outstanding FHLBC advances, we owned shares of FHLBC common
stock at December 31, 2010 with a par value that was $9.0 million more than we were required to own to maintain our membership, in the Federal Home Loan Bank System and to be eligible to obtain advances (excess or
voluntary capital stock).

The FHLBC is subject to a cease and desist order issued by the Federal Housing Finance Board, now known
as the Federal Housing Finance Agency (FHFA), in 2007. Among other things, the cease and desist order requires the FHLBC to submit a capital plan to the FHFA, prohibits certain capital stock repurchases and stock redemptions, including
certain redemptions upon membership withdrawal, without the prior approval of the Director of the Office of Supervision of the FHFA ( Director), and prohibits the payments of dividends without the prior approval of the Director. The
FHLBC has reported that it has submitted a capital plan to the Director but that it has not yet been approved. The FHLBC did not pay any dividends from the third quarter of 2007 through 2010, but in the first quarter of 2011, paid a nominal cash
dividend at an annualized rate of 10 basis points per share. The FHLBC reported in February 2011 that it had earnings of net income of $366 million for 2010, compared to a net loss of $65 million in 2009, and that it is in compliance with its
regulatory capital requirements.

Current accounting guidance requires us to evaluate our FHLBC common stock for impairment based on the
ultimate recoverability of the par value of the security without regard to temporary declines in value. We concluded from our most recent impairment testing that it is probable that the par value of our FHLBC common stock is ultimately
recoverable based on the FHLBCs current compliance with its regulatory capital requirements, the net income that it reported for 2010, its receipt of regulatory approval to pay a dividend in the first quarter of 2011 and published reports
indicating that it is continuing to work with its regulator to finalize a capital plan. However, if events were to occur that give rise to substantial doubt about the ultimate recoverability of the par value of our FHLBC common stock, this
investment could become other-than-temporarily impaired, and the impairment loss that we would be required to record would cause our earnings to decrease by the after-tax amount of the impairment loss.



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Our Future Success is Dependent on Our Ability to Compete Effectively in the Highly Competitive Banking
Industry

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, we have grown our business successfully by focusing on our geographic markets and emphasizing the high level of service and responsiveness
desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, brokerage houses, mutual funds, insurance companies, real estate conduits, and specialized finance companies.
Many of our competitors offer products and services that we do not offer, and many have substantially greater resources and lending limits, name recognition and market presence that benefit them in attracting business. In addition, larger
competitors may be able to price loans and deposits more aggressively than we do, and smaller newer competitors may be more aggressive in pricing loans 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 to the extensive regulations imposed on federal savings 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.

Our Business May Be Adversely Affected by the Highly Regulated Environment in Which
We Operate

We are subject to extensive federal and state legislation, regulation, examination and supervision. The Dodd-Frank Act and
other recently enacted legislation, the regulations promulgated there, and future legislation and regulations that may be enacted or promulgated, could have an adverse effect on our business and operations. In addition, the OTS will cease to be the
primary federal regulator of the Company and the Bank on July 21, 2011, and we may need to make adjustments in our policies and procedures to ensure compliance with the rules and regulations of the OCC and the FRB. Our success will be impacted
by our continued ability to comply with applicable laws and regulations. Some of these laws and regulations may increase our costs. While we cannot predict what effect any future changes in these laws or regulations or their interpretations would
have on us, these changes or interpretations may adversely affect our future operations.

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 current 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. See Our Ability to Successfully Conduct
Acquisitions Will Affect Our Ability to Grow Our Franchise and Compete Effectively in Our Marketplace.

Our Return on
Stockholders Equity Will Continue to Be Low Due to Our High Capital Level

Net income divided by average stockholders equity,
known as return on equity, is a ratio that many investors use to compare the performance of a financial institution to its peers. Our capital remains relatively high by industry standards pending a more optimal deployment of the additional capital
raised in our 2005 mutual-to-stock conversion. Until we can increase our net interest income and noninterest income, we expect our return on equity to continue to be below the historical industry average, which may negatively affect the value of our
shares of common stock



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The Companys Ability to Pay Dividends is Affected by Regulatory Limitations on the Banks
Ability to Pay Dividends and Other Regulatory Limitations

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. The Bank may pay dividends without the approval of its primary federal regulator only if the Bank meets its applicable regulatory capital requirements before and after the payment of the dividends and its total dividends
do not exceed its net income to date over the calendar year plus its retained net income over the preceding two years. Although the Banks capital exceeded applicable regulatory requirements at December 31, 2010, the Bank did not have
sufficient net income over the preceding two years to pay a dividend to the Company without the prior approval of its primary federal regulator. If the Bank were to seek the approval of its primary federal regulator to pay a dividend, there can be
no assurance that such approval would be granted. If at some point in the future the Company utilizes its available cash for other purposes Bank is unable to pay dividends to the Company, the Company may not have sufficient funds to continue to pay
dividends on its common stock. In addition, the Companys ability to pay dividends on its common stock could be further limited by the application of the source of strength doctrine, which requires holding companies to provide
financial support to their subsidiary depository institutions if the subsidiary is in financial distress, or by regulatory order.

We
Continually Encounter Technological Change, and May Have Fewer Resources than Many of Our 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.

Our Ability to
Successfully Conduct Acquisitions Will Affect Our Ability to Grow Our Franchise and Compete Effectively in Our Marketplace

We consider
the possible acquisition of other banks, thrifts and other financial services companies in private or FDIC-assisted transactions to supplement internal growth. Although we entered into a definitive agreement to acquire DG Bancorp, Inc. and its
subsidiary, Downers Grove National Bank in the third quarter of 2010, our efforts to acquire other financial institutions and financial service companies in the future may not be successful. Other potential acquirors exist for most acquisition
candidates, creating competition that can affect the purchase price for which the institution can be acquired. In many cases, our competitors have significantly greater resources than we have, and greater flexibility to structure the consideration
for the transaction. We may not participate in specific acquisition opportunities if we consider the proposed transaction unacceptable, including the current or potential future terms, conditions and limitations imposed by an FDIC-assisted
transaction. We also may not be the successful bidder in acquisition opportunities that we pursue due to the willingness or ability of other potential acquirors to propose a higher purchase price or more attractive terms and conditions than we are
willing or able to propose. The results of a merger or acquisition could change materially based on future changes in applicable accounting principles and regulatory requirements related to acquired assets and liabilities. If we are unable to or do
not conduct acquisitions to supplement internal growth, our ability to deploy effectively the capital we raised in the 2005 offering, expand our geographic presence and improve our results of operations could be adversely affected.

FDIC Deposit Insurance Premiums Have Increased and May Increase Further in the Future

The Federal Deposit Insurance Act, as amended, requires the FDIC to maintain a reserve ratio between 1.15% and 1.50%. The FDICs Board of Directors is required to establish a designated reserve ratio
within that range and set assessment rates to meet that target within a time frame that the FDICs Board of Directors deems appropriate. If the reserve ratio falls below 1.15%, the FDICs Board of Directors is required to
establish a restoration plan to bring the reserve ratio back to 1.15% within five years. The FDICs reserve ratio declined over the past several years due to costs associated with bank failures, and it is possible that the reserve ratio could
be placed under stress due to future bank failures. As part of its plan to restore the reserve ratio to 1.15%, the FDICs Board of Directors imposed a special assessment equal to five basis points of assets less Tier 1 capital as of
June 30, 2009, which was payable on September 30, 2009. In addition, the FDIC increased its quarterly assessment rates and amended the method by which rates are calculated. On November 12, 2009, the FDIC approved a final rule
requiring insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Prepaid assessments are to be applied against the
actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned on June 30, 2013. See Supervision and Regulation  Insurance of
Deposit Accounts. On December 30, 2009, the Bank paid the estimated assessment fees for the fourth quarter of 2009 and prepaid $6.8 million in estimated assessment fees through 2012. These increased assessments have had an adverse impact
on our results of operations in 2009 and will continue to have an adverse impact in future years. If circumstances require the FDIC to impose additional special assessments or further increase its quarterly assessment rates, the adverse impact will
be exacerbated.



17



---

Various Factors May Make Takeover Attempts That You 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 acquiror
could offer a premium over the then prevailing price of our shares of common stock. The OTS regulations prohibit the direct or indirect acquisition of more than 10% of any class of equity security of a converted savings institution without the prior
approval of the OTS. 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.

Non-Compliance with USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act,
Truth-in-Lending Act or Other Laws and Regulations Could Result in Fines or Sanctions, and Curtail Expansion Opportunities

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 imposed and will continue
to expand 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.



18



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|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



19



---

|ITEM 2. | PROPERTIES
|------- | ----------

As of
December 31, 2010 the net book value of our properties was $28.5 million. The following is a list of our offices:



|                                                                              |  |                                                                 |  |                                                                   
|----------------------------------------------------------------------------- |  | --------------------------------------------------------------- |  | ------------------------------------------------------------------
|Burr Ridge (Executive Office)
15W060 North Frontage Road Burr Ridge, IL
60527 |  | Deerfield 630 N. Waukegan
Road Deerfield, IL 60015              |  | Northbrook 1368 N. Shermer
Road Northbrook, IL 60062              
|                                                                              |  |                                                                
|Calumet City 1901 Sibley
Boulevard Calumet City, IL 60409                     |  | Hazel Crest 3700 W. 183rd
Street Hazel Crest, IL 60429          |  | Olympia Fields 21110 S.
Western Avenue Olympia Fields, IL 60461   
|                                                                              |  |                                                                
|Calumet Park 1333 W. 127th
Street Calumet Park, IL 60827                      |  | Joliet 1401 N.
Larkin Joliet, IL 60435                          |  | Orland Park 48 Orland Square
Drive Orland Park, IL 60462          
|                                                                              |  |                                                                
|Chicago - Hyde Park 1354 East
55th Street Chicago, IL 60615                   |  | Lincolnshire One Marriott
Drive Lincolnshire, IL 60069          |  | Schaumburg 1005 W. Wise
Road Schaumburg, IL 60193                 
|                                                                              |  |                                                                
|Chicago - Hyde Park East 55th
at Lake Park Avenue Chicago, IL 60615           |  | Lincolnwood 3443 W.
Touhy Lincolnwood, IL 60712                 |  | South Libertyville 1123 S.
Milwaukee Avenue Libertyville, IL 60048
|                                                                              |  |                                                                
|Chicago Ridge 6415 W. 95th
Street Chicago Ridge, IL 60415                     |  | Naperville 1200 E. Ogden
Avenue Naperville, IL 60563            |  |                                                                   
|                                                                              |  |                                                                
|Chicago - Lincoln Park 2424 N.
Clark Street Chicago, IL 60614                 |  | North Libertyville 1409 W.
Peterson Road Libertyville, IL 60048 |  |                                                                   

Except for our Chicago-Lincoln Park, Northbrook, and Hyde Park East offices, which are leased, all of our offices are
owned. In addition to the above listed properties, we also operate three Express Branch facilities, two satellite national commercial leasing offices and two remote ATMs on sites where we do not have a full-service banking office.



|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. | [RESERVED]
|------- | ----------



20



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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 December 31, 2010 was 1,820. 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 cash dividends paid for the periods ended December 31, 2010 and 2009.



|                                 |  |      |       |  |     |   |      |       |  |   |                    |  |  |   |      | 
|-------------------------------- |  | ---- | ----- |  | --- | - | ---- | ----- |  | - | ------------------ |  |  | - | ---- | 
|2009 and 2010 Quarterly Periods  |  | High |       |  | Low |   |      | Close |  |   | CashDividends Paid | 
|Quarter ended December 31, 2010  |  | $    | 9.90  |  |     | $ | 9.06 |       |  | $ | 9.75               |  |  | $ | 0.07 | 
|Quarter ended September 30, 2010 |  |      | 9.38  |  |     |   | 8.12 |       |  |   | 9.17               |  |  |   | 0.07 | 
|Quarter ended June 30, 2010      |  |      | 9.99  |  |     |   | 8.28 |       |  |   | 8.31               |  |  |   | 0.07 | 
|Quarter ended March 31, 2010     |  |      | 10.16 |  |     |   | 9.01 |       |  |   | 9.17               |  |  |   | 0.07 | 
|                                 |  |      |       | 
|Quarter ended December 31, 2009  |  | $    | 10.40 |  |     | $ | 9.07 |       |  | $ | 9.90               |  |  | $ | 0.07 | 
|Quarter ended September 30, 2009 |  |      | 11.04 |  |     |   | 8.75 |       |  |   | 9.60               |  |  |   | 0.07 | 
|Quarter ended June 30, 2009      |  |      | 11.10 |  |     |   | 8.07 |       |  |   | 8.86               |  |  |   | 0.07 | 
|Quarter ended March 31, 2009     |  |      | 11.10 |  |     |   | 7.19 |       |  |   | 9.97               |  |  |   | 0.07 | 

The Company is 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: (A) the Companys net earnings for the fiscal year in which the distribution is made; (B) the Companys net earnings for the preceding fiscal year; or (C) 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 quarter ended December 31, 2010.

Repurchases of Equity Securities

Our Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. In accordance with this authorization, we had
repurchased 4,239,134 shares of our common stock as of December 31, 2010. There were no share repurchases conducted in the fourth quarter of 2010. The current share repurchase authorization will expire on May 16, 2011, unless extended by
our Board of Directors.



21



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Stock Performance Graph

The following Performance Graph and related information shall not be deemed soliciting material or to be filed with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

We completed our mutual-to-stock conversion on June 23, 2005, in connection with which the Company sold an aggregate of 24,466,250
shares of common stock at a price of $10.00 per share. The Companys common stock began trading on the Nasdaq Stock Market under the symbol BFIN on June 24, 2005, and the per share closing price of one share of the
Companys common stock on that date was $13.60. The following graph represents $100 invested in our common stock at the $13.60 per share closing price on June 24, 2005. The graph illustrates the comparison of the cumulative total returns
for the common stock of the Company, the Russell 2000 Index, the NASDAQ Bank Index and the Americas Community Bankers NASDAQ Index for the periods indicated.

There can be no assurance that our stock performance will continue in the future with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock
performance.

LOGO



|                                         |  |            |        |  |            |  |        |            |  |  |            |  |  |            |       |  |            |  |        |  |  |  |        | 
|---------------------------------------- |  | ---------- | ------ |  | ---------- |  | ------ | ---------- |  |  | ---------- |  |  | ---------- | ----- |  | ---------- |  | ------ |  |  |  | ------ | 
|                                         |  | 12/31/2005 |        |  | 12/31/2006 |  |        | 12/31/2007 |  |  | 12/31/2008 |  |  | 12/31/2009 |       |  | 12/31/2010 | 
|BankFinancial Corporation                |  |            | 107.94 |  |            |  | 132.36 |            |  |  | 119.65     |  |  |            | 78.58 |  |            |  | 78.45  |  |  |  | 79.41  | 
|Russell 2000 Index                       |  |            | 107.49 |  |            |  | 127.24 |            |  |  | 125.24     |  |  |            | 82.93 |  |            |  | 105.46 |  |  |  | 133.78 | 
|NASDAQ Bank Index                        |  |            | 102.58 |  |            |  | 113.88 |            |  |  | 88.74      |  |  |            | 67.51 |  |            |  | 55.02  |  |  |  | 61.56  | 
|Americas Community Bankers NASDAQ Index |  |            | 103.69 |  |            |  | 114.92 |            |  |  | 86.43      |  |  |            | 69.51 |  |            |  | 54.65  |  |  |  | 59.71  | 



22



---

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The
following information is derived from the audited consolidated financial statements of the Company. For additional information, reference is made to Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements of the Company and related notes included elsewhere in this Annual Report.



|                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|------------------------------------------------------------ |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- |  |  | - | --------- | -
|                                                             |  | At December 31,                               |          
|                                                             |  | 2010                                          |           |   | 2009 |   |           | 2008 |  |   | 2007      |   |  | 2006 |          
|                                                             |  | (Dollars in thousands)                        |          
|Selected Financial Condition Data:                           |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|                                                             |  |                                               |           |   |     
|Total assets                                                 |  | $                                             | 1,530,655 |   |      | $ | 1,566,963 |      |  | $ | 1,554,855 |   |  | $    | 1,480,712 |  |  | $ | 1,613,150 |  
|Loans, net                                                   |  |                                               | 1,050,766 |   |      |   | 1,218,540 |      |  |   | 1,268,122 |   |  |      | 1,254,167 |  |  |   | 1,329,943 |  
|Loans held-for-sale                                          |  |                                               | 2,716     |   |      |   |          |      |  |   | 872       |   |  |      | 173       |  |  |   | 298       |  
|Securities, at fair value                                    |  |                                               | 120,747   |   |      |   | 102,126   |      |  |   | 124,919   |   |  |      | 77,049    |  |  |   | 117,853   |  
|Goodwill                                                     |  |                                               | 22,566    |   |      |   | 22,566    |      |  |   | 22,566    |   |  |      | 22,566    |  |  |   | 22,579    |  
|Core deposit intangible                                      |  |                                               | 2,700     |   |      |   | 4,295     |      |  |   | 5,985     |   |  |      | 7,769     |  |  |   | 9,648     |  
|Deposits                                                     |  |                                               | 1,235,377 |   |      |   | 1,233,395 |      |  |   | 1,069,855 |   |  |      | 1,073,650 |  |  |   | 1,129,585 |  
|Borrowings                                                   |  |                                               | 23,749    |   |      |   | 50,784    |      |  |   | 200,350   |   |  |      | 96,433    |  |  |   | 138,148   |  
|Equity                                                       |  |                                               | 253,285   |   |      |   | 263,603   |      |  |   | 266,791   |   |  |      | 291,137   |  |  |   | 326,015   |  
|                                                             | 
|                                                             |  | Years Ended December 31,                      |          
|                                                             |  | 2010                                          |           |   | 2009 |   |           | 2008 |  |   | 2007      |   |  | 2006 |          
|                                                             |  | (Dollars in thousands, except per share data) |          
|Selected Operating Data:                                     |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|                                                             |  |                                               |           |   |     
|Interest and dividend income                                 |  | $                                             | 64,936    |   |      | $ | 74,109    |      |  | $ | 77,960    |   |  | $    | 91,953    |  |  | $ | 94,086    |  
|Interest expense                                             |  |                                               | 13,186    |   |      |   | 20,557    |      |  |   | 25,667    |   |  |      | 38,304    |  |  |   | 37,489    |  
|                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|Net interest income                                          |  |                                               | 51,750    |   |      |   | 53,552    |      |  |   | 52,293    |   |  |      | 53,649    |  |  |   | 56,597    |  
|Provision (credit) for loan losses                           |  |                                               | 12,083    |   |      |   | 8,811     |      |  |   | 5,092     |   |  |      | 697       |  |  |   | (136      | )
|                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|Net interest income after provision (credit) for loan losses |  |                                               | 39,667    |   |      |   | 44,741    |      |  |   | 47,201    |   |  |      | 52,952    |  |  |   | 56,733    |  
|Noninterest income                                           |  |                                               | 7,128     |   |      |   | 7,239     |      |  |   | 10,418    |   |  |      | 9,665     |  |  |   | 10,554    |  
|Noninterest expense (1)                                      |  |                                               | 53,849    |   |      |   | 52,731    |      |  |   | 89,056    |   |  |      | 52,499    |  |  |   | 52,415    |  
|                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|Income (loss) before income tax expense                      |  |                                               | (7,054    | ) |      |   | (751      | )    |  |   | (31,437   | ) |  |      | 10,118    |  |  |   | 14,872    |  
|Income tax expense (benefit)                                 |  |                                               | (2,747    | ) |      |   | (13       | )    |  |   | (12,048   | ) |  |      | 2,963     |  |  |   | 4,826     |  
|                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|Net income (loss)                                            |  | $                                             | (4,307    | ) |      | $ | (738      | )    |  | $ | (19,389   | ) |  | $    | 7,155     |  |  | $ | 10,046    |  
|                                                             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |  |  |   |           |  
|                                                             |  |                                               |           |   |     
|Basic earnings (loss) per common share                       |  | $                                             | (0.22     | ) |      | $ | (0.04     | )    |  | $ | (0.98     | ) |  | $    | 0.35      |  |  | $ | 0.45      |  
|Diluted earnings (loss) per common share                     |  | $                                             | (0.22     | ) |      | $ | (0.04     | )    |  | $ | (0.98     | ) |  | $    | 0.35      |  |  | $ | 0.45      |  

(footnotes on
following page)



23



---

|                                                                        |  |                                        |        |    |      |   |        |      |  |   |        |    |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | -------------------------------------- | ------ | -- | ---- | - | ------ | ---- |  | - | ------ | -- |  | ---- | ------ | - |  | - | ------ | -
|                                                                        |  | At or For the Years Ended December 31, |       
|                                                                        |  | 2010                                   |        |    | 2009 |   |        | 2008 |  |   | 2007   |    |  | 2006 |       
|                                                                        |  |                                        |        |    |     
|Selected Financial Ratios and Other Data:                               |  |                                        |        |    |      |   |        |      |  |   |        |    |  |      |        |   |  |   |        |  
|                                                                        |  |                                        |        |    |     
|Performance Ratios:                                                     |  |                                        |        |    |      |   |        |      |  |   |        |    |  |      |        |   |  |   |        |  
|Return on assets (ratio of net income (loss) to average total assets)   |  |                                        | (0.28  | )% |      |   | (0.05  | )%   |  |   | (1.33  | )% |  |      | 0.47   | % |  |   | 0.61   | %
|Return on equity (ratio of net income (loss) to average equity)         |  |                                        | (1.64  | )  |      |   | (0.28  | )    |  |   | (6.84  | )  |  |      | 2.30   |   |  |   | 3.02   |  
|Net interest rate spread (2)                                            |  |                                        | 3.36   |    |      |   | 3.36   |      |  |   | 3.35   |    |  |      | 2.94   |   |  |   | 2.89   |  
|Net interest margin (3)                                                 |  |                                        | 3.57   |    |      |   | 3.69   |      |  |   | 3.88   |    |  |      | 3.78   |   |  |   | 3.68   |  
|Efficiency ratio (4)                                                    |  |                                        | 91.46  |    |      |   | 86.74  |      |  |   | 142.01 |    |  |      | 82.92  |   |  |   | 78.06  |  
|Noninterest expense to average total assets                             |  |                                        | 3.45   |    |      |   | 3.36   |      |  |   | 6.09   |    |  |      | 3.42   |   |  |   | 3.19   |  
|Average interest-earning assets to average interest-bearing liabilities |  |                                        | 122.56 |    |      |   | 123.43 |      |  |   | 127.85 |    |  |      | 130.95 |   |  |   | 132.67 |  
|Dividends declared per share                                            |  | $                                      | 0.28   |    |      | $ | 0.28   |      |  | $ | 0.28   |    |  | $    | 0.28   |   |  | $ | 0.18   |  
|Dividend payout ratio                                                   |  |                                        | N.M.   |    |      |   | N.M.   |      |  |   | N.M.   |    |  |      | 90.6   | % |  |   | 44.3   | %
|                                                                        |  |                                        |        |    |     
|Asset Quality Ratios:                                                   |  |                                        |        |    |      |   |        |      |  |   |        |    |  |      |        |   |  |   |        |  
|Nonperforming assets to total assets (5)                                |  |                                        | 3.94   | %  |      |   | 3.42   | %    |  |   | 0.94   | %  |  |      | 0.87   | % |  |   | 0.57   | %
|Nonperforming loans to total loans                                      |  |                                        | 4.26   |    |      |   | 4.01   |      |  |   | 1.07   |    |  |      | 0.95   |   |  |   | 0.69   |  
|Allowance for loan losses to nonperforming loans                        |  |                                        | 48.54  |    |      |   | 37.63  |      |  |   | 107.97 |    |  |      | 91.65  |   |  |   | 115.13 |  
|Allowance for loan losses to total loans                                |  |                                        | 2.07   |    |      |   | 1.51   |      |  |   | 1.15   |    |  |      | 0.87   |   |  |   | 0.79   |  
|Net charge-offs to average loans outstanding                            |  |                                        | 0.75   |    |      |   | 0.39   |      |  |   | 0.11   |    |  |      | 0.02   |   |  |   | 0.07   |  
|                                                                        |  |                                        |        |    |     
|Capital Ratios:                                                         |  |                                        |        |    |      |   |        |      |  |   |        |    |  |      |        |   |  |   |        |  
|Equity to total assets at end of period                                 |  |                                        | 16.55  | %  |      |   | 16.82  | %    |  |   | 17.16  | %  |  |      | 19.66  | % |  |   | 20.21  | %
|Average equity to average assets                                        |  |                                        | 16.77  |    |      |   | 17.02  |      |  |   | 19.39  |    |  |      | 20.32  |   |  |   | 20.25  |  
|Tier 1 leverage ratio (Bank only)                                       |  |                                        | 12.48  |    |      |   | 12.44  |      |  |   | 12.08  |    |  |      | 13.95  |   |  |   | 15.05  |  
|                                                                        |  |                                        |        |    |     
|Other Data:                                                             |  |                                        |        |    |      |   |        |      |  |   |        |    |  |      |        |   |  |   |        |  
|Number of full-service offices                                          |  |                                        | 18     |    |      |   | 18     |      |  |   | 18     |    |  |      | 18     |   |  |   | 18     |  
|Employees (full-time equivalents)                                       |  |                                        | 328    |    |      |   | 372    |      |  |   | 393    |    |  |      | 425    |   |  |   | 438    |  



|(1) | Noninterest expense for the years ended December 31, 2009 and 2008 includes $401,000 and $35.9 million, respectively, of impairment loss on securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The net interest margin represents net interest income divided by average total interest-earning assets for the period.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(4) | The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(5) | Nonperforming assets include nonperforming loans and other real estate owned and in process.
|--- | --------------------------------------------------------------------------------------------



N.M. Not Meaningful



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The discussion and analysis that follows focuses on the factors affecting our consolidated financial condition at December 31, 2010 and 2009, and our
consolidated results of operations for the three years ended December 31, 2010. The 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

Loans.Our loan portfolio consists primarily of investment and business loans (multifamily, nonresidential real estate, commercial, construction and land loans, and commercial
leases), which together make up 75.9% of gross loans at December 31, 2010. Net loans receivable decreased $167.8 million, or 13.8%, to $1.051 billion at December 31, 2010, from $1.219 billion at December 31, 2009. Multi-family
mortgage loans decreased by $32.3 million, or 9.8%, due in substantial part to a HUD refinancing that was completed by a related group of borrowers. Commercial loans decreased by $23.4 million, or 26.6%, due to the combined impact of loan pay downs
and reduced originations. Commercial leases decreased by $25.7 million, or 14.5%, as scheduled lease payments outpaced originations. Nonresidential real estate loans decreased $34.6 million, or 10.9%, primarily due to principal payments of $56.6
million, which were partially offset by $15.3 million in draws on existing credit commitments. Construction and land loans decreased $14.2 million, or 43.5%, primarily due to project sales and conversions to permanent amortizing loans. One-to-four
family residential mortgage loans decreased $33.3 million, or 11.5%, primarily due to refinancings that were not replaced with new originations. Future loan growth could be adversely affected by our unwillingness to compete for loans by relaxing our
historical underwriting standards.

Securities.Securities increased $18.6 million, or 18.2%, to $120.7 million at
December 31, 2010, from $102.1 million at December 31, 2009. The primary reason for the increase was $50.5 million in purchases, offset by $31.8 million of principal repayments and maturities of securities. During 2010 we utilized FDIC
insured certificates of deposit as an investment option.

Deposits.Deposits increased $2.0 million, or 0.2%, to $1.235
billion at December 31, 2010, from $1.233 billion at December 31, 2009. We increased our core deposits (savings, money market, noninterest-bearing demand and NOW accounts) by $25.5 million and reduced our balances of wholesale deposits by
$14.7 million during the year. Core deposits increased as a percentage of total deposits, representing 69.2% of total deposits at December 31, 2010, compared to 67.3% of total deposits at December 31, 2009.

Borrowings.Borrowings decreased $27.0 million, or 53.2%, to $23.7 million at December 31, 2010, from $50.8 million at
December 31, 2009, due to our repayments of maturing FHLBC advances.

Stockholders Equity.Total
stockholders equity was $253.3 million at December 31, 2010, compared to $263.6 million at December 31, 2009. The decrease in total stockholders equity was primarily due to the combined impact of our repurchase of 356,411
shares of our common stock during 2010 at a total cost of $3.1 million, our declaration and payment of cash dividends totaling $5.9 million, the $4.3 million net loss that we recorded for 2010 and a $50,000 decrease in accumulated other
comprehensive income. These items were partially offset by a $3.1 million increase in total stockholders equity that resulted from the vesting of stock-based compensation and ESOP shares earned. The unallocated shares of common stock that our
ESOP owns were reflected as a $14.2 million reduction to stockholders equity at December 31, 2010, compared to a $15.2 million reduction to stockholders equity at December 31, 2009.

Net Loss.We recorded a net loss of $4.3 million for the year ended December 31, 2010, compared to net losses of $738,000 and
$19.4 million for 2009 and 2008, respectively. The net loss in 2010 was due in substantial part to our recording a $12.1 million provision for loan losses, $7.3 million for nonperforming asset management expense and operations of other real estate
owned combined with a $1.8 million decrease in net interest income. The net loss in 2009 was due primarily to the recording of an $8.8 million provision for loan losses, a $2.1 million increase in FDIC expense and $1.4 million in combined pre-tax
losses that we recorded in connection with the impairment and subsequent sale of our Freddie Mac preferred stocks. The impact of these items was partially offset by a $1.3 million gain that we recognized on the sale of our merchant processing
operations in 2009. The net loss in 2008 was due in substantial part to a $35.9 million pre-tax impairment loss that we recorded on our Freddie Mac preferred stocks after Freddie Mac was placed into conservatorship. Our basic loss per common share
was $0.22, $0.04 and $0.98 for the years ended December 31, 2010, 2009 and 2008, respectively.



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Net Interest Income. We recorded net interest income of $51.8 million for the
year ended December 31, 2010, compared to $53.6 million for 2009 and $52.3 million for 2008. The decrease in net interest income for 2010 reflected a $9.2 million decrease in interest income, which was partially offset, by a $7.4 million
decrease in interest expense. Our net interest rate spread was 3.36% for the years ended December 31, 2010 and 2009.

Provision for Loan Losses. We recorded a provision for loan losses of $12.1 million for the year ended December 31,
2010, compared to $8.8 million for 2009 and $5.1 million for 2008. The provision for loan losses that we recorded in 2010 reflects the combined impact of a $4.4 million increase in the portion of the specific allowance for loan losses that we
allocate to impaired loans and $8.5 million in net charge-offs, which were partially offset by a $794,000 decrease in the general component of the allowance for loan losses.

Noninterest Income.Noninterest income for the year ended December 31, 2010 was $7.1 million, compared to $7.2 million for 2009 and $10.4 million for 2008. Our noninterest income
for 2010 included service charges and fees of $3.0 million, compared to $3.4 million for 2009 and $3.6 million for 2008. Earnings on bank-owned life insurance were $430,000 for the year ended December 31, 2010, compared to a $20,000 loss for
2009 and earnings of $586,000 for 2008. Our noninterest income for 2009 included a $988,000 loss on the sale of our Freddie Mac preferred stocks and a $1.3 million gain on the sale of our merchant processing operations. Our noninterest income for
2008 included a $1.4 million pre-tax gain on the sale of shares of Visa, Inc. Class B common stock that we received in connection with Visa, Inc.s initial public offering, and a $1.2 million pre-tax gain on additional shares of Visa, Inc.
Class B common stock that were allocated to us in the initial public offering and are currently held in a litigation escrow under Visa, Inc.s retrospective responsibility plan. The gain that we recorded on the escrowed shares of the Visa, Inc.
Class B common stock reduced our obligation to indemnify Visa USA under Visa, Inc.s retrospective responsibility plan.

Noninterest Expense.Noninterest expense for the year ended December 31, 2010 was $53.9 million, compared to $52.7 million for
2009 and $89.1 million for 2008. Noninterest expense for 2010 included $3.3 million in nonperforming asset management expenses, compared to $770,000 in 2009. Operations of other real estate owned totaled $4.0 million in 2010, compared to $1.3
million in 2009. Noninterest expense for 2009 included a $401,000 pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks. Expense for FDIC deposit insurance totaled $2.1 million during the year ended
December 31, 2010, compared to $2.2 million for 2009 and $162,000 for 2008. The increase in our 2009 expense for FDIC deposit insurance was due to the combined effect of the FDICs increase in its quarterly assessment rate, the FDICs
imposition of a special assessment against all insured institutions and the full utilization of the FDIC assessment credits that we previously had available to offset or reduce FDIC quarterly assessments. Noninterest expense for 2008 included a
$35.9 million pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks and a $2.0 million pre-tax loss on the early extinguishment of borrowings that we recorded in connection with the prepayment of a $25 million
FHLBC term advance.

Income Taxes.We recorded an income tax benefit of $2.7 million for the year ended December 31,
2010, compared to $13,000 and $12.0 million for 2009 and 2008. The effective tax rates were 38.94%, 1.73% and 38.32% for the years ended December 31, 2010, 2009 and 2008, respectively. For 2009, the difference between the GAAP basis (fair
market value at the date of grant) and the tax basis (fair market value at the date of vesting) of equity-based compensation granted in prior years reduced our income tax benefit. The income tax benefit for 2008 was due in substantial part to
the recording of an impairment loss on our Freddie Mac preferred stocks.

Key Strategic Initiatives and Events

Stock Repurchase Program.Our Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. The
authorization permits shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization may be
utilized at management's discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of
Directors. The repurchase authorization will expire on May 16, 2011, unless extended by the Board of Directors. As of December 31, 2010, the Company had repurchased 4,239,134 shares of its common stock pursuant to the repurchase
authorization.



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Quarterly Cash Dividends.Our Board of Directors declared four quarterly cash dividends of
$0.07 per share during 2010. Cash dividends totaling $5.9 million were paid in 2010. On January 27, 2011, the Board of Directors declared a quarterly cash dividend of $0.07 per share that is payable on March 4, 2011.

Pending Acquisition.On September 13, 2010, we entered into a definitive agreement to acquire DG Bancorp, Inc., the bank holding
company for Downers Grove National Bank, a privately held community bank with approximately $219 million in assets and $213 million in deposits as of December 31, 2010. Downers Grove National Bank has two banking offices located in Downers
Grove and Westmont, Illinois. We have received all regulatory approvals that are required to consummate the transaction and the closing is expected to occur during the first quarter of 2011, subject to customary closing conditions. Downers Grove
National Bank will be merged into the Bank as part of the consummation of the transaction.

We are in the process of negotiating the
acquisition of a portfolio of performing loans from Citibank N.A. with an aggregate unpaid principal balance of approximately $155.8 million. The purchase is scheduled to close in March 2011, subject to customary closing conditions. This loan
portfolio consists of multifamily loans originated by Citibank N.A. or the former Citibank, F.S.B. and the loans are secured by real estate collateral located in the Chicago metropolitan market area. The portfolio consists of 470 loans with an
overall weighted average effective yield of 5.87%. All loans in the portfolio were current on all payments due as of the month prior to the month in which the purchase is scheduled to close. Upon the closing of the purchase, we expect to file a
Current Report on Form 8-K further describing the portfolio acquisition transaction and the portfolio characteristics.

Economic and
Competitive Conditions

General U.S. financial market conditions further stabilized during 2010. The national economy began a very modest
expansion but local economic conditions remained largely unchanged from 2009. Pricing and underwriting for multi-family and commercial real estate loans were generally favorable, but we experienced relatively low demand for these loan types
throughout 2010. Pricing for commercial leases became less favorable during 2010 amid weak supply as lessors deployed excess cash and several competitors re-entered the market during the year. Demand for the Banks traditional adjustable-rate
residential mortgage loans remained low due to an overwhelming market preference for fixed-rate residential mortgage loans given low market interest rates and our underwriting standards.

We experienced net declines in all loan portfolio component balances during 2010 due to several factors, including overall weak loan demand, loan payoffs, our decisions to exit certain credit
relationships and transfers of certain loans to OREO upon the conclusion of formal collection proceedings. We expect a return to modest growth in most loan portfolio segments if real estate market valuations stabilize and the supply of commercial
lease opportunities improves based on global macroeconomic conditions.

Our loan portfolio quality metrics reflected the overall economic
environment in 2010. The net increase in nonaccrual loans and a related increase in our loan loss reserves resulted primarily from a corresponding material decline in the valuations of the underlying collateral and a decline in effective rents and
occupancies in certain income-producing properties; however, effective rents and occupancies in multifamily properties began to stabilize late in 2010. We also noted a continued influx of personal and business bankruptcy cases; of these, the
majority of borrowers sought to avoid their obligations while a minority sought to restructure their debt to continue ownership of their assets. General market conditions and efforts by various governmental entities and local courts to further slow
the pace of foreclosures continued to affect the pace of our progress in resolving classified assets, but we expect the pace of resolutions to increase in 2011. We continue to believe that unemployment, consumer spending and borrower perceptions of
residential and commercial real estate valuations will be the primary factors affecting loan portfolio quality in 2011.

As we expected, our
general loan loss reserves continued to increase. As part of our computation of the required level for our general loan loss reserve, our model incorporates the changes in national and local economic risk factors, the changes in the levels of
classified loans by loan type, and the impact of the additional specific valuation allowances or charge-offs recorded on classified loans. Our underwriting standards remain consistent with our historical standards, although our credit analyses
incorporate somewhat more conservative assumptions with respect to effective rents, expenses and occupancies given the current economic environment.



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Deposits increased slightly in 2010. Pricing conditions for local deposits, whether low-balance core
deposits, certificates of deposits or high-balance, high-yield transaction accounts, remained favorable during the year due to very low market yields and continued weak industry-wide loan demand. We continued to moderate our competitive position
given the weak lending environment and our excess liquidity position. We expect a similar competitive environment for the first half of 2011, and we will continue our marketing efforts to further enhance the depth and quality of our deposit
portfolio.

Our net interest spread declined in 2010 as the decline in loan portfolio balances and, to a lesser extent, the impact of loans
placed on non-accrual status offset the benefits of a favorable yield curve and improved credit spreads. Given the quantity and volatility of the variables affecting our net interest margin and net interest spread, we are unable to confidently
predict our net interest margin and net interest spread in 2011.

Non-interest income decreased in 2010 due to a materially lower net gain on
the sale of securities and reduced deposit-related fee income, which was partially offset by higher income from insurance and annuities and other fee income. Wealth management performed slightly better than our expectations for 2010.

Non-interest expense increased slightly in 2010 as a significant increase in expenses related to non-performing assets and write-downs on OREO offset the
favorable impact of our focus on improving efficiency through operational reviews and technology deployments. We expect that the expenses related to non-performing loans and classified asset management will decline in the latter part of 2011 in
conjunction with the anticipated gradual decline of the levels of non-performing assets.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective
decisions or assessments, are as follows:

Allowance for Loan Losses. Arriving at an appropriate level of allowance for
loan losses involves a high degree of judgment. Our allowance for loan losses provides for probable incurred losses based upon evaluations of known and inherent risks in the loan portfolio. We review the level of the allowance on a quarterly basis
and establish the provision for loan losses based upon historical loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors
to assess the adequacy of the allowance for loan losses. Among the material estimates that we must make to establish the allowance are loss exposure at default; the amount and timing of future cash flows on affected loans; the value of collateral;
and a determination of loss factors to be applied to the various elements of the loan portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to us to establish the
allowance for loan losses, future adjustments to the allowance may be necessary if borrower financial, collateral valuation or economic conditions differ substantially from the information and assumptions used in making the evaluation. In addition,
as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. These agencies may require us to recognize additions to the allowance based on their judgments of information available to
them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

Intangible Assets. Acquisitions accounted for under purchase accounting require us to record as assets on our financial statements both goodwill, an intangible asset that is equal to
the excess of the purchase price which we pay for another company over the estimated fair value of the net assets acquired, and identifiable intangible assets such as core deposit intangibles and non-compete agreements. We evaluate our goodwill
asset at least annually, or when other indicators suggest that an impairment may have occurred. We are required to reduce the carrying value of our goodwill asset through a charge to earnings if an impairment exists. Core deposit and other
identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
fully recoverable. The valuation techniques that we use to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates,
projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates that we used to determine the carrying value of our
goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives could have a material adverse impact on our results of operations. As of December 31, 2010, our intangible assets consisted of a
goodwill asset of $22.6 million and core deposit intangibles of $2.7 million.



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In performing its analysis, the third-party valuation firm considered three general approaches to valuation:
the asset-based approach, the market approach, and the income approach. In its valuation, the third-party valuation firm used two methods within the market approach and one method within the income approach. The method utilized within the income
approach was the discounted cash flow method, which relies upon the perception of a future stream of benefits, the present value of which represents the indication of value of BankFinancial FSB, the reporting unit pursuant to applicable ASC 350
guidance. The methods utilized within the market approach were the guideline public company method and guideline transaction method. The guideline public company method utilizes the pricing of guideline public companies, which in our case were
publicly-traded banks and bank holding companies bearing certain similarities to the reporting unit, including asset size, geographic region, and profitability. The third-party valuation firm concluded that the fair value of the reporting unit,
exceeded its carrying value as of the valuation date, and therefore, there was no impairment of our goodwill asset pursuant to the first step of the goodwill impairment test prescribed by ASC 350, Intangibles  Goodwill and Other. We concurred
with the methodology and the conclusion of the third-party valuation firm.

Income Taxes.We consider accounting for
income taxes a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are
established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We must assess the realization of the deferred tax asset and, to the extent that we believe that recovery is not likely,
a valuation allowance is established. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. No valuation allowance was required at December 31, 2010. Although we have
determined a valuation allowance is not required for any deferred tax assets at December 31, 2010, there is no guarantee that a valuation allowance will not be required in the future.

Statement of Financial Condition at December 31, 2010 and December 31, 2009

Total assets decreased $36.3 million, or 2.3%, to $1.531 billion at December 31, 2010, from $1.567 billion at December 31, 2009, primarily due
to a $167.8 million decrease in net loans, to $1.051 billion at December 31, 2010, from $1.219 billion at December 31, 2009, partially offset by a $112.6 million increase in net cash and cash equivalents to $220.8 million at
December 31, 2010, from $108.2 million at December 31, 2009.

Our loan portfolio consists primarily of investment and business loans
(multi-family, nonresidential real estate, commercial, construction and land loans, and commercial leases), which together make up 75.9% of gross loans. Net loans receivable decreased $167.8 million, or 13.8%, to $1.051 billion at December 31,
2010, from $1.219 billion at December 31, 2009. Nonresidential real estate loans decreased $34.6 million, or 10.9%, primarily due to principal payments of $56.6 million, which were partially offset by $15.3 million in draws on existing credit
commitments. Multi-family mortgage loans decreased by $32.3 million, or 9.8%, due in substantial part to a HUD refinancing that was completed by a related group of borrowers. Commercial loans decreased by $23.4 million, or 26.6%, due the combined
impact of loan pay downs and reduced originations. Commercial leases decreased by $25.7 million, or 14.5%, as scheduled lease payments outpaced originations. Construction and land loans decreased $14.2 million, or 43.5%, primarily due to project
sales and conversions to permanent amortizing loans. One-to-four family residential mortgage loans decreased $33.3 million, or 11.5%, primarily due to refinancings that were not replaced with new originations.

Our allowance for loan losses increased by $3.6 million, to $22.2 million at December 31, 2010, from $18.6 million at December 31, 2009. The
increase reflects the combined impact of a $4.4 million increase in the portion of the specific allowance for loan losses that we allocate to impaired loans and $8.5 million in net charge-offs, which were partially offset by a $794,000 decrease in
the general component of the allowance for loan losses. Increases in the specific portion of the allowance for loan losses occurred principally in the following areas: multi-family mortgage loans ($2.6 million); non-residential real estate loans
($131,000); commercial loans ($1.1 million); construction and land loans ($729,000); and commercial leases ($72,000). Net decreases in the specific portion of the allowance for loan losses that we allocate to impaired loans occurred for
investor-owned one-to-four family residential loans ($283,000), due to the transfer of properties to other real estate owned during 2010.



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Securities increased by $18.6 million, or 18.2%, to $120.7 million at December 31, 2010, from $102.1
million at December 31, 2009. The primary reason for the increase was $50.5 million in security purchases, which were partially offset by $31.8 million in principal repayments, sales and maturities of securities. In 2010, we utilized
investments in FDIC insured certificates of deposit as an investment option.

We owned common stock of the FHLBC with a stated par value of
$15.6 million at December 31, 2010 and 2009. The FHLBC did not declare or pay any dividends from the third quarter of 2007 through 2010. In the first quarter of 2011, the FHLBC declared and paid a cash dividend at an annualized rate of 10 basis
points per share.

In late 2009, we prepaid our estimated quarterly risk-based assessments for the remainder of 2009, and for all of 2010,
2011, and 2012, pursuant to the FDIC final rule requiring the prepayment of deposit insurance assessments by insured depository institutions. At December 31, 2010, the remaining prepaid FDIC assessment was $4.8 million.

In conjunction with the sale of our Freddie Mac preferred stocks in 2009, we recorded an income tax receivable of $11.7 million at December 31,
2009. We received $11.3 million in tax refunds during 2010. Other assets increased $2.9 million to $15.1 million at December 31, 2010, from $12.2 million at December 31, 2009, primarily due to a $2.7 million increase in deferred tax
assets.

Deposits increased $2.0 million, or 0.2%, to $1.235 billion at December 31, 2010, from $1.233 billion at December 31, 2009,
primarily due to increased money market account, savings and noninterest-bearing demand balances. Money market accounts increased $18.9 million, or 5.9%, to $341.0 million at December 31, 2010, from $322.1 million at December 31, 2009.
Savings accounts increased $2.8 million, or 2.9%, to $98.9 million at December 31, 2010, from $96.1 million at December 31, 2009, and noninterest-bearing demand accounts increased $4.2 million to $112.5 million at December 31, 2010,
from $108.3 million at December 31, 2009. Total core deposits (savings, money market, noninterest-bearing demand and interest-bearing NOW accounts) increased as a percentage of total deposits, representing 69.2% of total deposits at
December 31, 2010, compared to 67.3% of total deposits at December 31, 2009.

Borrowings decreased $27.0 million, or 53.2%, to $23.7
million at December 31, 2010, from $50.8 million at December 31, 2009, due to our repayments of maturing FHLBC advances.

Total
stockholders equity was $253.3 million at December 31, 2010, compared to $263.6 million at December 31, 2009. The decrease in total stockholders equity was primarily due to the combined impact of our repurchase of 356,411
shares of our common stock during 2010 at a total cost of $3.1 million, and our declaration and payment of cash dividends totaling $5.9 million, the $4.3 million net loss that we recorded for 2010 and a $50,000 decrease accumulated other
comprehensive income. These items were partially offset by a $3.1 million increase in total stockholders equity that resulted from the vesting of stock-based compensation and ESOP shares earned. The unallocated shares of common stock that our
ESOP owns were reflected as a $14.2 million reduction to stockholders equity at December 31, 2010, compared to a $15.2 million reduction to stockholders equity at December 31, 2009.

Loans

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. The following briefly describes our principal loan products.

Multi-family Mortgage Loans.
Loans secured by multi-family mortgage loans totaled $296.9 million, or 27.7%, of our total loan portfolio, at December 31, 2010. At December 31, 2010, $73.0 million of our multi-family mortgage loan portfolio consisted of loans originated
in carefully selected metropolitan markets outside the Banks primary lending area, and these loans represented 24.6% of our multi-family mortgage loan portfolio and 6.8% of our total loan portfolio. Multi-family mortgage loans generally are
secured by multi-family rental properties such as apartment buildings, including subsidized apartment units. The majority of our multi-family mortgage loans have adjustable interest rates following an initial fixed-rate period, typically between
three and five years.



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Nonresidential Real Estate Loans.Loans secured by nonresidential real estate totaled
$282.0 million, or 26.3%, of our total loan portfolio, at December 31, 2010. We emphasize nonresidential real estate loans with initial principal balances between $1.0 million and $5.0 million. The nonresidential real estate properties securing
these loans are predominantly office buildings, light industrial buildings, shopping centers and mixed-use developments, and to a lesser extent, more specialized properties such as nursing homes and other healthcare facilities. Substantially all of
our nonresidential real estate loans are secured by properties located in our primary market area. Our nonresidential real estate loans are typically written as three- or five-year adjustable-rate mortgage loans or mortgage loans with balloon
maturities of three or five years. Amortization of these loans is typically based on 20- to 25-year payout schedules. We also originate some 15-year fixed-rate, fully amortizing loans.

Commercial Loans. Commercial loans totaled $64.7 million, or 6.0%, of our total loan portfolio, at December 31, 2010. This total includes unsecured commercial loans with an aggregate
outstanding balance of $7.8 million. We generally make commercial loans to customers in our primary market area to finance equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally
range from less than one year to five years. The loans either carry a fixed-rate or adjustable interest rates indexed to a lending rate that is either determined internally or based on a short-term market rate index.

Commercial Leases.Commercial leases totaled $151.1 million, or 14.1%, of our total loan portfolio, at December 31,
2010. Our commercial leases primarily involve technology equipment, material handling equipment, medical equipment and other capital equipment. The transactions are generally structured as a non-recourse assignment by the leasing company of the
payment stream on the lease supplemented by the grant of a security interest in the lease and the leased equipment. Consequently, we underwrite leases by examining the creditworthiness of the lessee rather than the lessor. The lessee generally
agrees to send the lease payments directly to us. As of December 31, 2010, 57.7% of our commercial lease portfolio involved lessees with investment-grade rated public debt, 39.9% involved publicly-traded lessees with no public debt and thus no
public debt rating, and 2.4% involved privately-held lessees or lessees with a below investment-grade public debt rating. Debt ratings are determined by Moodys, Standard & Poors, Fitch, A.M. Best or an equivalent rating firm.
Commercial leases typically have a maximum maturity of seven years and we limit our maximum outstanding credit exposure to $10.0 million to any single lessee. Leases to companies with no public debt ratings generally involve companies with a net
worth in excess of $25.0 million and typically have a maximum maturity of five years.

Construction and Land
Loans. Construction and land loans totaled $18.4 million, or 1.7%, of our total loan portfolio at December 31, 2010. These loans generally consist of land acquisition loans to help finance the purchase of land intended for
further development, including single-family homes, multi-family housing and commercial income property, development loans to builders in our market area to finance improvements to real estate, consisting mostly of single-family subdivisions,
typically to finance the cost of utilities, roads, sewers and other development costs. These builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to
another builder, often in conjunction with development loans. In general, the maximum loan-to-value ratio for raw land acquisition loan is 65% of the appraised value of the property, and the maximum term of these loans is two years. The maximum
amount loaned on a development loan is generally limited to the cost of the land and public improvements, and advances are made in accordance with a schedule reflecting the cost of the improvements. Advances are generally limited to 90% of actual
construction costs and, as required by applicable regulations, a 75% loan to completed appraised value ratio. We have discouraged new construction lending for the past several years and have had only limited interest in site acquisition loans for
future construction.

One-to-Four Family Residential Mortgage Lending.Conforming and non-conforming fixed-rate and
adjustable-rate residential mortgage loans totaled $256.3 million, or 23.9%, of our total loan portfolio at December 31, 2010. Our residential mortgage loan portfolio includes traditional one-to-four family residential mortgage loans, home
equity loans and home equity lines of credit that are secured by the borrowers primary residence, and loans to investors in non-owner-occupied single-family homes. At December 31, 2010, home equity loans totaled $9.8 million, or 0.9%, of
total loans, home equity lines of credit totaled $79.7 million, or 7.4%, of total loans, and loans to investors in non-owner-occupied single-family homes totaled $76.0 million, or 7.1% of total loans. We generally originate both fixed- and
adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which currently is $417,000 for single-family homes in our market area. Private mortgage insurance is required for first mortgage loans with
loan-to-value ratios in excess of 80%. At December 31, 2010, our adjustable-rate residential first mortgage loan portfolio totaled $129.6 million, and included $18.6 million in loans that re-price once a year and $111.0 million in loans that
re-price periodically after an initial fixed-rate period of three years or more.



31



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We also originate loans above conforming limits, referred to as jumbo loans, that are
underwritten to the credit standards of Fannie Mae given the demand for these loans in the Chicago metropolitan area. We also originate loans that do not fully meet the credit standards of Fannie Mae if they are considered acceptable risks given
their favorable compensating risk factors. In general, we do not originate or purchase loans with underwriting characteristics that, taken together, are materially lower than the credit standards of Fannie Mae, and as part of the underwriting
process, we consider the availability of purchasers for jumbo and other nonconforming loans.



32



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Loan Portfolio Composition

The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale, by type of loan at the dates indicated.



|                                    |  |                        |           |   |         |  |        |        |  |   |           |   |  |        |        |   |         |   |           |        |  |  |         |   |  |        |           |   |         |  |        |   |  |   |           |   |  |  |        |  
|----------------------------------- |  | ---------------------- | --------- | - | ------- |  | ------ | ------ |  | - | --------- | - |  | ------ | ------ | - | ------- | - | --------- | ------ |  |  | ------- | - |  | ------ | --------- | - | ------- |  | ------ | - |  | - | --------- | - |  |  | ------ | -
|                                    |  | At December 31,        |          
|                                    |  | 2010                   |           |   | 2009    |  |        | 2008   |  |   | 2007      |   |  | 2006   |       
|                                    |  | Amount                 |           |   | Percent |  |        | Amount |  |   | Percent   |   |  | Amount |        |   | Percent |   |           | Amount |  |  | Percent |   |  | Amount |           |   | Percent | 
|                                    |  | (Dollars in thousands) |          
|                                    |  |                        |           |   |         |  |        |        |  |  
|One-to-four family residential      |  | $                      | 256,300   |   |         |  | 23.92  | %      |  | $ | 289,623   |   |  |        | 23.44  | % |         | $ | 312,390   |        |  |  | 24.39   | % |  | $      | 345,245   |   |         |  | 27.33  | % |  | $ | 397,545   |   |  |  | 29.71  | %
|Multi-family mortgage               |  |                        | 296,916   |   |         |  | 27.71  |        |  |   | 329,227   |   |  |        | 26.65  |   |         |   | 305,318   |        |  |  | 23.84   |   |  |        | 291,395   |   |         |  | 23.07  |   |  |   | 297,131   |   |  |  | 22.20  |  
|Nonresidential real estate          |  |                        | 281,987   |   |         |  | 26.31  |        |  |   | 316,607   |   |  |        | 25.62  |   |         |   | 342,583   |        |  |  | 26.74   |   |  |        | 325,885   |   |         |  | 25.80  |   |  |   | 320,729   |   |  |  | 23.97  |  
|Construction and land               |  |                        | 18,398    |   |         |  | 1.72   |        |  |   | 32,577    |   |  |        | 2.64   |   |         |   | 50,687    |        |  |  | 3.96    |   |  |        | 64,483    |   |         |  | 5.10   |   |  |   | 85,222    |   |  |  | 6.37   |  
|Commercial loans                    |  |                        | 64,679    |   |         |  | 6.04   |        |  |   | 88,067    |   |  |        | 7.13   |   |         |   | 92,679    |        |  |  | 7.23    |   |  |        | 87,777    |   |         |  | 6.95   |   |  |   | 94,305    |   |  |  | 7.05   |  
|Commercial leases                   |  |                        | 151,107   |   |         |  | 14.10  |        |  |   | 176,821   |   |  |        | 14.31  |   |         |   | 174,644   |        |  |  | 13.63   |   |  |        | 144,841   |   |         |  | 11.47  |   |  |   | 139,164   |   |  |  | 10.40  |  
|Consumer                            |  |                        | 2,182     |   |         |  | 0.20   |        |  |   | 2,539     |   |  |        | 0.21   |   |         |   | 2,655     |        |  |  | 0.21    |   |  |        | 3,506     |   |         |  | 0.28   |   |  |   | 4,045     |   |  |  | 0.30   |  
|                                    |  |                        |           |   |         |  |        |        |  |   |           |   |  |        |        |   |         |   |           |        |  |  |         |   |  |        |           |   |         |  |        |   |  |   |           |   |  |  |        |  
|                                    |  |                        |           |   |         |  |        |        |  |  
|Total loans                         |  |                        | 1,071,569 |   |         |  | 100.00 | %      |  |   | 1,235,461 |   |  |        | 100.00 | % |         |   | 1,280,956 |        |  |  | 100.00  | % |  |        | 1,263,132 |   |         |  | 100.00 | % |  |   | 1,338,141 |   |  |  | 100.00 | %
|                                    |  |                        |           |   |         |  |        |        |  |   |           |   |  |        |        |   |         |   |           |        |  |  |         |   |  |        |           |   |         |  |        |   |  |   |           |   |  |  |        |  
|                                    |  |                        |           |   |         |  |        |        |  |  
|Net deferred loan origination costs |  |                        | 1,377     |   |         |  |        |        |  |   | 1,701     |   |  |        |        |   |         |   | 1,912     |        |  |  |         |   |  |        | 2,086     |   |         |  |        |   |  |   | 2,424     |   |  |  |        |  
|Allowance for loan losses           |  |                        | (22,180   | ) |         |  |        |        |  |   | (18,622   | ) |  |        |        |   |         |   | (14,746   | )      |  |  |         |   |  |        | (11,051   | ) |         |  |        |   |  |   | (10,622   | ) |  |  |        |  
|                                    |  |                        |           |   |         |  |        |        |  |   |           |   |  |        |        |   |         |   |           |        |  |  |         |   |  |        |           |   |         |  |        |   |  |   |           |   |  |  |        |  
|Total loans, net                    |  | $                      | 1,050,766 |   |         |  |        |        |  | $ | 1,218,540 |   |  |        |        |   |         | $ | 1,268,122 |        |  |  |         |   |  | $      | 1,254,167 |   |         |  |        |   |  | $ | 1,329,943 |   |  |  |        |  
|                                    |  |                        |           |   |         |  |        |        |  |   |           |   |  |        |        |   |         |   |           |        |  |  |         |   |  |        |           |   |         |  |        |   |  |   |           |   |  |  |        |  



33



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Loan Portfolio Maturities

The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2010. Demand loans, loans having no stated repayment schedule or maturity and overdraft loans are
reported as being due in one year or less.



|                                     |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 
|------------------------------------ |  | ---------------------- | ------- |  | ------------------------- | - | ------- | ---------------- |  | - | ------- |  |  | - | --------- | 
|                                     |  | WithinOne Year         |         |  | One YearThroughFive Years |   |         | BeyondFive Years |  |   | Total   | 
|                                     |  | (Dollars in thousands) |        
|                                     |  |                        |         | 
|Scheduled Repayments of Loans:       |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 
|One-to-four family residential       |  | $                      | 31,866  |  |                           | $ | 66,179  |                  |  | $ | 158,255 |  |  | $ | 256,300   | 
|Multi-family mortgage                |  |                        | 59,279  |  |                           |   | 91,429  |                  |  |   | 146,208 |  |  |   | 296,916   | 
|Nonresidential real estate           |  |                        | 110,529 |  |                           |   | 162,893 |                  |  |   | 8,565   |  |  |   | 281,987   | 
|Construction and land                |  |                        | 14,734  |  |                           |   | 3,660   |                  |  |   | 4       |  |  |   | 18,398    | 
|Commercial loans and leases          |  |                        | 127,057 |  |                           |   | 86,562  |                  |  |   | 2,167   |  |  |   | 215,786   | 
|Consumer                             |  |                        | 1,025   |  |                           |   | 753     |                  |  |   | 404     |  |  |   | 2,182     | 
|                                     |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 
|Total loans                          |  | $                      | 344,490 |  |                           | $ | 411,476 |                  |  | $ | 315,603 |  |  | $ | 1,071,569 | 
|                                     |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 
|                                     |  |                        |         | 
|                                     |  |                        |         |  |                           |   |         |                  |  |   | Total   | 
|Loans Maturing After One Year:       |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 
|Predetermined (fixed) interest rates |  |                        |         |  |                           |   |         |                  |  |   |         |  |  | $ | 360,108   | 
|Adjustable interest rates            |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   | 366,971   | 
|                                     |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 
|Total loans                          |  |                        |         |  |                           |   |         |                  |  |   |         |  |  | $ | 727,079   | 
|                                     |  |                        |         |  |                           |   |         |                  |  |   |         |  |  |   |           | 

Past Due Loans

The following table reflects investment and business loans past due less than 90 days:



|                                                    |  |                        |        |   |                      |   |        |                            |  |   |        |  
|--------------------------------------------------- |  | ---------------------- | ------ | - | -------------------- | - | ------ | -------------------------- |  | - | ------ | -
|                                                    |  | 30 - 59 DaysPast
Due   |        |   | 60 - 89 DaysPast
Due |   |        | Total30 - 89 
DaysPast Due | 
|                                                    |  | (Dollars in thousands) |       
|                                                    |  |                        |       
|Multi-family mortgage loans                         |  | $                      | 8,346  |   |                      | $ | 4,235  |                            |  | $ | 12,581 |  
|Nonresidential real estate loans                    |  |                        | 9,331  |   |                      |   | 16,244 |                            |  |   | 25,575 |  
|Construction and land loans                         |  |                        | 1,260  |   |                      |   | 1,268  |                            |  |   | 2,528  |  
|Commercial                                          |  |                        | 8,522  |   |                      |   | 886    |                            |  |   | 9,408  |  
|                                                    |  |                        |        |   |                      |   |        |                            |  |   |        |  
|                                                    |  |                        |       
|Past due investment and business loans              |  | $                      | 27,459 |   |                      | $ | 22,633 |                            |  | $ | 50,092 |  
|                                                    |  |                        |        |   |                      |   |        |                            |  |   |        |  
|                                                    |  |                        |       
|Matured loans                                       |  | $                      | 17,401 |   |                      | $ | 12,123 |                            |  | $ | 29,524 |  
|                                                    |  |                        |       
|% of past due investment and business matured loans |  |                        | 63.37  | % |                      |   | 53.56  | %                          |  |   | 58.94  | %

At December 31, 2010, multifamily,
non-residential real estate, construction and development and commercial loans past due loans totaled $50.1 million. Of the $50.1 million, $29.5 million or 58.9% were Pass rated matured loans in the process of renewal and $8.4 million or
16.8% were on non-accrual status. The remaining $13.0 million or 24.5% were subject to informal collection activity to bring the loan current.



34



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Nonperforming Loans and Assets

We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we place loans on nonaccrual status when we
do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in
accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have
loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and
there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually
received or the renewal of the loan has not occurred for administrative reasons. At December 31, 2010, we had four loans totaling $818,000 in this category.

We typically obtain new third-party appraisals or collateral valuations when we place a loan on nonaccrual status or when we commence formal collection action, unless the existing valuation information
for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy ( ACV Policy). We also obtain new third-party appraisals or collateral valuations when the judicial foreclosure
process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. We use updated valuation information based on Multiple Listing Service data, broker opinions of value,
actual sales prices of similar assets sold by us, and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for financial statement and management purposes. Our ACV Policy
establishes the maximum useful life of a real estate appraisal at 18 months. As of December 31, 2010, the average life of the third-party appraisals on collateral supporting the computation of ASC 310-10-35 specific valuation allowances was 12
months and the average life of the appraisals supporting the net realizable value of OREO was nine months. Because appraisals and updated valuations utilize historical or ask-side data in reaching valuation conclusions, the appraised or
updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.

Real estate appraisals may include
up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market
conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements.
As-is valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. As-stabilized or as-completed valuations assume the real
estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. As-stabilized or as-completed valuations may be subject to a present value adjustment for market conditions or
the schedule of improvements.

As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by
assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income-producing real estate, investors value most highly a stable income stream from the asset; consequently, we conduct a
comparative evaluation to determine whether conducting a sale on an as-is, as-stabilized or as-improved basis is most likely to produce the highest net realizable value. If we determine that the
as-stabilized or as-improved basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of
the expected costs to sell. As of December 31, 2010, impaired real estate loans and OREO valued on an as-is basis was $27.3 million, or 74.0% of the total principal balance of impaired real estate loans, and $10.3 million, or 70.7%
of the net book value of OREO.

Our estimates of the net realizable value of real estate collateral also include a deduction for the expected
costs to sell the collateral or such other deductions from the cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, we apply a 10.0%
deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires
unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs
to sell the collateral. For OREO, we only apply a 5.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.



35



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Nonperforming Assets Summary

The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets at the dates indicated.



|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ----- | -
|                                     |  | At December 31,        |       
|                                     |  | 2010                   |        |   | 2009 |   |        | 2008 |  |   | 2007   |   |  | 2006 |       
|                                     |  | (Dollars in thousands) |       
|                                     |  |                        |        |   |     
|Nonaccrual loans:                    |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|One-to-four family residential       |  | $                      | 10,059 |   |      | $ | 11,453 |      |  | $ | 2,205  |   |  | $    | 2,196  |   |  | $ | 2,212 |  
|Multi-family mortgage                |  |                        | 13,228 |   |      |   | 13,961 |      |  |   | 2,101  |   |  |      | 4,186  |   |  |   | 1,165 |  
|Nonresidential real estate           |  |                        | 12,428 |   |      |   | 11,074 |      |  |   | 2,961  |   |  |      | 2,823  |   |  |   | 4,378 |  
|Construction and land                |  |                        | 6,139  |   |      |   | 8,841  |      |  |   | 5,145  |   |  |      | 988    |   |  |   |      |  
|Commercial loans                     |  |                        | 3,766  |   |      |   | 4,160  |      |  |   | 1,141  |   |  |      | 1,751  |   |  |   | 1,419 |  
|Commercial leases                    |  |                        | 72     |   |      |   |       |      |  |   | 105    |   |  |      | 112    |   |  |   | 47    |  
|Consumer                             |  |                        | 3      |   |      |   |       |      |  |   |       |   |  |      | 2      |   |  |   | 5     |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total nonaccrual loans               |  |                        | 45,695 |   |      |   | 49,489 |      |  |   | 13,658 |   |  |      | 12,058 |   |  |   | 9,226 |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|                                     |  |                        |        |   |     
|Other real estate owned:             |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|One-to-four family residential       |  |                        | 2,770  |   |      |   | 601    |      |  |   | 588    |   |  |      | 252    |   |  |   |      |  
|Multi-family mortgage                |  |                        | 2,486  |   |      |   | 976    |      |  |   | 133    |   |  |      |       |   |  |   |      |  
|Nonresidential real estate           |  |                        | 5,835  |   |      |   | 1,416  |      |  |   |       |   |  |      | 568    |   |  |   |      |  
|Land                                 |  |                        | 1,745  |   |      |   | 1,091  |      |  |   | 234    |   |  |      |       |   |  |   |      |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total other real estate owned        |  |                        | 12,836 |   |      |   | 4,084  |      |  |   | 955    |   |  |      | 820    |   |  |   |      |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|                                     |  |                        |        |   |     
|Other real estate owned in process:  |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|One-to-four family residential       |  |                        | 245    |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |      |  
|Nonresidential real estate           |  |                        | 1,541  |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |      |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total other real estate owned        |  |                        | 1,786  |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |      |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|                                     |  |                        |        |   |     
|Total nonperforming assets           |  | $                      | 60,317 |   |      | $ | 53,573 |      |  | $ | 14,613 |   |  | $    | 12,878 |   |  | $ | 9,226 |  
|                                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|                                     |  |                        |        |   |     
|Ratios:                              |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Nonperforming loans to total loans   |  |                        | 4.26   | % |      |   | 4.01   | %    |  |   | 1.07   | % |  |      | 0.95   | % |  |   | 0.69  | %
|Nonperforming assets to total assets |  |                        | 3.94   |   |      |   | 3.42   |      |  |   | 0.94   |   |  |      | 0.87   |   |  |   | 0.57  |  

Loans on Nonaccrual Status

At December 31, 2010, nonaccrual loans declined slightly due principally to transfers of loans to OREO and resolutions of pending
cases. The decline was partially offset by isolated increases in nonaccrual loans in the commercial real estate and commercial lease categories. Nonaccrual loans decreased by $3.8 million to $45.7 million at December 31, 2010, from $49.5
million at December 31, 2009. For the year ended December 31, 2010, no accrued interest on nonaccrual loans had been recognized.

At
December 31, 2010, our total non-performing loans involved 105 borrower relationships, or an average of $435,000 loan per borrower relationship. Therefore, there are no specific concentrations of credit risk such that a majority of loans
involves only a few borrower relationships. Our three largest non-performing borrower relationships represent 31.9% of total non-performing loans. These loans are briefly described as follows:



| |  |  | We have a $5.8 million nonperforming loan that is secured by a retail shopping center located in our primary Chicago metropolitan market. As of
December 31, 2010, this loan was on nonaccrual status and had a $787,000 specific valuation allowance that was based on an updated as improved third party appraisal. The shopping center is 92% occupied by businesses that are
affiliated with investors in the entity that owns the shopping center. The loan is further secured by additional collateral pledged by the investors, and is supported by the personal guarantees of the investors. The business operations of the
existing tenants of the shopping center, together with the supplementary personal resources of the guarantors, were not sufficient to comply with the planned payment schedule of principal and interest. Accordingly, pursuant to applicable regulatory
guidance, future renewals of the loan will be classified as a troubled debt restructuring (TDR), and the loan will remain on nonaccrual status until the borrowers business operations demonstrate the capability to sustain at least
six months of debt service on a fully amortizing basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



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| |  |  | We have a $4.4 million nonperforming loan that is secured by a 242-unit multifamily residential building located outside of our primary Chicago
metropolitan market. This loan is included in our Wholesale Commercial Lending category of loans. As of December 31, 2010, this loan was on nonaccrual status and had a $1.5 million specific valuation allowance that was based on an updated
as improved third-party appraisal. The borrower initially filed a Chapter 11 bankruptcy petition, but the bankruptcy case was recently dismissed. A court-appointed receiver is now in place. We recently received two separate offers to
purchase this property for prices in excess of our net book value, and tentatively expect this matter to be fully resolved in 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have a $4.4 million credit exposure to a single borrower, that is secured by a completed single-family residence that the borrower constructed for
the purposes of sale, a parcel of vacant land, and the borrowers personal residence. All of the real estate collateral is located in our primary Chicago metropolitan market. As of December 31, 2010, the loans were on nonaccrual status and
had a $1.2 million specific valuation allowance based on updated as is third-party appraisals. The Bank has been appointed mortgagee-in-possession of the completed single family residence, and the pending foreclosure action is expected
to conclude in 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Real Estate Owned or In Process

Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO or OREO in process until it is sold. When real estate is acquired through foreclosure or by deed in
lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal as discussed above. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.



|                                             |  |                            |       |  |           |   |        |             |  |   |             |   |  |      |     |   |                            |   |        |   |  |   |        | 
|-------------------------------------------- |  | -------------------------- | ----- |  | --------- | - | ------ | ----------- |  | - | ----------- | - |  | ---- | --- | - | -------------------------- | - | ------ | - |  | - | ------ | 
|                                             |  | Balance
atDecember 31,2009 |       |  | Additions |   |        | Write-downs |  |   | Charge-Offs |   |  | Sale |     |   | Balance
atDecember 31,2010 |  
|                                             |  | (Dollars in thousands)     |      
|Other real estate owned and in process:      |  |                            |       |  |           |   |        |             |  |   |             |   |  |      |     |   |                            |   |        |   |  |   |        | 
|                                             |  |                            |       |  |           |  
|One-to-four family residential               |  | $                          | 601   |  |           | $ | 3,777  |             |  | $ | (1,196      | ) |  | $    |    |   |                            | $ | (167   | ) |  | $ | 3,015  | 
|Multi-family mortgage                        |  |                            | 976   |  |           |   | 5,037  |             |  |   | (609        | ) |  |      | (51 | ) |                            |   | (2,867 | ) |  |   | 2,486  | 
|Nonresidential real estate                   |  |                            | 1,416 |  |           |   | 7,219  |             |  |   | (407        | ) |  |      |    |   |                            |   | (852   | ) |  |   | 7,376  | 
|Land                                         |  |                            | 1,091 |  |           |   | 1,404  |             |  |   | (84         | ) |  |      | (45 | ) |                            |   | (621   | ) |  |   | 1,745  | 
|                                             |  |                            |       |  |           |   |        |             |  |   |             |   |  |      |     |   |                            |   |        |   |  |   |        | 
|Total other real estate owned and in
process |  | $                          | 4,084 |  |           | $ | 17,437 |             |  | $ | (2,296      | ) |  | $    | (96 | ) |                            | $ | (4,507 | ) |  | $ | 14,622 | 
|                                             |  |                            |       |  |           |   |        |             |  |   |             |   |  |      |     |   |                            |   |        |   |  |   |        | 

As discussed above, the appraised value of real estate assets may or may not reflect the actual sales price that will be
received. We market real estate for sale based on our estimate of its net realizable value. Depending on the levels of market interest received during the initial period of market exposure, we may reduce the offering price in subsequent periods; if
we do so, the new offering price becomes the new net realizable value. We may also accept an offer to purchase a given real estate asset at a price below the net realizable value if there has been limited interest at the original offering price and
we conclude that further market exposure time (even at a price lower than the current offering price but higher than the proposed actual sales price) will not produce materially better results given the holding costs and management risks incurred
over time.



37



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Loan Extensions and Modifications

Maturing loans are subject to our standard loan underwriting policies and practices. Due to the need to obtain updated borrower and guarantor financial information, collateral information or to prepare
revised loan documentations, loans in the process of renewal may appear as past due because the information needed to underwrite a renewal of the loan is not available to us prior to the maturity date of the loan. At times, short-term administrative
extensions, which are typically 90 days in duration, are granted to facilitate proper underwriting. In general, loan modifications are subject to a risk-adjusted pricing analysis. We do not grant loan modification requests that involve below-market
interest rates. Other than split-note restructurings conducted in conformance with applicable Federal Financial Institutions Examination Council (FFIEC) workout guidance, we do not grant loan modifications that involve principal
concessions. We also do not grant loan modifications that suspend all loan payments for any period; however, we may grant loan modifications that involve the short-term suspension of principal amortization payments. Typically, we grant loan
modifications for three to six month periods, at the conclusion of which the loan will either mature or return in all material respects to its original terms and conditions. During 2010, the Bank conducted thirteen commercial loan modifications to
eight borrowers totaling $7.1 million (or 0.66% of total loans as of December 31, 2010) that did not qualify as troubled debt restructurings due to the fact that no concessions were made to the borrowers other than those which we would grant in
the ordinary course of business. The modifications involved actions such as reducing an above-market interest rate to a market interest rate or extending a shorter-duration amortization period to a longer amortization period that remained in
compliance with our normal underwriting standards. We also conducted loan modifications to four residential borrowers with a total exposure of $410,296. These modifications generally involved the repayment of past due principal and/or interest loan
payments over a three- to six-month period of time, in exchange for a forbearance of our legal remedies.

When appropriate, we evaluate loan
extensions or modifications in accordance with ASC 310-40 and related federal regulatory guidance concerning TDRs and the FFIEC workout guidance to determine the required treatment for nonaccrual status and risk classification purposes. In general,
if we grant a loan modification or extension that involves either the absence of principal amortization (other than for revolving lines of credit which are customarily granted on interest-only terms), or if we grant a material extension of an
existing loan amortization period in excess of our underwriting standards, the loan will be placed on nonaccrual status and impairment testing conducted to determine whether a specific valuation allowance or loss classification / charge-off is
required. If the loan is well secured by an abundance of collateral and the collectability of both interest and principal is probable, the loan may remain on accrual status, but it will be classified as a TDR due to the concession made in the loan
principal amortization payment component. A loan in full compliance with the payment requirements specified in a loan modification will not be considered as past due, but may nonetheless be placed on nonaccrual status or be classified as a TDR, as
appropriate under the circumstances.

In accordance with the FFIEC workout guidance, the resulting A promissory note in a
split-note restructuring will be considered a TDR at the time of the restructuring and will remain so classified for at least 12 months. The resulting B note will be either placed on nonaccrual status or charged-off and any payments on
the B promissory note will be treated as a recovery of principal unless the note is fully collateralized pursuant to our underwriting standards and we believe that the collection of both the principal and interest of the B
note is probable.



38



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Troubled Debt Restructurings

The following table sets forth the troubled debt restructurings by loan category as of December 31,



|                                                    |  |                        |       |  |      |   |       | 
|--------------------------------------------------- |  | ---------------------- | ----- |  | ---- | - | ----- | 
|                                                    |  | 2010                   |       |  | 2009 |  
|                                                    |  | (dollars in thousands) |      
|                                                    |  |                       
|Multi-family mortgage                               |  | $                      | 1,675 |  |      | $ |      | 
|Nonresidential real estate                          |  |                        | 1,699 |  |      |   | 7,406 | 
|                                                    |  |                        |       |  |      |   |       | 
|                                                    |  |                       
|Troubled debt restructured loans  accrual loans    |  |                        | 3,374 |  |      |   | 7,406 | 
|                                                    |  |                       
|Multi-family mortgage                               |  |                        | 13    |  |      |   |      | 
|Nonresidential real estate                          |  |                        | 3,137 |  |      |   | 2,152 | 
|                                                    |  |                        |       |  |      |   |       | 
|Troubled debt restructured loans  nonaccrual loans |  |                        | 3,150 |  |      |   | 2,152 | 
|                                                    |  |                        |       |  |      |   |       | 
|Total troubled debt restricted loans                |  | $                      | 6,524 |  |      | $ | 9,558 | 
|                                                    |  |                        |       |  |      |   |       | 

TDR loans decreased $3.0 million in 2010. Total loans classified as TDRs represented 0.61% of the total loans at
December 31, 2010.

Of the $6.5 million in loans that were classified as TDRs at December 31, 2010, 52% were on accrual status and
continued to perform according to the terms of the applicable loan agreements. Of the $9.6 million in loans that were classified as TDRs at December 31, 2009, $7.4 million, or 77%, remained on accrual status as of that date. Subsequently,
approximately 50% of the TDRs that were on accrual status at December 31, 2009 were placed on nonaccrual status during 2010 due principally to an inability of the borrowers to continue debt service on a fully-amortizing basis.

Risk Classification of Assets

Our
policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets, or designated as special mention.

An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral for the
loan, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in assets classified as
substandard with the added characteristic that the weaknesses present also make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are
those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal regulations. An asset designated as special mention has potential
weaknesses that deserve close attention and, if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions credit position with respect to the asset at some future
date. Assets designated special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Based on a review of our assets at December 31, 2010, classified assets consisted of substandard assets of $60.4 million, doubtful assets of $477,000, and no loans classified as loss assets. As of
December 31, 2010, we had $25.9 million of assets designated as special mention.



39



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Allowance 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, trends in nonaccrual loans, evaluations of real estate collateral, current economic conditions, volume and type of lending,
adverse situations that may affect a borrowers ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from the estimates as more
information becomes available or events change.

We provide for loan losses based on the allowance method. Accordingly, all loan losses are
charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable
incurred credit losses. We review the loan portfolio on an ongoing basis and make provisions for loan losses on a quarterly basis to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United
States of America. The allowance for loan losses consists of two components:



| |  |  | specific allowances established for any impaired residential owner or non-owner occupied mortgage, multi-family mortgage, nonresidential real estate,
construction and land, commercial, and commercial lease loans for which the recorded investment in the loan exceeds the measured value of the loan; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general allowances for loan losses for each loan class based on historical loan loss experience; and adjustments to historical loss experience (general
allowances), maintained to cover uncertainties that affect our estimate of probable incurred credit losses for each loan class.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The adjustments to historical loss experience are based on our evaluation of several factors, including levels of, and trends in, past due and classified loans; levels of, and trends in, charge-offs and
recoveries; trends in volume and terms of loans, including any credit concentrations in the loan portfolio; experience, ability, and depth of lending management and other relevant staff; and national and local economic trends and conditions.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan
portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred credit losses than would be the case without the increase. Conversely, when the loan portfolio
decreases, absent other factors, the allowance for loan loss methodology generally results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

We review our loan portfolio on an ongoing basis to determine whether any loans require classification and impairment testing in accordance with applicable regulations and accounting principles. When we
classify loans as either substandard or doubtful and in certain other cases, we review the collateral and future cash flow projections to determine if a specific reserve is necessary. The allowance for loan losses represents amounts that have been
established to recognize incurred credit losses in the loan portfolio that are both probable and reasonably estimable at the date of the financial statements. When we classify problem loans as loss, we charge-off such amounts.

We refined the calculation of the general component of the allowance for loan losses during the fourth quarter of 2010 in response to the new FASB
disclosure requirement to segment each loan portfolio category into specific loan classes (FASB Standards Update 2010-20 (ASU 210-20), Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses). Loan class segmentation tables are presented in Note 4  Loans Receivable of the Consolidated Financial Statements. As a matter of consistency, the loan class segmentation was also applied within the 12-quarter loss
history used to calculate the general component of the allowance for loan losses, an adjustment of the inherent risk factor weightings based on our evaluation of their relevance to the new loan classes, and the elimination of duplicative historical
loss factors as a result of the segmentation of the portfolio by class. These refinements were applied to the loan balances, net of impaired loans, to calculate a $12.8 million general component of our allowance for loan losses at December 31,
2010. The refinements resulted in a net reduction of $1.7 million to the general component of our allowance for loan losses at December 31, 2010, principally due to the establishment of loan class segments that had lower historical loss ratios
than the general loan categories to which they belong. Specifically, the refinements reduced the portion of the general component of the allowance for loan losses attributable to commercial leases by $908,000, the portion attributable to commercial
loans by $788,000, the portion attributable to non-residential real estate loans by $195,000, and the portion attributable to multi-family mortgage loans by $144,000. These reductions were partially offset by a $384,000 increase in the portion of
the general component of the allowance for loan losses that is attributable to one-to-four family mortgage loans.



40



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While we use the best information available to make evaluations, future adjustments to the allowance may
become necessary if conditions differ substantially from the information that we used in making the evaluations. Our determinations as to the risk classification of our loans and the amount of our allowance for loan losses are subject to review by
our regulatory agencies, which can require that we establish additional loss allowances.

Net Charge-offs and Recoveries

The following table sets forth activity in our allowance for loan losses for the years indicated.



|                                                 |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------ |  | -------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                 |  | At or For the Years Ended December 31, |       
|                                                 |  | 2010                                   |        |   | 2009 |   |        | 2008 |  |   | 2007   |   |  | 2006 |       
|                                                 |  | (Dollars in thousands)                 |       
|                                                 |  |                                        |        |   |     
|Balance at beginning of year                     |  | $                                      | 18,622 |   |      | $ | 14,746 |      |  | $ | 11,051 |   |  | $    | 10,622 |   |  | $ | 11,514 |  
|                                                 |  |                                        |        |   |     
|Charge-offs:                                     |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|One-to-four family residential                   |  |                                        | (2,292 | ) |      |   | (461   | )    |  |   | (248   | ) |  |      | (10    | ) |  |   |       |  
|Multi-family mortgage                            |  |                                        | (2,385 | ) |      |   | (297   | )    |  |   | (169   | ) |  |      |       |   |  |   |       |  
|Nonresidential real estate                       |  |                                        | (2,897 | ) |      |   | (1,518 | )    |  |   | (605   | ) |  |      |       |   |  |   |       |  
|Construction and land                            |  |                                        | (525   | ) |      |   | (2,262 | )    |  |   | (115   | ) |  |      |       |   |  |   |       |  
|Commercial loans                                 |  |                                        | (1,174 | ) |      |   | (463   | )    |  |   | (130   | ) |  |      | (237   | ) |  |   | (946   | )
|Commercial leases                                |  |                                        |       |   |      |   | (22    | )    |  |   |       |   |  |      |       |   |  |   |       |  
|Consumer                                         |  |                                        | (16    | ) |      |   | (42    | )    |  |   | (146   | ) |  |      | (58    | ) |  |   | (26    | )
|                                                 |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                |  |                                        | (9,289 | ) |      |   | (5,065 | )    |  |   | (1,413 | ) |  |      | (305   | ) |  |   | (972   | )
|                                                 |  |                                        |        |   |     
|Recoveries:                                      |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|One-to-four family residential                   |  |                                        | 69     |   |      |   | 82     |      |  |   | 1      |   |  |      |       |   |  |   |       |  
|Multi-family mortgage                            |  |                                        | 3      |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential real estate                       |  |                                        | 633    |   |      |   | 36     |      |  |   | 4      |   |  |      |       |   |  |   |       |  
|Construction and land                            |  |                                        | 58     |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans                                 |  |                                        | 1      |   |      |   | 3      |      |  |   | 1      |   |  |      | 14     |   |  |   |       |  
|Commercial leases                                |  |                                        |       |   |      |   | 6      |      |  |   |       |   |  |      |       |   |  |   |       |  
|Consumer                                         |  |                                        |       |   |      |   | 3      |      |  |   | 10     |   |  |      | 23     |   |  |   | 4      |  
|                                                 |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                 |  |                                        | 764    |   |      |   | 130    |      |  |   | 16     |   |  |      | 37     |   |  |   | 4      |  
|                                                 |  |                                        |        |   |     
|Net charge-offs                                  |  |                                        | (8,525 | ) |      |   | (4,935 | )    |  |   | (1,397 | ) |  |      | (268   | ) |  |   | (968   | )
|Allowance of acquired bank                       |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 212    |  
|Provision (credit) for loan losses               |  |                                        | 12,083 |   |      |   | 8,811  |      |  |   | 5,092  |   |  |      | 697    |   |  |   | (136   | )
|                                                 |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                 |  |                                        |        |   |     
|Balance at end of year                           |  | $                                      | 22,180 |   |      | $ | 18,622 |      |  | $ | 14,746 |   |  | $    | 11,051 |   |  | $ | 10,622 |  
|                                                 |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                 |  |                                        |        |   |     
|Ratios:                                          |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs to average loans outstanding     |  |                                        | 0.75   | % |      |   | 0.39   | %    |  |   | 0.11   | % |  |      | 0.02   | % |  |   | 0.07   | %
|Allowance for loan losses to nonperforming loans |  |                                        | 48.54  |   |      |   | 37.63  |      |  |   | 107.97 |   |  |      | 91.65  |   |  |   | 115.13 |  
|Allowance for loan losses to total loans         |  |                                        | 2.07   |   |      |   | 1.51   |      |  |   | 1.15   |   |  |      | 0.87   |   |  |   | 0.79   |  

Net charge-offs and total charge-offs
were $8.5 million and $9.3 million, respectively, for the year ended December 31, 2010, compared to $4.9 million in net charge-offs and $5.1 million in total charge-offs for the year ended December 31, 2009, and $1.4 million in net
charge-offs and total charge-offs for the year ended December 31, 2008. Total recoveries were $764,000 in 2010, compared to $130,000 in 2009 and $16,000 in 2008.

We recorded a provision for loan losses of $12.1 million in 2010, compared to $8.8 million in 2009 and $5.1 million in 2008. Of the $12.1 million provision for loan losses that we recorded in 2010, $4.4
million is attributable to the specific portion of the allowance for loan losses that we allocate to impaired loans and $8.5 million in charge-offs, which were partially offset by a $794,000 decrease in the general portion of the allowance for loan
losses.

A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for
the amount of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final
disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the
conclusion of legal proceedings where the borrowers obligation to repay is legally discharged (such as a federal Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net
proceeds in excess of the costs to collect.



41



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Included in 2010 charge-offs of $9.3 million were $3.3 million in charge-offs related to final disposition
of collateral or other loan resolutions, of which $1.7 million occurred in the fourth quarter 2010. $6.0 million of charge-offs recorded at the time real estate transferred to other real estate owned, of which $3.8 million occurred in the fourth
quarter 2010.



42



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Allocation of Allowance for Loan Losses

The following table sets forth our allowance for loan losses allocated by loan category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any
particular category and does not restrict the use of the allowance to absorb losses in other categories.



|                               |  |                         |        |  |                         |   |           |                                             |  |  |                         |   |  |                         |        |  |                                             |   |           |                         |  |  |                         |   |  |                                             |        |  |  |   |           |  |  |  |        |  
|------------------------------ |  | ----------------------- | ------ |  | ----------------------- | - | --------- | ------------------------------------------- |  |  | ----------------------- | - |  | ----------------------- | ------ |  | ------------------------------------------- | - | --------- | ----------------------- |  |  | ----------------------- | - |  | ------------------------------------------- | ------ |  |  | - | --------- |  |  |  | ------ | -
|                               |  | At December 31,         |       
|                               |  | 2010                    |        |  | 2009                    |   |           | 2008                                        | 
|                               |  | Allowancefor LoanLosses |        |  | LoanBalances byCategory |   |           | Percentof Loansin EachCategoryto TotalLoans |  |  | Allowancefor LoanLosses |   |  | LoanBalances byCategory |        |  | Percentof Loansin EachCategoryto TotalLoans |   |           | Allowancefor LoanLosses |  |  | LoanBalances byCategory |   |  | Percentof Loansin EachCategoryto TotalLoans |       
|                               |  | (Dollars in thousands)  |       
|                               |  |                         |        |  |                         |   |           |                                             | 
|One-to-four family residential |  | $                       | 3,556  |  |                         | $ | 256,300   |                                             |  |  | 23.92                   | % |  | $                       | 3,333  |  |                                             | $ | 289,623   |                         |  |  | 23.44                   | % |  | $                                           | 2,040  |  |  | $ | 312,390   |  |  |  | 24.39  | %
|Multi-family mortgage          |  |                         | 7,032  |  |                         |   | 296,916   |                                             |  |  | 27.71                   |   |  |                         | 3,597  |  |                                             |   | 329,227   |                         |  |  | 26.65                   |   |  |                                             | 2,370  |  |  |   | 305,318   |  |  |  | 23.84  |  
|Nonresidential real estate     |  |                         | 5,714  |  |                         |   | 281,987   |                                             |  |  | 26.31                   |   |  |                         | 5,696  |  |                                             |   | 316,607   |                         |  |  | 25.62                   |   |  |                                             | 4,659  |  |  |   | 342,583   |  |  |  | 26.74  |  
|Construction and land          |  |                         | 2,461  |  |                         |   | 18,398    |                                             |  |  | 1.72                    |   |  |                         | 1,861  |  |                                             |   | 32,577    |                         |  |  | 2.64                    |   |  |                                             | 1,899  |  |  |   | 50,687    |  |  |  | 3.96   |  
|Commercial loans               |  |                         | 2,879  |  |                         |   | 64,679    |                                             |  |  | 6.04                    |   |  |                         | 2,520  |  |                                             |   | 88,067    |                         |  |  | 7.13                    |   |  |                                             | 2,058  |  |  |   | 92,679    |  |  |  | 7.23   |  
|Commercial leases              |  |                         | 518    |  |                         |   | 151,107   |                                             |  |  | 14.10                   |   |  |                         | 1,591  |  |                                             |   | 176,821   |                         |  |  | 14.31                   |   |  |                                             | 1,668  |  |  |   | 174,644   |  |  |  | 13.63  |  
|Consumer                       |  |                         | 20     |  |                         |   | 2,182     |                                             |  |  | 0.20                    |   |  |                         | 24     |  |                                             |   | 2,539     |                         |  |  | 0.21                    |   |  |                                             | 52     |  |  |   | 2,655     |  |  |  | 0.21   |  
|                               |  |                         |        |  |                         |   |           |                                             |  |  |                         |   |  |                         |        |  |                                             |   |           |                         |  |  |                         |   |  |                                             |        |  |  |   |           |  |  |  |        |  
|Total                          |  | $                       | 22,180 |  |                         | $ | 1,071,569 |                                             |  |  | 100.00                  | % |  | $                       | 18,622 |  |                                             | $ | 1,235,461 |                         |  |  | 100.00                  | % |  | $                                           | 14,746 |  |  | $ | 1,280,956 |  |  |  | 100.00 | %
|                               |  |                         |        |  |                         |   |           |                                             |  |  |                         |   |  |                         |        |  |                                             |   |           |                         |  |  |                         |   |  |                                             |        |  |  |   |           |  |  |  |        |  



|                               |  |                         |        |  |                         |   |           |                                             |  |  |                         |   |  |                         |        |  |                                             |   |           |  |  |  |        |  
|------------------------------ |  | ----------------------- | ------ |  | ----------------------- | - | --------- | ------------------------------------------- |  |  | ----------------------- | - |  | ----------------------- | ------ |  | ------------------------------------------- | - | --------- |  |  |  | ------ | -
|                               |  | At December 31,         |       
|                               |  | 2007                    |        |  | 2006                    |  
|                               |  | Allowancefor LoanLosses |        |  | LoanBalances byCategory |   |           | Percentof Loansin EachCategoryto TotalLoans |  |  | Allowancefor LoanLosses |   |  | LoanBalances byCategory |        |  | Percentof Loansin EachCategoryto TotalLoans |  
|                               |  | (Dollars in thousands)  |       
|                               |  |                         |        |  |                         |  
|One-to-four family residential |  | $                       | 1,823  |  |                         | $ | 345,245   |                                             |  |  | 27.33                   | % |  | $                       | 1,855  |  |                                             | $ | 397,545   |  |  |  | 29.71  | %
|Multi-family mortgage          |  |                         | 2,206  |  |                         |   | 291,395   |                                             |  |  | 23.07                   |   |  |                         | 1,908  |  |                                             |   | 297,131   |  |  |  | 22.20  |  
|Nonresidential real estate     |  |                         | 3,055  |  |                         |   | 325,885   |                                             |  |  | 25.80                   |   |  |                         | 2,846  |  |                                             |   | 320,729   |  |  |  | 23.97  |  
|Construction and land          |  |                         | 937    |  |                         |   | 64,483    |                                             |  |  | 5.10                    |   |  |                         | 1,120  |  |                                             |   | 85,222    |  |  |  | 6.37   |  
|Commercial loans               |  |                         | 1,799  |  |                         |   | 87,777    |                                             |  |  | 6.95                    |   |  |                         | 1,741  |  |                                             |   | 94,305    |  |  |  | 7.05   |  
|Commercial leases              |  |                         | 1,174  |  |                         |   | 144,841   |                                             |  |  | 11.47                   |   |  |                         | 1,112  |  |                                             |   | 139,164   |  |  |  | 10.40  |  
|Consumer                       |  |                         | 57     |  |                         |   | 3,506     |                                             |  |  | 0.28                    |   |  |                         | 40     |  |                                             |   | 4,045     |  |  |  | 0.30   |  
|                               |  |                         |        |  |                         |   |           |                                             |  |  |                         |   |  |                         |        |  |                                             |   |           |  |  |  |        |  
|Total                          |  | $                       | 11,051 |  |                         | $ | 1,263,132 |                                             |  |  | 100.00                  | % |  | $                       | 10,622 |  |                                             | $ | 1,338,141 |  |  |  | 100.00 | %
|                               |  |                         |        |  |                         |   |           |                                             |  |  |                         |   |  |                         |        |  |                                             |   |           |  |  |  |        |  



43



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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, 2010, 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.
The equity securities reflected in the 2008 columns in the table consist of Freddie Mac preferred stocks. All securities reflected in the table were classified as available-for-sale at December 31, 2010, 2009 and 2008.

We hold the FHLBC common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLBCs
advance program. The aggregate cost of our FHLBC common stock as of December 31, 2010 was $15.6 million based on its par value. There is no market for FHLBC common stock. Due to our receipt of stock dividends in prior years and the amount of
our outstanding FHLBC advances, we owned shares of FHLBC common stock at December 31, 2010 with a par value that was $9.0 million more than we were required to own to maintain our membership in the Federal Home Loan Bank System and to be
eligible to obtain advances (excess or voluntary capital stock).

The following table sets forth the composition,
amortized cost and fair value of our securities at the dates indicated.



|                                               |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|---------------------------------------------- |  | ---------------------- | ------- |  | ---------- | - | ------- | ------------- |  | - | ---------- |  |  | ------------- | ------- |  | ---------- | - | ------- |  |  | - | ------- | 
|                                               |  | At December 31,        |        
|                                               |  | 2010                   |         |  | 2009       |   |         | 2008          | 
|                                               |  | AmortizedCost          |         |  | Fair Value |   |         | AmortizedCost |  |   | Fair Value |  |  | AmortizedCost |         |  | Fair Value |  
|                                               |  | (Dollars in thousands) |        
|                                               |  |                        |         |  |            |  
|Securities:                                    |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|Certificate of deposits                        |  | $                      | 27,766  |  |            | $ | 27,766  |               |  | $ |           |  |  | $             |        |  |            | $ | 500     |  |  | $ | 500     | 
|Municipal securities                           |  |                        | 675     |  |            |   | 709     |               |  |   | 1,225      |  |  |               | 1,303   |  |            |   | 1,735   |  |  |   | 1,811   | 
|SBA guaranteed loan participation certificates |  |                        | 103     |  |            |   | 105     |               |  |   | 114        |  |  |               | 115     |  |            |   | 131     |  |  |   | 125     | 
|Equity securities:                             |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|Freddie Mac                                    |  |                        |        |  |            |   |        |               |  |   |           |  |  |               |        |  |            |   | 2,356   |  |  |   | 353     | 
|                                               |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|                                               |  |                        |         |  |            |  
|Total                                          |  |                        | 28,544  |  |            |   | 28,580  |               |  |   | 1,339      |  |  |               | 1,418   |  |            |   | 4,722   |  |  |   | 2,789   | 
|                                               |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|                                               |  |                        |         |  |            |  
|Mortgage-backed Securities:                    |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|Mortgage-backed securities - residential       |  |                        | 41,034  |  |            |   | 42,435  |               |  |   | 33,008     |  |  |               | 34,057  |  |            |   | 41,865  |  |  |   | 41,976  | 
|CMOs and REMICs - residential                  |  |                        | 48,262  |  |            |   | 49,732  |               |  |   | 64,791     |  |  |               | 66,651  |  |            |   | 79,425  |  |  |   | 80,154  | 
|                                               |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|                                               |  |                        |         |  |            |  
|Total mortgage-backed securities               |  |                        | 89,296  |  |            |   | 92,167  |               |  |   | 97,799     |  |  |               | 100,708 |  |            |   | 121,290 |  |  |   | 122,130 | 
|                                               |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 
|                                               |  |                        |         |  |            |  
|Total                                          |  | $                      | 117,840 |  |            | $ | 120,747 |               |  | $ | 99,138     |  |  | $             | 102,126 |  |            | $ | 126,012 |  |  | $ | 124,919 | 
|                                               |  |                        |         |  |            |   |         |               |  |   |            |  |  |               |         |  |            |   |         |  |  |   |         | 

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.



44



---

We also periodically evaluate our FHLBC common stock, which is not a marketable investment security, for
impairment in accordance with Statement of Position (SOP) 01-6 (ASC 942-325-35), Accounting by Certain Entities (Including Entities with Trade Receivables) that lend to or Finance the Activities of Others. SOP 01-6 provides that when evaluating FHLB
stock for impairment, its value should be determined based on the ultimate recovery of its par value rather than by recognizing temporary declines in value.

The FHLBC is subject to a cease and desist order issued by the FHFA, in 2007. Among other things, the cease and desist order requires the FHLBC to submit a capital plan to the FHFA, prohibits certain
capital stock repurchases and stock redemptions, including certain redemptions upon membership withdrawal, without the prior approval of the Director, and prohibits the payments of dividends without the prior approval of the Director. The FHLBC has
reported that it has submitted a capital plan to the Director but that it has not yet been approved. The FHLBC did not pay any dividends from the third quarter of 2007 through 2010, but in the first quarter of 2011, paid a nominal cash dividend at
an annualized rate of 10 basis points per share. The FHLBC reported in February 2011 that it had earnings of net income of $366 million for 2010, compared to a net loss of $65 million in 2009, and that it is compliance with its regulatory capital
requirements.

We considered the above evidence in accordance with SOP 01-6 and concluded that it is probable that its par value is ultimately
recoverable based on the FHLBCs current compliance with its regulatory capital requirements, the net income that it reported for 2010, its receipt of approval from the Director to pay a dividend in the first quarter of 2011 and published
reports indicating that it is continuing to work with the FHFA to finalize a capital plan.



45



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Portfolio Maturities and Yields

The composition and maturities of the securities portfolio and the mortgage-backed securities portfolio at December 31, 2010 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 Yearthrough Five Years |  |      | More than Five Yearsthrough Ten Years |  |   | More than Ten Years  |  |  | Total Securities |     
|                                               |  | AmortizedCost          |        |  | WeightedAverageYield                 |  |      | AmortizedCost                         |  |   | WeightedAverageYield |  |  | AmortizedCost    |      |   | WeightedAverageYield |   |       | AmortizedCost |  |  | WeightedAverageYield |   |  | AmortizedCost |        |  | WeightedAverageYield |  |      | Fair Value | 
|                                               |  | (Dollars in thousands) |       
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                     
|Mortgage-backed Securities:                    |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|Pass-through securities:                       |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|Fannie Mae                                     |  | $                      |       |  |                                      |  |     | %                                     |  | $ | 178                  |  |  |                  | 4.50 | % |                      | $ | 946   |               |  |  | 5.87                 | % |  | $             | 19,359 |  |                      |  | 3.24 | %          |  | $ | 20,483  |  |  |  | 3.37 | % |  | $ | 21,579  | 
|Freddie Mac                                    |  |                        |       |  |                                      |  |     |                                       |  |   | 98                   |  |  |                  | 3.13 |   |                      |   | 581   |               |  |  | 2.11                 |   |  |               | 4,546  |  |                      |  | 5.05 |            |  |   | 5,225   |  |  |  | 4.69 |   |  |   | 5,512   | 
|Ginnie Mae                                     |  |                        |       |  |                                      |  |     |                                       |  |   |                     |  |  |                  |     |   |                      |   |      |               |  |  |                     |   |  |               | 15,326 |  |                      |  | 2.34 |            |  |   | 15,326  |  |  |  | 2.34 |   |  |   | 15,344  | 
|CMOs and REMICs                                |  |                        |       |  |                                      |  |     |                                       |  |   |                     |  |  |                  |     |   |                      |   | 154   |               |  |  | 3.11                 |   |  |               | 48,108 |  |                      |  | 4.09 |            |  |   | 48,262  |  |  |  | 4.08 |   |  |   | 49,732  | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|Total                                          |  |                        |       |  |                                      |  |     |                                       |  |   | 276                  |  |  |                  | 4.02 |   |                      |   | 1,681 |               |  |  | 4.32                 |   |  |               | 87,339 |  |                      |  | 3.64 |            |  |   | 89,296  |  |  |  | 3.66 |   |  |   | 92,167  | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                     
|Securities:                                    |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|Certificates of deposit                        |  |                        | 22,712 |  |                                      |  | 0.58 |                                       |  |   | 5,054                |  |  |                  | 0.74 |   |                      |   |      |               |  |  |                     |   |  |               |       |  |                      |  |     |            |  |   | 27,766  |  |  |  | 0.61 |   |  |   | 27,766  | 
|Municipal securities                           |  |                        | 160    |  |                                      |  | 4.15 |                                       |  |   | 515                  |  |  |                  | 4.47 |   |                      |   |      |               |  |  |                     |   |  |               |       |  |                      |  |     |            |  |   | 675     |  |  |  | 4.39 |   |  |   | 709     | 
|SBA guaranteed loan participation certificates |  |                        |       |  |                                      |  |     |                                       |  |   |                     |  |  |                  |     |   |                      |   | 103   |               |  |  | 1.75                 |   |  |               |       |  |                      |  |     |            |  |   | 103     |  |  |  | 1.75 |   |  |   | 105     | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|Total                                          |  |                        | 22,872 |  |                                      |  | 0.60 |                                       |  |   | 5,569                |  |  |                  | 1.09 |   |                      |   | 103   |               |  |  | 1.75                 |   |  |               |       |  |                      |  |     |            |  |   | 28,544  |  |  |  | 0.70 |   |  |   | 28,580  | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                     
|Total securities                               |  | $                      | 22,872 |  |                                      |  | 0.60 | %                                     |  | $ | 5,845                |  |  |                  | 1.22 | % |                      | $ | 1,784 |               |  |  | 4.17                 | % |  | $             | 87,339 |  |                      |  | 3.64 | %          |  | $ | 117,840 |  |  |  | 2.94 | % |  | $ | 120,747 | 
|                                               |  |                        |        |  |                                      |  |      |                                       |  |   |                      |  |  |                  |      |   |                      |   |       |               |  |  |                      |   |  |               |        |  |                      |  |      |            |  |   |         |  |  |  |      |   |  |   |         | 



46



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Sources of Funds

Deposits. At December 31, 2010, our deposits totaled $1.235 billion. Interest-bearing deposits totaled $1.123 billion and noninterest-bearing demand deposits totaled $112.5 million.
NOW, savings and money market accounts totaled $742.8 million. Noninterest-bearing demand deposits at December 31, 2010 included $6.0 million in internal checking accounts, such as accounts for Bank cashiers checks and money orders. At
December 31, 2010, we had $380.1 million of certificates of deposit outstanding, of which $271.2 million had maturities of one year or less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, we
believe, based on historical experience and our current pricing strategy, that we will retain a significant portion of these accounts upon maturity.

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 FDICs 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 brokered deposits.

The following table sets forth the distribution of total deposit
accounts, by account type, for the periods indicated.



|                                  |  |                          |           |  |         |  |        |                     |  |  |                |   |  |         |           |  |                     |  |        |                |  |  |         |   |  |                     |           |  |  |  |        |   |  |  |      |  
|--------------------------------- |  | ------------------------ | --------- |  | ------- |  | ------ | ------------------- |  |  | -------------- | - |  | ------- | --------- |  | ------------------- |  | ------ | -------------- |  |  | ------- | - |  | ------------------- | --------- |  |  |  | ------ | - |  |  | ---- | -
|                                  |  | Years Ended December 31, |          
|                                  |  | 2010                     |           |  | 2009    |  |        | 2008                | 
|                                  |  | AverageBalance           |           |  | Percent |  |        | WeightedAverageRate |  |  | AverageBalance |   |  | Percent |           |  | WeightedAverageRate |  |        | AverageBalance |  |  | Percent |   |  | WeightedAverageRate |          
|                                  |  | (Dollars in thousands)   |          
|                                  |  |                          |           |  |         |  |        |                     | 
|Non-interest bearing demand:      |  |                          |           |  |         |  |        |                     |  |  |                |   |  |         |           |  |                     |  |        |                |  |  |         |   |  |                     |           |  |  |  |        |   |  |  |      |  
|Retail                            |  | $                        | 26,308    |  |         |  | 2.11   | %                   |  |  |               | % |  | $       | 28,058    |  |                     |  | 2.39   | %              |  |  |        | % |  | $                   | 25,617    |  |  |  | 2.45   | % |  |  |     | %
|Commercial                        |  |                          | 75,986    |  |         |  | 6.08   |                     |  |  |               |   |  |         | 77,279    |  |                     |  | 6.55   |                |  |  |        |   |  |                     | 79,099    |  |  |  | 7.53   |   |  |  |     |  
|                                  |  |                          |           |  |         |  |        |                     |  |  |                |   |  |         |           |  |                     |  |        |                |  |  |         |   |  |                     |           |  |  |  |        |   |  |  |      |  
|Total non-interest bearing demand |  |                          | 102,294   |  |         |  | 8.19   |                     |  |  |               |   |  |         | 105,337   |  |                     |  | 8.94   |                |  |  |        |   |  |                     | 104,716   |  |  |  | 9.98   |   |  |  |     |  
|Savings deposits                  |  |                          | 98,338    |  |         |  | 7.87   |                     |  |  | 0.43           |   |  |         | 97,187    |  |                     |  | 8.24   |                |  |  | 0.51    |   |  |                     | 98,171    |  |  |  | 9.35   |   |  |  | 0.73 |  
|Money market accounts             |  |                          | 347,250   |  |         |  | 27.81  |                     |  |  | 0.94           |   |  |         | 270,583   |  |                     |  | 22.94  |                |  |  | 1.66    |   |  |                     | 210,857   |  |  |  | 20.08  |   |  |  | 2.56 |  
|Interest-bearing NOW accounts     |  |                          | 295,720   |  |         |  | 23.68  |                     |  |  | 0.49           |   |  |         | 284,583   |  |                     |  | 24.13  |                |  |  | 0.77    |   |  |                     | 311,886   |  |  |  | 29.71  |   |  |  | 1.55 |  
|Certificates of deposit           |  |                          | 405,188   |  |         |  | 32.45  |                     |  |  | 1.78           |   |  |         | 421,640   |  |                     |  | 35.75  |                |  |  | 2.69    |   |  |                     | 324,239   |  |  |  | 30.88  |   |  |  | 3.42 |  
|                                  |  |                          |           |  |         |  |        |                     |  |  |                |   |  |         |           |  |                     |  |        |                |  |  |         |   |  |                     |           |  |  |  |        |   |  |  |      |  
|                                  |  |                          |           |  |         |  |        |                     | 
|Total deposits                    |  | $                        | 1,248,790 |  |         |  | 100.00 | %                   |  |  |                |   |  | $       | 1,179,330 |  |                     |  | 100.00 | %              |  |  |         |   |  | $                   | 1,049,869 |  |  |  | 100.00 | % |  |  |      |  
|                                  |  |                          |           |  |         |  |        |                     |  |  |                |   |  |         |           |  |                     |  |        |                |  |  |         |   |  |                     |           |  |  |  |        |   |  |  |      |  

The following table sets forth certificates of deposit by time remaining until maturity at December 31, 2010.



|                                            |  |                        |        |  |                   |   |        |                    |  |   |               |  |  |       |         |  |  |   |         | 
|------------------------------------------- |  | ---------------------- | ------ |  | ----------------- | - | ------ | ------------------ |  | - | ------------- |  |  | ----- | ------- |  |  | - | ------- | 
|                                            |  | Maturity               |        |  |                   |  
|                                            |  | 3 Months orLess        |        |  | Over 3 to 6Months |   |        | Over 6 to 12Months |  |   | Over 12Months |  |  | Total |        
|                                            |  | (Dollars in thousands) |       
|Certificates of deposit less than $100,000  |  | $                      | 52,472 |  |                   | $ | 51,449 |                    |  | $ | 75,817        |  |  | $     | 63,346  |  |  | $ | 243,084 | 
|Certificates of deposit of $100,000 or more |  |                        | 23,728 |  |                   |   | 26,132 |                    |  |   | 41,645        |  |  |       | 45,485  |  |  |   | 136,990 | 
|                                            |  |                        |        |  |                   |   |        |                    |  |   |               |  |  |       |         |  |  |   |         | 
|Total certificates of deposit               |  | $                      | 76,200 |  |                   | $ | 77,581 |                    |  | $ | 117,462       |  |  | $     | 108,831 |  |  | $ | 380,074 | 
|                                            |  |                        |        |  |                   |   |        |                    |  |   |               |  |  |       |         |  |  |   |         | 



47



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Borrowings. Our borrowings consist primarily of Federal Home Loan Bank advances and repurchase
agreements. The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated.



|                                              |  |                                        |        |   |      |   |         |      |  |   |         |  
|--------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                              |  | At or For the Years Ended December 31, |       
|                                              |  | 2010                                   |        |   | 2009 |   |         | 2008 | 
|                                              |  | (Dollars in thousands)                 |       
|                                              |  |                                        |       
|Balance at end of year                        |  | $                                      | 23,749 |   |      | $ | 50,784  |      |  | $ | 200,350 |  
|Average balance during year                   |  |                                        | 37,653 |   |      |   | 101,785 |      |  |   | 110,039 |  
|Maximum outstanding at any month end          |  |                                        | 50,384 |   |      |   | 141,970 |      |  |   | 200,350 |  
|Weighted average interest rate at end of year |  |                                        | 2.00   | % |      |   | 2.44    | %    |  |   | 1.33    | %
|Average interest rate during year             |  |                                        | 2.27   | % |      |   | 2.02    | %    |  |   | 3.30    | %

At December 31, 2010, we had the
capacity to borrow an additional $240.5 million under our credit facilities with the FHLBC. Furthermore, we had unpledged securities that could be used to support in excess of $71.4 million of additional FHLBC borrowings.

At December 31, 2010, we had a pre-approved overnight federal funds borrowing capacity of $28.0 million and a line of credit with the Federal
Reserve Bank of Chicago for $425,000. At December 31, 2010, there were no outstanding federal funds borrowings and there was no outstanding balance on the line of credit.

Statement of Operating Results for the Years Ended December 31, 2010, 2009 and 2008

Net Income

Comparison of Year 2010
to 2009. We recorded a net loss of $4.3 million for the year ended December 31, 2010, compared to net loss of $738,000 for the year ended December 31, 2009. The net loss for 2010 was attributable in substantial part to the
combined impact of a $12.1 million provision for loan losses and $7.3 million for nonperforming asset management expense and operations of other real estate owned. The 2009 results included an $8.8 million provision for loan losses and a $401,000
loss on impairment of securities. The impact of these items in 2009 was partially offset by a $1.3 million gain that we recognized on the sale of our merchant processing operations. Our loss per share of common stock for year ended December 31,
2010 was $0.22 per share, compared to $0.04 per share for the year ended December 31, 2009.

Comparison of Year 2009 to
2008. We recorded a net loss of $738,000 for the year ended December 31, 2009, compared to net loss of $19.4 million for the year ended December 31, 2008. The net loss for 2009 was attributable in substantial part to the
combined impact of an $8.8 million provision for loan losses, a $401,000 pre-tax impairment loss on our Freddie Mac preferred stocks, and a $998,000 pre-tax loss that we recognized upon the subsequent sale of these securities. In addition, we
recorded a $2.2 million expense, compared to $162,000 in 2008, for FDIC quarterly and special assessments in 2009 due to the combined effect of the FDICs increase in its quarterly assessment rate, the FDICs imposition of a special
assessment against all insured depository institutions and the full utilization of the FDIC assessment credits that we previously had available to offset or reduce FDIC quarterly assessments. The impact of these items was partially offset by a $1.3
million gain that we recognized on the sale of our merchant processing operations in 2009. The net loss for 2008 was primarily due to a $35.9 million pre-tax impairment loss that we recorded on our Freddie Mac preferred stocks. Our loss per share of
common stock for year ended December 31, 2009 was $0.04 per share, compared to a loss of $0.98 per share for the year ended December 31, 2008.

Net Interest Income

Comparison of Year 2010 to 2009. Net interest
income decreased by $1.8 million, or 3.4%, to $51.8 million for the year ended December 31, 2010, from $53.6 million for the year ended December 31, 2009. Our net interest rate spread remained at 3.36% for the years ended December 31,
2010 and 2009. Our net interest margin decreased by 12 basis points to 3.57% for the year ended December 31, 2010, from 3.69% for the year ended December 31, 2009. Our average interest-earning assets remained at $1.451 billion for the year
ended 2010 and 2009, and our average interest-bearing liabilities increased $8.4 million to $1.184 billion in 2010, from $1.176 billion in 2009.



48



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Interest income decreased by $9.2 million, or 12.4%, to $64.9 million for the year ended December 31,
2010, from $74.1 million for the year ended December 31, 2009. The decrease in interest income resulted primarily from a 64 basis point decrease in the average yield on interest earning assets to 4.47% for the year ended December 31, 2010,
from 5.11% for the year ended December 31, 2009, and a decrease in average loans receivable.

Interest income on loans, the most
significant portion of interest income, decreased by $8.2 million, or 11.9%, to $60.9 million for the year ended December 31, 2010, from $69.2 million for the year ended December 31, 2009. The average yield on loans decreased 10 basis
points to 5.34% for the year ended December 31, 2010, from 5.44% for the year ended December 31, 2009. Interest income on loans and the average yield on loans were impacted by a $130.2 million, or 10.2%, decrease in average loans
receivable to $1.141 billion for the year ended December 31, 2010, from $1.271 billion for the year ended December 31, 2009, and a net increase of $381,000 in the reserve for uncollected interest relating to loans that were placed on
nonaccrual status during the year ended December 31, 2010.

Interest income on securities decreased $1.3 million, or 27.6%, to $3.5
million for the year ended December 31, 2010, from $4.8 million for the year ended December 31, 2009. The decrease in interest income on securities was due in substantial part to a $26.6 million, or 23.6%, decrease in the average
balance of securities to $86.0 million for the year ended December 31, 2010, from $112.7 million for the year ended December 31, 2009. The average yield on securities decreased by 23 basis points to 4.05% for the year ended
December 31, 2010, from 4.28% for the year ended December 31, 2009.

The FHLBC did not pay dividends on its common stock in 2010 or
2009.

Interest income on interest-bearing deposits in other financial institutions increased $399,000 to $522,000 for the year ended
December 31, 2010, from $123,000 for the year ended December 31, 2009. The increase was primarily due to a $156.7 million increase in the average balance of our interest bearing deposits in other financial institutions to $208.7 million
for the year ended December 31, 2010, from $52.0 million for the year ended December 31, 2009. The average yield on our interest-bearing deposits in other financial institutions increased one basis point to 0.25% for the year ended
December 31, 2010, from 0.24% for the year ended December 31, 2009.

Interest expense decreased by $7.4 million, or 35.9%, to $13.2
million for the year ended December 31, 2010, from $20.6 million for the year ended December 31, 2009, representing a decrease in both interest expense on deposits and interest expense on borrowings.

Interest expense on deposits decreased by $6.2 million, or 33.3%, to $12.3 million for the year ended December 31, 2010, from $18.5 million for the
year ended December 31, 2009. The decrease in interest expense on deposits was primarily due to a 64 basis point decrease in the average rates paid on deposits, which was partially offset by a $72.5 million, or 6.8%, net increase in the average
balance of deposits. The average cost of deposits was 1.08% for the year ended December 31, 2010, compared to 1.72% for the year ended December 31, 2009. The average rate paid on savings accounts decreased eight basis points to 0.43% from
0.51%. On a year over year basis, the average cost of money market accounts decreased 72 basis points to 0.94%, from 1.66%, the average cost of NOW accounts decreased 28 basis points to 0.49%, from 0.77%, and the average cost of certificates of
deposit decreased 91 basis points to 1.78% from 2.69%. The average balances of money market accounts increased $76.7 million, or 28.3%, the average balance of NOW accounts increased $11.1 million, or 3.9%, and the average balance of savings accounts
increased $1.2 million, or 1.2% for the year ended December 31, 2010. These increases were partially offset by a decrease in the average balances of certificates of deposit of $16.5 million, or 3.9% for the year ended December 31, 2010.

Interest expense on borrowings decreased by $1.2 million, or 58.5%, to $853,000 for the year ended December 31, 2010, from $2.1 million
for the year ended December 31, 2009. This decrease was due in substantial part to a decrease in the average balance of borrowings of $64.1 million, or 63.0%, to $37.7 million at December 31, 2010, from $101.8 million at December 31,
2009. The decrease was partially offset by a 25 basis point increase in the average cost of borrowings to 2.27% for the year ended December 31, 2010, from 2.02% for the year ended December 31, 2009.



49



---

Comparison of Year 2009 to 2008. Net interest income increased by $1.3 million, or
2.4%, to $53.6 million for the year ended December 31, 2009, from $52.3 million for the year ended December 31, 2008. Our net interest rate spread improved by one basis point to 3.36% for the year ended December 31, 2009, from 3.35%
for the year ended December 31, 2008. Our net interest margin decreased by 19 basis points to 3.69% for the year ended December 31, 2009, from 3.88% for the year ended December 31, 2008. Our average interest-earning assets increased
$102.2 million to $1.451 billion in 2009, from $1.349 billion in 2008, and our average interest-bearing liabilities increased $120.6 million to $1.176 billion in 2009, from $1.055 billion in 2008.

Interest income decreased by $3.9 million, or 5.0%, to $74.0 million for the year ended December 31, 2009, from $78.0 million for the year ended
December 31, 2008. The decrease in interest income resulted primarily from a 68 basis point decrease in the average yield on interest earning assets to 5.10% for the year ended December 31, 2009, from 5.78% for the year ended
December 31, 2008. This decrease was partially offset by a $102.2 million increase in total average interest-earning assets to $1.451 billion for the year ended December 31, 2009, from $1.349 billion for the year ended December 31,
2008.

Interest income on loans, the most significant portion of interest income, decreased by $4.8 million, or 6.5%, to $69.2 million for the
year ended December 31, 2009, from $74.0 million for the year ended December 31, 2008. Interest income on loans and the average yield on loans were reduced by a net increase of $1.7 million in the reserve for uncollected interest that we
established for loans that were placed on nonaccrual status during the year ended December 31, 2009. This increase accounts for 34.4% of the decrease in interest income from loans. In addition, the average yield on loans decreased 52 basis
points to 5.44% for the year ended December 31, 2009, from 5.96% for the year ended December 31, 2008. These decreases were partially offset by a $29.5 million, or 2.4%, increase in the average balance of loans outstanding to $1.271
billion for the year ended December 31, 2009, from $1.242 billion for the year ended December 31, 2008.

Interest income on
securities increased $955,000, or 24.7%, to $4.8 million for the year ended December 31, 2009, from $3.9 million for the year ended December 31, 2008. The increase in interest income on securities resulted primarily from a $29.5
million, or 35.0%, increase in the average balance of securities to $112.7 million for the year ended December 31, 2009, from $83.5 million for the year ended December 31, 2008. This increase was partially offset by a 35 basis point
decrease in the average yield on securities to 4.28% for the year ended December 31, 2009, from 4.63% for the year ended December 31, 2008.

The FHLBC did not pay dividends on its common stock in 2009 or 2008.

Interest income on
interest-bearing deposits in other financial institutions increased $7,000, or 6.0%, to $123,000 for the year ended December 31, 2009, from $116,000 for the year ended December 31, 2008. The increase was primarily due to a $43.5 million
increase in the average balance of our interest bearing deposits to $52.0 million for the year ended December 31, 2009, from $8.5 million for 2008. This increase was partially offset by a decrease of 113 basis points in the average yield on our
interest-bearing deposits to 0.24% for the year ended December 31, 2009, from 1.37% for the year ended December 31, 2008.

Interest
expense decreased by $5.1 million, or 19.9%, to $20.6 million for the year ended December 31, 2009, from $25.7 million for the year ended December 31, 2008. The decrease was due to decreased interest expense on deposits and borrowings.

Interest expense on deposits decreased by $3.5 million, or 16.0%, to $18.5 million for the year ended December 31, 2009, from $22.0
million for the year ended December 31, 2008. The decrease in interest expense on deposits was primarily due to a 61 basis point decrease in the average rates paid on deposits, partially offset by a $128.8 million, or 13.6%, net increase in the
average balance of deposits. The average cost of deposits was 1.72% for the year ended December 31, 2009, compared to 2.33% for the year ended December 31, 2008. The average rate on savings accounts decreased 22 basis points to 0.51% from
0.73%. On a year over year basis, the average cost of money market accounts decreased 90 basis points to 1.66%, from 2.56%, the average cost of NOW accounts decreased 78 basis points to 0.77%, from 1.55%, and the average cost of certificates of
deposit decreased 73 basis points to 2.69% from 3.42%. The average balances of money market accounts increased $59.7 million, or 28.3%, and the average balance of certificates of deposit increased $97.4 million, or 30.0%, for the year ended
December 31, 2009. These increases were partially offset by a decrease in the average balances of NOW accounts of $27.3 million, or 8.8%, and a decrease in the average balances of savings accounts of $984,000, or 1.0% for the year ended
December 31, 2009.



50



---

Interest expense on borrowings decreased by $1.6 million, or 43.4%, to $2.1 million for the year ended
December 31, 2009, from $3.6 million for the year ended December 31, 2008. This decrease was due in substantial part to a 128 basis point decrease in the average cost of such borrowings to 2.02% for the year ended December 31, 2009,
from 3.30% for the year ended December 31, 2008, and a decrease in the average balance of borrowings of $8.3 million, or 7.5%, to $101.8 million at December 31, 2009, from $110.0 million at December 31, 2008.



51



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Average Balance Sheets

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. 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, |          
|                                                                 | 2010                      |                          |           | 2009     |  |   | 2008       | 
|                                                                 | AverageOutstandingBalance |                          |           | Interest |  |   | Yield/Rate |  |  | AverageOutstandingBalance |      |   | Interest |   |           | Yield/Rate |  |   | AverageOutstandingBalance |  |  | Interest |      |   | Yield/Rate |  
|                                                                 |                           | (Dollars in thousands)   |          
|                                                                 |                           |                          |           |          |  |   |            |  | 
|Interest-earning Assets:                                         |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Loans                                                            |                           | $                        | 1,140,865 |          |  | $ | 60,926     |  |  |                           | 5.34 | % |          | $ | 1,271,024 |            |  | $ | 69,170                    |  |  |          | 5.44 | % |            | $ | 1,241,518 |   |  | $ | 73,983 |  |  |  | 5.96 | %
|Securities                                                       |                           |                          | 86,032    |          |  |   | 3,488      |  |  |                           | 4.05 |   |          |   | 112,645   |            |  |   | 4,816                     |  |  |          | 4.28 |   |            |   | 83,455    |   |  |   | 3,861  |  |  |  | 4.63 |  
|Stock in FHLBC                                                   |                           |                          | 15,598    |          |  |   |           |  |  |                           |     |   |          |   | 15,598    |            |  |   |                          |  |  |          |     |   |            |   | 15,598    |   |  |   |       |  |  |  |     |  
|Other                                                            |                           |                          | 208,742   |          |  |   | 522        |  |  |                           | 0.25 |   |          |   | 52,032    |            |  |   | 123                       |  |  |          | 0.24 |   |            |   | 8,487     |   |  |   | 116    |  |  |  | 1.37 |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Total interest-earning assets                                    |                           |                          | 1,451,237 |          |  |   | 64,936     |  |  |                           | 4.47 |   |          |   | 1,451,299 |            |  |   | 74,109                    |  |  |          | 5.11 |   |            |   | 1,349,058 |   |  |   | 77,960 |  |  |  | 5.78 |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Noninterest-earning assets                                       |                           |                          | 111,314   |          |  |   |            |  |  |                           |      |   |          |   | 115,876   |            |  |   |                           |  |  |          |      |   |            |   | 113,957   |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Total assets                                                     |                           | $                        | 1,562,551 |          |  |   |            |  |  |                           |      |   |          | $ | 1,567,175 |            |  |   |                           |  |  |          |      |   |            | $ | 1,463,015 |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  | 
|Interest-bearing Liabilities:                                    |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Savings deposits                                                 |                           | $                        | 98,338    |          |  |   | 421        |  |  |                           | 0.43 |   |          | $ | 97,187    |            |  |   | 495                       |  |  |          | 0.51 |   |            | $ | 98,171    |   |  |   | 715    |  |  |  | 0.73 |  
|Money market accounts                                            |                           |                          | 347,250   |          |  |   | 3,252      |  |  |                           | 0.94 |   |          |   | 270,583   |            |  |   | 4,503                     |  |  |          | 1.66 |   |            |   | 210,857   |   |  |   | 5,397  |  |  |  | 2.56 |  
|NOW accounts                                                     |                           |                          | 295,720   |          |  |   | 1,441      |  |  |                           | 0.49 |   |          |   | 284,583   |            |  |   | 2,178                     |  |  |          | 0.77 |   |            |   | 311,886   |   |  |   | 4,844  |  |  |  | 1.55 |  
|Certificates of deposit                                          |                           |                          | 405,188   |          |  |   | 7,219      |  |  |                           | 1.78 |   |          |   | 421,640   |            |  |   | 11,325                    |  |  |          | 2.69 |   |            |   | 324,239   |   |  |   | 11,077 |  |  |  | 3.42 |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Total deposits                                                   |                           |                          | 1,146,496 |          |  |   | 12,333     |  |  |                           | 1.08 |   |          |   | 1,073,993 |            |  |   | 18,501                    |  |  |          | 1.72 |   |            |   | 945,153   |   |  |   | 22,033 |  |  |  | 2.33 |  
|Borrowings                                                       |                           |                          | 37,653    |          |  |   | 853        |  |  |                           | 2.27 |   |          |   | 101,785   |            |  |   | 2,056                     |  |  |          | 2.02 |   |            |   | 110,039   |   |  |   | 3,634  |  |  |  | 3.30 |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Total interest-bearing liabilities                               |                           |                          | 1,184,149 |          |  |   | 13,186     |  |  |                           | 1.11 |   |          |   | 1,175,778 |            |  |   | 20,557                    |  |  |          | 1.75 |   |            |   | 1,055,192 |   |  |   | 25,667 |  |  |  | 2.43 |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Noninterest-bearing deposits                                     |                           |                          | 102,294   |          |  |   |            |  |  |                           |      |   |          |   | 105,337   |            |  |   |                           |  |  |          |      |   |            |   | 104,716   |   |  |   |        |  |  |  |      |  
|Noninterest-bearing liabilities                                  |                           |                          | 14,003    |          |  |   |            |  |  |                           |      |   |          |   | 19,288    |            |  |   |                           |  |  |          |      |   |            |   | 19,447    |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Total liabilities                                                |                           |                          | 1,300,446 |          |  |   |            |  |  |                           |      |   |          |   | 1,300,403 |            |  |   |                           |  |  |          |      |   |            |   | 1,179,355 |   |  |   |        |  |  |  |      |  
|Equity                                                           |                           |                          | 262,105   |          |  |   |            |  |  |                           |      |   |          |   | 266,772   |            |  |   |                           |  |  |          |      |   |            |   | 283,660   |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Total liabilities and equity                                     |                           | $                        | 1,562,551 |          |  |   |            |  |  |                           |      |   |          | $ | 1,567,175 |            |  |   |                           |  |  |          |      |   |            | $ | 1,463,015 |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Net interest income                                              |                           |                          |           |          |  | $ | 51,750     |  |  |                           |      |   |          |   |           |            |  | $ | 53,552                    |  |  |          |      |   |            |   |           |   |  | $ | 52,293 |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Net interest rate spread (1)                                     |                           |                          |           |          |  |   |            |  |  |                           | 3.36 | % |          |   |           |            |  |   |                           |  |  |          | 3.36 | % |            |   |           |   |  |   |        |  |  |  | 3.35 | %
|Net interest-earning assets (2)                                  |                           | $                        | 267,088   |          |  |   |            |  |  |                           |      |   |          | $ | 275,521   |            |  |   |                           |  |  |          |      |   |            | $ | 293,866   |   |  |   |        |  |  |  |      |  
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Net interest margin (3)                                          |                           |                          |           |          |  |   |            |  |  |                           | 3.57 | % |          |   |           |            |  |   |                           |  |  |          | 3.69 | % |            |   |           |   |  |   |        |  |  |  | 3.88 | %
|                                                                 |                           |                          |           |          |  |   |            |  |  |                           |      |   |          |   |           |            |  |   |                           |  |  |          |      |   |            |   |           |   |  |   |        |  |  |  |      |  
|Ratio of interest-earning assets to interest-bearing liabilities |                           |                          | 122.56    | %        |  |   |            |  |  |                           |      |   |          |   | 123.43    | %          |  |   |                           |  |  |          |      |   |            |   | 127.85    | % |  |   |        |  |  |  |      |  



|(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.
|--- | ----------------------------------------------------------------------------------------------------



52



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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,   |       
|                                   |  | 2010 vs. 2009              |        |   | 2009 vs. 2008           |  
|                                   |  | Increase (Decrease) Due to |        |   | TotalIncrease(Decrease) |   |        | Increase (Decrease) Due to |        |   | TotalIncrease(Decrease) |     
|                                   |  | Volume                     |        |   | Rate                    |   |        |                            | Volume |   |                         | Rate |  |  
|                                   |  | (Dollars in thousands)     |       
|                                   |  |                            |        |   |                         |  
|Interest-earning assets:           |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  
|Loans                              |  | $                          | (6,989 | ) |                         | $ | (1,255 | )                          |        | $ | (8,244                  | )    |  | $ | 1,725 |   |  | $ | (6,538 | ) |  | $ | (4,813 | )
|Securities                         |  |                            | (1,082 | ) |                         |   | (246   | )                          |        |   | (1,328                  | )    |  |   | 1,266 |   |  |   | (311   | ) |  |   | 955    |  
|Stock in FHLBC                     |  |                            |       |   |                         |   |       |                            |        |   |                        |      |  |   |      |   |  |   |       |   |  |   |       |  
|Other                              |  |                            | 394    |   |                         |   | 5      |                            |        |   | 399                     |      |  |   | 171   |   |  |   | (164   | ) |  |   | 7      |  
|                                   |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  
|Total interest-earning assets      |  |                            | (7,677 | ) |                         |   | (1,496 | )                          |        |   | (9,173                  | )    |  |   | 3,162 |   |  |   | (7,013 | ) |  |   | (3,851 | )
|                                   |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  
|                                   |  |                            |        |   |                         |  
|Interest-bearing liabilities:      |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  
|Savings deposits                   |  |                            | 6      |   |                         |   | (80    | )                          |        |   | (74                     | )    |  |   | (7    | ) |  |   | (213   | ) |  |   | (220   | )
|Money market accounts              |  |                            | 1,045  |   |                         |   | (2,296 | )                          |        |   | (1,251                  | )    |  |   | 1,289 |   |  |   | (2,183 | ) |  |   | (894   | )
|NOW accounts                       |  |                            | 83     |   |                         |   | (820   | )                          |        |   | (737                    | )    |  |   | (392  | ) |  |   | (2,274 | ) |  |   | (2,666 | )
|Certificates of deposit            |  |                            | (425   | ) |                         |   | (3,681 | )                          |        |   | (4,106                  | )    |  |   | 2,912 |   |  |   | (2,664 | ) |  |   | 248    |  
|Borrowings                         |  |                            | (1,431 | ) |                         |   | 228    |                            |        |   | (1,203                  | )    |  |   | (255  | ) |  |   | (1,323 | ) |  |   | (1,578 | )
|                                   |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  
|Total interest-bearing liabilities |  |                            | (722   | ) |                         |   | (6,649 | )                          |        |   | (7,371                  | )    |  |   | 3,547 |   |  |   | (8,657 | ) |  |   | (5,110 | )
|                                   |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  
|                                   |  |                            |        |   |                         |  
|Change in net interest income      |  | $                          | (6,955 | ) |                         | $ | 5,153  |                            |        | $ | (1,802                  | )    |  | $ | (385  | ) |  | $ | 1,644  |   |  | $ | 1,259  |  
|                                   |  |                            |        |   |                         |   |        |                            |        |   |                         |      |  |   |       |   |  |   |        |   |  |   |        |  

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.

Comparison of Year 2010 to 2009. We recorded a provision for loan losses of $12.1 million for the year ended December 31, 2010, compared to a provision for loan losses of $8.8
million for the year ended December 31, 2009. The 2010 provision for loan losses reflects the combined impact of a $4.4 million increase in the specific portion of the allowance for loan losses that we allocate to impaired loans and $8.5
million in net charge-offs, which were partially offset by a $794,000 decrease in the general portion of the allowance for loan losses.

Net
loan charge-offs for 2010 were $8.5 million, or 0.75% of average loans, compared to $4.9 million, or 0.39% of average loans, in 2009. Our allowance for loan losses was $22.2 million, or 2.07% of total loans, at December 31, 2010, compared to
$18.6 million, or 1.51% of total loans, at December 31, 2009. The allowance for loan losses represented 48.5% of nonperforming loans at December 31, 2010. To the best of our knowledge, we have recorded all losses that are both probable and
reasonable to estimate for each reporting period.



53



---

Comparison of Year 2009 to 2008. We recorded a provision for loan losses of $8.8
million for the year ended December 31, 2009, compared to a provision for loan losses of $5.1 million for the year ended December 31, 2008. The 2009 provision for loan losses reflects a $2.4 million increase in the specific portion of the
allowance for loan losses that we allocate to impaired loans, a $1.5 million increase in the general portion of the allowance for loan losses, and $4.9 million in net charge-offs. We increased the general portion of the allowance by $1.5 million
based on the continued deterioration in national and local economic risk factors included in our model for determining the proper level of general reserves.

Net loan charge-offs for 2009 were $4.9 million, or 0.39% of average loans, compared to $1.4 million, or 0.11% of average loans, in 2008. Our allowance for loan losses was $18.6 million, or 1.51% of total
loans, at December 31, 2009, compared to $14.7 million, or 1.15% of total loans, at December 31, 2008. The allowance for loan losses represented 37.6% of nonperforming loans at December 31, 2009. To the best of our knowledge, we have
recorded all losses that are both probable and reasonable to estimate for each reporting period.

Noninterest Income



|                                                     |  |                          |        |   |        |   |        |      |  |   |           |   |  |           |        |   |  |   |          |  
|---------------------------------------------------- |  | ------------------------ | ------ | - | ------ | - | ------ | ---- |  | - | --------- | - |  | --------- | ------ | - |  | - | -------- | -
|                                                     |  | Years Ended December 31, |        |   | Change |  
|                                                     |  | 2010                     |        |   | 2009   |   |        | 2008 |  |   | 2010/2009 |   |  | 2009/2008 |       
|                                                     |  | (Dollars in thousands)   |       
|                                                     |  |                          |        |   |       
|Noninterest Income:                                  |  |                          |        |   |        |   |        |      |  |   |           |   |  |           |        |   |  |   |          |  
|Deposit service charges and fees                     |  | $                        | 3,020  |   |        | $ | 3,363  |      |  | $ | 3,571     |   |  | $         | (343   | ) |  | $ | (208     | )
|Other fee income                                     |  |                          | 1,868  |   |        |   | 1,816  |      |  |   | 1,944     |   |  |           | 52     |   |  |   | (128     | )
|Insurance commissions and annuities income           |  |                          | 775    |   |        |   | 715    |      |  |   | 794       |   |  |           | 60     |   |  |   | (79      | )
|Gain on sale of loans, net                           |  |                          | 501    |   |        |   | 699    |      |  |   | 118       |   |  |           | (198   | ) |  |   | 581      |  
|Gain (loss) on sales of securities                   |  |                          | 31     |   |        |   | (988   | )    |  |   | 1,385     |   |  |           | 1,019  |   |  |   | (2,373   | )
|Gain on unredeemed VISA stock                        |  |                          |       |   |        |   |       |      |  |   | 1,240     |   |  |           |       |   |  |   | (1,240   | )
|Gain (loss) on disposition of premises and equipment |  |                          | (19    | ) |        |   | (40    | )    |  |   | (302      | ) |  |           | 21     |   |  |   | 262      |  
|Loan servicing fees                                  |  |                          | 604    |   |        |   | 653    |      |  |   | 771       |   |  |           | (49    | ) |  |   | (118     | )
|Amortization and impairment of servicing assets      |  |                          | (475   | ) |        |   | (446   | )    |  |   | (524      | ) |  |           | (29    | ) |  |   | 78       |  
|Earnings (loss) on bank owned life insurance         |  |                          | 430    |   |        |   | (20    | )    |  |   | 586       |   |  |           | 450    |   |  |   | (606     | )
|Other                                                |  |                          | 393    |   |        |   | 1,487  |      |  |   | 835       |   |  |           | (1,094 | ) |  |   | 652      |  
|                                                     |  |                          |        |   |        |   |        |      |  |   |           |   |  |           |        |   |  |   |          |  
|Total noninterest income                             |  |                          | $7,128 |   |        |   | $7,239 |      |  |   | $10,418   |   |  |           | $(111) |   |  |   | $(3,179) |  
|                                                     |  |                          |        |   |        |   |        |      |  |   |           |   |  |           |        |   |  |   |          |  

Comparison of Year 2010 to 2009. Our noninterest income decreased by $111,000 to $7.1 million for the
year ended December 31, 2010, from $7.2 million for the year ended December 31, 2009. Our noninterest income for 2010 included $31,000 gain on the sale of securities, compared a $988,000 pre-tax loss relating to the sale of our Freddie Mac
preferred stocks in 2009. Additional factors affecting the change in noninterest income from year-to-year included a $343,000, or 10.2%, decrease in deposit service charges and fees to $3.0 million, from $3.4 million for 2009. Income from insurance
commissions and annuities increased by $60,000, or 8.4%, to $775,000 for the year ended December 31, 2010, compared to $715,000 for 2009. Gains on the sale of loans decreased by $198,000, or 28.3%, to $501,000, compared to $699,000 for 2009. We
recognized a net loss of $19,000 on the disposition of premises and equipment during 2010, compared to a net loss of $40,000 in 2009. Loan servicing fees decreased $49,000, or 7.5%, to $604,000 for the year ended December 31, 2010, from
$653,000 for the year ended December 31, 2009. Mortgage servicing rights amortization expense increased $67,000 or 13.9%, to $549,000 for the year ended December 31, 2010, compared to $482,000 for 2009. We recorded a reserve recovery of
$74,000 on our mortgage servicing rights in 2010, compared to a reserve recovery of $36,000 on our mortgage servicing rights in 2009. Bank-owned life insurance produced earnings of $430,000 for 2010, compared to a loss of $20,000 for 2009. Other
income for 2009 included a $1.3 million gain on the sale of our merchant processing operations.

Comparison of Year 2009 to
2008. Our noninterest income decreased by $3.2 million to $7.2 million for the year ended December 31, 2009, from $10.4 million for the year ended December 31, 2008. Our noninterest income for 2009 included a $988,000
pre-tax loss relating to the sale of our Freddie Mac preferred stocks, compared to $2.6 million in pre-tax gains relating to the redeemed and unredeemed shares of Visa, Inc. Class B common stock that were allocated to us in the initial public
offering that Visa, Inc. conducted in March of 2008. Additional factors affecting the change in noninterest income from year-to-year included a $208,000, or 5.8%, decrease in deposit service charges and fees to $3.3 million, from $3.6 million for
2008. Other fee income decreased $128,000, or 6.6%, to $1.8 million, compared to $1.9 million for 2008. Income from insurance commissions and annuities decreased by $79,000, or 10.0%, to $715,000 for the year ended December 31, 2009, compared
to $794,000 for 2008, due to decreased sales activity. Gains on the sale of loans increased by $581,000 to $699,000, compared to $118,000 for 2008. We recognized a net loss of $40,000 on the disposition of premises and equipment during 2009,
compared to a net loss of $302,000 in 2008. Loan servicing fees decreased $118,000, or 15.3%, to $653,000 for the year ended December 31, 2009, from $771,000 for 2008. Mortgage servicing rights amortization expense increased $68,000 or 16.4%,
to $482,000 for the year ended December 31, 2009, compared to $414,000 for 2008. We recorded a reserve recovery of $36,000 on our mortgage servicing rights in 2009, compared to a $110,000 reserve that we recorded for 2008. Bank-owned life
insurance produced a loss of $20,000 for 2009, compared to income of $586,000 for 2008, due to our decision to temporarily move investable policy funds into a low-yielding money market sub-account at the end of 2008 as a means of protecting the
underlying value of the policy. Other income totaled $1.5 million for the year ended December 31, 2009, compared to $835,000 for 2008, due primarily to the recording of a $1.3 million gain on the sale of our merchant processing operations in
the fourth quarter of 2009.



54



---

Noninterest Expense



|                                           |  |                          |        |  |        |   |        |      |  |   |           |  |  |           |        |   |  |   |         |  
|------------------------------------------ |  | ------------------------ | ------ |  | ------ | - | ------ | ---- |  | - | --------- |  |  | --------- | ------ | - |  | - | ------- | -
|                                           |  | Years Ended December 31, |        |  | Change |  
|                                           |  | 2010                     |        |  | 2009   |   |        | 2008 |  |   | 2010/2009 |  |  | 2009/2008 |       
|                                           |  | (Dollars in thousands)   |        |  |        |   |        |      | 
|                                           |  |                          |        |  |       
|Noninterest Expense:                       |  |                          |        |  |        |   |        |      |  |   |           |  |  |           |        |   |  |   |         |  
|Compensation and benefits                  |  | $                        | 26,339 |  |        | $ | 29,046 |      |  | $ | 30,535    |  |  | $         | (2,707 | ) |  | $ | (1,489  | )
|Office occupancy and equipment             |  |                          | 6,380  |  |        |   | 6,845  |      |  |   | 6,874     |  |  |           | (465   | ) |  |   | (29     | )
|Advertising and public relations           |  |                          | 1,277  |  |        |   | 1,321  |      |  |   | 1,361     |  |  |           | (44    | ) |  |   | (40     | )
|Information technology                     |  |                          | 3,733  |  |        |   | 3,637  |      |  |   | 3,662     |  |  |           | 96     |   |  |   | (25     | )
|Supplies, telephone and postage            |  |                          | 1,596  |  |        |   | 1,819  |      |  |   | 2,070     |  |  |           | (223   | ) |  |   | (251    | )
|Amortization of intangibles                |  |                          | 1,595  |  |        |   | 1,690  |      |  |   | 1,784     |  |  |           | (95    | ) |  |   | (94     | )
|Nonperforming asset management             |  |                          | 3,342  |  |        |   | 770    |      |  |   |          |  |  |           | 2,572  |   |  |   | 770     |  
|Operations of other real estate owned      |  |                          | 3,972  |  |        |   | 1,273  |      |  |   | 434       |  |  |           | 2,699  |   |  |   | 839     |  
|Loss on impairment of securities           |  |                          |       |  |        |   | 401    |      |  |   | 35,919    |  |  |           | (401   | ) |  |   | (35,518 | )
|Loss on early extinguishment of borrowings |  |                          |       |  |        |   |       |      |  |   | 1,975     |  |  |           |       |   |  |   | (1,975  | )
|FDIC insurance premiums                    |  |                          | 2,126  |  |        |   | 2,225  |      |  |   | 162       |  |  |           | (99    | ) |  |   | 2,063   |  
|Other                                      |  |                          | 3,489  |  |        |   | 3,704  |      |  |   | 4,280     |  |  |           | (215   | ) |  |   | (576    | )
|                                           |  |                          |        |  |        |   |        |      |  |   |           |  |  |           |        |   |  |   |         |  
|Total noninterest expense                  |  | $                        | 53,849 |  |        | $ | 52,731 |      |  | $ | 89,056    |  |  | $         | 1,118  |   |  | $ | (36,325 | )
|                                           |  |                          |        |  |        |   |        |      |  |   |           |  |  |           |        |   |  |   |         |  

Comparison of Year 2010 to 2009. For the year ended December 31, 2010, noninterest expense
increased by $1.1 million, or 2.1%, to $53.8 million, from $52.7 million for the year ended December 31, 2009. Noninterest expense for 2010 included $7.3 million in expenses for nonperforming asset management and operations of other real estate
owned. Noninterest expense for 2009 included a $401,000 pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks. Additional factors affecting the change in noninterest expense from year-to-year included a $2.7
million, or 9.3%, decrease in compensation expense to $26.3 million for the year ended December 31, 2010, from $29.0 million for the year ended December 31, 2009. The decrease was due in part to a decrease of 44 full-time equivalent
employees from 372 in 2009 to 328 in 2010. Supplies, telephone and postage expenses decreased $223,000, or 12.3%, to $1.6 million, and intangible amortization expense decreased by $95,000. Net expenses for nonperforming asset management for 2010
included legal expenses of $876,000, receiver fees of $372,000, and real estate taxes and insurance of $1.9 million. Net expenses for operations of other real estate owned totaled $4.0 million for 2010, compared to $1.3 million for the same period
in 2009. Net expenses for operations of other real estate owned included $2.4 million in write-downs on OREO and $415,000 of losses upon sale of OREO.

Comparison of Year 2009 to 2008. For the year ended December 31, 2009, noninterest expense decreased by $36.3 million, or 40.8%, to $52.7 million, from $89.1 million for the year
ended December 31, 2008. Noninterest expense for 2008 included a $35.9 million pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks and a $2.0 million pre-tax expense that we recorded in connection with the
prepayment of a $25 million FHLBC term advance. Additional factors affecting the change in noninterest expense from year-to-year included a $1.5 million, or 4.9%, decrease in compensation expense to $29.0 million for the year ended December 31,
2009, from $30.5 million for the year ended December 31, 2008. The decrease was due in part to a decrease of 21 full-time equivalent employees from 393 in 2008 to 372 in 2009, resulting from the implementation of functional staffing reviews.
Expense relating to equity-based compensation and benefits totaled $3.0 million in 2009, compared to $4.6 million during 2008. Supplies, telephone and postage expenses decreased $251,000, or 12.1%, to $1.8 million, and intangible amortization
expense decreased by $94,000. These expense reductions were partially offset by an increase in our net expense from other real estate owned operations to $1.3 million for the year ended December 31, 2009, compared to $434,000 for 2008. Net
operations from other real estate owned for the current year included $973,000 in write-downs or losses on other real estate owned, compared to $289,000 in write-downs or losses in 2008. Our expense for FDIC deposit insurance increased to $2.2
million during the year ended December 31, 2009, compared to $162,000 during the same period of 2008. The increase in our expense for FDIC deposit insurance was due to the combined effect of the FDICs increase in its quarterly assessment
rate, the FDICs imposition of a special assessment against all insured depository institutions and the full utilization of the FDIC assessment credits that we previously had available to offset or reduce FDIC quarterly assessments. Other
expenses increased by $194,000, or 4.5%, to $4.5 million in 2009.



55



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Income Tax Benefit

Comparison of Year 2010 to 2009. For the year ended December 31, 2010, we recorded an income tax benefit of $2.7 million, compared to an income tax benefit
of $13,000 for the year ended December 31, 2009. The effective tax rates were 38.94% and 1.73% for the years ended December 31, 2010 and 2009, respectively. For 2009, the difference between the GAAP basis (fair market value at the date of
grant) and the tax basis (fair market value at the date of vesting) of equity-based compensation granted in prior years reduced our income tax benefit.

Comparison of Year 2009 to 2008. For the year ended December 31, 2009, we recorded an income tax benefit of $13,000, compared to an income tax benefit of
$12.0 million for the year ended December 31, 2008. For 2009, the difference between the GAAP basis (fair market value at the date of grant) and the tax basis (fair market value at the date of vesting) of equity-based compensation granted
in prior years reduced our income tax benefit. The income tax benefit for 2008 was primarily due to the impairment loss that we recorded on our Freddie Mac preferred stocks.

Impact of Inflation and Changing Prices

The Companys financial statements and the
related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). GAAP generally requires the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation, if any, is reflected in the increased cost of our operations. Unlike industrial companies, our assets and
liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Management of Interest Rate Risk

Qualitative Analysis.A significant form of
market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and
deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and yield curve risk arising from changing rate relationships across the spectrum of maturities for constant or
variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan
prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.

The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that
risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (ALCO), which consists of
certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies
accordingly. The Board of Directors Asset/Liability Management Committee then reviews the ALCOs activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates
would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.



56



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We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In
an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans
and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we
primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and
securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.
Finally, we have classified all of our investment portfolio as available-for-sale so as to provide flexibility in liquidity management.

We
utilize a combination of analyses to monitor the Banks exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (NPV) over a range of interest rate
scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that
seem most likely based on historical experience during prior interest rate changes.

Our net interest income analysis utilizes the data
derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the U.S. Treasury yield curve as
of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income
analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.

Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from
overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan
and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income
analysis.

Quantitative Analysis.The following table sets forth, as of December 31, 2010, the estimated changes in the
Banks NPV and net interest income that would result from the designated instantaneous parallel shift in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions
including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.



|                                        |  |                           |        |  |                                                     |  |       |        |  |   |         |   |  |  |       |   
|--------------------------------------- |  | ------------------------- | ------ |  | --------------------------------------------------- |  | ----- | ------ |  | - | ------- | - |  |  | ----- | --
|                                        |  | Estimated Increase in NPV |        |  | Increase (decrease) in EstimatedNet Interest Income | 
|Change in Interest Rates (basis points) |  | Amount                    |        |  | Percent                                             |  |       | Amount |  |   | Percent |  
|                                        |  |                           |        | 
|+400                                    |  | $                         | 28,874 |  |                                                     |  | 12.33 | %      |  | $ | (687    | ) |  |  | (1.45 | )%
|+300                                    |  |                           | 22,421 |  |                                                     |  | 9.58  |        |  |   | (306    | ) |  |  | (0.64 | ) 
|+200                                    |  |                           | 16,367 |  |                                                     |  | 6.99  |        |  |   | (97     | ) |  |  | (0.20 | ) 
|+100                                    |  |                           | 8,836  |  |                                                     |  | 3.77  |        |  |   | 275     |   |  |  | 0.58  |   
|0                                       |  |                           |       |  |                                                     |  |      |        |  |   |        |   |  |  |      |   

The Company has opted not to include
an estimate for a decrease in rates at December 31, 2010 as the results are not relevant given the current targeted fed funds rate of the Federal Open Market Committee. The table set forth above indicates that at December 31, 2010, in the
event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 6.99% increase in NPV and a $97,000 decrease in net interest income. This data does not reflect any actions that we may undertake in
response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.



57



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Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements.
Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table
presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we
may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at
a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity Management

Liquidity
Management - Bank.The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to
meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term
investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows,
mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition.

Our cash
flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows in our Consolidated Financial Statements. Our primary investing activities are the origination for
investment or sale of one-to-four family residential mortgage loans, the origination for investment of multi-family mortgage, nonresidential real estate, commercial leases, construction and land, and commercial loans and the purchase of investment
securities and mortgage-backed securities. During the years ended December 31, 2010, 2009 and 2008 our loans originated for sale totaled $19.7 million, $40.8 million and $23.4 million, respectively. During the years ended December 31,
2010, 2009 and 2008, our loans originated for investment totaled $676.4 million, $796.3 million and $818.7 million, respectively. Purchases of loans totaled $2.7 million, $19.4 million and $12.7 million for the years ended December 31, 2010,
2009 and 2008, respectively. Purchases of securities totaled $50.5 million and $103.0 million for the years ended December 31, 2010 and 2008, respectively. There were no purchases of securities in 2009.

These activities were funded primarily by principal repayments on loans and securities, and the sale of loans and securities. During the years ended
December 31, 2010, 2009 and 2008, principal repayments on loans totaled $817.4 million, $852.1 million and $810.6 million, respectively. During the years ended December 31, 2010, 2009 and 2008, principal repayments on securities totaled
$30.1 million, $22.7 million and $9.1 million, respectively. During the years ended December 31, 2010, 2009 and 2008, proceeds from maturities and sales of securities totaled $1.8 million, $2.8 million and $17.5 million, respectively. During
the years ended December 31, 2010, 2009 and 2008, the proceeds from the sale of loans totaled $17.5 million, $42.4 million and $22.8 million, respectively.

Loan origination commitments totaled $16.7 million at December 31, 2010, and consisted of $14.3 million of fixed-rate loans and $2.4 million of adjustable-rate loans. Unused lines of credit and
standby letters of credit granted to customers totaled $138.2 million and $1.7 million, respectively, at December 31, 2010. At December 31, 2010, commitments to sell mortgages totaled $3.2 million.

Deposit flows are generally affected by the level of market interest rates, the interest rates and other terms and conditions on deposit products offered
by our banking competitors, and other factors. We had a net deposit increase of $2.0 million for the year ended December 31, 2010, compared to a net increase of $163.5 million for the year ended December 31, 2009 and net outflows of $3.8
million for the year ended December 31, 2008. At times during recent periods, we have not actively competed for higher cost deposit accounts, including certificates of deposit, choosing instead to fund loan growth from the loan and lease
repayments. Certificates of deposit that are scheduled to mature in one year or less from December 31, 2010 totaled $271.2 million. Based upon prior experience and our current pricing strategy, we believe that we will retain a significant
portion of these deposits upon their maturities.



58



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We anticipate that we will have sufficient funds available to meet current loan commitments and lines of
credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize additional sources of funds through FHLBC advances, of which $16.0 million were outstanding at December 31, 2010. At
December 31, 2010 we had the ability to borrow an additional $240.5 million under our credit facilities with the FHLBC. Furthermore, we have unpledged securities that could be used to support borrowings in excess of $71.4 million. Finally, at
December 31, 2010 we had available pre-approved overnight federal funds borrowing lines of $28.0 million and a line of credit available with the Federal Reserve Bank of Chicago of $425,000. At December 31, 2010, there was no outstanding
balance on these credit lines.

We minimize the funds required to originate one-to-four family residential mortgage loans in two ways. We sell
in the secondary market virtually all of our eligible fixed-rate one-to-four family residential mortgage loans. From time to time, we also securitize the conforming adjustable-rate one-to-four family residential mortgage loans that we originate and
hold the securities we receive in exchange. The resulting mortgage-backed securities that we retain on our balance sheet can be sold more readily to meet our liquidity or interest rate management needs. Because the securities carry a lower
risk-weighting than the underlying loans, the securitizations also lower our regulatory capital requirements. We did not securitize any loans during 2010 and 2009.

Liquidity Management - Company.The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and stock repurchases. The
primary sources of liquidity for the Company currently are $16.4 million of cash and cash equivalents and periodic cash dividends from the Bank.

Under the rules of the OTS, the Bank is not permitted to pay dividends on its capital stock to the Company, its sole stockholder, if the dividend would reduce the Banks stockholders equity
below the amount of the liquidation account established in connection with the Companys mutual-to-stock conversion. The Bank may pay dividends without the approval of the OTS only if the Bank meets its applicable regulatory capital
requirements before and after the payment of the dividends and its total dividends do not exceed its net income to date over the calendar year in which the dividend is paid plus retained net income over the preceding two years. The OTS has
discretion to prohibit permissible capital distributions on general safety and soundness grounds and must be given 30 days advance notice of all capital distributions from the Bank to the Company, including dividends.

During 2010, we used $3.1 million of existing cash and cash equivalents to repurchase shares of our common stock and $6.0 million of existing cash and
cash equivalents to pay cash dividends to our stockholders.

As of December 31, 2010, we were not aware of any known trends, events or
uncertainties that had or were reasonably likely to have a material impact on our liquidity. As of December 31, 2010, we had no other material commitments for capital expenditures.

Capital Management

Capital Management - Bank.The overall objectives of our
capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business
risks associated within the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.

The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by the OTS that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Banks capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. Adequately capitalized institutions require regulatory approval to accept brokered deposits. If undercapitalized, a financial institutions capital
distributions, asset growth and expansion are limited, and for the submission of a capital restoration is required.



59



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At year-end, actual capital ratios and minimum required ratios for the Bank were:



|                                                 |  |              |       |   |                                            |  |      |                                                                                |  |  |       |  
|------------------------------------------------ |  | ------------ | ----- | - | ------------------------------------------ |  | ---- | ------------------------------------------------------------------------------ |  |  | ----- | -
|                                                 |  | Actual Ratio |       |   | MinimumRequired forCapitalAdequacyPurposes |  |      | Minimum Required to BeWell Capitalized
UnderPrompt Corrective ActionProvisions | 
|                                                 |  |              |      
|December 31, 2010                                |  |              |       |   |                                            |  |      |                                                                                |  |  |       |  
|Total capital (to risk-weighted assets)          |  |              | 18.38 | % |                                            |  | 8.00 | %                                                                              |  |  | 10.00 | %
|Tier 1 (core) capital (to risk-weighted assets)  |  |              | 17.20 |   |                                            |  | 4.00 |                                                                                |  |  | 6.00  |  
|Tier 1 (core) capital (to adjusted total assets) |  |              | 12.48 |   |                                            |  | 4.00 |                                                                                |  |  | 5.00  |  
|                                                 |  |              |      
|December 31, 2009                                |  |              |       |   |                                            |  |      |                                                                                |  |  |       |  
|Total capital (to risk-weighted assets)          |  |              | 16.40 | % |                                            |  | 8.00 | %                                                                              |  |  | 10.00 | %
|Tier 1 (core) capital (to risk-weighted assets)  |  |              | 15.31 |   |                                            |  | 4.00 |                                                                                |  |  | 6.00  |  
|Tier 1 (core) capital (to adjusted total assets) |  |              | 12.44 |   |                                            |  | 4.00 |                                                                                |  |  | 5.00  |  

See Note 11  Regulatory
Matters in our Consolidated Financial Statements for a reconciliation of the Banks equity under GAAP to regulatory capital.

As of
December 31, 2010 and 2009, the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since those notifications that management believes have changed the
institutions capitalization category.

Capital Management - Company.On June 23, 2005, the Company completed its
mutual-to-stock conversion and sold 24,466,250 shares of common stock in a subscription offering at $10.00 per share and raised $240.3 million in offering proceeds, net of offering expenses. The Company contributed $120.9 million of the net proceeds
to the Bank, paid off $30 million of term borrowings, loaned $19.6 million to our ESOP and retained the remaining net proceeds of $72 million. As a result of the offering, the Company has capital levels substantially above those required to support
the current size and risk profile of the Company and its subsidiary, the Bank.

Total stockholders equity totaled $253.3 million at
December 31, 2010, compared to $263.6 million at December 31, 2009. The decrease in total stockholders equity was primarily due to the combined impact of our repurchase of 356,411 shares of our common stock during 2010 at a total
cost of $3.1 million, and our declaration and payment of cash dividends totaling $5.9 million, the $4.3 million net loss that we recorded for 2010 and a $50,000 decrease accumulated other comprehensive income. These items were partially offset by a
$3.1 million increase in total stockholders equity that resulted from the vesting of stock-based compensation and ESOP shares earned

The OTS has no specific quantitative capital regulations for savings and loan holding companies on either a consolidated or unconsolidated basis. There
are several capital measurements that the OTS uses to evaluate the adequacy of a savings and loan holding companys capital. One measurement is the tangible capital ratio. The tangible capital ratio (the ratio of tangible capital to tangible
total assets (stockholders equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets)) for the Company on a consolidated basis measures the percentage of consolidated tangible equity capital
supporting our consolidated tangible total assets. The Companys tangible capital ratio was 14.74% at December 31, 2010, compared to 15.14% at December 31, 2009.

Our strategy for utilizing the capital encompasses several components, including debt reduction, funding our ESOP, financing acquisitions, paying dividends to stockholders, repurchasing shares of our
common stock and for other general corporate purposes.



60



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Our Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. The
authorization permits shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization may be
utilized at managements discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of
Directors. The repurchase authorization will expire on May 16, 2011, unless extended by the Board of Directors. As of December 31, 2010, the Company had repurchased 4,239,134 shares of its common stock out of the 5,047,423 shares that have
been authorized for repurchase.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments.As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet
risks, such as commitments to extend credit, standby letters of credit, unused lines of credit and commitments to sell loans. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend
credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process afforded to loans that we make. Although we consider commitments to extend credit in determining our allowance for loan losses,
at December 31, 2010, we had made no provision for losses on commitments to extend credit, and had no specific or general allowance for losses on such commitments, as we have had no historical loss experience with commitments to extend credit
and we believed that no probable and reasonably estimable losses were inherent in our portfolio as a result of our commitments to extend credit. For additional information, see Note 14 - Loan Commitments and Other Off-Balance Sheet
Activities in our Consolidated Financial Statements.

Contractual Obligations. In the ordinary course of our operations,
we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.

The following table
summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2010. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums
or discounts or other similar carrying amount adjustments.



|                             |  |                        |         |  |                  |   |        |                    |  |   |                      |  |  |       |       |  |  |   |         | 
|---------------------------- |  | ---------------------- | ------- |  | ---------------- | - | ------ | ------------------ |  | - | -------------------- |  |  | ----- | ----- |  |  | - | ------- | 
|                             |  | Payments Due by Period |        
|Contractual Obligations      |  | Less than One Year     |         |  | One toThreeYears |   |        | Three toFive Years |  |   | More thanFive 
Years |  |  | Total |      
|                             |  | (Dollars in thousands) |        
|Certificates of deposit      |  | $                      | 271,243 |  |                  | $ | 94,877 |                    |  | $ | 13,954               |  |  | $     |      |  |  | $ | 380,074 | 
|Borrowings                   |  |                        | 20,749  |  |                  |   | 3,000  |                    |  |   |                     |  |  |       |      |  |  |   | 23,749  | 
|Standby letters of credit    |  |                        | 1,599   |  |                  |   | 100    |                    |  |   |                     |  |  |       |      |  |  |   | 1,699   | 
|Operating leases             |  |                        | 560     |  |                  |   | 1,084  |                    |  |   | 960                  |  |  |       | 6,576 |  |  |   | 9,180   | 
|                             |  |                        |         |  |                  |   |        |                    |  |   |                      |  |  |       |       |  |  |   |         | 
|Total                        |  | $                      | 294,151 |  |                  | $ | 99,061 |                    |  | $ | 14,914               |  |  | $     | 6,576 |  |  | $ | 414,702 | 
|                             |  |                        |         |  |                  |   |        |                    |  |   |                      |  |  |       |       |  |  |   |         | 
|                             |  |                        |         |  |                 
|Commitments to extend credit |  | $                      | 154,931 |  |                  | $ |       |                    |  | $ |                     |  |  | $     |      |  |  | $ | 154,931 | 
|                             |  |                        |         |  |                  |   |        |                    |  |   |                      |  |  |       |       |  |  |   |         | 



61



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Pending Acquisition

On September 13, 2010, the Company signed a definitive Merger Agreement to acquire DG Bancorp, Inc. and its wholly-owned subsidiary, Downers Grove National Bank. Founded in 1955, Downers Grove
National Bank is a privately held community bank with $219 million in assets and $213 million in deposits as of December 31, 2010. Downers Grove National Bank has two banking locations in Downers Grove and Westmont, IL communities. The
transaction has been approved by the Banks primary federal regulator, the Office of Thrift Supervision, and is expected to close in the first quarter of 2011, subject to customary closing conditions.

The following represents financial statements of DG Bancorp as of December 31, 2010 and 2009 and the results of their operations in the two years
ended December 31, 2010. These results have been audited in accordance with the auditing standards generally accepted in the United States of America, with an opinion thereon February 23, 2011.

DG Bancorp, Inc and Subsidiary

Consolidated Balance Sheet

December 31,

(In thousands)



|                                                                              |  |      |         |  |      |   |         | 
|----------------------------------------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                                                                              |  | 2010 |         |  | 2009 |  
|ASSETS                                                                        |  |      |         |  |      |   |         | 
|Cash and cash equivalents - cash and due from banks                           |  | $    | 45,558  |  |      | $ | 38,462  | 
|Securities,                                                                   |  |      | 20,937  |  |      |   | 10,164  | 
|Loans receivable, net of allowance for loan losses of $6,500 ($5,600 in 2009) |  |      | 134,947 |  |      |   | 188,218 | 
|Income tax receivable                                                         |  |      | 928     |  |      |   | 2,906   | 
|Other real estate owned                                                       |  |      | 13,233  |  |      |   | 6,360   | 
|Premises and equipment, net                                                   |  |      | 1,758   |  |      |   | 2,035   | 
|Other assets                                                                  |  |      | 1,777   |  |      |   | 4,809   | 
|                                                                              |  |      |         |  |      |   |         | 
|                                                                              |  |     
|Total assets                                                                  |  | $    | 219,138 |  |      | $ | 252,954 | 
|                                                                              |  |      |         |  |      |   |         | 
|                                                                              |  |     
|LIABILITIES AND STOCKHOLDERS EQUITY                                          |  |      |         |  |      |   |         | 
|Deposit accounts                                                              |  | $    | 212,610 |  |      | $ | 226,083 | 
|Borrowed funds                                                                |  |      |        |  |      |   | 8,000   | 
|Accrued expenses and other liabilities                                        |  |      | 1,056   |  |      |   | 1,351   | 
|                                                                              |  |      |         |  |      |   |         | 
|Total liabilities                                                             |  |      |         |  |      |   |         | 
|                                                                              |  |      | 213,666 |  |      |   | 235,434 | 
|                                                                              |  |     
|Total stockholders equity                                                    |  |      | 5,472   |  |      |   | 17,520  | 
|                                                                              |  |      |         |  |      |   |         | 
|                                                                              |  |     
|Total liabilities and stockholders equity                                    |  | $    | 219,138 |  |      | $ | 252,954 | 
|                                                                              |  |      |         |  |      |   |         | 



62



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DG Bancorp, Inc and Subsidiary

Consolidated Statement of Operations

For the Years Ended December 31,

(In thousands, except per share amounts)



|                                                  |  |      |         |   |      |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                  |  | 2010 |         |   | 2009 |  
|Interest and dividend income                      |  |      |         |   |      |   |         |  
|Loans, including fees                             |  | $    | 9,119   |   |      | $ | 12,497  |  
|Securities                                        |  |      | 402     |   |      |   | 728     |  
|Other                                             |  |      | 122     |   |      |   | 48      |  
|                                                  |  |      |         |   |      |   |         |  
|Total interest income                             |  |      | 9,643   |   |      |   | 13,273  |  
|                                                  |  |     
|Interest expense                                  |  |      |         |   |      |   |         |  
|Deposits                                          |  |      | 1,913   |   |      |   | 3,217   |  
|Borrowings                                        |  |      | 90      |   |      |   | 279     |  
|                                                  |  |      |         |   |      |   |         |  
|Total interest expense                            |  |      | 2,003   |   |      |   | 3,496   |  
|                                                  |  |     
|Net interest income                               |  |      | 7,640   |   |      |   | 9,777   |  
|Provision for loan losses                         |  |      | 10,987  |   |      |   | 12,208  |  
|                                                  |  |      |         |   |      |   |         |  
|                                                  |  |     
|Net interest loss after provision for loan losses |  |      | (3,347  | ) |      |   | (2,431  | )
|                                                  |  |      |         |   |      |   |         |  
|Noninterest income                                |  |      |         |   |      |   |         |  
|Trust income                                      |  |      | 874     |   |      |   | 881     |  
|Deposit service charges and fees                  |  |      | 316     |   |      |   | 368     |  
|Mortgage brokerage fees                           |  |      | 13      |   |      |   | 67      |  
|Other service charges , commissions, and fees     |  |      | 263     |   |      |   | 258     |  
|Gain on sale or call of securities                |  |      | 2       |   |      |   | 6       |  
|Gain on sale of other real estate owned           |  |      | 274     |   |      |   | 135     |  
|Other                                             |  |      | 164     |   |      |   | 155     |  
|                                                  |  |      |         |   |      |   |         |  
|Total noninterest income                          |  |      | 1,906   |   |      |   | 1,870   |  
|                                                  |  |     
|Noninterest expense                               |  |      |         |   |      |   |         |  
|Compensation and benefits                         |  |      | 4,106   |   |      |   | 4,339   |  
|Office occupancy                                  |  |      | 609     |   |      |   | 593     |  
|Furniture and equipment                           |  |      | 302     |   |      |   | 372     |  
|Professional fees                                 |  |      | 1,004   |   |      |   | 1,009   |  
|Data processing                                   |  |      | 419     |   |      |   | 418     |  
|Insurance                                         |  |      | 980     |   |      |   | 804     |  
|Examination and audit fees                        |  |      | 170     |   |      |   | 292     |  
|Impairment of goodwill                            |  |      |        |   |      |   | 600     |  
|Impairment of other real estate owned             |  |      | 219     |   |      |   | 917     |  
|Other                                             |  |      | 1,418   |   |      |   | 1,335   |  
|                                                  |  |      |         |   |      |   |         |  
|Total noninterest expense                         |  |      | 9,227   |   |      |   | 10,679  |  
|                                                  |  |     
|Loss before income taxes                          |  |      | (10,668 | ) |      |   | (11,240 | )
|                                                  |  |      |         |   |      |   |         |  
|                                                  |  |     
|Income tax provision (benefit)                    |  |      | 1,401   |   |      |   | (3,775  | )
|                                                  |  |      |         |   |      |   |         |  
|                                                  |  |     
|Net loss                                          |  | $    | (12,069 | ) |      | $ | (7,465  | )
|                                                  |  |      |         |   |      |   |         |  
|Basic and diluted loss per share                  |  | $    | (137.15 | ) |      | $ | (84.83  | )
|                                                  |  |      |         |   |      |   |         |  



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|-------- | ---------------------------------------------------------

For information regarding market risk see Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations - Management of Interest Rate Risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



63



---

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of BankFinancial Corporation is responsible for establishing and maintaining effective internal control over financial reporting.

Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial information through a
program of ongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur
and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement
preparation.

The Companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Companys internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the financial statements.

Management assessed the Companys internal control
over financial reporting as of December 31, 2010, as required by Section 404 of the Sarbanes-Oxley Act of 2002, based on the criteria for effective internal control over financial reporting described in the Internal
Control-Integrated Framework, adopted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concludes that, as of December 31, 2010, the Companys internal control over
financial reporting is effective.

The Companys independent registered public accounting firm has issued their report on the
effectiveness of the Companys internal control over financial reporting. That report follows under the heading, Report of Independent Registered Public Accounting Firm.



|                                                            |  |  |  |                                                    
|----------------------------------------------------------- |  |  |  | ---------------------------------------------------
|/s/ F. Morgan Gasior                                        |  |  |  | /s/ Paul A. Cloutier                               
|F. Morgan Gasior                                            |  |  |  | Paul A. Cloutier                                   
|Chairman of the Board, Chief ExecutiveOfficer and President |  |  |  | Executive Vice President andChief Financial Officer



64



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying statements of financial condition of BankFinancial Corporation (the Company) as of December 31, 2010
and 2009, and the related statements of operations, changes in stockholders equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010. We also have audited the
Companys internal control over financial reporting as of December 31, 2010, based on criteria established inInternal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Companys internal control over
financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design, and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BankFinancial Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based
on criteria established inInternal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Crowe Horwath LLP

Oak Brook, Illinois

March 8, 2011



65



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 2010 and 2009

(In thousands, except share and per share data)







|                                                                                                                                                   |  |              |           |   |              |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ------------ | - | --------- | -
|                                                                                                                                                   |  | December 31, |           |   | December 31, |  
|                                                                                                                                                   |  | 2010         |           |   | 2009         |  
|ASSETS                                                                                                                                             |  |              |           |   |              |   |           |  
|Cash and due from other financial institutions                                                                                                     |  | $            | 18,097    |   |              | $ | 20,355    |  
|Interest-bearing deposits in other financial institutions                                                                                          |  |              | 202,713   |   |              |   | 87,843    |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  
|Cash and cash equivalents                                                                                                                          |  |              | 220,810   |   |              |   | 108,198   |  
|Securities, at fair value                                                                                                                          |  |              | 120,747   |   |              |   | 102,126   |  
|Loans held-for-sale                                                                                                                                |  |              | 2,716     |   |              |   |          |  
|Loans receivable, net of allowance for loan losses:                                                                                                |  |              |           |   |              |   |           |  
|December 31, 2010, $22,180 and December 31, 2009, $18,622                                                                                          |  |              | 1,050,766 |   |              |   | 1,218,540 |  
|Other real estate owned and other real estate owned in process                                                                                     |  |              | 14,622    |   |              |   | 4,084     |  
|Stock in Federal Home Loan Bank, at cost                                                                                                           |  |              | 15,598    |   |              |   | 15,598    |  
|Premises and equipment, net                                                                                                                        |  |              | 32,495    |   |              |   | 34,614    |  
|Accrued interest receivable                                                                                                                        |  |              | 5,390     |   |              |   | 6,111     |  
|Goodwill                                                                                                                                           |  |              | 22,566    |   |              |   | 22,566    |  
|Core deposit intangible                                                                                                                            |  |              | 2,700     |   |              |   | 4,295     |  
|Bank owned life insurance                                                                                                                          |  |              | 20,581    |   |              |   | 20,151    |  
|FDIC prepaid expense                                                                                                                               |  |              | 4,845     |   |              |   | 6,777     |  
|Income tax receivable                                                                                                                              |  |              | 1,749     |   |              |   | 11,729    |  
|Deferred taxes, net                                                                                                                                |  |              | 9,333     |   |              |   | 6,561     |  
|Other assets                                                                                                                                       |  |              | 5,737     |   |              |   | 5,613     |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  
|                                                                                                                                                   |  |             
|Total assets                                                                                                                                       |  | $            | 1,530,655 |   |              | $ | 1,566,963 |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  
|                                                                                                                                                   |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                               |  |              |           |   |              |   |           |  
|Liabilities:                                                                                                                                       |  |              |           |   |              |   |           |  
|Deposits                                                                                                                                           |  |              | 1,235,377 |   |              |   | 1,233,395 |  
|Borrowings                                                                                                                                         |  |              | 23,749    |   |              |   | 50,784    |  
|Advance payments by borrowers taxes and insurance                                                                                                  |  |              | 7,325     |   |              |   | 8,052     |  
|Accrued interest payable and other liabilities                                                                                                     |  |              | 10,919    |   |              |   | 11,129    |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  
|Total liabilities                                                                                                                                  |  |              | 1,277,370 |   |              |   | 1,303,360 |  
|                                                                                                                                                   |  |             
|Commitments and contingent liabilities                                                                                                             |  |              |           |   |              |   |           |  
|Stockholders equity:                                                                                                                              |  |              |           |   |              |   |           |  
|Preferred Stock, $0.01 par value, 25,000,000 shares authorized, none issued or
outstanding                                                         |  |              |          |   |              |   |          |  
|Common Stock, $0.01 par value, 100,000,000 shares authorized; shares issued at December 31, 2010, 21,072,966; and at
December 31, 2009, 21,416,377 |  |              | 211       |   |              |   | 214       |  
|Additional paid-in capital                                                                                                                         |  |              | 194,186   |   |              |   | 195,177   |  
|Retained earnings                                                                                                                                  |  |              | 71,278    |   |              |   | 81,531    |  
|Unearned Employee Stock Ownership Plan shares                                                                                                      |  |              | (14,190   | ) |              |   | (15,169   | )
|Accumulated other comprehensive income                                                                                                             |  |              | 1,800     |   |              |   | 1,850     |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  
|                                                                                                                                                   |  |             
|Total stockholders equity                                                                                                                         |  |              | 253,285   |   |              |   | 263,603   |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  
|                                                                                                                                                   |  |             
|Total liabilities and stockholders equity                                                                                                         |  | $            | 1,530,655 |   |              | $ | 1,566,963 |  
|                                                                                                                                                   |  |              |           |   |              |   |           |  





See accompanying notes to consolidated financial statements.

66



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2010, 2009, and 2008

(In thousands, except per share
data)







|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                    |  | 2010 |            |   | 2009 |   |            | 2008 | 
|                                                    |  |      |           
|Interest and dividend income                        |  |      |            |   |      |   |            |      |  |   |            |  
|Loans, including fees                               |  | $    | 60,926     |   |      | $ | 69,170     |      |  | $ | 73,983     |  
|Securities                                          |  |      | 3,488      |   |      |   | 4,816      |      |  |   | 3,861      |  
|Other                                               |  |      | 522        |   |      |   | 123        |      |  |   | 116        |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest income                               |  |      | 64,936     |   |      |   | 74,109     |      |  |   | 77,960     |  
|                                                    |  |      |           
|Interest expense                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Deposits                                            |  |      | 12,333     |   |      |   | 18,501     |      |  |   | 22,033     |  
|Borrowings                                          |  |      | 853        |   |      |   | 2,056      |      |  |   | 3,634      |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest expense                              |  |      | 13,186     |   |      |   | 20,557     |      |  |   | 25,667     |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|                                                    |  |      |           
|Net interest income                                 |  |      | 51,750     |   |      |   | 53,552     |      |  |   | 52,293     |  
|                                                    |  |      |           
|Provision for loan losses                           |  |      | 12,083     |   |      |   | 8,811      |      |  |   | 5,092      |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|                                                    |  |      |           
|Net interest income after provision for loan losses |  |      | 39,667     |   |      |   | 44,741     |      |  |   | 47,201     |  
|                                                    |  |      |           
|Noninterest income                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Deposit service charges and fees                    |  |      | 3,020      |   |      |   | 3,363      |      |  |   | 3,571      |  
|Other fee income                                    |  |      | 1,868      |   |      |   | 1,816      |      |  |   | 1,944      |  
|Insurance commissions and annuities income          |  |      | 775        |   |      |   | 715        |      |  |   | 794        |  
|Gain on sale of loans, net                          |  |      | 501        |   |      |   | 699        |      |  |   | 118        |  
|Gain (loss) on sale of securities                   |  |      | 31         |   |      |   | (988       | )    |  |   | 1,385      |  
|Gain on unredeemed VISA stock                       |  |      |           |   |      |   |           |      |  |   | 1,240      |  
|Loss on disposition of premises and equipment       |  |      | (19        | ) |      |   | (40        | )    |  |   | (302       | )
|Loan servicing fees                                 |  |      | 604        |   |      |   | 653        |      |  |   | 771        |  
|Amortization and impairment of servicing assets     |  |      | (475       | ) |      |   | (446       | )    |  |   | (524       | )
|Earnings (loss) on bank owned life insurance        |  |      | 430        |   |      |   | (20        | )    |  |   | 586        |  
|Other                                               |  |      | 393        |   |      |   | 1,487      |      |  |   | 835        |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest income                            |  |      | 7,128      |   |      |   | 7,239      |      |  |   | 10,418     |  
|                                                    |  |      |           
|Noninterest expense                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Compensation and benefits                           |  |      | 26,339     |   |      |   | 29,046     |      |  |   | 30,535     |  
|Office occupancy and equipment                      |  |      | 6,380      |   |      |   | 6,845      |      |  |   | 6,874      |  
|Advertising and public relations                    |  |      | 1,277      |   |      |   | 1,321      |      |  |   | 1,361      |  
|Information technology                              |  |      | 3,733      |   |      |   | 3,637      |      |  |   | 3,662      |  
|Supplies, telephone, and postage                    |  |      | 1,596      |   |      |   | 1,819      |      |  |   | 2,070      |  
|Amortization of intangibles                         |  |      | 1,595      |   |      |   | 1,690      |      |  |   | 1,784      |  
|Nonperforming asset management                      |  |      | 3,342      |   |      |   | 770        |      |  |   |           |  
|Operations of other real estate owned               |  |      | 3,972      |   |      |   | 1,273      |      |  |   | 434        |  
|Loss on impairment of securities                    |  |      |           |   |      |   | 401        |      |  |   | 35,919     |  
|Loss on early extinguishment of borrowings          |  |      |           |   |      |   |           |      |  |   | 1,975      |  
|FDIC insurance premiums                             |  |      | 2,126      |   |      |   | 2,225      |      |  |   | 162        |  
|Other                                               |  |      | 3,489      |   |      |   | 3,704      |      |  |   | 4,280      |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest expense                           |  |      | 53,849     |   |      |   | 52,731     |      |  |   | 89,056     |  
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|                                                    |  |      |           
|Loss before income taxes                            |  |      | (7,054     | ) |      |   | (751       | )    |  |   | (31,437    | )
|                                                    |  |      |           
|Income tax benefit                                  |  |      | (2,747     | ) |      |   | (13        | )    |  |   | (12,048    | )
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|                                                    |  |      |           
|Net loss                                            |  | $    | (4,307     | ) |      | $ | (738       | )    |  | $ | (19,389    | )
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|                                                    |  |      |           
|Basic loss per common share                         |  | $    | (0.22      | ) |      | $ | (0.04      | )    |  | $ | (0.98      | )
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted loss per common share                       |  | $    | (0.22      | ) |      | $ | (0.04      | )    |  | $ | (0.98      | )
|                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|                                                    |  |      |           
|Weighted average common shares outstanding          |  |      | 19,664,109 |   |      |   | 19,698,074 |      |  |   | 19,818,895 |  
|Diluted weighted average common shares outstanding  |  |      | 19,664,109 |   |      |   | 19,698,074 |      |  |   | 19,818,895 |  





See accompanying notes to consolidated financial statements.

67



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2010, 2009, and 2008

(In thousands)







|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------- | --- | - | ------------------------ | - | ------- | ---------------- |  | - | ---------------------------------------- | - |  | ------------------------------------------- | ------- | - | ----- | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                          |  | CommonStock |     |   | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | UnearnedEmployeeStockOwnershipPlanShares |   |  | AccumulatedOtherComprehensive
Income (Loss) |         |   | Total |   |        | ComprehensiveLoss | 
|Balance at December 31, 2007                              |  | $           | 222 |   |                          | $ | 198,449 |                  |  | $ | 113,802                                  |   |  | $                                           | (17,126 | ) |       | $ | (4,210 | )                 |  | $ | 291,137 |   |  |   |         |  
|Comprehensive loss:                                       |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Net loss                                                  |  |             |    |   |                          |   |        |                  |  |   | (19,389                                  | ) |  |                                             |        |   |       |   |       |                   |  |   | (19,389 | ) |  | $ | (19,389 | )
|Change in other comprehensive loss, net of tax effects    |  |             |    |   |                          |   |        |                  |  |   |                                         |   |  |                                             |        |   |       |   | 3,534  |                   |  |   | 3,534   |   |  |   | 3,534   |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Total comprehensive loss                                  |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  | $ | (15,855 | )
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Purchase and retirement of common stock (549,700 shares)  |  |             | (5  | ) |                          |   | (7,732  | )                |  |   |                                         |   |  |                                             |        |   |       |   |       |                   |  |   | (7,737  | ) |  |   |         |  
|Nonvested stock awards-stock-based compensation expense   |  |             |    |   |                          |   | 4,383   |                  |  |   |                                         |   |  |                                             |        |   |       |   |       |                   |  |   | 4,383   |   |  |   |         |  
|Cash dividends declared on common stock ($0.28 per share) |  |             |    |   |                          |   |        |                  |  |   | (6,134                                   | ) |  |                                             |        |   |       |   |       |                   |  |   | (6,134  | ) |  |   |         |  
|ESOP shares earned                                        |  |             |    |   |                          |   | 19      |                  |  |   |                                         |   |  |                                             | 978     |   |       |   |       |                   |  |   | 997     |   |  |   |         |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Balance at December 31, 2008                              |  | $           | 217 |   |                          | $ | 195,119 |                  |  | $ | 88,279                                   |   |  | $                                           | (16,148 | ) |       | $ | (676   | )                 |  | $ | 266,791 |   |  |   |         |  
|Comprehensive income                                      |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Net loss                                                  |  |             |    |   |                          |   |        |                  |  |   | (738                                     | ) |  |                                             |        |   |       |   |       |                   |  |   | (738    | ) |  | $ | (738    | )
|Change in other comprehensive income, net of tax effects  |  |             |    |   |                          |   |        |                  |  |   |                                         |   |  |                                             |        |   |       |   | 2,526  |                   |  |   | 2,526   |   |  |   | 2,526   |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Total comprehensive income                                |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  | $ | 1,788   |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Purchase and retirement of common stock (277,800 shares)  |  |             | (3  | ) |                          |   | (2,488  | )                |  |   |                                         |   |  |                                             |        |   |       |   |       |                   |  |   | (2,491  | ) |  |   |         |  
|Nonvested stock awards-stock-based compensation expense   |  |             |    |   |                          |   | 2,556   |                  |  |   |                                         |   |  |                                             |        |   |       |   |       |                   |  |   | 2,556   |   |  |   |         |  
|Cash dividends declared on common stock ($0.28 per share) |  |             |    |   |                          |   |        |                  |  |   | (6,010                                   | ) |  |                                             |        |   |       |   |       |                   |  |   | (6,010  | ) |  |   |         |  
|ESOP shares earned                                        |  |             |    |   |                          |   | (10     | )                |  |   |                                         |   |  |                                             | 979     |   |       |   |       |                   |  |   | 969     |   |  |   |         |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  
|Balance at December 31, 2009                              |  | $           | 214 |   |                          | $ | 195,177 |                  |  | $ | 81,531                                   |   |  | $                                           | (15,169 | ) |       | $ | 1,850  |                   |  | $ | 263,603 |   |  |   |         |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                             |         |   |       |   |        |                   |  |   |         |   |  |   |         |  





See accompanying notes to consolidated financial statements.

68



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2010, 2009, and 2008

(In thousands)







|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  |   |        |  
|--------------------------------------------------------- |  | ----------- | --- | - | ------------------------ | - | ------- | ---------------- |  | - | ---------------------------------------- | - |  | -------------------------------------------- | ------- | - | ----- | - | ----- | ------------------ |  | - | ------- | - |  | - | ------ | -
|                                                          |  | CommonStock |     |   | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | UnearnedEmployeeStockOwnershipPlanShares |   |  | AccumulatedOtherComprehen-sive
 Income(Loss) |         |   | Total |   |       | Compre-hensiveLoss | 
|Balance at December 31, 2009                              |  | $           | 214 |   |                          | $ | 195,177 |                  |  | $ | 81,531                                   |   |  | $                                            | (15,169 | ) |       | $ | 1,850 |                    |  | $ | 263,603 |   |  |   |        |  
|Comprehensive income                                      |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  |   |        |  
|Net loss                                                  |  |             |    |   |                          |   |        |                  |  |   | (4,307                                   | ) |  |                                              |        |   |       |   |      |                    |  |   | (4,307  | ) |  | $ | (4,307 | )
|Change in other comprehensive income, net of tax effects  |  |             |    |   |                          |   |        |                  |  |   |                                         |   |  |                                              |        |   |       |   | (50   | )                  |  |   | (50     | ) |  |   | (50    | )
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  |   |        |  
|Total comprehensive loss                                  |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  | $ | (4,357 | )
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  |   |        |  
|Purchase and retirement of common stock(356,411 shares)   |  |             | (3  | ) |                          |   | (3,121  | )                |  |   |                                         |   |  |                                              |        |   |       |   |      |                    |  |   | (3,124  | ) |  |   |        |  
|Nonvested stock awards - stock-based compensation expense |  |             |    |   |                          |   | 2,155   |                  |  |   |                                         |   |  |                                              |        |   |       |   |      |                    |  |   | 2,155   |   |  |   |        |  
|Cash dividends declared on common stock($0.28 per share)  |  |             |    |   |                          |   |        |                  |  |   | (5,946                                   | ) |  |                                              |        |   |       |   |      |                    |  |   | (5,946  | ) |  |   |        |  
|ESOP shares earned                                        |  |             |    |   |                          |   | (25     | )                |  |   |                                         |   |  |                                              | 979     |   |       |   |      |                    |  |   | 954     |   |  |   |        |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  |   |        |  
|Balance at December 31, 2010                              |  | $           | 211 |   |                          | $ | 194,186 |                  |  | $ | 71,278                                   |   |  | $                                            | (14,190 | ) |       | $ | 1,800 |                    |  | $ | 253,285 |   |  |   |        |  
|                                                          |  |             |     |   |                          |   |         |                  |  |   |                                          |   |  |                                              |         |   |       |   |       |                    |  |   |         |   |  |   |        |  





See accompanying notes to consolidated financial statements.

69



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2010, 2009, and 2008

(In thousands)







|                                                                           |  |      |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                           |  | 2010 |          |   | 2009 |   |          | 2008 | 
|                                                                           |  |      |         
|Cash flows from operating activities                                       |  |      |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                   |  | $    | (4,307   | ) |      | $ | (738     | )    |  | $ | (19,389  | )
|Adjustments to reconcile to net loss to net cash from operating activities |  |      |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                  |  |      | 12,083   |   |      |   | 8,811    |      |  |   | 5,092    |  
|ESOP shares earned                                                         |  |      | 954      |   |      |   | 969      |      |  |   | 997      |  
|Stock-based compensation expense                                           |  |      | 2,155    |   |      |   | 2,556    |      |  |   | 4,125    |  
|Depreciation and amortization                                              |  |      | 4,449    |   |      |   | 4,331    |      |  |   | 3,945    |  
|Amortization of premiums and discounts on securities and loans             |  |      | (21      | ) |      |   | (59      | )    |  |   | (41      | )
|Amortization of core deposit and other intangible assets                   |  |      | 1,588    |   |      |   | 1,676    |      |  |   | 1,769    |  
|Amortization and impairment of servicing assets                            |  |      | 475      |   |      |   | 446      |      |  |   | 524      |  
|Net change in net deferred loan origination costs                          |  |      | 324      |   |      |   | 211      |      |  |   | 174      |  
|Net loss on sale of other real estate owned                                |  |      | 415      |   |      |   | 91       |      |  |   | 253      |  
|Net gain on sale of loans                                                  |  |      | (501     | ) |      |   | (699     | )    |  |   | (118     | )
|Net loss (gain) on sale of securities                                      |  |      | (31      | ) |      |   | 988      |      |  |   | (1,385   | )
|Loss on impairment of securities                                           |  |      |         |   |      |   | 401      |      |  |   | 35,919   |  
|Gain on unredeemed VISA stock                                              |  |      |         |   |      |   |         |      |  |   | (1,240   | )
|Net loss disposition of premises and equipment                             |  |      | 19       |   |      |   | 40       |      |  |   | 302      |  
|Loans originated for sale                                                  |  |      | (19,666  | ) |      |   | (40,795  | )    |  |   | (23,395  | )
|Proceeds from sale of loans                                                |  |      | 17,451   |   |      |   | 42,366   |      |  |   | 22,814   |  
|Net change in:                                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Deferred income tax                                                        |  |      | (2,742   | ) |      |   | 8,854    |      |  |   | (14,396  | )
|Accrued interest receivable                                                |  |      | 721      |   |      |   | 621      |      |  |   | 358      |  
|Loss (earnings) on bank owned life insurance                               |  |      | (430     | ) |      |   | 20       |      |  |   | (586     | )
|Other assets                                                               |  |      | 12,151   |   |      |   | (17,280  | )    |  |   | (3,513   | )
|Accrued interest payable and other liabilities                             |  |      | (210     | ) |      |   | 1,455    |      |  |   | (792     | )
|                                                                           |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash from operating activities                                         |  |      | 24,877   |   |      |   | 14,265   |      |  |   | 11,417   |  
|                                                                           |  |      |         
|Cash flows from investing activities                                       |  |      |          |   |      |   |          |      |  |   |          |  
|Securities                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Proceeds from sales                                                        |  |      | 31       |   |      |   | 967      |      |  |   | 1,385    |  
|Proceeds from maturities                                                   |  |      | 1,730    |   |      |   | 1,872    |      |  |   | 16,113   |  
|Proceeds from principal repayments                                         |  |      | 30,075   |   |      |   | 22,718   |      |  |   | 9,051    |  
|Purchases of securities                                                    |  |      | (50,489  | ) |      |   |         |      |  |   | (103,018 | )
|Loans receivable                                                           |  |      |          |   |      |   |          |      |  |   |          |  
|Principal payments on loans receivable                                     |  |      | 817,376  |   |      |   | 852,140  |      |  |   | 810,643  |  
|Purchases of loans                                                         |  |      | (2,738   | ) |      |   | (19,423  | )    |  |   | (12,680  | )
|Originated for investment                                                  |  |      | (676,424 | ) |      |   | (796,324 | )    |  |   | (818,656 | )
|Proceeds from sale of other real estate owned                              |  |      | 4,091    |   |      |   | 331      |      |  |   | 2,274    |  
|Purchase of premises and equipment, net                                    |  |      | (1,067   | ) |      |   | (3,098   | )    |  |   | (3,015   | )
|                                                                           |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash from investing activities                                         |  |      | 122,585  |   |      |   | 59,183   |      |  |   | (97,903  | )





(Continued)

70



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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2010, 2009, and 2008

(In thousands)







|                                                                    |  |      |         |   |      |   |          |      |  |   |         |  
|------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                    |  | 2010 |         |   | 2009 |   |          | 2008 | 
|                                                                    |  |      |        
|Cash flows from financing activities                                |  |      |         |   |      |   |          |      |  |   |         |  
|Net change in deposits                                              |  | $    | 1,982   |   |      | $ | 163,540  |      |  | $ | (3,795  | )
|Net change in advance payments by borrowers for taxes and insurance |  |      | (727    | ) |      |   | (52      | )    |  |   | 616     |  
|Net change in borrowings                                            |  |      | (27,035 | ) |      |   | (149,566 | )    |  |   | 103,917 |  
|Repurchase and retirement of common stock                           |  |      | (3,124  | ) |      |   | (2,491   | )    |  |   | (7,737  | )
|Cash dividends paid on common stock                                 |  |      | (5,946  | ) |      |   | (6,010   | )    |  |   | (6,134  | )
|                                                                    |  |      |         |   |      |   |          |      |  |   |         |  
|Net cash from financing activities                                  |  |      | (34,850 | ) |      |   | 5,421    |      |  |   | 86,867  |  
|                                                                    |  |      |         |   |      |   |          |      |  |   |         |  
|                                                                    |  |      |        
|Net change in cash and cash equivalents                             |  |      | 112,612 |   |      |   | 78,869   |      |  |   | 381     |  
|                                                                    |  |      |        
|Beginning cash and cash equivalents                                 |  |      | 108,198 |   |      |   | 29,329   |      |  |   | 28,948  |  
|                                                                    |  |      |         |   |      |   |          |      |  |   |         |  
|                                                                    |  |      |        
|Ending cash and cash equivalents                                    |  | $    | 220,810 |   |      | $ | 108,198  |      |  | $ | 29,329  |  
|                                                                    |  |      |         |   |      |   |          |      |  |   |         |  
|                                                                    |  |      |        
|Supplemental disclosures of cash flow information:                  |  |      |         |   |      |   |          |      |  |   |         |  
|Interest paid                                                       |  | $    | 13,575  |   |      | $ | 20,767   |      |  | $ | 25,902  |  
|Income taxes paid                                                   |  |      | 1,300   |   |      |   | 1,500    |      |  |   | 3,575   |  
|Income taxes refunded                                               |  |      | 11,291  |   |      |   |         |      |  |   |        |  
|Loans transferred to other real estate owned                        |  |      | 17,437  |   |      |   | 5,990    |      |  |   | 2,967   |  





See accompanying notes to consolidated financial statements.

71



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: BankFinancial Corporation, a Maryland corporation headquartered in
Burr Ridge, Illinois (the Company), is the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the Bank). On March 15, 2008, Financial Assurance Services, Inc. (Financial
Assurance), a wholly-owned subsidiary of the Bank, completed the sale of its title insurance agency business to a newly formed, third-party title insurance agency. The transaction had no material impact on the Companys total assets,
stockholders equity or net income.

Principles of Consolidation: The consolidated financial statements
include the accounts of and transactions of BankFinancial Corporation, the Maryland corporation, the Bank, and the Banks wholly-owned subsidiaries, Financial Assurance Services, Inc. and BF Asset Recovery Corporation (collectively, the
Company). All significant intercompany accounts and transactions have been eliminated.

Nature of Business: The
Companys revenues, operating income, and assets are primarily from the banking industry. All of the Companys banking operations are considered by management to be aggregated in one reportable operating segment for financial reporting
purposes. Loan origination customers are mainly located in the greater Chicago metropolitan area. To supplement loan originations, the Company purchases mortgage loans. The loan portfolio is concentrated in loans that are primarily secured by real
estate.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the
United States of America (GAAP), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, mortgage servicing rights, deferred tax assets, goodwill, other intangible assets, stock-based compensation, impairment of securities and fair value of financial instruments are particularly
subject to change.

Interest-bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other
financial institutions maturing in less than 90 days are carried at cost.

Cash Flows: Cash and cash equivalents include cash,
deposits with other financial institutions maturing in less than 90 days, and daily federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, borrowings,
and advance payments by borrowers for taxes and insurance.

Securities: Debt securities are classified as available-for-sale
when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available-for-sale. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for
mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold. Declines in the fair value of securities below their cost that are other-than-temporary are reflected as
realized losses. In determining if losses are other-than-temporary, management considers: (1) the length of time and extent that fair value has been less than cost or adjusted cost, as applicable, (2) the financial condition and near term
prospects of the issuer, and (3) whether the Company has the intent to sell the debt security or it is more likely than not that the Company will be required to sell the debt security before the anticipated recovery.

Federal Home Loan Bank Stock: The Bank is a member of the Federal Home Loan Bank system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in additional amounts. Federal Home Loan Bank of Chicago (FHLBC) stock is carried at cost and classified as a restricted security. Current accounting guidance for
FHLBC stock provides that, for impairment testing purposes, the value of long term investments such as our FHLBC common stock is based on the ultimate recoverability of the par value of the security without regard to temporary declines
in value. Both cash and stock dividends are reported as income.





72



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Loans Held-for-Sale: Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or estimated fair market value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held-for-sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the fair value of
the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans and Loan Income: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net
of the allowance for loan losses, premiums and discounts on loans purchased, and net deferred loan costs. Interest income on loans is recognized in income over the term of the loan based on the amount of principal outstanding.

Premiums and discounts associated with loans purchased are amortized over the contractual term of the loan using the level-yield method.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the contractual loan term, adjusted
for prepayments. Interest income is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed
on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not
received for loans placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss
experience; the nature and volume of the portfolio; information about specific borrower situations; and estimated collateral values, economic conditions, and other factors. The amount of the allowance is based on estimates and the ultimate losses
may vary from such estimates as more information becomes available, or as later events occur or circumstances change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in
managements judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates
to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers nonclassified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Loans that experience insignificant payment delays and payment shortfalls are
generally not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, considering the length of the delay, reasons for the delay and prior experience with the borrower. Multi-family,
nonresidential, construction and land, and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Trouble debt restructurings are measured at the present value of estimated future cash flows using the loans effective rate
at inception or the fair value of the collateral.





73



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Mortgage Servicing Rights: Mortgage servicing rights are recognized separately when they
are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value and gains on sales of loans are recorded in the statement of operations. Fair value is based on market prices for comparable
mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use
in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model
inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into
non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing
assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and
investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer
exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with amortization and impairment of servicing assets on the statement of operations. The fair
values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income that is reported on the statement of operations as loan servicing fees is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the
outstanding principal; or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material.

Other Real Estate Owned: Real estate properties acquired in collection of a loan are initially recorded at fair value less cost to sell at acquisition, establishing a new cost basis. If fair
value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating expenses, gains and losses on disposition, and changes in the valuation allowance are reported in noninterest expense as operations of other real
estate owned.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is included in noninterest expense and is computed on the straight-line method over the estimated useful lives of the assets. Useful lives are estimated to be 25 to 40 years for buildings and improvements that extend the
life of the original building, ten to 20 years for routine building improvements, five to 15 years for furniture and equipment, two to five years for computer hardware and software and no greater than four years on automobiles. The cost of
maintenance and repairs is charged to expense as incurred and significant repairs are capitalized.

Goodwill and Other Intangible
Assets: The goodwill asset resulted from business acquisitions prior to January 1, 2009 and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets.

The goodwill asset is assessed at least annually for impairment and any such impairment will be recognized in the period identified. There
was no impairment of the Banks goodwill asset for the years ended December 31, 2010, 2009 and 2008. The Company has selected December 31 as the date to perform the annual impairment test.

Other intangible assets consist of core deposit intangible assets arising from whole bank acquisitions. They are initially measured at fair value and
then are amortized on an accelerated method over their estimated useful lives.





74



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Bank Owned Life InsuranceThe Company has purchased life insurance policies on certain key
executives. The Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable
at settlement.

Long-Term Assets: Premises and equipment, core deposit and other intangible assets, and other long-term assets
are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit,
issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in the deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is more
likely than not that the tax position would be sustained in a tax examination, presuming that a tax examination will occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on
examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. At December 31, 2010 and 2009 the Company had unrecognized tax benefits of $176,000 and $165,000, respectively. The Company and
its subsidiary are subject to U.S. federal income tax as well as income tax of the State of Illinois. The Company is no longer subject to examination by these taxing authorities for years before 2006. Beginning in 2010 and 2009, the Company and the
Bank became subject to income taxes in the States of Colorado and New Jersey, respectively, due to the physical presence of regional National Commercial Leasing bankers in these jurisdictions. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The Company recognizes interest and/or penalties
related to income tax matters in income tax expense. At December 31, 2010 and 2009, the Company had recorded a cumulative accrual of $30,000 and $27,000, respectively, for potential interest and penalties.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions and any annual discretionary
contribution made at the discretion of the Companys Board of Directors. Deferred compensation expense allocates the benefits over years of service.

Employee Stock Ownership Plan (ESOP): The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders equity.
Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued
interest.

Earnings (Loss) Per Common Share: Basic earnings (loss) per common share is net income (loss) divided by the weighted
average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings (loss) per common share is net income (loss) divided by the weighted average number of
common shares outstanding during the period plus the dilutive effect of restricted stock shares and the additional potential shares issuable under stock options.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and
an amount or range of loss can be reasonably estimated. Management does not believe that there are such matters that will have a material effect on the financial statements as of December 31, 2010.





75



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank which is
required to meet regulatory reserve and clearing requirements. These required balances do not earn interest.

Fair Values of Financial
Instruments: Fair values of financial instruments are estimated using relevant market value information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other
comprehensive income (loss) includes unrealized gains and losses on securities, which are also recognized as separate components of stockholders equity.

Stock-based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. The
Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Companys common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required
service period, generally defined as the vesting period.

Transfers of Financial Assets:Transfers of financial assets are
accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Operating Segments:While management monitors the revenue streams of the various products and services, operations are managed
and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the financial service operations are considered by
management to be aggregated in one reportable operating segment.

Reclassifications: Certain reclassifications have been made in
the prior years financial statements to conform to the current years presentation.

Recent Accounting Pronouncements

FASB ASU 2010-20, Receivable (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses ASU 2010-20 requires new and enhanced disclosures about the credit quality of an entitys financing receivables and its allowance for credit losses. The new and amended disclosure requirements focus on such areas
as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and modifications. The ASU requires an entity to disaggregate new and existing disclosures
based on how it develops its allowance for credit losses and how it manages credit exposures. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after
December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. See Note 3 to these Consolidated Financial Statements
for the required disclosures at December 31, 2010.





76



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Newly Issued But Not Yet Effective Accounting Pronouncements:

FASB ASU 2011-01, Receivables (Topic 310), Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update
No. 2010-20 Under the existing effective date in FASB ASU 2010-20, public-entity creditors would have provided disclosures about troubled debt restructuring for periods beginning on or after December 15, 2010. ASU
2011-01 temporarily defers that effective date, enabling public-entity creditors to provide those disclosures (paragraphs 310-10-50-31 through 50-34) after the Financial Accounting Standards Board clarifies the guidance for determining what
constitutes a troubled debt restructuring. In the proposed Accounting Standards Update, Receivables (Topic 310), Clarifications to Accounting for Troubled Debt Restructurings by Creditors, the Board proposed that the clarifications would
be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in FASB ASU 2011-01, those clarifications would be applied retrospectively to the beginning of the fiscal year in
which the proposal is adopted. We have not yet evaluated the impact on our disclosures in the consolidated financial statements upon the adoption.

FASB ASU 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations ASU 2010-29 specifies that if a public entity
presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior
annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. ASU 2010-29 affects any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. This guidance is effective
prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2010. We have not yet evaluated the impact of adoption of ASU 2010-29 on our
disclosures for periods after adoption.

FASB ASU 2010-28, Intangibles  Goodwill and Other (Topic 350), When to Perform Step 2
of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts ASU 2010-28 affects all entities that have recognized a goodwill asset and have one or more reporting units whose carrying amount for
purposes of performing Step 1 of the goodwill impairment test is zero or negative. ASU 2010-28 modifies Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than
not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The
qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. For public entities, this guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The guidance is effective for a public
entitys first annual period that ends on or after December 15, 2010. Adoption of ASU 2010-28 is not expected to have a significant impact on our consolidated financial statements.





77



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 2  LOSS PER SHARE

Amounts reported in loss per share reflect loss available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of
unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive
effect if converted to common stock.



|                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                           |  | Year Ended December 31, |           
|                                           |  | 2010                    |            |   | 2009 |   |            | 2008 | 
|Net loss available to common stockholders  |  | $                       | (4,307     | ) |      | $ | (738       | )    |  | $ | (19,389    | )
|                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|                                           |  |                         |           
|Average common shares outstanding          |  |                         | 21,208,600 |   |      |   | 21,471,268 |      |  |   | 21,904,284 |  
|Less:                                      |  |                         |            |   |      |   |            |      |  |   |            |  
|Unearned ESOP shares                       |  |                         | (1,441,668 | ) |      |   | (1,554,492 | )    |  |   | (1,662,519 | )
|Unvested restricted stock shares           |  |                         | (102,823   | ) |      |   | (218,702   | )    |  |   | (422,870   | )
|                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted average common shares outstanding |  |                         | 19,664,109 |   |      |   | 19,698,074 |      |  |   | 19,818,895 |  
|                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|                                           |  |                         |           
|Basic loss per common share                |  | $                       | (0.22      | ) |      | $ | (0.04      | )    |  | $ | (0.98      | )
|                                           |  |                         |            |   |      |   |            |      |  |   |            |  



|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                              |  | Year Ended December 31, |           
|                                                                                              |  | 2010                    |            |   | 2009 |   |            | 2008 | 
|Net loss available to common stockholders                                                     |  | $                       | (4,307     | ) |      | $ | (738       | )    |  | $ | (19,389    | )
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Weighted average common shares outstanding                                                    |  |                         | 19,664,109 |   |      |   | 19,698,074 |      |  |   | 19,818,895 |  
|Add - Net effect of dilutive stock options and unvested restricted stock                      |  |                         |           |   |      |   |           |      |  |   |           |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted average dilutive common shares outstanding                                           |  |                         | 19,664,109 |   |      |   | 19,698,074 |      |  |   | 19,818,895 |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Diluted loss per common share                                                                 |  | $                       | (0.22      | ) |      | $ | (0.04      | )    |  | $ | (0.98      | )
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Number of antidilutive stock options excluded from the diluted earnings per share calculation |  |                         | 2,287,553  |   |      |   | 2,322,603  |      |  |   | 2,327,603  |  
|Weighted average exercise price of anti-dilutive option shares                                |  | $                       | 16.52      |   |      | $ | 16.51      |      |  | $ | 16.51      |  





78



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 3  SECURITIES

The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31 is as follows:



|                                                  |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|------------------------------------------------- |  | ------------- | ------- |  | -------------------- | - | ----- | --------------------- |  | - | ---------- | - |  | - | ------- | 
|                                                  |  | AmortizedCost |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | Fair Value |  
|2010                                              |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|Certificates of deposit                           |  | $             | 27,766  |  |                      | $ |      |                       |  | $ |           |   |  | $ | 27,766  | 
|Municipal securities                              |  |               | 675     |  |                      |   | 34    |                       |  |   |           |   |  |   | 709     | 
|Mortgage-backed securities - residential          |  |               | 41,034  |  |                      |   | 1,427 |                       |  |   | (26        | ) |  |   | 42,435  | 
|Collateralized mortgage obligations - residential |  |               | 48,262  |  |                      |   | 1,477 |                       |  |   | (7         | ) |  |   | 49,732  | 
|SBA-guaranteed loan participation certificates    |  |               | 103     |  |                      |   | 2     |                       |  |   |           |   |  |   | 105     | 
|                                                  |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                  |  | $             | 117,840 |  |                      | $ | 2,940 |                       |  | $ | (33        | ) |  | $ | 120,747 | 
|                                                  |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|2009                                              |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|Municipal securities                              |  | $             | 1,225   |  |                      | $ | 78    |                       |  | $ |           |   |  | $ | 1,303   | 
|Mortgage-backed securities - residential          |  |               | 33,008  |  |                      |   | 1,049 |                       |  |   |           |   |  |   | 34,057  | 
|Collateralized mortgage obligations - residential |  |               | 64,791  |  |                      |   | 1,873 |                       |  |   | (13        | ) |  |   | 66,651  | 
|SBA-guaranteed loan participation certificates    |  |               | 114     |  |                      |   | 1     |                       |  |   |           |   |  |   | 115     | 
|                                                  |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                  |  | $             | 99,138  |  |                      | $ | 3,001 |                       |  | $ | (13        | ) |  | $ | 102,126 | 
|                                                  |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 

Mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S.
government-sponsored entities and agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support. All securities reflected in the preceding table were classified as
available-for-sale at December 31, 2010 and 2009.

The amortized cost and fair values of securities at December 31, 2010 by
contractual maturity are shown below. Securities not due at a single maturity date are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.



|                                                  |  |               |         |  |            |   |         | 
|------------------------------------------------- |  | ------------- | ------- |  | ---------- | - | ------- | 
|                                                  |  | 2010          |        
|                                                  |  | AmortizedCost |         |  | Fair Value |  
|Due in one year or less                           |  | $             | 22,872  |  |            | $ | 22,875  | 
|Due after one year through five years             |  |               | 5,569   |  |            |   | 5,600   | 
|                                                  |  |               |         |  |            |   |         | 
|                                                  |  |               | 28,441  |  |            |   | 28,475  | 
|                                                  |  |              
|Mortgage-backed securities - residential          |  |               | 41,034  |  |            |   | 42,435  | 
|Collateralized mortgage obligations - residential |  |               | 48,262  |  |            |   | 49,732  | 
|SBA-guaranteed loan participation certificates    |  |               | 103     |  |            |   | 105     | 
|                                                  |  |               |         |  |            |   |         | 
|Total                                             |  | $             | 117,840 |  |            | $ | 120,747 | 
|                                                  |  |               |         |  |            |   |         | 

Securities pledged at December 31, 2010 and 2009 had a carrying amount of $13.0 million and $75.1 million,
respectively, and the security interests resulting from the pledges secures certain depository relationships, customer repurchase agreements and a line of credit with the Federal Reserve Bank of Chicago.





79



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 3  SECURITIES (continued)



Sale of securities were as follows:



|             |  |      |    |  |      |   |     |      |  |   |       | 
|------------ |  | ---- | -- |  | ---- | - | --- | ---- |  | - | ----- | 
|             |  | 2010 |    |  | 2009 |   |     | 2008 | 
|             |  |      |   
|Proceeds     |  | $    | 31 |  |      | $ | 967 |      |  | $ | 1,385 | 
|Gross gains  |  |      | 31 |  |      |   |    |      |  |   | 1,385 | 
|Gross losses |  |      |   |  |      |   | 988 |      |  |   |      | 

Securities with unrealized losses at
December 31, 2010 and 2009 not recognized in income are as follows:



|                                                  |  |                     |        |  |                   |   |    |           |  |   |                |  |  |           |   |  |                |   |        |  |  |   |    | 
|------------------------------------------------- |  | ------------------- | ------ |  | ----------------- | - | -- | --------- |  | - | -------------- |  |  | --------- | - |  | -------------- | - | ------ |  |  | - | -- | 
|                                                  |  | Less than 12 Months |        |  | 12 Months or More |   |    | Total     | 
|                                                  |  | FairValue           |        |  | UnrealizedLoss    |   |    | FairValue |  |   | UnrealizedLoss |  |  | FairValue |   |  | UnrealizedLoss |  
|2010                                              |  |                     |        |  |                   |   |    |           |  |   |                |  |  |           |   |  |                |   |        |  |  |   |    | 
|Mortgage-backed securities - residential          |  | $                   | 7,546  |  |                   | $ | 26 |           |  | $ |               |  |  | $         |  |  |                | $ | 7,546  |  |  | $ | 26 | 
|Collateralized mortgage obligations - residential |  |                     | 5,102  |  |                   |   | 7  |           |  |   |               |  |  |           |  |  |                |   | 5,102  |  |  |   | 7  | 
|                                                  |  |                     |        |  |                   |   |    |           |  |   |                |  |  |           |   |  |                |   |        |  |  |   |    | 
|                                                  |  |                     |        |  |                   |  
|Total                                             |  | $                   | 12,648 |  |                   | $ | 33 |           |  | $ |               |  |  | $         |  |  |                | $ | 12,648 |  |  | $ | 33 | 
|                                                  |  |                     |        |  |                   |   |    |           |  |   |                |  |  |           |   |  |                |   |        |  |  |   |    | 
|2009                                              |  |                     |        |  |                   |   |    |           |  |   |                |  |  |           |   |  |                |   |        |  |  |   |    | 
|Collateralized mortgage obligations - residential |  | $                   | 1,358  |  |                   | $ | 13 |           |  | $ |               |  |  | $         |  |  |                | $ | 1,358  |  |  | $ | 13 | 
|                                                  |  |                     |        |  |                   |   |    |           |  |   |                |  |  |           |   |  |                |   |        |  |  |   |    | 

The Company evaluates 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.

The
mortgage-backed securities and collateralized mortgage obligations that the Company holds in its investment portfolio remained in an unrealized loss position at December 31, 2010, but the unrealized losses were not considered significant under
the Companys impairment testing methodology. In addition, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell the securities before their anticipated recovery occurs.

At December 31, 2008, the Company held shares of Freddie Mac preferred stock in its investment portfolio. The securities experienced significant
declines in fair value (as measured by quoted market prices for these securities) during the years ended December 31, 2009 and 2008 due to a variety of market conditions and issuer-specific factors, including Freddie Macs conservatorship,
its issuance of new shares of preferred stock that are senior to all previously issued preferred shares, and its suspension of dividends on all previously issued preferred shares. The Company evaluated these shares of Freddie Mac preferred stock for
impairment, and concluded that the unrealized losses that existed at that date with respect to this series of Freddie Mac preferred stock constituted an other-than-temporary impairment under the current accounting guidance. Based on this conclusion,
the Company recorded a pre-tax impairment loss of $401,000 and $35.9 million for the years ended December 31, 2009 and 2008, respectively. These securities were sold in the fourth quarter of 2009 and the Company recorded a pre-tax loss of
$988,000 on the sale.





80



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE

Loans receivable are as follows:



|                                                 |  |      |           |   |      |   |           |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                 |  | 2010 |           |   | 2009 |  
|                                                 |  |     
|One-to-four family residential real estate loans |  | $    | 256,300   |   |      | $ | 289,623   |  
|Multi-family mortgage loans                      |  |      | 296,916   |   |      |   | 329,227   |  
|Nonresidential real estate loans                 |  |      | 281,987   |   |      |   | 316,607   |  
|Construction and land loans                      |  |      | 18,398    |   |      |   | 32,577    |  
|Commercial loans                                 |  |      | 64,679    |   |      |   | 88,067    |  
|Commercial leases                                |  |      | 151,107   |   |      |   | 176,821   |  
|Consumer loans                                   |  |      | 2,182     |   |      |   | 2,539     |  
|                                                 |  |      |           |   |      |   |           |  
|                                                 |  |     
|Total loans                                      |  |      | 1,071,569 |   |      |   | 1,235,461 |  
|Net deferred loan origination costs              |  |      | 1,377     |   |      |   | 1,701     |  
|Allowance for loan losses                        |  |      | (22,180   | ) |      |   | (18,622   | )
|                                                 |  |      |           |   |      |   |           |  
|                                                 |  |     
|Loans, net                                       |  | $    | 1,050,766 |   |      | $ | 1,218,540 |  
|                                                 |  |      |           |   |      |   |           |  

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed
to maximize loan income within an acceptable level of risk. The Company reviews and approves these policies and procedures on a periodic basis. A reporting system supplements the review process by providing management with frequent reports related
to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The majority of the loans the Company originates are investment and business loans (multi-family, nonresidential real estate, commercial,
construction and land loans, and commercial leases). In addition, we originate one-to-four family residential mortgage loans and consumer loans, and purchase and sell loan participations from time-to-time. The following briefly describes our
principal loan products.

Multi-family mortgage loans generally are secured by multi-family rental properties such as apartment buildings,
including subsidized apartment units. In general, loan amounts range between $250,000 and $5.0 million. Approximately 25% of the collateral is located outside of our primary market area; however, we do not have a concentration in any single market
outside of our primary market territory. In underwriting multi-family mortgage loans, the Company consider a number of factors, which include the projected net cash flow to the loans debt service requirement (generally requiring a minimum
ratio of 115% for loans below $400,000 and 120% for loans above $400,000), the age and condition of the collateral, the financial resources and income level of the borrower and the borrowers experience in owning or managing similar properties.
Multi-family mortgage loans are originated in amounts up to 80% of the appraised value of the property securing the loan. Personal guarantees are usually obtained from multi-family mortgage borrowers.

Loans secured by multi-family mortgages generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from
the project is reduced, the borrowers ability to repay the loan may be impaired.

The Company also originates real estate loans
principally secured by first liens on nonresidential real estate. The nonresidential real estate properties are predominantly office buildings, light industrial buildings, shopping centers and mixed-use developments and, to a lesser extent, more
specialized properties such as nursing homes and other healthcare facilities. The Company may, from time to time, purchase commercial real estate loan participations.





81



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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



The Company emphasizes nonresidential real estate loans with initial principal balances between $250,000
and $5.0 million. Substantially all of our nonresidential real estate loans are secured by properties located in our primary market area. The Companys nonresidential real estate loans are generally written as three- or five-year
adjustable-rate mortgages or mortgages with balloon maturities of three or five years. Amortization on these loans is typically based on 20- to 25-year schedules. The Company also originates some 15-year fixed-rate, fully amortizing loans.

In the underwriting of nonresidential real estate loans, the Company generally lends up to 80% of the propertys appraised value.
Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the propertys projected net cash flow to the
loans debt service requirement (generally requiring a minimum ratio of 120%), computed after deduction for a vacancy factor and property expenses we deem appropriate. Personal guarantees are usually obtained from nonresidential real estate
borrowers. The Company requires title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.

Nonresidential real estate loans generally carry higher interest rates and have shorter terms than those on one- to four-family residential mortgage
loans. Nonresidential real estate loans, however, entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the
real estate market and in the general economy.

The Company makes various types of secured and unsecured commercial loans to customers in our
market area for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to five years. The loans are either negotiated on a
fixed-rate basis or carry adjustable interest rates indexed to (i) a lending rate that is determined internally, or (ii) a short-term market rate index.

Commercial credit decisions are based upon our credit assessment of the loan applicant. The Company determines the applicants ability to repay in accordance with the proposed terms of the loans and
we assess the risks involved. An evaluation is made of the applicant to determine character and capacity to manage. Personal guarantees of the principals are usually obtained. In addition to evaluating the loan applicants financial statements,
we consider the adequacy of the primary and secondary sources of repayment for the loan. Credit agency reports of the applicants credit history supplement our analysis of the applicants creditworthiness and at times are supplemented with
inquiries to other banks and trade investigations. Collateral supporting a secured transaction also is analyzed to determine its marketability. Commercial business loans generally have higher interest rates than residential loans of like duration
because they have a higher risk of default since their repayment generally depends on the successful operation of the borrowers business and the sufficiency of any collateral. Pricing of commercial loans is based primarily on the credit risk
of the borrower, with due consideration given to borrowers with appropriate deposit relationships.

The Company also lends money to small and
mid-size leasing companies for equipment financing leases. Generally, commercial leases are secured by an assignment by the leasing company of the lease payments and by a secured interest in the equipment being leased. The lessee acknowledges
our security interest in the leased equipment and agrees to send lease payments directly to us. Consequently, the Company underwrites lease loans by examining the creditworthiness of the lessee rather than the lessor. Lease loans generally are
non-recourse to the leasing company.

The Companys commercial leases are secured primarily by technology equipment, medical equipment,
material handling equipment and other capital equipment. Lessees tend to be publicly-traded companies with investment-grade rated debt or companies that have not issued public debt and therefore do not have a public debt rating. The Company requires
that a minimum of 50% of our commercial lessees have an investment grade public debt rating by Moodys or Standard & Poors, or the equivalent. Commercial leases to these entities have a maximum maturity of seven years and a maximum
outstanding credit exposure of $5.0 million to any single entity. Lessees without public debt ratings generally have net worth in excess of $25.0 million. If the lessee does not have a public debt rating, they are subject to the same internal credit
analysis as any other customer. Commercial leases to these lessees have a maximum maturity of five years and a maximum outstanding credit exposure of $3.0 million to any single entity. In addition, the Company will originate commercial leases
to lessees with below-investment grade public debt ratings, but these leases are limited to 10% of our commercial lease portfolio and have a maximum outstanding credit exposure of $2.0 million to any single entity. Lease loans are almost always
fully amortizing, with fixed interest rates.





82



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



Although the Company does not actively originate construction and land loans at present, construction
and land loans generally consist of land acquisition loans to help finance the purchase of land intended for further development, including single-family homes, multi-family housing and commercial income property, development loans to builders in
our market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. These builders generally rely on the sale of
single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder, often in conjunction with development loans. Construction and land loans typically involve a higher degree of credit
risk than financing on improved, owner-occupied real estate. The risk of loss on construction and land loans is largely dependent upon the accuracy of the initial appraisal of the propertys value upon completion of construction or development;
the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. The Company seeks to minimize these risks by maintaining consistent lending policies and rigorous underwriting standards.
However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, the length of time to complete and/or sell or lease the collateral property is greater than anticipated, or if there is a downturn in the
local economy or real estate market, the property could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the construction and land loan portfolio, and
could result in significant losses or delinquencies.

The Company offers conforming and non-conforming, fixed-rate and adjustable-rate
residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $2.5 million. The Company currently offers fixed-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with
monthly payments, and adjustable-rate conventional mortgage loans with initial terms of between one and three years that amortize up to 30 years. One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae
guidelines, and loans that conform to such guidelines are referred to as conforming loans. The Company generally originates both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by
Fannie Mae, which is currently $417,000 for single-family homes. Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 80%.

The Company also originates loans above conforming limits, sometimes referred to as jumbo loans, that have been underwritten to the credit standards of Fannie Mae. These loans are generally
eligible for sale to various firms that specialize in the purchase of such non-conforming loans. In the Chicago metropolitan area, larger residential loans are not uncommon. The Company also originates loans at higher rates that do not fully meet
the credit standards of Fannie Mae but are deemed to be acceptable risks.

The markets served by the Company have been impacted by widespread
economic weakness and high unemployment, which have contributed to a rise in charge-offs and non-performing assets. The ability of the Companys borrowers to repay their loans, and the value of the collateral securing such loans, could be
further adversely impacted by continued or more significant economic weakness in its local markets as a result of increased unemployment, declining real estate values, or increased residential and office vacancies. This not only could result in the
Company experiencing a further increase in charge-offs and/or non-performing assets, but also could necessitate an increase in the provision for loan losses. These events, if they were to occur, would have an adverse impact on the Companys
results of operations and its capital.





83



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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



The following tables present the balance in the allowance for loan losses and the recorded investment in
loans by portfolio segment and based on impairment method as of December 31, 2010 and 2009:



|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|------------------------------------------------ |  | ----------------------------------- | ----- |  | ------------------------------------ | - | ------ | ----- |  | - | ----------------------------------- |  |  | ------------------------------------ | ------ |  | ----- | - | --------- |  |  | - | --------- | -
|                                                 |  | Allowance for loan losses           |       |  | Loan Balances                        |  
|December 31, 2010                                |  | Individuallyevaluated forimpairment |       |  | Collectivelyevaluated 
forimpairment |   |        | Total |  |   | Individuallyevaluated forimpairment |  |  | Collectivelyevaluated 
forimpairment |        |  | Total |  
|                                                 |  |                                     |       |  |                                      |  
|One-to-four family residential real estate loans |  | $                                   | 686   |  |                                      | $ | 2,870  |       |  | $ | 3,556                               |  |  | $                                    | 4,022  |  |       | $ | 252,278   |  |  | $ | 256,300   |  
|Multi-family mortgage loans                      |  |                                     | 3,231 |  |                                      |   | 3,801  |       |  |   | 7,032                               |  |  |                                      | 13,971 |  |       |   | 282,945   |  |  |   | 296,916   |  
|Nonresidential real estate loans                 |  |                                     | 1,637 |  |                                      |   | 4,077  |       |  |   | 5,714                               |  |  |                                      | 12,722 |  |       |   | 269,266   |  |  |   | 281,987   |  
|Construction and land loans                      |  |                                     | 1,855 |  |                                      |   | 606    |       |  |   | 2,461                               |  |  |                                      | 6,138  |  |       |   | 12,259    |  |  |   | 18,398    |  
|Commercial loans                                 |  |                                     | 1,931 |  |                                      |   | 948    |       |  |   | 2,879                               |  |  |                                      | 3,766  |  |       |   | 60,913    |  |  |   | 64,679    |  
|Commercial leases                                |  |                                     | 72    |  |                                      |   | 446    |       |  |   | 518                                 |  |  |                                      | 72     |  |       |   | 151,035   |  |  |   | 151,107   |  
|Consumer loans                                   |  |                                     |      |  |                                      |   | 20     |       |  |   | 20                                  |  |  |                                      |       |  |       |   | 2,182     |  |  |   | 2,182     |  
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|                                                 |  |                                     |       |  |                                      |  
|Total                                            |  | $                                   | 9,412 |  |                                      | $ | 12,768 |       |  | $ | 22,180                              |  |  | $                                    | 40,691 |  |       | $ | 1,030,878 |  |  |   | 1,071,569 |  
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|Net deferred loan origination costs              |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   | 1,377     |  
|Allowance for loan losses                        |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   | (22,180   | )
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|                                                 |  |                                     |       |  |                                      |  
|Loans, net                                       |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  | $ | 1,050,766 |  
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|                                                 |  |                                    
|                                                 |  | Allowance for loan losses           |       |  | Loan Balances                        |  
|December 31, 2009                                |  | Individuallyevaluated forimpairment |       |  | Collectivelyevaluated 
forimpairment |   |        | Total |  |   | Individuallyevaluated forimpairment |  |  | Collectivelyevaluated 
forimpairment |        |  | Total |  
|                                                 |  |                                     |       |  |                                      |  
|One-to-four family residential real estate loans |  | $                                   | 992   |  |                                      | $ | 2,341  |       |  | $ | 3,333                               |  |  | $                                    | 8,177  |  |       | $ | 281,446   |  |  | $ | 289,623   |  
|Multi-family mortgage loans                      |  |                                     | 641   |  |                                      |   | 2,956  |       |  |   | 3,597                               |  |  |                                      | 13,961 |  |       |   | 315,266   |  |  |   | 329,227   |  
|Nonresidential real estate loans                 |  |                                     | 1,506 |  |                                      |   | 4,190  |       |  |   | 5,696                               |  |  |                                      | 10,651 |  |       |   | 305,956   |  |  |   | 316,607   |  
|Construction and land loans                      |  |                                     | 1,126 |  |                                      |   | 735    |       |  |   | 1,861                               |  |  |                                      | 8,842  |  |       |   | 23,735    |  |  |   | 32,577    |  
|Commercial loans                                 |  |                                     | 795   |  |                                      |   | 1,725  |       |  |   | 2,520                               |  |  |                                      | 4,011  |  |       |   | 84,056    |  |  |   | 88,067    |  
|Commercial leases                                |  |                                     |      |  |                                      |   | 1,591  |       |  |   | 1,591                               |  |  |                                      |       |  |       |   | 176,821   |  |  |   | 176,821   |  
|Consumer loans                                   |  |                                     |      |  |                                      |   | 24     |       |  |   | 24                                  |  |  |                                      |       |  |       |   | 2,539     |  |  |   | 2,539     |  
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|                                                 |  |                                     |       |  |                                      |  
|Total                                            |  | $                                   | 5,060 |  |                                      | $ | 13,562 |       |  | $ | 18,622                              |  |  | $                                    | 45,642 |  |       | $ | 1,189,819 |  |  |   | 1,235,461 |  
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|Net deferred loan origination costs              |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   | 1,701     |  
|Allowance for loan losses                        |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   | (18,622   | )
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  
|                                                 |  |                                     |       |  |                                      |  
|Loans, net                                       |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  | $ | 1,218,540 |  
|                                                 |  |                                     |       |  |                                      |   |        |       |  |   |                                     |  |  |                                      |        |  |       |   |           |  |  |   |           |  





84



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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



Activity in the allowance for loan losses is as follows:



|                          |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                          |  | 2010 |        |   | 2009 |   |        | 2008 | 
|                          |  |      |       
|Beginning of year         |  | $    | 18,622 |   |      | $ | 14,746 |      |  | $ | 11,051 |  
|Provision for loan losses |  |      | 12,083 |   |      |   | 8,811  |      |  |   | 5,092  |  
|Loans charged off         |  |      | (9,289 | ) |      |   | (5,065 | )    |  |   | (1,413 | )
|Recoveries                |  |      | 764    |   |      |   | 130    |      |  |   | 16     |  
|                          |  |      |        |   |      |   |        |      |  |   |        |  
|End of year               |  | $    | 22,180 |   |      | $ | 18,622 |      |  | $ | 14,746 |  
|                          |  |      |        |   |      |   |        |      |  |   |        |  

We refined the calculation of the general component of the allowance for loan losses during the fourth quarter of 2010 in
response to the new FASB disclosure requirement to segment each loan portfolio category into specific loan classes (FASB Standards Update 2010-20 (ASU 210-20), Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses) As a matter of consistency, the loan class segmentation was also applied within the 12-quarter loss history used to calculate the general component of the allowance for loan losses, an
adjustment of the inherent risk factor weightings based on our evaluation of their relevance to the new loan classes, and the elimination of duplicative historical loss factors as a result of the segmentation of the portfolio by class. These
refinements were applied to the loan balances, net of impaired loans, to calculate a $12.8 million general component of our allowance for loan losses at December 31, 2010. The refinements resulted in a net reduction of $1.7 million to the
general component of our allowance for loan losses at December 31, 2010, principally due to the establishment of loan class segments that had lower historical loss ratios than the general loan categories to which they belong. Specifically, the
refinements reduced the portion of the general component of the allowance for loan losses attributable to commercial leases by $908,000, the portion attributable to commercial loans by $788,000, the portion attributable to non-residential real
estate loans by $195,000, and the portion attributable to multi-family mortgage loans by $144,000. These reductions were partially offset by a $384,000 increase in the portion of the general component of the allowance for loan losses that is
attributable one-to-four family mortgage loans.

Impaired loans were as follows:



|                                                                     |  |      |        |  |      |   |        | 
|-------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                                     |  | 2010 |        |  | 2009 |  
|                                                                     |  |     
|Year-end loans with allocated allowance for loan losses              |  | $    | 31,057 |  |      | $ | 22,583 | 
|Year-end loans with no allocated allowance for loan losses           |  |      | 9,634  |  |      |   | 23,059 | 
|Year-end troubled debt restructured loans not individually evaluated |  |      | 2,975  |  |      |   | 7,406  | 
|                                                                     |  |      |        |  |      |   |        | 
|                                                                     |  |     
|Total impaired loans                                                 |  | $    | 43,666 |  |      | $ | 53,049 | 
|                                                                     |  |      |        |  |      |   |        | 
|                                                                     |  |     
|Amount of the allowance for loan losses allocated to impaired loans  |  | $    | 9,412  |  |      | $ | 5,060  | 



|                                             |  |      |        |  |      |   |        |      |  |   |        | 
|-------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                             |  | 2010 |        |  | 2009 |   |        | 2008 | 
|                                             |  |      |       
|Average of impaired loans during the year    |  | $    | 48,850 |  |      | $ | 40,520 |      |  | $ | 22,944 | 
|Interest income recognized during impairment |  |      | 1,102  |  |      |   | 1,106  |      |  |   | 1,152  | 
|Cash basis interest income recognized        |  |      | 1,102  |  |      |   | 1,106  |      |  |   | 1,152  | 





85



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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



Several of the following disclosures are presented by recorded investment, which the FASB
defines as the amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment. The following represents the components of recorded investment:



|                                        
|----------------------------------------
|Loan principal balance                  
|Less unapplied payments                 
|Plus negative unapplied balance         
|Less escrow balance                     
|Plus negative escrow balance            
|Plus unamortized net deferred loan costs
|Less unamortized net deferred loan fees 
|Plus unamortized premium                
|Less unamortized discount               
|Less previous charge-offs               
|Plus recorded accrued interest          
|= Recorded investment                   

The following table presents loans individually evaluated for impairment by class loans as of December 31, 2010:



|                                                                      |  |                         |        |  |                    |   |        |                                   |  |   |       | 
|--------------------------------------------------------------------- |  | ----------------------- | ------ |  | ------------------ | - | ------ | --------------------------------- |  | - | ----- | 
|                                                                      |  | Unpaid PrincipalBalance |        |  | RecordedInvestment |   |        | Allowance forLoan LossesAllocated | 
|With no related allowance recorded:                                   |  |                         |        |  |                    |   |        |                                   |  |   |       | 
|One-to-four family residential real estate loans  non-owner occupied |  | $                       | 1,244  |  |                    | $ | 1,321  |                                   |  | $ |      | 
|Multi-family mortgage loans                                           |  |                         | 3,554  |  |                    |   | 3,723  |                                   |  |   |      | 
|Nonresidential real estate loans                                      |  |                         | 3,949  |  |                    |   | 4,008  |                                   |  |   |      | 
|Construction loans                                                    |  |                         | 333    |  |                    |   | 357    |                                   |  |   |      | 
|Commercial loans  secured                                            |  |                         | 457    |  |                    |   | 478    |                                   |  |   |      | 
|Commercial loans - other                                              |  |                         | 97     |  |                    |   | 117    |                                   |  |   |      | 
|                                                                      |  |                         |        |  |                    |   |        |                                   |  |   |       | 
|                                                                      |  |                         | 9,634  |  |                    |   | 10,004 |                                   |  |   |      | 
|                                                                      |  |                         |       
|With an allowance recorded:                                           |  |                         |        |  |                    |   |        |                                   |  |   |       | 
|One-to-four family residential real estate loans  non-owner occupied |  | $                       | 2,778  |  |                    | $ | 2,888  |                                   |  | $ | 686   | 
|Multi-family mortgage loans                                           |  |                         | 6,012  |  |                    |   | 6,362  |                                   |  |   | 1,709 | 
|Wholesale commercial lending                                          |  |                         | 4,405  |  |                    |   | 4,589  |                                   |  |   | 1,522 | 
|Nonresidential real estate loans                                      |  |                         | 8,773  |  |                    |   | 8,837  |                                   |  |   | 1,637 | 
|Construction loans                                                    |  |                         | 2,940  |  |                    |   | 3,244  |                                   |  |   | 730   | 
|Land loans                                                            |  |                         | 2,865  |  |                    |   | 3,339  |                                   |  |   | 1,125 | 
|Commercial loans  secured                                            |  |                         | 3,054  |  |                    |   | 3,265  |                                   |  |   | 1,804 | 
|Commercial loans  unsecured                                          |  |                         | 158    |  |                    |   | 202    |                                   |  |   | 127   | 
|Non-rated commercial leases                                           |  |                         | 72     |  |                    |   | 77     |                                   |  |   | 72    | 
|                                                                      |  |                         |        |  |                    |   |        |                                   |  |   |       | 
|                                                                      |  |                         |       
|                                                                      |  |                         | 31,057 |  |                    |   | 32,803 |                                   |  |   | 9,412 | 
|                                                                      |  |                         |        |  |                    |   |        |                                   |  |   |       | 
|                                                                      |  |                         |       
|Total                                                                 |  | $                       | 40,691 |  |                    | $ | 42,807 |                                   |  | $ | 9,412 | 
|                                                                      |  |                         |        |  |                    |   |        |                                   |  |   |       | 





86



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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



Nonaccrual loans and loans past due 90 days still on accrual are as follows:



|                                             |  |      |        |  |      |   |        | 
|-------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                             |  | 2010 |        |  | 2009 |  
|                                             |  |     
|Nonaccrual loans                             |  | $    | 45,695 |  |      | $ | 49,489 | 
|Loans past due over 90 days still on accrual |  |      | 818    |  |      |   | 148    | 
|                                             |  |     
|Reserve for uncollected loan interest        |  | $    | 2,698  |  |      | $ | 2,317  | 

The following table presents the
recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:



|                                                                      |  |                 |        |  |                    |   |        |                                          |  |   |     | 
|--------------------------------------------------------------------- |  | --------------- | ------ |  | ------------------ | - | ------ | ---------------------------------------- |  | - | --- | 
|                                                                      |  | Nonaccrualloans |        |  | RecordedInvestment |   |        | Loans PastDue Over 90Days, stillaccruing | 
|                                                                      |  |                 |       
|One-to-four family residential real estate loans                      |  | $               | 5,748  |  |                    | $ | 6,115  |                                          |  | $ | 47  | 
|One-to-four family residential real estate loans  non owner occupied |  |                 | 4,311  |  |                    |   | 4,513  |                                          |  |   | 496 | 
|Multi-family mortgage loans                                           |  |                 | 8,823  |  |                    |   | 9,327  |                                          |  |   | 275 | 
|Wholesale commercial lending                                          |  |                 | 4,405  |  |                    |   | 4,589  |                                          |  |   |    | 
|Nonresidential real estate loans                                      |  |                 | 12,428 |  |                    |   | 12,575 |                                          |  |   |    | 
|Construction loans                                                    |  |                 | 3,274  |  |                    |   | 3,601  |                                          |  |   |    | 
|Land loans                                                            |  |                 | 2,865  |  |                    |   | 3,339  |                                          |  |   |    | 
|Commercial loans  secured                                            |  |                 | 3,511  |  |                    |   | 3,743  |                                          |  |   |    | 
|Commercial loans  unsecured                                          |  |                 | 158    |  |                    |   | 202    |                                          |  |   |    | 
|Commercial loans  other                                              |  |                 | 97     |  |                    |   | 118    |                                          |  |   |    | 
|Non-rated commercial leases                                           |  |                 | 72     |  |                    |   | 77     |                                          |  |   |    | 
|Consumer loans                                                        |  |                 | 3      |  |                    |   | 3      |                                          |  |   |    | 
|                                                                      |  |                 |        |  |                    |   |        |                                          |  |   |     | 
|                                                                      |  |                 |       
|                                                                      |  | $               | 45,695 |  |                    | $ | 48,202 |                                          |  | $ | 818 | 
|                                                                      |  |                 |        |  |                    |   |        |                                          |  |   |     | 

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may
only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Generally, the Bank utilizes the 90 days delinquent, still accruing category of loan classification when: (1) the loan is repaid in full shortly after the period end date; (2) the
loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of
payments actually received or the renewal of a loan has not occurred for administrative reasons.





87



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



The following table presents the aging of the recorded investment in past due loans as December 31,
2010 by class of loans:



|                                                                      |  |                    |        |  |                    |   |        |                              |  |   |                |  |  |                   |         |  |       |   |         |  |  |   |           | 
|--------------------------------------------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ------ | ---------------------------- |  | - | -------------- |  |  | ----------------- | ------- |  | ----- | - | ------- |  |  | - | --------- | 
|                                                                      |  | 30-59 DaysPast Due |        |  | 60-89 DaysPast Due |   |        | Greater than 90Days Past Due |  |   | Total Past Due |  |  | Loans Not PastDue |         |  | Total |  
|                                                                      |  |                    |        |  |                    |  
|One-to-four family residential real estate loans                      |  | $                  | 1,202  |  |                    | $ | 202    |                              |  | $ | 5,890          |  |  | $                 | 7,294   |  |       | $ | 172,438 |  |  | $ | 179,732   | 
|One-to-four family residential real estate loans - non-owner occupied |  |                    | 3,335  |  |                    |   | 449    |                              |  |   | 5,019          |  |  |                   | 8,803   |  |       |   | 68,127  |  |  |   | 76,930    | 
|Multi-family mortgage loans                                           |  |                    | 7,174  |  |                    |   | 4,304  |                              |  |   | 9,588          |  |  |                   | 21,066  |  |       |   | 202,481 |  |  |   | 223,547   | 
|Wholesale commercial lending                                          |  |                    | 1,231  |  |                    |   |       |                              |  |   | 4,589          |  |  |                   | 5,820   |  |       |   | 67,712  |  |  |   | 73,532    | 
|Nonresidential real estate loans                                      |  |                    | 9,270  |  |                    |   | 16,061 |                              |  |   | 3,944          |  |  |                   | 29,275  |  |       |   | 251,139 |  |  |   | 280,414   | 
|Construction loans                                                    |  |                    | 1,267  |  |                    |   | 1,284  |                              |  |   | 3,601          |  |  |                   | 6,152   |  |       |   | 3,321   |  |  |   | 9,473     | 
|Land loans                                                            |  |                    |       |  |                    |   |       |                              |  |   | 3,339          |  |  |                   | 3,339   |  |       |   | 6,422   |  |  |   | 9,761     | 
|Commercial loans:                                                     |  |                    |        |  |                    |   |        |                              |  |   |                |  |  |                   |         |  |       |   |         |  |  |   |           | 
|Secured                                                               |  |                    | 929    |  |                    |   | 700    |                              |  |   | 3,712          |  |  |                   | 5,341   |  |       |   | 18,370  |  |  |   | 23,711    | 
|Unsecured                                                             |  |                    | 551    |  |                    |   | 178    |                              |  |   | 202            |  |  |                   | 931     |  |       |   | 6,558   |  |  |   | 7,489     | 
|Municipal loans                                                       |  |                    |       |  |                    |   |       |                              |  |   |               |  |  |                   |        |  |       |   | 4,629   |  |  |   | 4,629     | 
|Warehouse lines                                                       |  |                    |       |  |                    |   |       |                              |  |   |               |  |  |                   |        |  |       |   | 12,320  |  |  |   | 12,320    | 
|Health care                                                           |  |                    |       |  |                    |   |       |                              |  |   |               |  |  |                   |        |  |       |   | 8,089   |  |  |   | 8,089     | 
|Other                                                                 |  |                    | 7,060  |  |                    |   |       |                              |  |   | 118            |  |  |                   | 7,178   |  |       |   | 1,922   |  |  |   | 9,100     | 
|Commercial leases:                                                    |  |                    |        |  |                    |   |        |                              |  |   |                |  |  |                   |         |  |       |   |         |  |  |   |           | 
|Investment rated commercial leases                                    |  |                    | 2,039  |  |                    |   | 2,312  |                              |  |   |               |  |  |                   | 4,351   |  |       |   | 83,506  |  |  |   | 87,857    | 
|Below investment grade                                                |  |                    | 3      |  |                    |   |       |                              |  |   |               |  |  |                   | 3       |  |       |   | 3,725   |  |  |   | 3,728     | 
|Non-rated                                                             |  |                    | 3,382  |  |                    |   | 434    |                              |  |   | 76             |  |  |                   | 3,892   |  |       |   | 47,199  |  |  |   | 51,091    | 
|Lease pools                                                           |  |                    |       |  |                    |   |       |                              |  |   |               |  |  |                   |        |  |       |   | 9,791   |  |  |   | 9,791     | 
|Consumer loans                                                        |  |                    | 3      |  |                    |   |       |                              |  |   | 4              |  |  |                   | 7       |  |       |   | 2,186   |  |  |   | 2,193     | 
|                                                                      |  |                    |        |  |                    |   |        |                              |  |   |                |  |  |                   |         |  |       |   |         |  |  |   |           | 
|                                                                      |  |                    |        |  |                    |  
|Total                                                                 |  | $                  | 37,446 |  |                    | $ | 25,924 |                              |  | $ | 40,082         |  |  | $                 | 103,452 |  |       | $ | 969,935 |  |  | $ | 1,073,387 | 
|                                                                      |  |                    |        |  |                    |   |        |                              |  |   |                |  |  |                   |         |  |       |   |         |  |  |   |           | 





88



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



Troubled Debt Restructurings:

The Company has $6.5 million of troubled debt restructurings at December 31, 2010, with an allocated $658,000 of specific reserves to those customers. Troubled debt restructurings at
December 31, 2009 were $9.6 million, with an allocated $525,000 of specific reserves to those customers. The Company has no outstanding commitments to customers whose loans are classified as troubled debt restructurings.

Credit Quality Indicators:

The Company
categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed
on a monthly basis. The Company uses the following definitions for risk ratings:

Special Mention.Loans classified as
special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit
position at some future date.

Substandard.Loans classified as substandard are inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that
the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful
have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
pass rated loans.





89



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 4  LOANS RECEIVABLE (continued)



As of December 31, 2010, and based on the most recent analysis performed, the risk category of
loans by class of loans is as follows:



|                                                                      |  |      |         |  |            |   |        |                |  |   |             |  |  |          |        |  |       |   |     |  |  |   |           | 
|--------------------------------------------------------------------- |  | ---- | ------- |  | ---------- | - | ------ | -------------- |  | - | ----------- |  |  | -------- | ------ |  | ----- | - | --- |  |  | - | --------- | 
|                                                                      |  | Pass |         |  | Watch List |   |        | SpecialMention |  |   | Substandard |  |  | Doubtful |        |  | Total |  
|                                                                      |  |      |         |  |            |  
|One-to-four family residential real estate loans                      |  | $    | 174,349 |  |            | $ |       |                |  | $ |            |  |  | $        | 5,097  |  |       | $ |    |  |  | $ | 179,446   | 
|One-to-four family residential real estate loans - non-owner occupied |  |      | 65,071  |  |            |   | 6,400  |                |  |   | 776         |  |  |          | 4,607  |  |       |   |    |  |  |   | 76,854    | 
|Multi-family mortgage loans                                           |  |      | 197,427 |  |            |   | 12,348 |                |  |   | 4,642       |  |  |          | 9,501  |  |       |   |    |  |  |   | 223,918   | 
|Wholesale commercial lending                                          |  |      | 67,304  |  |            |   | 1,361  |                |  |   |            |  |  |          | 4,333  |  |       |   |    |  |  |   | 72,998    | 
|Nonresidential real estate loans                                      |  |      | 225,528 |  |            |   | 24,997 |                |  |   | 18,756      |  |  |          | 12,706 |  |       |   |    |  |  |   | 281,987   | 
|Construction loans                                                    |  |      | 4,576   |  |            |   |       |                |  |   | 1,252       |  |  |          | 3,274  |  |       |   |    |  |  |   | 9,102     | 
|Land loans                                                            |  |      | 3,057   |  |            |   | 3,196  |                |  |   | 181         |  |  |          | 2,613  |  |       |   | 249 |  |  |   | 9,296     | 
|Commercial loans:                                                     |  |      |         |  |            |   |        |                |  |   |             |  |  |          |        |  |       |   |    |  |  |   |           | 
|Secured                                                               |  |      | 17,504  |  |            |   | 2,186  |                |  |   | 174         |  |  |          | 3,401  |  |       |   | 98  |  |  |   | 23,363    | 
|Unsecured                                                             |  |      | 6,647   |  |            |   | 595    |                |  |   | 16          |  |  |          | 99     |  |       |   | 58  |  |  |   | 7,415     | 
|Municipal loans                                                       |  |      | 4,540   |  |            |   |       |                |  |   |            |  |  |          |       |  |       |   |    |  |  |   | 4,540     | 
|Warehouse lines                                                       |  |      | 12,274  |  |            |   |       |                |  |   |            |  |  |          |       |  |       |   |    |  |  |   | 12,274    | 
|Health care                                                           |  |      | 7,851   |  |            |   | 71     |                |  |   | 149         |  |  |          |       |  |       |   |    |  |  |   | 8,071     | 
|Other                                                                 |  |      | 8,629   |  |            |   | 290    |                |  |   |            |  |  |          | 97     |  |       |   |    |  |  |   | 9,016     | 
|Commercial leases:                                                    |  |      |         |  |            |   |        |                |  |   |             |  |  |          |        |  |       |   |    |  |  |   |           | 
|Investment rated commercial leases                                    |  |      | 87,119  |  |            |   |       |                |  |   |            |  |  |          |       |  |       |   |    |  |  |   | 87,119    | 
|Below investment grade                                                |  |      | 3,148   |  |            |   | 542    |                |  |   |            |  |  |          |       |  |       |   |    |  |  |   | 3,690     | 
|Non-rated                                                             |  |      | 49,959  |  |            |   | 569    |                |  |   |            |  |  |          |       |  |       |   | 72  |  |  |   | 50,600    | 
|Lease pools                                                           |  |      | 9,698   |  |            |   |       |                |  |   |            |  |  |          |       |  |       |   |    |  |  |   | 9,698     | 
|Consumer loans                                                        |  |      | 2,182   |  |            |   |       |                |  |   |            |  |  |          |       |  |       |   |    |  |  |   | 2,182     | 
|                                                                      |  |      |         |  |            |   |        |                |  |   |             |  |  |          |        |  |       |   |     |  |  |   |           | 
|                                                                      |  |      |         |  |            |  
|Total                                                                 |  | $    | 946,863 |  |            | $ | 52,555 |                |  | $ | 25,946      |  |  | $        | 45,728 |  |       | $ | 477 |  |  | $ | 1,071,569 | 
|                                                                      |  |      |         |  |            |   |        |                |  |   |             |  |  |          |        |  |       |   |     |  |  |   |           | 





90



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 5  SECONDARY MORTGAGE MARKET ACTIVITIES

First mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal
balances of these loans were $220.9 million, $274.2 million, and $303.9 million at December 31, 2010, 2009, and 2008, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were $6.9 million, $6.4
million, and $6.3 million at December 31, 2010, 2009, and 2008, respectively.

Capitalized mortgage servicing rights are included in
other assets in the accompanying consolidated statements of financial condition. Activity for capitalized mortgage servicing rights and the related valuation allowance was as follows.



|                                            |  |      |       |   |      |   |       |  
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                            |  | 2010 |       |   | 2009 |  
|                                            |  |     
|Servicing rights                            |  |      |       |   |      |   |       |  
|Beginning of year                           |  | $    | 1,780 |   |      | $ | 1,940 |  
|Additions                                   |  |      | 118   |   |      |   | 322   |  
|Amortized to expense                        |  |      | (549  | ) |      |   | (482  | )
|                                            |  |      |       |   |      |   |       |  
|                                            |  |     
|End of year                                 |  | $    | 1,349 |   |      | $ | 1,780 |  
|                                            |  |      |       |   |      |   |       |  
|Valuation allowance                         |  |      |       |   |      |   |       |  
|Beginning of year                           |  | $    | 74    |   |      | $ | 110   |  
|Additions expensed                          |  |      | 24    |   |      |   | 153   |  
|Reductions credited to expense              |  |      | (98   | ) |      |   | (189  | )
|                                            |  |      |       |   |      |   |       |  
|                                            |  |     
|End of year                                 |  | $    |      |   |      | $ | 74    |  
|                                            |  |      |       |   |      |   |       |  
|                                            |  |     
|Carrying value of mortgage servicing rights |  | $    | 1,349 |   |      | $ | 1,706 |  
|                                            |  |      |       |   |      |   |       |  
|                                            |  |     
|Fair value of mortgage servicing rights     |  | $    | 1,612 |   |      | $ | 1,862 |  
|                                            |  |      |       |   |      |   |       |  





91



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 5  SECONDARY MORTGAGE MARKET ACTIVITIES (continued)



The estimated fair value of mortgage servicing rights is the present value of the expected future cash
flows over the projected life of the loan. Assumptions used in the present value calculation are based on actual performance of the underlying servicing along with general market consensus. The expected cash flow is the net amount of all mortgage
servicing income and expense items. The expected cash flows are discounted at an interest rate appropriate for the associated risk given the current market conditions. Significant assumptions are as follows:



|                                |  |      |       |   |      |   |       |  
|------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                |  | 2010 |       |   | 2009 |  
|Prepayment speed                |  |      | 15.96 | % |      |   | 16.65 | %
|Discount rate                   |  |      | 12.00 | % |      |   | 12.00 | %
|Average servicing cost per loan |  | $    | 61.00 |   |      | $ | 58.00 |  
|Escrow float rate               |  |      | 0.80  | % |      |   | 0.60  | %

Key economic assumptions used in measuring
the fair value of the Companys mortgage servicing rights as of December 31, 2010 and the effect on the fair value of our mortgage servicing rights from adverse changes in those assumptions, are as follows:



|                                               |  |   |       |  
|---------------------------------------------- |  | - | ----- | -
|Fair value of mortgage servicing rights        |  | $ | 1,612 |  
|Weighted average annual prepayment speed       |  |   | 15.96 | %
|Decrease in fair value from 10% adverse change |  |   | (49   | )
|Decrease in fair value from 20% adverse change |  |   | (93   | )
|Weighted-average annual discount rate          |  |   | 12.00 | %
|Decrease in fair value from 10% adverse change |  |   | (59   | )
|Decrease in fair value from 20% adverse change |  |   | (114  | )

These sensitivities are hypothetical and
should be used with caution. As the above table indicates, changes in fair value based on variations in individual assumptions generally cannot be used to predict changes in fair value based upon further variations of the same assumptions. Also, the
effect of a variation in a particular assumption on the fair value of the retained interest is calculated in the above table independently, without changing any other assumption. In reality, changes in one factor may result in changes in another
factor, which might magnify or counteract the sensitivities.

The weighted average amortization period is 48 months. The estimated
amortization expense for each of the next five years is as follows:



|     |  |   |     | 
|---- |  | - | --- | 
|2011 |  | $ | 265 | 
|2012 |  |   | 214 | 
|2013 |  |   | 173 | 
|2014 |  |   | 141 | 
|2015 |  |   | 116 | 





92



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 6  PREMISES AND EQUIPMENT

Premises and equipment are as follows:



|                           |  |      |         |   |      |   |         |  
|-------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                           |  | 2010 |         |   | 2009 |  
|Land and land improvements |  | $    | 11,658  |   |      | $ | 11,658  |  
|Buildings and improvements |  |      | 31,127  |   |      |   | 30,825  |  
|Furniture and equipment    |  |      | 9,530   |   |      |   | 9,426   |  
|Computer equipment         |  |      | 7,396   |   |      |   | 7,657   |  
|                           |  |      |         |   |      |   |         |  
|                           |  |     
|                           |  |      | 59,711  |   |      |   | 59,566  |  
|Accumulated depreciation   |  |      | (27,216 | ) |      |   | (24,952 | )
|                           |  |      |         |   |      |   |         |  
|                           |  |     
|                           |  | $    | 32,495  |   |      | $ | 34,614  |  
|                           |  |      |         |   |      |   |         |  

Depreciation of premises and equipment was $3.2 million, $3.0 million and $2.6 million for the years ended December 31,
2010, 2009 and 2008, respectively.

The Company leases certain branch facilities under noncancelable operating lease agreements expiring
through 2032. Rent expense, net of sublease income, for facilities was $556,000, $519,000, and $452,000 in 2010, 2009, and 2008, respectively, excluding taxes, insurance, and maintenance. The projected minimum rental under existing leases, not
including taxes, insurance, and maintenance, as of December 31, 2010 is as follows:



|           |  |   |       | 
|---------- |  | - | ----- | 
|2011       |  | $ | 560   | 
|2012       |  |   | 551   | 
|2013       |  |   | 533   | 
|2014       |  |   | 497   | 
|2015       |  |   | 463   | 
|Thereafter |  |   | 6,576 | 
|           |  |   |       | 
|           | 
|Total      |  | $ | 9,180 | 
|           |  |   |       | 

The Company has subleased some of its branch facilities and currently is entitled to receive income as follows:



|      |  |   |     | 
|----- |  | - | --- | 
|2011  |  | $ | 43  | 
|2012  |  |   | 40  | 
|2013  |  |   | 38  | 
|2014  |  |   | 18  | 
|2015  |  |   |    | 
|      |  |   |     | 
|      | 
|Total |  | $ | 139 | 
|      |  |   |     | 





93



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 7  CORE DEPOSIT INTANGIBLE

Core deposit intangible assets were as follows:



|                                                       |  |                     |        |  |                         |   |        |                     |  |   |                         |  |  |   |        | 
|------------------------------------------------------ |  | ------------------- | ------ |  | ----------------------- | - | ------ | ------------------- |  | - | ----------------------- |  |  | - | ------ | 
|                                                       |  | 2010                |        |  | 2009                    |  
|                                                       |  | GrossCarryingAmount |        |  | AccumulatedAmortization |   |        | GrossCarryingAmount |  |   | AccumulatedAmortization | 
|                                                       |  |                     |        | 
|Amortized intangible assets - core deposit intangibles |  | $                   | 18,612 |  |                         | $ | 15,912 |                     |  | $ | 18,612                  |  |  | $ | 14,317 | 
|                                                       |  |                     |        |  |                         |   |        |                     |  |   |                         |  |  |   |        | 

Aggregate amortization expense was $1.6 million, $1.7 million and $1.8 million for 2010, 2009 and 2008, respectively.

Estimated amortization expense for each of the next five years is as follows:



|     |  |   |       | 
|---- |  | - | ----- | 
|2011 |  | $ | 1,404 | 
|2012 |  |   | 252   | 
|2013 |  |   | 225   | 
|2014 |  |   | 198   | 
|2015 |  |   | 170   | 

NOTE 8  DEPOSITS

Year-end deposits are as follows:



|                                     |  |      |           |  |      |   |           | 
|------------------------------------ |  | ---- | --------- |  | ---- | - | --------- | 
|                                     |  | 2010 |           |  | 2009 |  
|                                     |  |     
|Non-interest-bearing demand deposits |  | $    | 112,549   |  |      | $ | 108,308   | 
|Savings deposits                     |  |      | 98,894    |  |      |   | 96,107    | 
|Money market accounts                |  |      | 341,048   |  |      |   | 322,126   | 
|Interest-bearing NOW accounts        |  |      | 302,812   |  |      |   | 303,219   | 
|Certificates of deposit              |  |      | 380,074   |  |      |   | 403,635   | 
|                                     |  |      |           |  |      |   |           | 
|                                     |  |     
|                                     |  | $    | 1,235,377 |  |      | $ | 1,233,395 | 
|                                     |  |      |           |  |      |   |           | 

Certificates of deposit of $100,000 or more were $137.0 million and $141.1 million at year-end 2010 and 2009, respectively.

Scheduled maturities of certificates of deposit for the next five years are as follows:



|     |  |   |         | 
|---- |  | - | ------- | 
|2011 |  | $ | 271,243 | 
|2012 |  |   | 85,450  | 
|2013 |  |   | 9,427   | 
|2014 |  |   | 7,002   | 
|2015 |  |   | 6,952   | 





94



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 8  DEPOSITS (continued)



Interest expense on deposit accounts is summarized as follows for the years indicated:



|                              |  |      |        |  |      |   |        |      |  |   |        | 
|----------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                              |  | 2010 |        |  | 2009 |   |        | 2008 | 
|Savings deposits              |  | $    | 421    |  |      | $ | 495    |      |  | $ | 715    | 
|Money market accounts         |  |      | 3,252  |  |      |   | 4,503  |      |  |   | 5,397  | 
|Interest-bearing NOW accounts |  |      | 1,441  |  |      |   | 2,178  |      |  |   | 4,844  | 
|Certificates of deposit       |  |      | 7,219  |  |      |   | 11,325 |      |  |   | 11,077 | 
|                              |  |      |        |  |      |   |        |      |  |   |        | 
|                              |  |      |       
|                              |  | $    | 12,333 |  |      | $ | 18,501 |      |  | $ | 22,033 | 
|                              |  |      |        |  |      |   |        |      |  |   |        | 

NOTE 9  BORROWINGS

Borrowed funds are summarized as follows:



|                                               |  |                                |      |   |                                |  |      |        |  |  |                                |   |  |        |        |  |  |  |      |   |  |   |        | 
|---------------------------------------------- |  | ------------------------------ | ---- | - | ------------------------------ |  | ---- | ------ |  |  | ------------------------------ | - |  | ------ | ------ |  |  |  | ---- | - |  | - | ------ | 
|                                               |  | December 31, 2010              |      |   | December 31, 2009              | 
|                                               |  | Contractual InterestRate Range |      |   | WeightedAverageContractualRate |  |      | Amount |  |  | WeightedAverageContractualRate |   |  | Amount |       
|Fixed-rate advance from FHLBC due:             |  |                                |      |   |                                |  |      |        |  |  |                                |   |  |        |        |  |  |  |      |   |  |   |        | 
|Within 1 year                                  |  |                                | 2.14 | % |                                |  | 3.76 | %      |  |  | 2.81                           | % |  | $      | 13,000 |  |  |  | 2.79 | % |  | $ | 27,550 | 
|1 to 2 years                                   |  |                                |     |   |                                |  |     |        |  |  |                               |   |  |        |       |  |  |  | 2.81 |   |  |   | 13,000 | 
|2 to 3 years                                   |  |                                | 2.99 |   |                                |  | 2.99 |        |  |  | 2.99                           |   |  |        | 3,000  |  |  |  |     |   |  |   |       | 
|4 to 5 years                                   |  |                                |     |   |                                |  |     |        |  |  |                               |   |  |        |       |  |  |  | 2.99 |   |  |   | 3,000  | 
|                                               |  |                                |      |   |                                |  |      |        |  |  |                                |   |  |        |        |  |  |  |      |   |  |   |        | 
|Total FHLBC funds                              |  |                                | 2.14 |   |                                |  | 3.76 |        |  |  | 2.84                           |   |  |        | 16,000 |  |  |  | 2.81 |   |  |   | 43,550 | 
|Securities sold under agreements to repurchase |  |                                | 0.25 |   |                                |  | 0.25 |        |  |  | 0.25                           |   |  |        | 7,749  |  |  |  | 0.25 |   |  |   | 7,234  | 
|                                               |  |                                |      |   |                                |  |      |        |  |  |                                |   |  |        |        |  |  |  |      |   |  |   |        | 
|                                               |  |                                |      |   |                                | 
|Total borrowings                               |  |                                | 0.25 | % |                                |  | 3.76 | %      |  |  | 2.00                           | % |  | $      | 23,749 |  |  |  | 2.44 | % |  | $ | 50,784 | 
|                                               |  |                                |      |   |                                |  |      |        |  |  |                                |   |  |        |        |  |  |  |      |   |  |   |        | 

On January 31, 2011 a $6.0 million advance with a rate of 2.14% came due and the Company utilized existing liquidity to
repay the advance. In December 2008, the Bank elected to pursue certain balance sheet restructuring strategies as a result of the historically low interest rate environment. The restructuring consisted of retiring a $25.0 million of FHLBC term
advance and replacing it with a new FHLBC advance with an adjustable interest rate and a maturity of approximately one month. The Company incurred a net pre-tax prepayment penalty and recognized an immediate loss of $2.0 million on the early
extinguishment of borrowings, in accordance with Emerging Issues Task Force 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. Certain of the Companys existing borrowings would be subject to prepayment
penalties should they be repaid prior to maturity. There were no prepayment penalties recorded in 2010 and 2009.

The Company maintains a
collateral pledge agreement covering secured advances whereby the Company has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, specifically identified whole first mortgages on improved residential property not
more than 90-days delinquent to secure advances from the FHLBC. All of the Banks FHLBC common stock is pledged as additional collateral for these advances. At December 31, 2010, $246.2 million and $140.4 million of first mortgage and
multi-family mortgage loans, respectively, collateralized the advances. At December 31, 2010, we had the ability to borrow an additional $240.5 million under our credit facilities with the FHLBC. The Company also had available pre-approved
overnight federal funds borrowing and repurchase agreement lines. At December 31, 2010 and 2009, there was no outstanding balance on these lines.





95



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 10  INCOME TAXES

The income tax benefit is as follows:



|                         |  |      |        |   |      |   |        |      |  |   |         |  
|------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                         |  | 2010 |        |   | 2009 |   |        | 2008 | 
|                         |  |      |       
|Current                  |  | $    | (5     | ) |      | $ | (8,867 | )    |  | $ | 2,348   |  
|Deferred                 |  |      | (2,742 | ) |      |   | 8,854  |      |  |   | (14,396 | )
|                         |  |      |        |   |      |   |        |      |  |   |         |  
|                         |  |      |       
|Total income tax benefit |  | $    | (2,747 | ) |      | $ | (13    | )    |  | $ | (12,048 | )
|                         |  |      |        |   |      |   |        |      |  |   |         |  

A reconciliation of the provision for income taxes computed at the statutory federal corporate tax rate of 34% for 2010,
2009 and 2008 to the income tax expense in the consolidated statements of operations follows:



|                                                     |  |      |        |   |      |   |      |      |  |   |         |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ------- | -
|                                                     |  | 2010 |        |   | 2009 |   |      | 2008 | 
|                                                     |  |      |       
|Provision computed at the statutory federal tax rate |  | $    | (2,398 | ) |      | $ | (256 | )    |  | $ | (10,689 | )
|                                                     |  |      |       
|State taxes and other, net                           |  |      | (491   | ) |      |   | (47  | )    |  |   | (1,360  | )
|Bank owned life insurance                            |  |      | (146   | ) |      |   | 7    |      |  |   | (199    | )
|ESOP/Share based compensation                        |  |      | 288    |   |      |   | 309  |      |  |   | 442     |  
|Dividends received deduction                         |  |      |       |   |      |   |     |      |  |   | (242    | )
|                                                     |  |      |        |   |      |   |      |      |  |   |         |  
|                                                     |  |      |       
|                                                     |  | $    | (2,747 | ) |      | $ | (13  | )    |  | $ | (12,048 | )
|                                                     |  |      |        |   |      |   |      |      |  |   |         |  
|                                                     |  |      |       
|Effective income tax rate                            |  |      | 38.94  | % |      |   | 1.73 | %    |  |   | 38.33   | %

Retained earnings at December 31,
2010 and 2009 include $14.9 million for which no deferred federal income tax liability has been recorded. This amount represents an allocation of income to bad debt deductions for tax purposes alone.

The net deferred tax asset is as follows:



|                                                                                      |  |      |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                      |  | 2010 |        |   | 2009 |  
|                                                                                      |  |     
|Gross Deferred tax assets:                                                            |  |      |        |   |      |   |        |  
|Allowance for loan losses                                                             |  | $    | 8,396  |   |      | $ | 7,049  |  
|Alternative minimum tax, general business credit and net operating loss carryforwards |  |      | 6,934  |   |      |   | 6,869  |  
|Non-qualified stock options                                                           |  |      | 892    |   |      |   | 772    |  
|OREO write-downs                                                                      |  |      | 1,017  |   |      |   | 319    |  
|Other                                                                                 |  |      | 395    |   |      |   | 521    |  
|                                                                                      |  |      |        |   |      |   |        |  
|                                                                                      |  |      | 17,634 |   |      |   | 15,530 |  
|Gross Deferred tax liabilities:                                                       |  |      |        |   |      |   |        |  
|Net deferred loan origination costs                                                   |  |      | (1,309 | ) |      |   | (1,434 | )
|FHLBC stock dividends                                                                 |  |      | (1,785 | ) |      |   | (1,785 | )
|Purchase accounting adjustments                                                       |  |      | (902   | ) |      |   | (1,393 | )
|Accumulated depreciation                                                              |  |      | (767   | ) |      |   | (994   | )
|Mortgage servicing rights                                                             |  |      | (511   | ) |      |   | (646   | )
|Goodwill                                                                              |  |      | (1,355 | ) |      |   | (1,069 | )
|Other                                                                                 |  |      | (564   | ) |      |   | (510   | )
|Unrealized gain on securities                                                         |  |      | (1,108 | ) |      |   | (1,138 | )
|                                                                                      |  |      |        |   |      |   |        |  
|                                                                                      |  |      | (8,301 | ) |      |   | (8,969 | )
|                                                                                      |  |      |        |   |      |   |        |  
|                                                                                      |  |     
|Net deferred tax asset                                                                |  | $    | 9,333  |   |      | $ | 6,561  |  
|                                                                                      |  |      |        |   |      |   |        |  





96



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 10  INCOME TAXES (continued)



At December 31, 2010, the Company had a federal net operating loss carryforward of $5.9 million,
which will begin to expire in 2029. At December 31, 2010, the Company had a state net operating loss carryforward for the State of Illinois of $32.0 million, which will begin to expire in 2025. Based upon projections of future taxable income,
management believes that it is more likely than not that the deferred tax assets reflected in the above table will be fully realized and thus a valuation allowance is not needed.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:



|                                                             |  |      |     |   |      |   |     |  
|------------------------------------------------------------ |  | ---- | --- | - | ---- | - | --- | -
|                                                             |  | 2010 |     |   | 2009 |  
|                                                             |  |     
|Beginning of year                                            |  | $    | 165 |   |      | $ | 173 |  
|Additions based on tax positions related to the current year |  |      | 15  |   |      |   | 8   |  
|Additions for tax positions of prior years                   |  |      | 34  |   |      |   | 13  |  
|Reductions due to the statute of limitations                 |  |      | (38 | ) |      |   | (29 | )
|                                                             |  |      |     |   |      |   |     |  
|                                                             |  |     
|End of year                                                  |  | $    | 176 |   |      | $ | 165 |  
|                                                             |  |      |     |   |      |   |     |  

The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next
twelve months.

The total amount of interest and penalties recorded in the statement of operations for the year ended December 31, 2010,
2009 and 2008 was $3,000, $2,000, and $5,000, respectively. The amount accrued for interest and penalties at December 31, 2010 and 2009 was $30,000 and $27,000, respectively.

The Company and its subsidiary are subject to U.S. federal income tax as well as income tax of the State of Illinois. The Company is no longer subject to examination by these taxing authorities for years
before 2007. Beginning in 2010 and 2009, the Company and the Bank became subject to income taxes in the States of Colorado and New Jersey, respectively, due to the physical presence of regional National Commercial Leasing bankers in these
jurisdictions.

NOTE 11 REGULATORY MATTERS

The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatoryand possibly
additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

The prompt
corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall
financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions, asset growth and expansion are limited, and the submission of a capital restoration is
required.





97



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 11 REGULATORY MATTERS

At year-end, actual capital levels and minimum required levels for the Bank were:



|                                                 |  |        |         |  |                                            |  |       |                                                                             |  |   |        |  |  |        |      |   |       |   |         |  |  |  |       |  
|------------------------------------------------ |  | ------ | ------- |  | ------------------------------------------ |  | ----- | --------------------------------------------------------------------------- |  | - | ------ |  |  | ------ | ---- | - | ----- | - | ------- |  |  |  | ----- | -
|                                                 |  | Actual |         |  | MinimumRequired forCapitalAdequacyPurposes |  |       | MinimumRequired to BeWell CapitalizedUnder
PromptCorrectiveActionProvisions | 
|                                                 |  | Amount |         |  | Ratio                                      |  |       | Amount                                                                      |  |   | Ratio  |  |  | Amount |      |   | Ratio |  
|December 31, 2010                                |  |        |         |  |                                            |  |       |                                                                             |  |   |        |  |  |        |      |   |       |   |         |  |  |  |       |  
|Total capital (to risk- weighted assets)         |  | $      | 199,362 |  |                                            |  | 18.38 | %                                                                           |  | $ | 86,764 |  |  |        | 8.00 | % |       | $ | 108,456 |  |  |  | 10.00 | %
|Tier 1 (core) capital (to risk-weighted assets)  |  |        | 186,594 |  |                                            |  | 17.20 |                                                                             |  |   | 43,382 |  |  |        | 4.00 |   |       |   | 65,073  |  |  |  | 6.00  |  
|Tier 1 (core) capital (to adjusted total assets) |  |        | 186,594 |  |                                            |  | 12.48 |                                                                             |  |   | 59,825 |  |  |        | 4.00 |   |       |   | 74,781  |  |  |  | 5.00  |  
|                                                 |  |        |         |  |                                            | 
|December 31, 2009                                |  |        |         |  |                                            |  |       |                                                                             |  |   |        |  |  |        |      |   |       |   |         |  |  |  |       |  
|Total capital (to risk- weighted assets)         |  | $      | 204,661 |  |                                            |  | 16.40 | %                                                                           |  | $ | 99,857 |  |  |        | 8.00 | % |       | $ | 124,821 |  |  |  | 10.00 | %
|Tier 1 (core) capital (to risk-weighted assets)  |  |        | 191,099 |  |                                            |  | 15.31 |                                                                             |  |   | 49,929 |  |  |        | 4.00 |   |       |   | 74,893  |  |  |  | 6.00  |  
|Tier 1 (core) capital (to adjusted total assets) |  |        | 191,099 |  |                                            |  | 12.44 |                                                                             |  |   | 61,446 |  |  |        | 4.00 |   |       |   | 76,808  |  |  |  | 5.00  |  

A reconciliation of the Banks
equity under GAAP to regulatory capital is as follows:



|                                                   |  |      |         |   |      |   |         |  
|-------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                   |  | 2010 |         |   | 2009 |  
|GAAP equity                                        |  | $    | 219,269 |   |      | $ | 220,135 |  
|Disallowed goodwill and other intangible assets    |  |      | (23,485 | ) |      |   | (24,878 | )
|Disallowed servicing assets and deferred tax asset |  |      | (7,390  | ) |      |   | (2,308  | )
|Accumulated loss (gain) on securities              |  |      | (1,800  | ) |      |   | (1,850  | )
|                                                   |  |      |         |   |      |   |         |  
|Tier 1 capital                                     |  |      | 186,594 |   |      |   | 191,099 |  
|General regulatory loan loss reserves              |  |      | 12,768  |   |      |   | 13,562  |  
|                                                   |  |      |         |   |      |   |         |  
|Total regulatory capital                           |  | $    | 199,362 |   |      | $ | 204,661 |  
|                                                   |  |      |         |   |      |   |         |  

As of December 31, 2010 the most recent notification from the Office of Thrift Supervision categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutions category.





98



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 11 REGULATORY MATTERS (continued)



Federal regulations require the Bank to comply with a Qualified Thrift Lender (QTL) test,
which generally requires that 65% of assets be maintained in housing-related finance and other specified assets. If the QTL test is not met, limits are placed on growth, branching, new investment, FHLBC advances, and dividends or the institution
must convert to a commercial bank charter. Management considers the QTL test to have been met as of December 31, 2010.

The Bank is
subject to restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval. At December 31, 2010, the Bank does not have pre-approved approval for future dividends.

NOTE 12  EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan.Employees are eligible to participate in the ESOP after attainment of age 21 and completion of one year of service.
In connection with the conversion and reorganization, the ESOP borrowed $19.6 million from the Company, and used the proceeds of the loan to purchase 1,957,300 shares of common stock issued in the subscription offering at $10.00 per share. The loan
is secured by the shares and will be repaid by the ESOP with funds from the Banks discretionary contributions to the ESOP and earnings on ESOP assets. The Bank has committed to make discretionary contributions to the ESOP sufficient to service
the loan over a period not to exceed 20 years. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Participants receive their earned shares at the end of employment.

Contributions to the ESOP during 2010 and 2009 were $1.5 million and $1.9 million, respectively, including dividends and interest received on
unallocated shares of $425,000 and $453,000 in 2010 and 2009, respectively. Expense related to the ESOP, net of dividends and interest received on unallocated ESOP shares, was $529,000, $516,000 and $512,000 for the years ended December 31,
2010, 2009 and 2008, respectively.

Shares held by the ESOP were as follows:



|                              |  |      |           |   |      |   |           |  
|----------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                              |  | 2010 |           |   | 2009 |  
|                              |  |     
|Allocated to participants     |  |      | 517,671   |   |      |   | 432,420   |  
|Distributed to participants   |  |      | (15,430   | ) |      |   | (12,614   | )
|Unearned                      |  |      | 1,419,042 |   |      |   | 1,516,907 |  
|                              |  |      |           |   |      |   |           |  
|Total ESOP shares             |  |      | 1,921,283 |   |      |   | 1,936,713 |  
|                              |  |      |           |   |      |   |           |  
|Fair value of unearned shares |  | $    | 13,836    |   |      | $ | 15,017    |  
|                              |  |      |           |   |      |   |           |  

Profit Sharing Plan/401(k) Plan.The Company has a defined contribution plan (profit sharing plan)
covering all of its eligible employees. Employees are eligible to participate in the profit sharing plan after attainment of age 21 and completion of one year of service. The Company provides a match of $0.50 on each $1.00 of contribution up to 6%
of eligible compensation beginning April 1, 2007. The Company may also contribute an additional amount annually at the discretion of the Board of Directors. Contributions totaling $389,000, $376,000, and $442,000 were made for the years ended
2010, 2009, and 2008, respectively.

NOTE 13  EQUITY INCENTIVE PLANS

On June 27, 2006, the Companys stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan, which authorized the Human
Resources Committee of the Board of Directors of the Company to grant a variety of cash- and equity-based incentive awards, including stock options, stock appreciation rights, restricted stock, performance shares and other incentive awards, to
employees and directors aggregating up to 3,425,275 shares of the Companys common stock.





99



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 13  EQUITY INCENTIVE PLANS (continued)



The Human Resources Committee may grant stock options to purchase shares of the Companys common
stock to certain employees and directors of the Company. The exercise price for the stock options is the fair market value of the common stock on the dates of the grants. The stock options generally vest annually over three to five year periods;
vesting is subject to acceleration in certain circumstances. The stock options will expire if not exercised within five years from the date of grant.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. The risk-free interest
rate was determined using the yield available on the option grant date for a zero-coupon U.S. Treasury security with a term equivalent to the expected life of the option. The expected life for options granted represents the period the option is
expected to be outstanding and was determined by applying the simplified method as allowed by SAB 107. The expected volatility for options issued in 2009 was determined using the Companys historical data. Estimated forfeitures were assumed to
be zero due to the lack of historical experience for the Company. There were no options granted in 2010.

The Company recognized $344,000,
$406,000 and $594,000 of stock-based compensation expenses relating to the granting of stock options for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010, the Company had $12,000 of total unrecognized
compensation cost related to unvested stock options that will vest in 2011.



|                                               |  |                 |           |   |                               |   |        |                                                   |  |  |                             |  |  |   |   | 
|---------------------------------------------- |  | --------------- | --------- | - | ----------------------------- | - | ------ | ------------------------------------------------- |  |  | --------------------------- |  |  | - | - | 
|Stock Options                                  |  | Number ofShares |           |   | WeightedAverageExercise Price |   |        | WeightedAverageRemainingContractualTerm(in years) |  |  | AggregateIntrinsicValue
(1) | 
|                                               |  |                 |           |  
|Stock options outstanding at December 31, 2008 |  |                 | 2,327,603 |   |                               | $ | 16.51  |                                                   |  |  | 2.8                         |  |  | $ |  | 
|                                               |  |                 |           |  
|Stock options granted                          |  |                 |          |   |                               |   |       |                                                   |  |  |                             |  |  |   |   | 
|Stock options exercised                        |  |                 |          |   |                               |   |       |                                                   |  |  |                             |  |  |   |   | 
|Stock options expired                          |  |                 | (2,000    | ) |                               |   | (16.00 | )                                                 |  |  |                             |  |  |   |   | 
|Stock options forfeited                        |  |                 | (3,000    | ) |                               |   | (16.00 | )                                                 |  |  |                             |  |  |   |   | 
|                                               |  |                 |           |   |                               |   |        |                                                   |  |  |                             |  |  |   |   | 
|Stock options outstanding at December 31, 2009 |  |                 | 2,322,603 |   |                               | $ | 16.51  |                                                   |  |  | 1.9                         |  |  | $ |  | 
|                                               |  |                 |           |  
|Stock options granted                          |  |                 |          |   |                               |   |       |                                                   |  |  |                             |  |  |   |   | 
|Stock options exercised                        |  |                 |          |   |                               |   |       |                                                   |  |  |                             |  |  |   |   | 
|Stock options expired                          |  |                 | (24,240   | ) |                               |   | (15.98 | )                                                 |  |  |                             |  |  |   |   | 
|Stock options forfeited                        |  |                 | (10,810   | ) |                               |   | (15.97 | )                                                 |  |  |                             |  |  |   |   | 
|                                               |  |                 |           |   |                               |   |        |                                                   |  |  |                             |  |  |   |   | 
|Stock options outstanding at December 31, 2010 |  |                 | 2,287,553 |   |                               | $ | 16.52  |                                                   |  |  | 0.8                         |  |  | $ |  | 
|                                               |  |                 |           |   |                               |   |        |                                                   |  |  |                             |  |  |   |   | 
|                                               |  |                 |           |  
|Stock options exercisable at December 31, 2010 |  |                 | 2,249,853 |   |                               | $ | 16.53  |                                                   |  |  | 0.8                         |  |  | $ |  | 
|                                               |  |                 |           |  
|Fully vested and expected to vest              |  |                 | 2,287,553 |   |                               | $ | 16.52  |                                                   |  |  | 0.8                         |  |  | $ |  | 



|(1) | Stock option aggregate intrinsic value represents the number of shares subject to options multiplied by the difference (if positive) in the closing market price of the
common stock underlying the options on the date shown and the weighted average exercise price.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





100



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 13  EQUITY INCENTIVE PLANS (continued)



The Human Resources Committee of the Board of Directors may grant shares of restricted stock to certain
employees and directors of the Company. The awards generally vest annually over varying periods from three to five years and vesting is subject to acceleration in certain circumstances. The cost of such awards will be accrued ratably as compensation
expense over such respective periods based on expected vesting dates. The Company recognized $1.8 million, $2.2 million and $3.5 million of expenses relating to the grant of shares of restricted stock during the years ended December 31, 2010,
2009 and 2008, respectively. As of December 31, 2010, the total unrecognized compensation cost related to unvested shares of restricted stock was $83,000. The cost is expected to be recognized over an 18 month period.



|                                        |  |                     |          |   |                                        |   |        |                                       |  |  |                             |  |  |   |       | 
|--------------------------------------- |  | ------------------- | -------- | - | -------------------------------------- | - | ------ | ------------------------------------- |  |  | --------------------------- |  |  | - | ----- | 
|Restricted Stock                        |  | Number ofShares
(1) |          |   | WeightedAverage FairValue at GrantDate |   |        | WeightedAverageTerm to Vest(in years) |  |  | AggregateIntrinsicValue
(2) | 
|                                        |  |                     |          |  
|Shares outstanding at December 31, 2008 |  |                     | 239,100  |   |                                        | $ | 17.56  |                                       |  |  | 1.5                         |  |  | $ | 2,436 | 
|                                        |  |                     |          |  
|Shares granted                          |  |                     |         |   |                                        |   |       |                                       |  |  |                             |  |  |   |       | 
|Shares vested                           |  |                     | (130,450 | ) |                                        |   | (17.57 | )                                     |  |  |                             |  |  |   |       | 
|Shares forfeited                        |  |                     |         |   |                                        |   |       |                                       |  |  |                             |  |  |   |       | 
|                                        |  |                     |          |   |                                        |   |        |                                       |  |  |                             |  |  |   |       | 
|Shares outstanding at December 31, 2009 |  |                     | 108,650  |   |                                        | $ | 17.56  |                                       |  |  | 1.0                         |  |  | $ | 1,076 | 
|                                        |  |                     |          |  
|Shares granted                          |  |                     | 13,000   |   |                                        |   | 9.54   |                                       |  |  |                             |  |  |   |       | 
|Shares vested                           |  |                     | (112,983 | ) |                                        |   | (17.56 | )                                     |  |  |                             |  |  |   |       | 
|Shares forfeited                        |  |                     |         |   |                                        |   |       |                                       |  |  |                             |  |  |   |       | 
|                                        |  |                     |          |   |                                        |   |        |                                       |  |  |                             |  |  |   |       | 
|Shares outstanding at December 31, 2010 |  |                     | 8,667    |   |                                        | $ | 9.54   |                                       |  |  | 1.5                         |  |  | $ | 85    | 
|                                        |  |                     |          |   |                                        |   |        |                                       |  |  |                             |  |  |   |       | 



|(1) | The end of period balances consist only of unvested shares.
|--- | -----------------------------------------------------------

|(2) | Restricted stock aggregate intrinsic value represents the number of shares of restricted stock multiplied by the market price of the common stock underlying the
outstanding shares on the date shown.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 14 LOAN COMMITMENTS AND OTHER OFF-BALANCE SHEET ACTIVITIES

The Company is party to various financial instruments with off-balance-sheet risk. The Company uses these financial instruments in the normal
course of business to meet the financing needs of customers and to effectively manage exposure to interest rate risk. These financial instruments include commitments to extend credit, standby letters of credit, unused lines of credit, and
commitments to sell loans. When viewed in terms of the maximum exposure, those instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial
condition. Credit risk is the possibility that a counterparty to a financial instrument will be unable to perform its contractual obligations. Interest rate risk is the possibility that, due to changes in economic conditions, the Companys net
interest income will be adversely affected.

The following is a summary of the contractual or notional amount of each significant class of
off-balance-sheet financial instruments outstanding. The Companys exposure to credit loss in the event of nonperformance by the counterparty for commitments to extend credit, standby letters of credit, and unused lines of credit is represented
by the contractual notional amount of these instruments.

The contractual or notional amounts are as follows:



|                                                                        |  |      |         |  |      |   |         | 
|----------------------------------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                                                                        |  | 2010 |         |  | 2009 |  
|Financial instruments wherein contractual amounts represent credit risk |  |      |         |  |      |   |         | 
|Commitments to extend credit                                            |  | $    | 16,712  |  |      | $ | 11,221  | 
|Standby letters of credit                                               |  |      | 1,699   |  |      |   | 2,170   | 
|Unused lines of credit                                                  |  |      | 138,219 |  |      |   | 149,815 | 
|Commitments to sell mortgages                                           |  |      | 3,247   |  |      |   | 1,313   | 





101



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 14  LOAN COMMITMENTS AND OTHER OFF-BALANCE SHEET ACTIVITIES (continued)



Commitments to extend credit are generally made for periods of 60 days or less. The fixed-rate loans
commitment totaled $14.3 million with interest rates ranging from 3.625% to 6.63% and maturities ranging from one to 30 years.

Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the customers. The collateral held varies, but primarily consists of single-family residential real estate.

The Bank, as a member of Visa USA, received 51,404 unrestricted shares of Visa, Inc. Class B common stock in connection with Visa,
Inc.s initial public offering in 2007, and 32,398 additional shares of Class B common stock that were deposited into a litigation escrow that Visa, Inc. established under its retrospective responsibility plan. The retroactive responsibility
plan obligates all former Visa USA members to indemnify Visa USA, in proportion to their equity interests in Visa USA, for certain litigation losses and expenses, including settlement expenses, for the lawsuits covered by the retrospective
responsibility plan. The primary method for discharging the indemnification obligations under the retrospective responsibility plan is a reduction of the ratio at which the Visa, Inc. Class B shares held in the litigation escrow can be converted
into publicly traded Class A common shares of Visa, Inc. Due to the restrictions that the retrospective responsibility plan imposes on the Companys Visa, Inc. Class B shares, the Company has not recorded the Class B shares as an asset.

NOTE 15  FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:



| |  |  | Level 1  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the
measurement date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company used the following methods and significant assumptions to estimate the fair
value of each type of financial instrument:

The fair values of marketable equity securities are generally determined by quoted prices, in
active markets, for each specific security (Level 1 measurement inputs). If Level 1 measurement inputs are not available for a marketable equity security, we determine its fair value based on the quoted price of a similar security traded in an
active market (Level 2 measurement inputs). 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 (Level 2 measurement inputs).

The fair values of loans held-for-sale are generally determined by quoted prices in active markets that are accessible at the measurement date for similar, unrestricted assets (Level 2 measurement
inputs).





102



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 15  FAIR VALUE (continued)



Impaired loans and other real estate owned properties are evaluated and valued at the time the loan is
identified as impaired or placed into other real estate owned, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy.
Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals.
Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

The fair values of mortgage servicing rights are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 measurement inputs).

The following table sets forth the Companys financial assets that were accounted for at fair value and are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement.



|                                                  |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|------------------------------------------------- |  | ------------- | ------- |  | ----------------------------- | - | ------- | -------------------------------------------------------- |  | - | ------------------------------------- |  |  | --------------------------------------- | ------- |  |  | - | - | 
|                                                  |  |               |         |  | Fair Value Measurements Using |  
|                                                  |  | AmortizedCost |         |  | Fair Value                    |   |         | QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) |  |   | SignificantObservableInputs(Level
 2) |  |  | SignificantUnobservableInputs(Level
 3) |        
|December 31, 2010                                 |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|Securities:                                       |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|Certificates of deposit                           |  | $             | 27,766  |  |                               | $ | 27,766  |                                                          |  | $ |                                      |  |  | $                                       | 27,766  |  |  | $ |  | 
|Municipal securities                              |  |               | 675     |  |                               |   | 709     |                                                          |  |   |                                      |  |  |                                         | 709     |  |  |   |  | 
|Mortgage-backed securities  Residential          |  |               | 41,034  |  |                               |   | 42,435  |                                                          |  |   |                                      |  |  |                                         | 42,435  |  |  |   |  | 
|Collateralized mortgage Obligations  residential |  |               | 48,262  |  |                               |   | 49,732  |                                                          |  |   |                                      |  |  |                                         | 49,732  |  |  |   |  | 
|SBA-guaranteed loan participation certificates    |  |               | 103     |  |                               |   | 105     |                                                          |  |   |                                      |  |  |                                         | 105     |  |  |   |  | 
|                                                  |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|                                                  |  | $             | 117,840 |  |                               | $ | 120,747 |                                                          |  | $ |                                      |  |  | $                                       | 120,747 |  |  | $ |  | 
|                                                  |  |               |         |  |                              
|December 31, 2009                                 |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|Securities:                                       |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|Municipal securities                              |  | $             | 1,225   |  |                               | $ | 1,303   |                                                          |  | $ |                                      |  |  | $                                       | 1,303   |  |  | $ |  | 
|Mortgage-backed securities  residential          |  |               | 33,008  |  |                               |   | 34,057  |                                                          |  |   |                                      |  |  |                                         | 34,057  |  |  |   |  | 
|Collateralized mortgage Obligations - residential |  |               | 64,791  |  |                               |   | 66,651  |                                                          |  |   |                                      |  |  |                                         | 66,651  |  |  |   |  | 
|SBA-guaranteed loan participation certificates    |  |               | 114     |  |                               |   | 115     |                                                          |  |   |                                      |  |  |                                         | 115     |  |  |   |  | 
|                                                  |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 
|                                                  |  | $             | 99,138  |  |                               | $ | 102,126 |                                                          |  | $ |                                      |  |  | $                                       | 102,126 |  |  | $ |  | 
|                                                  |  |               |         |  |                               |   |         |                                                          |  |   |                                       |  |  |                                         |         |  |  |   |   | 





103



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 15  FAIR VALUE (continued)



The Companys assets that were measured at fair value on a non-recurring basis are as follows:



|                          |  |           |        |  |                                                             |   |   |                                       |  |   |                                        |  |  |   |        | 
|------------------------- |  | --------- | ------ |  | ----------------------------------------------------------- | - | - | ------------------------------------- |  | - | -------------------------------------- |  |  | - | ------ | 
|                          |  |           |        |  | Fair Value Measurements Using                               |  
|                          |  | FairValue |        |  | Quoted Prices inActive Markets forIdentical Assets(Level
1) |   |   | SignificantObservableInputs(Level
 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|December 31, 2010         |  |           |        |  |                                                             |   |   |                                       |  |   |                                        |  |  |   |        | 
|Impaired loans            |  | $         | 31,057 |  |                                                             | $ |  |                                       |  | $ |                                       |  |  | $ | 31,057 | 
|Other real estate owned   |  |           | 4,224  |  |                                                             |   |  |                                       |  |   |                                       |  |  |   | 4,224  | 
|                          |  |           |        | 
|December 31, 2009         |  |           |        |  |                                                             |   |   |                                       |  |   |                                        |  |  |   |        | 
|Impaired loans            |  | $         | 22,583 |  |                                                             | $ |  |                                       |  | $ |                                       |  |  | $ | 22,583 | 
|Other real estate owned   |  |           | 1,118  |  |                                                             |   |  |                                       |  |   |                                       |  |  |   | 1,118  | 
|Mortgage servicing rights |  |           | 377    |  |                                                             |   |  |                                       |  |   | 377                                    |  |  |   |       | 

Impaired loans, which are measured
for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $43.7 million, with a valuation allowance of $9.4 million at December 31, 2010, compared to a carrying amount of $50.8 million, with
a valuation allowance of $5.1 million at December 31, 2009, resulting in a provision for loan losses of $4.3 million for the year ended December 31, 2010.

OREO and OREO in process, which is carried at lower of cost or fair value less costs to sell, had a carrying value of $14.6 million at December 31, 2010, which included write downs of $2.4 million
for the year ended December 31, 2010 compared to $4.1 million at December 31, 2009, which included write downs of $687,000 for the year ended December 31, 2009.

Mortgage servicing rights, which are carried at lower of cost or fair value, had a carrying amount of $1.3 million at December 31, 2010, of which $974,000 related to fixed rate loans and $375,000
related to adjustable rate loans. There was a recovery of $74,000 on mortgage servicing rights for the year ended December 31, 2010, compared to $36,000 recovery for the same period in 2009.





104



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 15  FAIR VALUE (continued)



The carrying amount and estimated fair value of financial instruments is as follows:



|                                                   |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|-------------------------------------------------- |  | -------------- | --------- | - | ------------------- | - | --------- | -------------- |  | - | ------------------- | - |  | - | --------- | -
|                                                   |  | 2010           |           |   | 2009                |  
|                                                   |  | CarryingAmount |           |   | EstimatedFair Value |   |           | CarryingAmount |  |   | EstimatedFair Value |  
|Financial assets                                   |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Cash and cash equivalents                          |  | $              | 220,810   |   |                     | $ | 220,810   |                |  | $ | 108,198             |   |  | $ | 108,198   |  
|Securities                                         |  |                | 120,747   |   |                     |   | 120,747   |                |  |   | 102,126             |   |  |   | 102,126   |  
|Loans held-for-sale                                |  |                | 2,716     |   |                     |   | 2,716     |                |  |   |                    |   |  |   |          |  
|Loans receivable, net of allowance for loan losses |  |                | 1,050,766 |   |                     |   | 1,065,404 |                |  |   | 1,218,540           |   |  |   | 1,221,098 |  
|FHLBC stock                                        |  |                | 15,598    |   |                     |   | N/A       |                |  |   | 15,598              |   |  |   | N/A       |  
|Accrued interest receivable                        |  |                | 5,390     |   |                     |   | 5,390     |                |  |   | 6111                |   |  |   | 6,111     |  
|Mortgage servicing rights                          |  |                | 1,349     |   |                     |   | 1,612     |                |  |   | 1,706               |   |  |   | 1,862     |  
|                                                   |  |                |           |  
|Financial liabilities                              |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Non-interest-bearing demand deposits               |  | $              | (112,549  | ) |                     | $ | (112,549  | )              |  | $ | (108,308            | ) |  | $ | (108,308  | )
|Savings deposits                                   |  |                | (98,894   | ) |                     |   | (98,894   | )              |  |   | (96,107             | ) |  |   | (96,107   | )
|NOW and money market accounts                      |  |                | (643,860  | ) |                     |   | (643,860  | )              |  |   | (625,345            | ) |  |   | (625,345  | )
|Certificates of deposit                            |  |                | (380,074  | ) |                     |   | (384,103  | )              |  |   | (403,635            | ) |  |   | (407,693  | )
|Borrowings                                         |  |                | (23,749   | ) |                     |   | (23,995   | )              |  |   | (50,784             | ) |  |   | (51,573   | )
|Accrued interest payable                           |  |                | (146      | ) |                     |   | (146      | )              |  |   | (535                | ) |  |   | (535      | )

For purposes of the above, the following
assumptions were used:

Cash and Cash Equivalents: The estimated fair values for cash and cash equivalents are based on their
carrying value due to the short-term nature of these assets.

Loans: The estimated fair value for loans has been determined by
calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be repriced or repaid. The estimated
fair values of loans held-for-sale are based on quoted market prices.

FHLBC Stock: It is not practicable to determine the fair
value of FHLBC stock due to the restrictions placed on its transferability.

Deposit Liabilities: The estimated fair value for
certificates of deposit has been determined by calculating the present value of future cash flows based on estimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of
non-interest-bearing demand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level that approximates the local market area. Additionally, these deposits
can be withdrawn on demand.

Borrowings: The estimated fair values of advances from the FHLBC and notes payable are based on
current market rates for similar financing. The estimated fair value of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.

Accrued Interest: The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.

Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of unfunded loan commitments,
standby letters of credit, and unused lines of credit. The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.





105



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 15  FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)



While the above estimates are based on managements judgment of the most appropriate factors, as of
the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The
estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments,
such as premises and equipment, are not included in the above disclosures.

NOTE 16 OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related taxes were as follows:



|                                                             |  |      |     |   |      |   |       |      |  |   |         |  
|------------------------------------------------------------ |  | ---- | --- | - | ---- | - | ----- | ---- |  | - | ------- | -
|                                                             |  | 2010 |     |   | 2009 |   |       | 2008 | 
|Unrealized holding gains (losses) on securities, net of tax  |  | $    | (31 | ) |      | $ | 1,666 |      |  | $ | (17,274 | )
|                                                             |  |      |    
|Net loss (gain) on sale of securities recognized, net of tax |  |      | (19 | ) |      |   | 612   |      |  |   | (835    | )
|                                                             |  |      |    
|Loss on impairment of securities, net of tax                 |  |      |    |   |      |   | 248   |      |  |   | 21,643  |  
|                                                             |  |      |     |   |      |   |       |      |  |   |         |  
|                                                             |  | $    | (50 | ) |      | $ | 2,526 |      |  | $ | 3,534   |  
|                                                             |  |      |     |   |      |   |       |      |  |   |         |  

NOTE 17  COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of BankFinancial Corporation as of December 31, 2010 and 2009 and for the three years ended December 31, 2010 follows:

Condensed Statements of Financial Condition



|                                           |  |      |         |  |      |   |         | 
|------------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                                           |  | 2010 |         |  | 2009 |  
|ASSETS                                     |  |      |         |  |      |   |         | 
|Cash in subsidiary                         |  | $    | 16,422  |  |      | $ | 25,755  | 
|Loan receivable from ESOP                  |  |      | 16,367  |  |      |   | 17,172  | 
|Investment in subsidiary                   |  |      | 219,269 |  |      |   | 220,135 | 
|Income tax receivable                      |  |      | 1,749   |  |      |   | 11,729  | 
|Other assets                               |  |      | 368     |  |      |   | 141     | 
|                                           |  |      |         |  |      |   |         | 
|                                           |  |     
|Total assets                               |  | $    | 254,175 |  |      | $ | 274,932 | 
|                                           |  |      |         |  |      |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |      |         |  |      |   |         | 
|Accrued expenses and other liabilities     |  |      | 890     |  |      |   | 11,329  | 
|Total stockholders equity                 |  |      | 253,285 |  |      |   | 263,603 | 
|                                           |  |      |         |  |      |   |         | 
|                                           |  |     
|Total liabilities and stockholders equity |  | $    | 254,175 |  |      | $ | 274,932 | 
|                                           |  |      |         |  |      |   |         | 





106



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 17  COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)



Condensed Statements of Operations



|                                                                    |  |      |        |   |      |   |       |      |  |   |         |  
|------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------- | -
|                                                                    |  | 2010 |        |   | 2009 |   |       | 2008 | 
|Interest income                                                     |  | $    | 730    |   |      | $ | 1,244 |      |  | $ | 1,287   |  
|Dividends from subsidiary                                           |  |      |       |   |      |   |      |      |  |   | 2,000   |  
|Other expense                                                       |  |      | 1,343  |   |      |   | 1,428 |      |  |   | 1,858   |  
|                                                                    |  |      |        |   |      |   |       |      |  |   |         |  
|Income (loss) before income tax and undistributed subsidiary income |  |      | (613   | ) |      |   | (184  | )    |  |   | 1,429   |  
|Income tax benefit                                                  |  |      | (232   | ) |      |   | (69   | )    |  |   | (217    | )
|                                                                    |  |      |        |   |      |   |       |      |  |   |         |  
|Income (loss) before equity in undistributed subsidiary income      |  |      | (381   | ) |      |   | (115  | )    |  |   | 1,646   |  
|Equity in undistributed subsidiary income (excess distributions)    |  |      | (3,926 | ) |      |   | (623  | )    |  |   | (21,035 | )
|                                                                    |  |      |        |   |      |   |       |      |  |   |         |  
|                                                                    |  |      |       
|Net loss                                                            |  | $    | (4,307 | ) |      | $ | (738  | )    |  | $ | (19,389 | )
|                                                                    |  |      |        |   |      |   |       |      |  |   |         |  

Condensed Statements of Cash Flows



|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                 |  | 2010 |         |   | 2009 |   |         | 2008 | 
|                                                                 |  |      |        
|Cash flows from operating activities                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                         |  | $    | (4,307  | ) |      | $ | (738    | )    |  | $ | (19,389 | )
|Adjustments                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Equity in undistributed subsidiary income (excess distributions) |  |      | 3,926   |   |      |   | 623     |      |  |   | 21,035  |  
|Change in other assets                                           |  |      | 9,752   |   |      |   | (10,492 | )    |  |   | 549     |  
|Change in accrued expenses and other liabilities                 |  |      | (10,439 | ) |      |   | 11,281  |      |  |   | (143    | )
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                 |  |      |        
|Net cash from operating activities                               |  |      | (1,068  | ) |      |   | 674     |      |  |   | 2,052   |  
|                                                                 |  |      |        
|Cash flows from investing activities                             |  |      |         |   |      |   |         |      |  |   |         |  
|Principal payments received on ESOP loan                         |  |      | 805     |   |      |   | 606     |      |  |   | 563     |  
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                 |  |      |        
|Net cash from investing activities                               |  |      | 805     |   |      |   | 606     |      |  |   | 563     |  
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                 |  |      |        
|Cash flows from financing activities                             |  |      |         |   |      |   |         |      |  |   |         |  
|Repurchase and retirement of common stock                        |  |      | (3,124  | ) |      |   | (2,491  | )    |  |   | (7,737  | )
|Cash dividends paid on common stock                              |  |      | (5,946  | ) |      |   | (6,010  | )    |  |   | (6,134  | )
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                 |  |      |        
|Net cash from financing activities                               |  |      | (9,070  | ) |      |   | (8,501  | )    |  |   | (13,871 | )
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                 |  |      |        
|Net change in cash and cash equivalents                          |  |      | (9,333  | ) |      |   | (7,221  | )    |  |   | (11,256 | )
|                                                                 |  |      |        
|Beginning cash and cash equivalents                              |  |      | 25,755  |   |      |   | 32,976  |      |  |   | 44,232  |  
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                 |  |      |        
|Ending cash and cash equivalents                                 |  | $    | 16,422  |   |      | $ | 25,755  |      |  | $ | 32,976  |  
|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  





107



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 18  SELECTED QUARTERLY FINANCIAL DATA(Unaudited)



|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|---------------------------------------- |  | ---------------------------- | ------ |  | ------------- | - | ------ | ------------ |  | - | ------------- |  |  | - | ------ | -
|                                         |  | Year Ended December 31, 2010 |       
|                                         |  | FirstQuarter                 |        |  | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter | 
|                                         |  |                              |        | 
|Interest income                          |  | $                            | 17,145 |  |               | $ | 16,451 |              |  | $ | 15,892        |  |  | $ | 15,448 |  
|Interest expense                         |  |                              | 3,929  |  |               |   | 3,677  |              |  |   | 3,138         |  |  |   | 2,442  |  
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Net interest income                      |  |                              | 13,216 |  |               |   | 12,774 |              |  |   | 12,754        |  |  |   | 13,006 |  
|Provision for loan losses                |  |                              | 851    |  |               |   | 2,665  |              |  |   | 419           |  |  |   | 8,148  |  
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Net interest income                      |  |                              | 12,365 |  |               |   | 10,109 |              |  |   | 12,335        |  |  |   | 4,858  |  
|Noninterest income                       |  |                              | 1,455  |  |               |   | 1,812  |              |  |   | 1,958         |  |  |   | 1,903  |  
|Noninterest expense                      |  |                              | 12,678 |  |               |   | 12,370 |              |  |   | 13,190        |  |  |   | 15,611 |  
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Income (loss) before income taxes        |  |                              | 1,142  |  |               |   | (449   | )            |  |   | 1,103         |  |  |   | (8,850 | )
|Income tax expense (benefit)             |  |                              | 426    |  |               |   | (161   | )            |  |   | 366           |  |  |   | (3,378 | )
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Net income (loss)                        |  | $                            | 716    |  |               | $ | (288   | )            |  | $ | 737           |  |  | $ | (5,472 | )
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|                                         |  |                              |        | 
|Basic earnings (loss) per common share   |  | $                            | 0.04   |  |               | $ | (0.01  | )            |  | $ | 0.04          |  |  | $ | (0.28  | )
|Diluted earnings (loss) per common share |  | $                            | 0.04   |  |               | $ | (0.01  | )            |  | $ | 0.04          |  |  | $ | (0.28  | )
|                                         | 
|                                         |  | Year Ended December 31, 2009 |       
|                                         |  | FirstQuarter                 |        |  | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter | 
|                                         |  |                              |        | 
|Interest income                          |  | $                            | 18,906 |  |               | $ | 18,713 |              |  | $ | 18,510        |  |  | $ | 17,980 |  
|Interest expense                         |  |                              | 5,736  |  |               |   | 5,500  |              |  |   | 4,838         |  |  |   | 4,483  |  
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Net interest income                      |  |                              | 13,170 |  |               |   | 13,213 |              |  |   | 13,672        |  |  |   | 13,497 |  
|Provision for loan losses                |  |                              | 1,344  |  |               |   | 2,847  |              |  |   | 427           |  |  |   | 4,193  |  
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Net interest income                      |  |                              | 11,826 |  |               |   | 10,366 |              |  |   | 13,245        |  |  |   | 9,304  |  
|Noninterest income                       |  |                              | 1,642  |  |               |   | 1,802  |              |  |   | 1,660         |  |  |   | 2,135  |  
|Noninterest expense                      |  |                              | 13,042 |  |               |   | 13,047 |              |  |   | 12,581        |  |  |   | 14,061 |  
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Income (loss) before income taxes        |  |                              | 426    |  |               |   | (879   | )            |  |   | 2,324         |  |  |   | (2,622 | )
|Income tax expense (benefit)             |  |                              | 254    |  |               |   | (214   | )            |  |   | 973           |  |  |   | (1,026 | )
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|Net income (loss)                        |  | $                            | 172    |  |               | $ | (665   | )            |  | $ | 1,351         |  |  | $ | (1,596 | )
|                                         |  |                              |        |  |               |   |        |              |  |   |               |  |  |   |        |  
|                                         |  |                              |        | 
|Basic earnings (loss) per common share   |  | $                            | 0.01   |  |               | $ | (0.03  | )            |  | $ | 0.07          |  |  | $ | (0.08  | )
|Diluted earnings (loss) per common share |  | $                            | 0.01   |  |               | $ | (0.03  | )            |  | $ | 0.07          |  |  | $ | (0.08  | )

The Company recorded a net loss of $5.5
million for the fourth quarter of 2010. The Companys fourth quarter 2010 operating results included an $8.1 million provision for loan losses and $4.7 million recorded in nonperforming asset expense and operations of other real estate owned
OREO due to fourth quarter 2010 OREO expense accruals, OREO property write-downs to net realizable value, and final resolution of certain classified loans and assets. 2009 fourth quarter results included $4.2 million of provision for
loan losses, partially offset by a $1.3 million gain recognized on the sale of our merchant processing operations.

On January 27, 2011,
the Company announced that its Board of Directors declared a cash dividend of $0.07 per share of its common stock. The dividend will be payable on March 4, 2011 to stockholders of record on February 9, 2011.





108



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)



NOTE 19  SUBSEQUENT EVENTS(Unaudited)

Pending acquisitions

On
September 13, 2010, the Company signed a definitive Merger Agreement to acquire DG Bancorp, Inc. and its wholly-owned subsidiary, Downers Grove National Bank. Founded in 1955, Downers Grove National Bank is a privately held community bank with
$219 million in assets and $213 million in deposits as of December 31, 2010. Downers Grove National Bank has two banking locations in Downers Grove and Westmont, IL communities. The transaction has been approved by the Banks primary
federal regulator, the Office of Thrift Supervision, and is expected to close in the first quarter of 2011, subject to customary closing conditions.

We are in the process of negotiating the acquisition of a portfolio of performing loans from Citibank N.A. with an aggregate unpaid principal balance of approximately $155.8 million. The purchase is
scheduled to close in March 2011, subject to customary closing conditions. This loan portfolio consists of multifamily loans originated by Citibank N.A. or the former Citibank, F.S.B. and the loans are secured by real estate collateral located in
the Chicago metropolitan market area. The portfolio consists of 470 loans with an overall weighted average effective yield of 5.87%. All loans in the portfolio were current on all payments due as of the month prior to the month in which the purchase
is scheduled to close. Upon the closing of the purchase, we expect to file a Current Report on Form 8-K further describing the portfolio acquisition transaction and the portfolio characteristics.





109



---

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

Not Applicable.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

(a)
Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Principal
Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal
year ( Evaluation Date). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them
to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic Securities and Exchange Commission filings.

(b) Managements Annual Report on Internal Control Over Financial Reporting.

The annual
report of management on the effectiveness of our internal control over financial reporting and the attestation report thereon issued by our independent registered public accounting firm are set forth under Report of Management on Internal
Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting under Item 8 - Financial Statements and Supplementary Data.

(c) Changes in internal controls.

There were
no changes made in our internal controls during the fourth quarter of 2010 or, to our knowledge, in other factors that have materially affected, or are reasonably likely to materially affect these controls.

See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

Not Applicable.



110



---

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------

Directors and Executive Officers

The information concerning our directors and executive
officers required by this item will be filed with the Securities and Exchange Commission by amendment to this Form 10-K, not later than 120 days after the end of our fiscal year.

Section 16(a) Beneficial Ownership Reporting Compliance

The information concerning
compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by our directors, officers and 10 percent stockholders required by this item will be filed with the Securities and Exchange Commission by
amendment to this Form 10-K, not later than 120 days after the end of our fiscal year.

Code of Ethics

We have adopted a Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial officer, principal
accounting officer, and persons performing similar functions. A copy of our Code of Ethics was attached as Exhibit 14 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2006. We have also adopted a
Code of Business Conduct, pursuant to Nasdaq requirements, that applies generally to our directors, officers, and employees.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The
information concerning compensation required by this item will be filed with the Securities and Exchange Commission by amendment to this Form 10-K, not later than 120 days after the end of our fiscal year.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information concerning security ownership of certain beneficial owners and management required by this item will be filed with the Securities and
Exchange Commission by amendment to this Form 10-K, not later than 120 days after the end of our fiscal year.



111



---

Securities Authorized for Issuance under Equity Compensation Plan

The following table sets forth information regarding the securities that were authorized for issuance under our 2006 Equity Incentive Plan as of
December 31, 2010:



|                                                       |  |                                                                                       |           |  |                                                                         |   |       |                                                                                                                                      |  |  |         | 
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------- | --------- |  | ----------------------------------------------------------------------- | - | ----- | ------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------- | 
|                                                       |  | Column (A)                                                                            |           |  | Column (B)                                                              |   |       | Column (C)                                                                                                                           | 
|Plan Category                                          |  | Number ofSecurities to beIssued UponExercise
ofOutstandingOptions, Warrantsand Rights |           |  | Weighted-AverageExercise Price ofOutstandingOptions, Warrantsand Rights |   |       | Number ofSecuritiesRemainingAvailable for FutureIssuance under
2006Equity IncentivePlan
(ExcludingSecurities Reflectedin Column (A)) | 
|Equity compensation plans approved by stockholders     |  |                                                                                       | 2,296,220 |  |                                                                         | $ | 16.52 |                                                                                                                                      |  |  | 244,622 | 
|Equity compensation plans not approved by stockholders |  |                                                                                       |          |  |                                                                         |   |      |                                                                                                                                      |  |  |        | 
|                                                       |  |                                                                                       |           |  |                                                                         |   |       |                                                                                                                                      |  |  |         | 
|Total                                                  |  |                                                                                       | 2,296,220 |  |                                                                         |   | 16.52 |                                                                                                                                      |  |  | 244,622 | 



Column (A) represents stock options and restricted stock outstanding under the Companys 2006 Equity Incentive Plan. Future equity awards under
the 2006 Equity Incentive Plan may take the form of stock options, stock appreciation rights, performance unit awards, restricted stock, restricted performance stock, restricted stock units, stock awards or cash. Column (B) represents the
weighted-average exercise price of the outstanding stock options only; the outstanding restricted stock awards are not included in this calculation. Column (C) represents the maximum aggregate number of future equity awards that can be made
under the 2006 Equity Incentive Plan as of December 31, 2010.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

The information concerning certain relationships and related transactions required by this will be filed with the Securities and Exchange Commission by amendment to this Form 10-K, not later than 120 days
after the end of our fiscal year.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The information concerning principal accountant fees and services will be filed with the Securities and Exchange Commission by amendment to this Form 10-K, not later than 120 days after the end of our
fiscal year.

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

(a)(1) Financial Statements

The following consolidated financial statement of the
registrant and its subsidiaries are filed as part of this document under Item 8 - Financial Statements and Supplementary Data.



| | (A) | Report of Independent Registered Accounting Firm
| | --- | ------------------------------------------------



| | (B) | Consolidated Statements of Financial Condition - at December 31, 2010 and 2009
| | --- | ------------------------------------------------------------------------------



| | (C) | Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
| | --- | ------------------------------------------------------------------------------------------



| | (D) | Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2010, 2009 and 2008
| | --- | ---------------------------------------------------------------------------------------------------------------



| | (E) | Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
| | --- | ------------------------------------------------------------------------------------------



| | (F) | Notes to Consolidated Financial Statements
| | --- | ------------------------------------------



112



---

(a)(2) Financial Statement Schedules

None.

(a)(3) Exhibits

The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.



|      |  |                                                                  |  |                                                                                                                                                          
|----- |  | ---------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Exhibit                                                          |  | Location                                                                                                                                                 
|3.1   |  | Articles of Incorporation of BankFinancial Corporation           |  | Exhibit 3.1 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004 
|      |  |                                                                 
|3.2   |  | Bylaws of BankFinancial Corporation                              |  | Exhibit 3.2 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004 
|      |  |                                                                 
|3.3   |  | Articles of Amendment to Charter of BankFinancial Corporation    |  | Exhibit 3.3 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004 
|      |  |                                                                 
|3.4   |  | Restated Bylaws of BankFinancial Corporation                     |  | Exhibit 3.4 to the Annual Report on Form 10-K of the Company, originally filed with the Securities and Exchange Commission on March 15, 2007             
|      |  |                                                                 
|4     |  | Form of Common Stock Certificate of BankFinancial Corporation    |  | Exhibit 4 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004   
|      |  |                                                                 
|10.1  |  | Employee Stock Ownership Plan                                    |  | Exhibit 10.1 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004
|      |  |                                                                 
|10.2  |  | Deferred Compensation Plan                                       |  | Exhibit 10.2 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004
|      |  |                                                                 
|10.3  |  | BankFinancial FSB Employment Agreement with F. Morgan Gasior     |  | Exhibit 10.1 to the Current Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on May 5, 2008               
|      |  |                                                                 
|10.4  |  | BankFinancial FSB Employment Agreement with James J. Brennan     |  | Exhibit 10.3 to the Current Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on May 5, 2008.              
|      |  |                                                                 
|10.5  |  | BankFinancial FSB Employment Agreement with Paul A. Cloutier     |  | Exhibit 10.2 to the Current Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on May 5, 2008               
|      |  |                                                                 
|10.6  |  | BankFinancial FSB Employment Agreement with Christa N Calabrese  |  | Exhibit 10.5 to the Current Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on May 5, 2008               
|      |  |                                                                 
|10.12 |  | Form of Incentive Stock Option Award Terms                       |  | Exhibit 10.1 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006                 
|      |  |                                                                 
|10.13 |  | 2006 BankFinancial Corporation Equity Incentive Plan             |  | Appendix C to the Definitive Form 14A, originally filed with the Securities and Exchange Commission on May 25, 2006 (File No. 000-51331)                 
|      |  |                                                                 
|10.14 |  | Form of Performance Based Incentive Stock Option Award Terms     |  | Exhibit 10.2 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006                 
|      |  |                                                                 
|10.15 |  | Form of Non-Qualified Stock Option Award Terms                   |  | Exhibit 10.3 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006                 
|10.16 |  | Form of Performance Based Non-Qualified Stock Option Award Terms |  | Exhibit 10.4 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006                 



113



---

|      |  |                                                                                                                                 |  |                                                                                                                                                        
|----- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Exhibit                                                                                                                         |  | Location                                                                                                                                               
|10.17 |  | Form of Restricted Stock Unit Award Agreement                                                                                   |  | Exhibit 10.5 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006               
|      |  |                                                                                                                                
|10.18 |  | Form of Performance Based Restricted Stock Award Agreement                                                                      |  | Exhibit 10.6 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006               
|      |  |                                                                                                                                
|10.19 |  | Form of Restricted Stock Award Agreement                                                                                        |  | Exhibit 10.7 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006               
|      |  |                                                                                                                                
|10.20 |  | Form of Stock Appreciation Rights Agreement                                                                                     |  | Exhibit 10.8 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on September 5, 2006               
|      |  |                                                                                                                                
|10.25 |  | BankFinancial Corporation Employment Agreement with F. Morgan Gasior                                                            |  | Exhibit 10.1 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on October 20, 2008                
|      |  |                                                                                                                                
|10.26 |  | BankFinancial Corporation Employment Agreement with Paul A. Cloutier                                                            |  | Exhibit 10.2 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on October 20, 2008                
|      |  |                                                                                                                                
|10.27 |  | BankFinancial Corporation Employment Agreement with James J. Brennan                                                            |  | Exhibit 10.3 to the Report on Form 8-K of the Company, originally filed with the Securities and Exchange Commission on October 20, 2008                
|      |  |                                                                                                                                
|10.28 |  | BankFinancial Corporation Employment Agreement with Elizabeth A. Doolan                                                         |  | Exhibit 10.28 to the Annual Report on Form 10-K of the Company, originally filed with the Securities and Exchange Commission on February 23, 2009.     
|      |  |                                                                                                                                
|10.29 |  | BankFinancial FSB Employment Agreement with Elizabeth A. Doolan                                                                 |  | Exhibit 10.28 to the Annual Report on Form 10-K of the Company, originally filed with the Securities and Exchange Commission on February 23, 2009.     
|      |  |                                                                                                                                
|10.30 |  | BankFinancial FSB Employment Agreement with Gregg T. Adams                                                                      |  | Exhibit 10.30 to the Annual Report on Form 10-K/A of the Company originally filed with the Securities and Exchange Commission on April 30, 2010.       
|      |  |                                                                                                                                
|14    |  | Code of Ethics for Senior Financial Officers                                                                                    |  | Exhibit 14 to the Annual Report on Form 10-K of the Company, originally filed with the Securities and Exchange Commission on March 27, 2006            
|      |  |                                                                                                                                
|21    |  | Subsidiaries of Registrant                                                                                                      |  | Exhibit 21 to the Registration Statement on Form S-1 of the Company, originally filed with the Securities and Exchange Commission on September 23, 2004
|      |  |                                                                                                                                
|23    |  | Consent of Crowe Horwath LLP                                                                                                    |  | Filed herewith                                                                                                                                         
|      |  |                                                                                                                                
|31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              |  | Filed herewith                                                                                                                                         
|      |  |                                                                                                                                
|31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              |  | Filed herewith                                                                                                                                         
|      |  |                                                                                                                                
|32    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |  | Furnished herewith                                                                                                                                     



|* | A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



|                    |  |                           |  |                                                             
|------------------- |  | ------------------------- |  | ------------------------------------------------------------
|                    |  | BANKFINANCIAL CORPORATION
|                    |  |                          
|Date: March 9, 2011 |  | By:                       |  | /s/ F. Morgan Gasior                                        
|                    |  |                           |  | F. Morgan Gasior                                            
|                    |  |                           |  | Chairman of the Board, Chief Executive Officer and President
|                    |  |                           |  | (Duly Authorized Representative)                            

Pursuant
to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                              |  |  |  |                                                                                            |  |  |  |              
|--------------------------------------------- |  |  |  | ------------------------------------------------------------------------------------------ |  |  |  | -------------
|Signatures                                    |  |  |  | Title                                                                                      |  |  |  | Date         
|                                              |  |  |  |                                                                                           
|/s/ F. Morgan Gasior F. Morgan Gasior         |  |  |  | Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Paul A. Cloutier Paul A. Cloutier         |  |  |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)         |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Elizabeth A. Doolan Elizabeth A. Doolan   |  |  |  | Senior Vice President and Controller (Principal Accounting Officer)                        |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Cassandra J. Francis Cassandra J. Francis |  |  |  | Director                                                                                   |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ John M. Hausmann John M. Hausmann         |  |  |  | Director                                                                                   |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Sherwin R. Koopmans Sherwin R. Koopmans   |  |  |  | Director                                                                                   |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Joseph A. Schudt Joseph A. Schudt         |  |  |  | Director                                                                                   |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Terry R. Wells Terry R. Wells             |  |  |  | Director                                                                                   |  |  |  | March 9, 2011
|                                              |  |  |  |                                                                                           
|/s/ Glen R. Wherfel Glen R. Wherfel           |  |  |  | Director                                                                                   |  |  |  | March 9, 2011



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