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, 2007

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 of 1933.    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 Exchange
Act.    Yes   ̈    No  x.



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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes   ̈    No  x

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   ̈

Large
accelerated filer   ̈    Accelerated filer  x    Non-accelerated filer   ̈

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

At March 7, 2008, there were 22,031,077 shares of common stock, $0.01 par value, outstanding.

The aggregate market value of the
registrants outstanding voting common stock held by non-affiliates on June 30, 2007, determined using a per share closing price on that date of $15.45, as quoted on The Nasdaq Stock Market, was $334.1 million.

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 special 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 purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and
describe our future plans, strategies and expectations, 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 future plans or strategies is inherently uncertain and actual results 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, a flattening or inversion of the yield curve, less
than anticipated balance sheet growth, lack of demand for loan products, unanticipated changes in secondary mortgage market conditions, 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, deteriorating economic conditions that could result in increased delinquencies in our loan portfolio,
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 area, the possible short-term dilutive effect of potential acquisitions or de
novo branches, if any, changes in accounting principles, policies and guidelines, and future adverse developments concerning Freddie Mac or the Federal Home Loan Bank of Chicago. These risks and uncertainties 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, 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. (BankFinancial MHC) 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).

BankFinancial Corporation, the Maryland corporation, did not engage in any business prior to the completion of the mutual-to-stock conversion on June 23, 2005.
Consequently, this Annual Report on Form 10-K reflects the financial condition and operating results of BankFinancial MHC and BankFinancial Corporation, the federal corporation, and their subsidiaries, including the Bank, until June 23, 2005,
and of BankFinancial Corporation, the Maryland corporation, and its subsidiaries, including the Bank, thereafter. The words Company, we and our thus are intended to refer to BankFinancial MHC, BankFinancial
Corporation, the federal corporation, and their subsidiaries with respect to matters and time periods occurring on or before June 23, 2005, and to BankFinancial Corporation, the Maryland corporation, and its subsidiaries, with respect to
matters and time periods occurring thereafter.



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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 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 located in Cook, DuPage, Lake and Will Counties, Illinois, and through our Internet Branch, www.bankfinancial.com.

The Banks primary business is making loans and accepting deposits. The Bank also offers our customers a variety of financial products and services that are related
or ancillary to loans and deposits, including cash management, merchant processing, funds transfers, bill payment and other online banking transactions, automated teller machines, safe deposit boxes, wealth management, and general insurance agency
and title insurance 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 substantially all of our revenues from these geographic areas. The Banks primary market for deposits is currently concentrated around the areas where our full-service banking offices are located.

The Bank was organized in 1924, and was operated as a traditional savings bank until 2000, when we implemented a strategy to transform the Bank into a multi-faceted
financial institution with a diversified balance sheet, enhanced capabilities in commercial banking products and services, an expanded geographic presence in the Chicago metropolitan area, and managerial and technological resources and an
infrastructure capable of supporting future growth. In furtherance of this strategy, we have actively sought to change the composition of our loans and deposits, expand our multi-family and commercial real estate lending activities, and implement
additional commercial lending and leasing capabilities and product lines. We also acquired Success Bancshares, Inc. and its subsidiary, Success National Bank in 2001, and University National Bank in Chicagos Hyde Park community on
April 5, 2006. See Acquisition.

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 represent 72.0% of our loan
portfolio. At December 31, 2007, $291.4 million, or 23.1%, of our total loan portfolio consisted of multi-family mortgage loans; $325.9 million, or 25.8%, of our total loan portfolio consisted of nonresidential real estate loans; $83.2 million,
or 6.6%, of our total loan portfolio consisted of commercial loans; $144.8 million, or 11.5%, of our total loan portfolio consisted of commercial leases; $64.5 million, or 5.1%, of our total loan portfolio consisted of construction and land loans;
and $345.2 million, or 27.3%, of our total loan portfolio consisted of one- to four-family residential mortgage loans, including home equity loans and lines of credit and other second mortgage loans.

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 merchant processing and cash
management. We also provide low-cost checking account services for low and moderate income customers. 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, 2007, our deposits totaled $1.074 billion. Interest-bearing deposits totaled $962.1 million
and noninterest-bearing demand deposits totaled $111.6 million, which included $5.0 million in internal checking accounts such as bank cashier checks and money orders, and $3.5 million in title insurance escrow funds. Savings, money market and NOW
deposits totaled $654.5 million, and certificates of deposit totaled $307.6 million, of which $269.5 million had maturities of one year or less.



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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., sells life insurance, fixed annuities, property and casualty insurance and other insurance products on an agency basis, and also offers title insurance and title agency services through its Financial Title Services
Division. During the year ended December 31, 2007, Financial Assurance Services reported net income of $239,000, and had 14 employees. The Banks other wholly-owned subsidiary, BF Asset Recovery Corporation, is in the business of holding
title to certain Bank-owned real estate, and had no net income or loss for the year ended December 31, 2007.

Acquisition

On April 5, 2006, the Company completed its acquisition of University National Bank, a privately held community bank with approximately $113 million in assets and
$104 million in deposits, and two banking offices in the Hyde Park community in Chicago, Illinois, for approximately $24 million in cash pursuant to the terms of a Stock Purchase Agreement with University Bancorporation dated November 29, 2005.
Immediately upon the completion of the stock purchase, University National Bank was merged into the Bank. The acquisition, which was accounted for under the purchase method of accounting, resulted in goodwill of $11.7 million and an other intangible
of $3.3 million. The transaction was treated, for federal and state income tax purposes, as a purchase of University National Banks assets pursuant to applicable provisions of the Internal Revenue Code, making the goodwill and core deposit
intangible arising from the transaction tax-deductible over a period of 15 years. University National Banks results of operations have been included in the Companys results of operations only since the effective date of the acquisition.

Website and Stockholder Information

The website for
the Company and the Bank is located at www.bankfinancial.com. Information on this website does not constitute part of this Form 10-K.

The Company
makes available, free of charge, its Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the 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 Internet site,
www.bankfinancial.com, under Stockholder Information and at the SECs Internet site, www.sec.gov.

Competition

We face significant competition in both originating loans and attracting deposits. The Chicago metropolitan area and the counties in which we operate have a high
concentration of financial institutions, many of which are significantly larger institutions and have greater financial resources than we have, and many of which are our competitors to varying degrees. Our competition for loans 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 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 banking and local decision-making. Specifically, we promote and maintain
relationships and build customer loyalty within local communities by emphasizing decentralized regional management and by focusing our marketing and community involvement on the specific needs of individual neighborhoods. In addition, we, from time
to time, seek to meet competition for loans by offering our current and prospective borrowers preferred rates and terms on deposit products for new lending business. We do not rely on any individual, group or entity for a material portion of our
deposits.



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Employees

At
December 31, 2007, we had 393 full-time employees and 31 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 regulated and supervised by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation (FDIC). This regulation and supervision establish 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
and depositors. 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 primary federal regulator of the institution critiques the financial institutions operations in a report of examination and assigns its 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 to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of the Banks loan documents.

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 FDIC, the OTS, the Board of Governors of the Federal Reserve System or Congress, could
have a material adverse impact on the Company, the Bank and their respective operations.

Federal Banking Regulation

Business Activities.A federal savings 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. 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.

Capital Requirements. The regulations of the OTS require 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 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.



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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.

At
December 31, 2007, the Banks capital exceeded all applicable 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, 2007, 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 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 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, 2007, the Bank maintained approximately 68.76% of its portfolio assets in qualified
thrift investments, and as of that date, satisfied the QTL test. A savings bank that fails the QTL test must either convert to a bank charter or operate under specified restrictions, including limits on growth, branching, new investment, FHLB
advances and dividends. The OTS order approving our mutual-to-stock conversion requires us to maintain our federal savings bank charter until at least June 23, 2008.

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 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 savings banks net income for that year to date plus the savings
banks retained net income for the preceding two years;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the savings bank 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 savings bank is not eligible for expedited treatment of its filings.
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Even if an application is not otherwise required, every 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.

The OTS may disapprove a notice or application if:



| |  |  | the 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 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 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 on the basis of characteristics specified in those statutes. A
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 all 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 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 savings bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings banks capital.
Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings bank. OTS regulations also prohibit a 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



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are based, in part, on the amount of the Banks capital. In addition, extensions of credit in excess of certain limits must be approved by the
Banks Board of Directors. The Bank does not extend credit to its directors and executive officers.

Enforcement. The OTS has primary
enforcement responsibility over federal savings institutions, 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 removal of officers and/or
directors of the institution, 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 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.

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 savings banks. For this purpose, a savings bank is placed in one of the following five categories based on the 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
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| |  |  | critically undercapitalized (less than 2% tangible capital).
| | - |  | ------------------------------------------------------------

Generally, the banking regulator is required to appoint a receiver or conservator for a 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 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 savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.



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At December 31, 2007, the Bank met the criteria for being considered well-capitalized.

Insurance of Deposit Accounts.Deposit accounts in the Bank are insured by the Deposit Insurance Fund (DIF) of the FDIC (effective
March 31, 2006, the FDIC merged the Bank Insurance Fund and the Savings Insurance Fund into a single insurance fund, the DIF), generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for
self-directed retirement accounts. The Banks deposits, therefore, are subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based system for determining deposit insurance assessments. The FDIC is authorized to raise the
assessment rates as necessary to maintain the required ratio of reserves to insured deposits of 1.25%. In addition, all FDIC-insured institutions must pay assessments to the FDIC at an annual rate of approximately 0.0122% of insured deposits to fund
interest payments on bonds maturing in 2017 that were issued by a federal agency to recapitalize the predecessor to the Savings Association Insurance Fund.

Federal deposit insurance legislation adopted in 2006 required, among other things, the merger of the Savings Association Insurance Fund and the Bank Insurance Fund into a unified insurance deposit fund, an increase in the amount of federal
deposit insurance coverage per separately insured deposits (with a cost of living adjustment to become effective in five years), and the reserve ratio to be modified to provide for a range between 1.15% and 1.50% of estimated insured deposits.

On November 2, 2006, the FDIC adopted final regulations that calculate deposit insurance assessments based on risk. The final regulations, which
became effective on January 1, 2007, are intended to enable the FDIC to more closely tie each insured depository institutions deposit insurance assessments to the risk it poses to the federal deposit insurance fund. The regulations
establish four risk categories based supervisory ratings, capital and other financial ratios, and, if applicable, long-term debt issuer ratings. The Bank is in the lowest risk category, Risk Category I, and the base assessment rates for insured
depository institutions in Risk Category I range from five and seven cents for every $100 of domestic deposits. The Federal Deposit Insurance Reform Act of 2005 authorized eligible insured depository institutions such as the Bank to receive a
one-time credit against future deposit insurance assessments. The FDIC has determined that the Banks one-time assessment credit was $1.8 million at December 31, 2006, with $1.3 million remaining at December 31, 2007. The one-time
assessment credit is applied to pay deposit insurance assessments as they become due. The FDIC has also adopted final regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits.

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,
2007, the Bank was in compliance with this requirement.

Federal Reserve System

Federal Reserve Board regulations require savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At
December 31, 2007, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.



10



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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 new 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.

Holding Company Regulation

The Company is a unitary savings and loan holding company, subject to regulation and supervision by the OTS. The
OTS 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.

Under prior law, a unitary savings and loan holding company generally had no regulatory restrictions on the types of business activities in which it could engage,
provided that its subsidiary savings bank was a qualified thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts the activities of unitary savings and loan holding companies not existing on, or applied for before, May 4, 1999, to
those permissible for financial holding companies or for multiple savings and loan holding companies. The Company is not a grandfathered unitary savings and loan holding company, and therefore is 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.

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 involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.

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 Securities Exchange Act of
1934.

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. The Sarbanes-Oxley Act represents significant federal
involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of
directors and its committees.



11



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Federal Securities Laws

The Companys common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the Securities Exchange Act of 1934.

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. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.

Bad Debt Reserves. Prior to the Small Business Protection Act of 1996, 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. As a result 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.

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, 2007, the Banks total federal pre-1988 reserve was approximately $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. Our alternative minimum tax credits were fully utilized in 2007.

Net Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years (five years for losses incurred in 2001 and 2002) and forward to the succeeding 20 taxable years. At
December 31, 2007, the Company had no net operating loss carryforward for federal income tax purposes. At December 31, 2007, the Company included in deferred tax assets a $876,000 asset for capital loss carryforwards, which expires in
2011. Based upon projections of future taxable income, including capital gains, management believes that it is more likely than not that the deferred tax assets will be fully realized and thus a valuation allowance is not needed.

Corporate Dividends. We may exclude from our income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.

State and Local Taxation. We pay income tax to the State of Illinois. As a Maryland business corporation, we are 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, 2007, the Company had no net operating loss carryforward for state income tax purposes.



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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.

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.

Our Return on Stockholders Equity Will Continue to Be Low In the Near Future as a Result of the 2005 Subscription Offering

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 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 industry average, which may
negatively affect the value of our shares of common stock.

Our Nonresidential Real Estate Loans, Multi-family Mortgage Loans, Construction and Land
Loans, Commercial Loans and Commercial Leases Expose Us to Increased Credit Risks

At December 31, 2007, our portfolio of nonresidential real
estate loans totaled $325.9 million, or 25.8% of total loans; our portfolio of multi-family mortgage loans totaled $291.4 million, or 23.1% of total loans; our portfolio of construction and land loans totaled $64.5 million, or 5.1% of total loans;
our portfolio of commercial loans totaled $83.2 million, or 6.6% of total loans; and our portfolio of commercial leases totaled $144.8 million, or 11.5% of total loans. We plan to continue to originate these types of loans and retain them in our
portfolio, although we may participate portions of some of these loans to other financial institutions. These types of loans generally have greater credit risk than one- to four-family residential mortgage loans because repayment of the loans often
depends on the successful business operations of the borrower. These loans typically have larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Many of our borrowers also
have more than one nonresidential real estate, multi-family mortgage, construction or commercial loan or lease outstanding with us. Consequently, an adverse development involving one or more loans or credit relationships can expose us to
significantly greater risk of loss compared to an adverse development involving a one- to four-family residential mortgage loan.



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Our Concentration of Loans within Certain Segments of the Healthcare Industry Exposes Us to Increased Credit Risk

At December 31, 2007, we had $53.7 million of loans to healthcare providers, including loans to nursing homes and hospice care companies and leases to
hospitals for equipment. These loans represented 4.3% of our total loan portfolio as of that date. Of these loans, $18.6 million, or 34.7%, were collateralized by real estate. The remainder consisted of working capital lines of credit secured by
government accounts receivable, of which we are a joint payee, or by leased equipment. Loans to healthcare providers have unique credit risks. A healthcare providers income stream is subject to many factors beyond the control of the healthcare
provider, including the risk that the provider will not be reimbursed for all services provided. The State of Illinois has experienced budget shortfalls in recent years, causing delays in state reimbursement for healthcare costs. Government
reimbursement rates are also subject to change, including retroactive adjustments. For example, a significant overpayment to a healthcare provider can result in the provider owing significant governmental repayments to the federal or state
government. A healthcare providers profitability also depends on its ability to maintain certain levels of occupancy. Unexpected declines in occupancy rates can restrict a providers cash flow. Any of these factors can impair the ability
of our healthcare provider borrowers to make loan repayments, which could result in significant loss to us.

At December 31, 2007, we had not taken
any charge-offs within this segment of our loan portfolio, but we have established a specific loan loss reserve allowance in the amount of $259,000 for loans to one borrower with an aggregate principal balance of $6.3 million. The loans to this
borrower are also partially secured by additional collateral, including home equity and other personal assets. In addition, based on weaknesses in the financial performance of, and untimely or incomplete financial statements for, certain nursing
homes operated by another borrower, we classified as substandard loans to this other borrower, which had an aggregate principal balance of $3.2 million, even though we did not establish a specific loan loss allowance for these loans. These loans
were current on their loan payments to us as of December 31, 2007.

We Could Record Future Losses on Our Holdings of Freddie Mac Preferred Stock

We own shares of Freddie Mac preferred stocks with an adjusted cost basis of $38.3 million, and a fair value of $31.2 million at December 31,
2007, based on quoted market prices for these securities. The quoted market prices for these securities have been very volatile in recent months on generally low trading volumes. The adjusted cost basis takes into account the pre-tax impairment
losses that we previously recorded for these securities in accordance with Securities and Exchange Commission Codification of Staff Accounting Bulletins, Topic 5: Miscellaneous Accounting  Item M, Other Than Temporary Impairment of Certain
Investments in Debt and Equity Securities. A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an
impairment that is other than temporary. These factors include, but are not limited to, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement
in value, a change in our intent or ability to hold the security for a period of time sufficient to allow for the forecasted recovery, or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast
a full recovery in value, including adverse developments concerning Freddie Mac. In addition, the fair value that we have recorded for these securities, which is based on quoted market prices, may be different from the actual price for which we
could sell the securities in a market transaction due to such factors as, volatility or illiquidity in the financial markets or for these securities, or the possibility of block discounts.

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 the terms of the loans, 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. We make various assumptions and
judgments 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. At December 31, 2007, our
allowance for loan losses was $11.1 million, representing 0.87% of total loans and 91.7% 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



14



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conditions, among other factors. We also make assumptions 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.

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

On April 5, 2006, we
completed the acquisition of University National Bank. We will also consider the possible acquisition of other banks, thrifts and other financial services companies to supplement internal growth. Our efforts to acquire other financial institutions
and financial service companies may not be successful. Numerous potential acquirors exist for most acquisition candidates, creating intense competition, which particularly affects 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. 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. If we are unable to or do not conduct acquisitions, our ability to deploy effectively the capital we raised in the offering, expand our geographic presence and improve our results of operations could be
adversely affected.

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

If we are successful in conducting acquisitions, 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. 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 successfully integrate an acquired institution 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.

Since Our Business is Concentrated in the Chicago Metropolitan Area, a Downturn in the Economy of
This Area May Adversely Affect Our Business

Our lending and deposit gathering activities are concentrated primarily in the Chicago metropolitan area.
Our success depends on 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,
including supply and demand, changes in general or regional economic conditions, interest rates, governmental rules or policies and natural disasters. Adverse changes in the regional and general economy could also reduce our growth rate, impair our
ability to collect loans and generally have a negative effect on our financial condition and results of operations.

Non-Compliance with USA PATRIOT
Act, Bank Secrecy 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



15



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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. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations.

The Banks Ability to Pay Dividends is Subject to Regulatory Limitations Which, to the Extent the Company Requires Such Dividends in the Future, May Affect its
Ability to Pay Dividends

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. It is possible, depending upon the financial condition of the Bank and other factors,
that the OTS, as the Banks primary regulator, could assert that the payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to pay dividends to the Company, the Company may not be
able to pay dividends on its common stock. Consequently, the potential inability to receive dividends from the Bank could adversely affect the Companys financial condition, results of operations and prospects.

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 also 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 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.

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, for three years following the completion of a mutual-to-stock conversion, 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



16



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removal is 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 (excluding the director whose removal is sought), assuming no vacancies. If approved by at least two-thirds of the number of our authorized directors, assuming no vacancies, 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.

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 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 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. Recently enacted, proposed and future legislation and regulations could have an adverse effect on our business and operations. Our success depends on our continued ability to comply with
these laws and regulations. Some of these 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 that is deemed appropriate), or to use its stock as consideration for an acquisition. See Risk Factors  Our Ability to Successfully Conduct Acquisitions Will Affect Our Ability to Grow Our Franchise and Compete Effectively
in Our Marketplace



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

None.



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

As of December 31, 2007, the net book
value of our properties was $30.7 million. The following is a list of our offices:



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

Except for our Chicago-Lincoln Park, Northbrook, and Hyde Park East offices, which are leased, all of our offices
are owned.



|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. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

During
the fourth quarter of the fiscal year covered by this report, the Company did not submit any matters to the vote of security holders.



18



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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, 2007 was 2,017. 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, 2007 and 2006.



|                                 |  |      |       |     |   |       |  |                   |       |  |   |     
|-------------------------------- |  | ---- | ----- | --- | - | ----- |  | ----------------- | ----- |  | - | ----
|2006 and 2007 Quarterly Periods  |  | High |       | Low |   | Close |  | CashDividendsPaid
|Quarter ended December 31, 2007  |  | $    | 16.67 |     | $ | 14.54 |  | $                 | 15.82 |  | $ | 0.07
|Quarter ended September 30, 2007 |  |      | 16.39 |     |   | 13.01 |  |                   | 15.82 |  |   | 0.07
|Quarter ended June 30, 2007      |  |      | 16.75 |     |   | 15.45 |  |                   | 15.45 |  |   | 0.07
|Quarter ended March 31, 2007     |  |      | 17.98 |     |   | 16.10 |  |                   | 16.27 |  |   | 0.07
|                                 |  |      |       |    
|Quarter ended December 31, 2006  |  | $    | 18.50 |     | $ | 17.23 |  | $                 | 17.81 |  | $ | 0.06
|Quarter ended September 30, 2006 |  |      | 18.11 |     |   | 16.31 |  |                   | 17.49 |  |   | 0.06
|Quarter ended June 30, 2006      |  |      | 17.30 |     |   | 15.15 |  |                   | 17.30 |  |   | 0.06
|Quarter ended March 31, 2006     |  |      | 16.41 |     |   | 14.55 |  |                   | 15.92 |  |   |    

For a discussion of the Banks ability to pay dividends, see Part I, Item I, Business Supervision
and RegulationFederal Banking RegulationCapital Distributions.

Recent Sales of Unregistered Securities

The Company had no sales of unregistered stock during the fiscal year ended December 31, 2007.



19



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Repurchases of Our Equity Securities

The following table sets forth information in connection with the repurchases of our common stock that were made pursuant to our stock repurchase program during the fourth quarter of 2007:



|                                           |  |                                 |  |                            |        |                                                                              |         |                                                                                |        
|------------------------------------------ |  | ------------------------------- |  | -------------------------- | ------ | ---------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | -------
|Period                                     |  | Total Number ofShares Purchased |  | AveragePrice Paidper Share |        | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |         | Maximum Number ofShares that May Yetbe Purchased underthe Plans or Programs(1)
|October 1, 2007 through October 31, 2007   |  | 51,800                          |  | $                          | 15.766 |                                                                              | 51,800  |                                                                                | 834,261
|November 1, 2007 through November 30, 2007 |  | 149,100                         |  | $                          | 15.612 |                                                                              | 149,100 |                                                                                | 685,161
|December 1, 2007 through December 31, 2007 |  | 135,000                         |  | $                          | 15.645 |                                                                              | 135,000 |                                                                                | 550,161
|                                           |  |                                 |  |                            |        |                                                                              |         |                                                                                |        
|Totals                                     |  | 335,900                         |  |                            |        |                                                                              | 335,900 |                                                                                |        
|                                           |  |                                 |  |                            |        |                                                                              |         |                                                                                |        



|(1) | Our Board of Directors has authorized the repurchase of up to 3,605,384 shares of our common stock. The current share repurchase authorization will expire on March 31, 2008,
unless extended.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

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



|                                         |  |           |  |            |  |            |  |           
|---------------------------------------- |  | --------- |  | ---------- |  | ---------- |  | ----------
|                                         |  | 6/24/2005 |  | 12/31/2005 |  | 12/31/2006 |  | 12/31/2007
|BankFinancial Corporation                |  | 100.00    |  | 107.94     |  | 132.34     |  | 119.67    
|Russell 2000 Index                       |  | 100.00    |  | 107.49     |  | 127.24     |  | 125.24    
|NASDAQ Bank Index                        |  | 100.00    |  | 102.59     |  | 113.88     |  | 88.74     
|Americas Community Bankers NASDAQ Index |  | 100.00    |  | 103.69     |  | 114.92     |  | 86.43     



21



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

The following information is
derived from the audited consolidated financial statements of the Company or, prior to June 24, 2005, BankFinancial MHC, Inc. For additional information, reference is made to 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,                               |          
|                                                             |  | 2007                                          |           | 2006 |   |           | 2005 |  | 2004 |           |  | 2003 |          
|                                                             |  | (Dollars in thousands)                        |          
|Selected Financial Condition Data:                           |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|Total assets                                                 |  | $                                             | 1,480,544 |      | $ | 1,613,298 |      |  | $    | 1,614,436 |  | $    | 1,492,782 |   |  | $ | 1,457,911 |  
|Loans, net                                                   |  |                                               | 1,253,999 |      |   | 1,330,091 |      |  |      | 1,231,891 |  |      | 1,091,952 |   |  |   | 1,067,248 |  
|Loans held-for-sale                                          |  |                                               | 173       |      |   | 298       |      |  |      | 375       |  |      | 5,531     |   |  |   | 5,280     |  
|Securities available-for-sale at fair value                  |  |                                               | 77,049    |      |   | 117,853   |      |  |      | 248,238   |  |      | 268,093   |   |  |   | 257,520   |  
|Goodwill                                                     |  |                                               | 22,566    |      |   | 22,579    |      |  |      | 10,865    |  |      | 10,865    |   |  |   | 10,865    |  
|Core deposit intangible                                      |  |                                               | 7,769     |      |   | 9,648     |      |  |      | 8,248     |  |      | 9,882     |   |  |   | 11,583    |  
|Deposits                                                     |  |                                               | 1,073,650 |      |   | 1,129,585 |      |  |      | 1,067,874 |  |      | 1,115,696 |   |  |   | 1,073,897 |  
|Borrowings                                                   |  |                                               | 96,433    |      |   | 138,148   |      |  |      | 191,388   |  |      | 264,742   |   |  |   | 268,225   |  
|Equity                                                       |  |                                               | 291,137   |      |   | 326,015   |      |  |      | 328,777   |  |      | 94,888    |   |  |   | 96,687    |  
|                                                             | 
|                                                             |  | Years Ended December 31,                      |          
|                                                             |  | 2007                                          |           | 2006 |   |           | 2005 |  | 2004 |           |  | 2003 |          
|                                                             |  | (Dollars in thousands, except per share data) |          
|Selected Operating Data:                                     |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|Interest and dividend income                                 |  | $                                             | 91,953    |      | $ | 94,086    |      |  | $    | 80,212    |  | $    | 66,738    |   |  | $ | 68,686    |  
|Interest expense                                             |  |                                               | 38,304    |      |   | 37,489    |      |  |      | 28,802    |  |      | 23,470    |   |  |   | 30,552    |  
|                                                             |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|Net interest income                                          |  |                                               | 53,649    |      |   | 56,597    |      |  |      | 51,410    |  |      | 43,268    |   |  |   | 38,134    |  
|Provision (credit) for loan losses                           |  |                                               | 697       |      |   | (136      | )    |  |      | 518       |  |      | (22       | ) |  |   | (579      | )
|                                                             |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|Net interest income after provision (credit) for loan losses |  |                                               | 52,952    |      |   | 56,733    |      |  |      | 50,892    |  |      | 43,290    |   |  |   | 38,713    |  
|Noninterest income                                           |  |                                               | 9,648     |      |   | 10,509    |      |  |      | 8,665     |  |      | 8,618     |   |  |   | 8,355     |  
|Noninterest expense (1)                                      |  |                                               | 52,482    |      |   | 52,370    |      |  |      | 44,206    |  |      | 50,715    |   |  |   | 64,061    |  
|                                                             |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|Income (loss) before income tax expense                      |  |                                               | 10,118    |      |   | 14,872    |      |  |      | 15,351    |  |      | 1,193     |   |  |   | (16,993   | )
|Income tax expense (benefit)                                 |  |                                               | 2,963     |      |   | 4,826     |      |  |      | 4,278     |  |      | (264      | ) |  |   | (7,415    | )
|                                                             |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|Net income (loss)                                            |  | $                                             | 7,155     |      | $ | 10,046    |      |  | $    | 11,073    |  | $    | 1,457     |   |  | $ | (9,578    | )
|                                                             |  |                                               |           |      |   |           |      |  |      |           |  |      |           |   |  |   |           |  
|                                                             |  |                                               |           |      |  
|Basic earnings per common share                              |  | $                                             | 0.35      |      | $ | 0.45      |      |  | $    | 0.29      |  |      | N.A.      |   |  |   | N.A.      |  
|Diluted earnings per common share                            |  | $                                             | 0.35      |      | $ | 0.45      |      |  | $    | 0.29      |  |      | N.A.      |   |  |   | N.A.      |  



N.A.  Not applicable

(footnotes on following page)



22



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|                                                                        |  |                                        |        |   |      |   |        |      |  |   |        |   |  |        |   |  |        |   
|----------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ------ | - |  | ------ | --
|                                                                        |  | At or For the Years Ended December 31, |       
|                                                                        |  | 2007                                   |        |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003   |  
|Selected Financial Ratios and Other Data:                               |  |                                        |        |   |      |   |        |      |  |   |        |   |  |        |   |  |        |   
|                                                                        |  |                                        |        |   |     
|Performance Ratios:                                                     |  |                                        |        |   |      |   |        |      |  |   |        |   |  |        |   |  |        |   
|Return on assets (ratio of net income (loss) to average total assets)   |  |                                        | 0.47   | % |      |   | 0.61   | %    |  |   | 0.70   | % |  | 0.10   | % |  | (0.66  | %)
|Return on equity (ratio of net income (loss) to average equity)         |  |                                        | 2.30   |   |      |   | 3.02   |      |  |   | 5.18   |   |  | 1.54   |   |  | (9.98  | ) 
|Net interest rate spread (2)                                            |  |                                        | 2.94   |   |      |   | 2.89   |      |  |   | 3.04   |   |  | 2.96   |   |  | 2.50   |   
|Net interest margin (3)                                                 |  |                                        | 3.78   |   |      |   | 3.68   |      |  |   | 3.44   |   |  | 3.14   |   |  | 2.77   |   
|Efficiency ratio (4)                                                    |  |                                        | 82.91  |   |      |   | 78.04  |      |  |   | 73.58  |   |  | 97.74  |   |  | 137.80 |   
|Noninterest expense to average total assets                             |  |                                        | 3.42   |   |      |   | 3.19   |      |  |   | 2.79   |   |  | 3.46   |   |  | 4.39   |   
|Average interest-earning assets to average interest-bearing liabilities |  |                                        | 130.95 |   |      |   | 132.67 |      |  |   | 120.45 |   |  | 110.49 |   |  | 111.72 |   
|Dividends declared per share                                            |  | $                                      | 0.28   |   |      | $ | 0.18   |      |  | $ |       |   |  | N.A.   |   |  | N.A.   |   
|Dividend payout ratio                                                   |  |                                        | 90.6   | % |      |   | 44.3   | %    |  |   |       |   |  | N.A.   |   |  | N.A.   |   
|                                                                        |  |                                        |        |   |     
|Asset Quality Ratios:                                                   |  |                                        |        |   |      |   |        |      |  |   |        |   |  |        |   |  |        |   
|Nonperforming assets to total assets                                    |  |                                        | 0.87   | % |      |   | 0.57   | %    |  |   | 0.36   | % |  | 0.44   | % |  | 0.60   | % 
|Nonperforming loans to total loans                                      |  |                                        | 0.95   |   |      |   | 0.69   |      |  |   | 0.46   |   |  | 0.59   |   |  | 0.66   |   
|Allowance for loan losses to nonperforming loans                        |  |                                        | 91.65  |   |      |   | 115.13 |      |  |   | 201.19 |   |  | 168.90 |   |  | 169.02 |   
|Allowance for loan losses to total loans                                |  |                                        | 0.87   |   |      |   | 0.79   |      |  |   | 0.93   |   |  | 1.00   |   |  | 1.12   |   
|Net charge-offs (recoveries) to average loans outstanding               |  |                                        | 0.02   |   |      |   | 0.07   |      |  |   | 0.00   |   |  | 0.09   |   |  | (0.01  | ) 
|                                                                        |  |                                        |        |   |     
|Capital Ratios:                                                         |  |                                        |        |   |      |   |        |      |  |   |        |   |  |        |   |  |        |   
|Equity to total assets at end of period                                 |  |                                        | 19.66  | % |      |   | 20.21  | %    |  |   | 20.36  | % |  | 6.36   | % |  | 6.63   | % 
|Average equity to average assets                                        |  |                                        | 20.32  |   |      |   | 20.25  |      |  |   | 13.48  |   |  | 6.45   |   |  | 6.58   |   
|Tier 1 leverage ratio (bank only)                                       |  |                                        | 13.95  |   |      |   | 15.05  |      |  |   | 13.82  |   |  | 7.12   |   |  | 7.18   |   
|                                                                        |  |                                        |        |   |     
|Other Data:                                                             |  |                                        |        |   |      |   |        |      |  |   |        |   |  |        |   |  |        |   
|Number of full service offices                                          |  |                                        | 18     |   |      |   | 18     |      |  |   | 16     |   |  | 16     |   |  | 16     |   
|Employees (full time equivalents)                                       |  |                                        | 425    |   |      |   | 438    |      |  |   | 451    |   |  | 446    |   |  | 482    |   



|(1) | Noninterest expense for the year ended December 31, 2004 includes $8.8 million of impairment loss on securities available-for-sale. Noninterest expense for the year ended
December 31, 2003 includes $8.3 million of prepayment penalties related to the restructuring of Federal Home Loan Bank advances and $12.5 million of impairment loss on securities available-for-sale.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



23



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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, 2007 and 2006, and our consolidated results of operations for the years ended
December 31, 2007, 2006 and 2005. The consolidated financial statements and 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.Net loans
receivable decreased $76.1 million, or 5.7%, to $1.254 billion at December 31, 2007, from $1.330 billion at December 31, 2006, primarily due to planned decreases in construction and land loans and one- to four-family residential mortgage
loans. Construction and land loans decreased by $20.7 million. One- to four-family residential mortgage loans decreased by $52.3 million, partially due to the securitization of $23.5 million of conforming adjustable-rate residential mortgage loans
with Fannie Mae. Non-residential real estate loans increased by $5.2 million. Commercial loans decreased by $6.1 million and commercial leases increased by $5.7 million. Multi-family real estate loans decreased by $5.7 million. Future loan growth
could be adversely affected by our unwillingness to compete for loans by relaxing our historical underwriting standards.

Securities Available for
Sale.Securities available for sale decreased $40.8 million, or 34.6%, to $77.0 million at December 31, 2007, from $117.9 million at December 31, 2006. The primary reasons for the decrease were the maturing of
$46.7 million in securities, excluding the activity in the short-term discount notes, and a negative $12.0 million change in market value principally related to our Freddie Mac preferred stocks. The decrease was partially offset by our
securitization of $23.5 million of conforming adjustable-rate residential mortgage loans with Fannie Mae during the fourth quarter of 2007. We received securities in exchange for the securitized loans, and recorded no gain or loss on the
transaction.

Deposits.Deposits decreased $55.9 million, or 5.0%, to $1.074 billion at December 31, 2007, from
$1.130 billion at December 31, 2006. The decrease was primarily due to a $19.5 million decrease in wholesale certificates of deposit and a $37.8 million decrease in retail certificates of deposit.

Borrowings.Borrowings decreased $41.7 million, or 30.2%, to $96.4 million at December 31, 2007, from $138.1 million at December 31, 2006,
primarily due to our decision to repay $66.0 million in maturing FHLB of Chicago advances.

Stockholders Equity.Total
stockholders equity totaled $291.1 million at December 31, 2007, compared to $326.0 million at December 31, 2006. The decrease in total stockholders equity was primarily due to our repurchase of 2,077,923 shares of our common
stock at an aggregate cost of $34.0 million, the declaration and payment of cash dividends totaling $6.5 million, and a $7.2 million decrease in accumulated other comprehensive income. These changes were partially offset by our 2007 net income of
$7.2 million and a $5.6 million increase resulting from the vesting of stock based compensation and ESOP shares earned.

Net Income.We had net income of $7.2 million for the year ended December 31, 2007, compared to net income of $10.0 million in 2006 and $11.1 million in 2005. Our basic earnings per common share was $0.35 and $0.45 for the years ended December 31,
2007 and 2006, respectively. Our basic earnings per share for 2005 was $0.29, representing basic earnings per share for the partial year beginning on June 23, 2005, the date that we completed our mutual-to-stock conversion, and ending on
December 31, 2005.

Net Interest Income.Net interest income decreased $3.0 million to $53.6 million for the year ended
December 31, 2007, from $56.6 million for the year ended December 31, 2006. Among the principal factors contributing to the decrease in net interest income was a $4.1 million decrease in interest earned on investment securities
available-for-sale due to a $117.0 million decline in the average investment securities available-for-sale balance. In addition, interest expense increased $815,000, primarily due to a 31 basis point increase in the average cost of interest-bearing
liabilities.



24



---

Provision for Loan Losses.We recorded a provision for loan losses of $697,000 for the year ended
December 31, 2007, compared to credit for loan losses of $136,000 for 2006 and a provision for loan losses of $518,000 for 2005.

Noninterest
Income.Noninterest income totaled $9.6 million for the year ended December 31, 2007, compared to $10.5 million for 2006 and $8.7 million in 2005. The decrease from 2007 to 2006 was due in part to a $592,000 decrease in deposit
service charges and fees, a $314,000 decrease in insurance commissions and annuities income and a $92,000 decrease in title insurance agency commissions and fees. Gains on the sale of securities totaled $399,000 for the year ended December 31,
2007, compared to $101,000 in 2006 and no gains or losses on the sale of securities in 2005. There was a $9,000 gain on the disposition of premises and equipment for the year ended December 31, 2007, compared to gains of $395,000 and $21,000
for the years ended December 31, 2006 and 2005, respectively.

Noninterest Expense.Noninterest expense for the year ended
December 31, 2007 was $52.5 million, compared to $52.4 million for 2006 and $44.2 million for 2005. Compensation and benefits expense for 2007 included $5.1 million in stock-based compensation expense, compared to $5.4 million in 2006 and
$718,000 in 2005. In addition, noninterest expense for 2007 included a $1.2 million pre-tax charge, which reflected our proportionate share of Visas estimated litigation obligations, compared to no such expense for the years ended
December 31, 2006 and 2005.

Income Taxes.We recorded income tax expense of $3.0 million for the year ended December 31,
2007, compared to $4.8 million for 2006 and $4.3 million for 2005.

Key Strategic Initiatives And Events

Stock Repurchase Program.Our Board of Directors has authorized the repurchase of up to 3,605,384 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. On
September 28, 2007 the Board of Directors extended the expiration date of the share repurchase authorization until March 31, 2008. As of December 31, 2007, we had repurchased 3,055,223 shares of common stock at an aggregate cost of
$51.2 million pursuant to this authorization.

Quarterly Cash Dividends. Our Board of Directors declared four quarterly cash dividends of
$0.07 per share during 2007. Total cash dividends paid in 2007 were $6.5 million. On January 31, 2008, the Board of Directors declared a quarterly dividend of $0.07 per share payable on March 7, 2008.

Equity Incentive Plan.On June 27, 2006, our stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan, which authorized the
Human Resources Committee of the Board of Directors to grant a variety of cash-based 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 our common stock. In 2006 and 2007, the Human Resources Committee awarded stock options to purchase 1,602,200 shares of our common stock and 833,450 shares of restricted stock to certain employees
and directors of the Company. The 2006 Equity Incentive Plan was established by the Board of Directors to promote the long-term financial success of the Company, to attract, retain and reward persons who can and do contribute to such success, and to
further align the participants interests with those of our stockholders.

On February 20, 2008, the Board of Directors approved certain
amendments to the 2008 Board compensation program and the 2007 management incentive compensation program based on the recommendation of the Boards Human Resources Committee. The Board determined that, commencing in March of 2008, the fee
payable for service on the Board will be paid in the form of stock options instead of cash. The Board increased the value of the board fees by 10% to compensate the Directors for accepting the market risk associated with the stock option awards.



25



---

The amendments further provide that participants in the management incentive compensation program, including the
Companys Chief Executive Officer, Chief Financial Officer and certain other officers, may elect to receive some or all of the incentive compensation they earned for 2007 in the form of stock options instead of cash. If participants elect to
receive stock options, they will receive that number of stock options with a grant date fair value (calculated according to the Companys GAAP expense for the stock options in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123R,) equal to the amount of the cash incentive compensation foregone. Participants will receive additional stock options with a grant date fair value equal to 10% of the stock options received in lieu of the cash
incentive award to compensate participants for the additional market risk associated with the stock option awards. The stock options granted in lieu of the cash incentive compensation will be fully vested at grant, while 50% of the additional
options will vest on December 15, 2008 and the remaining 50% will vest on June 15, 2009.

Economic And Competitive Conditions

Business conditions exhibited increasing uncertainty as 2007 progressed. In general, market conditions were more competitive in 2007, especially with respect to the
pricing for new and existing core deposit accounts. Pricing for high-quality loans worsened for most of 2007 but began to improve late in 2007 as capital market conditions deteriorated. The strength of the U.S. economy faltered as the year
concluded; in response, the U.S. Treasury curve became more favorable for the Company in 2008.

We experienced modest growth in our combined
multifamily/commercial real estate and commercial leasing portfolios. We also experienced stronger growth in our commercial loan portfolio, but our successful resolutions of certain healthcare loans resulted in a net balance reduction for 2007. Our
residential and construction portfolios declined during the year consistent with our planning. We expect that the uncertainty surrounding the U.S. economy and certain real estate markets will increase the unpredictability of the volume of our loan
originations and loan repayments in 2008.

Our overall loan portfolio quality remained essentially constant during 2007. We encountered isolated situations
where multifamily or small commercial real estate borrowers were unable to properly manage their investment property cash flows or had difficulty maintaining occupancy due to neighborhood safety issues. We expect that most cases will be resolved
during 2008 with little or no negative financial consequences for the Company.

Our construction loan portfolio quality remained stable as we reduced the
portfolio balances significantly during 2007. We are closely monitoring the capability of certain borrowers to continue making debt service payments on their construction projects. We expect that there will be isolated cases where we elect not to
renew certain construction loans and pursue either negotiated collateral dispositions or formal legal remedies if the borrower is unable to continue scheduled debt service or proposes unacceptable exit solutions.

As we expected, pursuant to our model, our general loan loss reserves continued to increase due to the changes in national and local economic risk factors. We continue
to believe that adherence to our historical loan underwriting standards remains appropriate.

Deposits declined in 2007 due in part to our decision to
reduce interest rates on higher-balance money market accounts and certificates of deposit consistent with overall declines in the Prime Rate and U.S. Treasury yields. Competition for deposits from certain institutions increased, however, as
competitors maintained constant deposit interest rates on higher-balance checking, savings, money market and certificates of deposit accounts; accordingly, our customer retention activities resulted in balance migration to higher-yielding accounts.
We expect the intensity of this competition to moderate to a limited extent in 2008, but this could be offset by the continued pressures from competitors with mortgage- or construction-related liquidity issues or competitors engaged in de novo
branch office expansion.

Our net interest margin and net interest spread were relatively stable during the year. Nonetheless, we believe that such
behavior may not necessarily continue because of further reductions in our construction and healthcare loan portfolios and continued deposit pricing pressures. These factors could be offset by a more favorable interest rate environment and
potentially widening commercial credit spreads on multifamily and commercial real estate loans. In addition, on a comparative basis, other factors affecting net interest margin include the cumulative effects of our share repurchase program and the
fact that our 2007 investment in Bank-Owned Life Insurance produces non-



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interest income rather than interest income. We expect that these factors will continue to affect our net interest margin in future quarters; however, we are
also focused on generating positive influences through the further diversification of our commercial credit portfolio, optimization of the overall mix of the loan portfolio and gathering non-interest bearing deposits from local small businesses.

Non-interest income declined in 2007 due in part to reduced fee income on deposit accounts and a lower volume of insurance-related sales. We believe that
deposit fee income could improve modestly but Title Insurance and Wealth Management will not contribute as strongly to earnings in 2008 as in 2007.

Our
focus on organizational efficiency resulted in a reduction of core operating expenses in 2007; overall expenses rose due to non-recurring factors involving a $250,000 fraud loss that we recorded in connection with claims that we settled with the
bankruptcy trustee and our blanket bond carrier for defalcations committed by a third party loan servicing company and liabilities arising from our membership in Visa USA. We expect expenses for marketing (especially retail deposits and small
business customers), commercial business development personnel and certain technology investments related to customer service and commercial loan operations to increase in 2008, but the increase is expected to be partially offset by continued
targeted reductions in staff and expenses consistent with the results of performance reviews and new technology deployments.

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:

Investment Securities. The classification and accounting for investment securities are discussed
in detail in Note 1 of the Consolidated Financial Statements presented elsewhere herein. Under SFAS No 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities must be classified as held-to maturity, available-for
sale, or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on managements intentions with respect to either holding or selling the securities. The classification of
investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders
equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment securities are generally determined by reference to quoted market prices and reliable independent sources We are
obligated to assess, at each reporting date whether there is an other-than-temporary impairment to our investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income (loss).
Investment securities are discussed in more detail in Note 4 to the Consolidated Financial Statements presented elsewhere herein.

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; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we
believe that we use the best information available 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 must follow SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires us to record as assets on our financial statements both goodwill, an intangible asset which 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. Under SFAS No. 142, we evaluate goodwill
at least annually, or when business conditions suggest an impairment may have occurred, for impairment, and we will reduce its carrying value through a charge to earnings if 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 recoverable. The valuation
techniques used by us 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



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affect their value or estimated lives could have a material adverse impact on our results of operations. As of December 31, 2007, our intangible assets
consisted of goodwill of $22.6 million and core deposit intangibles of $7.8 million.

Mortgage Servicing Rights. Mortgage servicing rights
represent the present value of the future servicing fees from the right to service loans in our loan servicing portfolio. Mortgage servicing rights are recognized as assets for the allocation value of retained servicing rights on loans sold. The
most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires a number of estimates, the most critical of which is the mortgage loan
prepayment speed assumption. The mortgage loan prepayment speed assumption is significantly affected by interest rates. In general, during periods of falling interest rates, mortgage loans prepay faster and the value of our mortgage servicing assets
declines. Conversely, during periods of rising rates, the value of mortgage servicing rights generally increases due to slower rates of prepayments. The amount and timing of mortgage servicing rights amortization is adjusted monthly based on actual
results. In addition, on a quarterly basis, we perform a valuation review of mortgage servicing rights for potential declines in value. This quarterly valuation review entails applying current assumptions to the portfolio classified by interest
rates and, secondarily, by geographic and prepayment characteristics. Based on the significance of any changes in assumptions since the preceding appraisal, this valuation may include an independent appraisal of the fair value of our servicing
portfolio.

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 allowances were required at December 31, 2007. Although we have determined a valuation allowance is not required for any deferred tax assets, there is no
guarantee that these assets will be recognizable in the future.

Comparison of Financial Condition at December 31, 2007 and December 31, 2006

Balance Sheet

Total assets decreased $132.8
million, or 8.2%, to $1.481 billion at December 31, 2007, from $1.613 billion at December 31, 2006. The principal reasons for the decrease in total assets were reductions in construction and land loans, one- to four-family residential
mortgage loans, and securities.

Our loan portfolio consists primarily of investment and business loans, which make up approximately 72.0% of our gross
loans. Net loans receivable decreased $76.1 million, or 5.7%, to $1.254 billion at December 31, 2007, from $1.330 billion at December 31, 2006, primarily due to planned decreases in construction and land loans and one- to four-family
residential mortgage loans. Construction and land loans decreased by $20.7 million, or 24.3%, to $64.5 million. One- to four-family residential mortgage loans decreased by $52.3 million, or 13.2%, to $345.2 million, partially due to the
securitization of $23.5 million of conforming adjustable rate residential mortgage loans with Fannie Mae. Commercial leases increased by $5.7 million, or 4.1%, to $144.8 million. Commercial loans decreased by $6.1 million, or 6.8%, to $83.2 million.
Multi-family real estate loans decreased by $5.7 million, or 1.9%, to $291.4 million.

Our allowance for loan losses increased by $429,000, from $10.62
million at December 31, 2006 to $11.05 million at December 31, 2007, due principally to a $404,000 increase in the portion of the allowance for loan losses that we allocate to impaired loans pursuant to SFAS No. 114 and a $25,000 net
increase in the general loan loss reserves that we establish pursuant to SFAS No. 5, Accounting for Contingencies, based on changes to the economic factors utilized in our model. As of December 31, 2007, our SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, allocation for impaired loans totaled $806,000.

Net securities available-for-sale decreased
$40.8 million, or 34.6%, to $77.0 million at December 31, 2007, from $117.9 million at December 31, 2006. The primary reasons for the decrease were the maturing of $46.7 million in



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securities, excluding the activity in the short-term discount notes, and a negative $12.0 million change in market value principally related to our Freddie
Mac preferred stocks. The decrease was partially offset by our securitization of $23.5 million of conforming adjustable rate residential mortgage loans with Fannie Mae during the fourth quarter of 2007. We received securities in exchange for the
securitized loans, and recorded no gain or loss on the transaction.

Cash and cash equivalents decreased by $38.4 million to $28.9 million at
December 31, 2007, compared to $67.3 million at December 31, 2006. The decrease was due in part to our purchase of $19.0 million of Bank-Owned Life Insurance during 2007. Other assets increased by $6.3 million, or 89.2%, to $13.3 million
at December 31, 2007, from $7.0 million at December 31, 2006, principally due to an increase in deferred taxes.

Deposits decreased $55.9
million, or 5.0%, to $1.074 billion at December 31, 2007, from $1.130 billion at December 31, 2006. The decrease was primarily due to a $19.5 million, or 90.7%, decrease in wholesale certificates of deposit and a $37.8 million, or 11.0%,
decrease in retail certificates of deposit. Total core deposits (savings, money market, noninterest bearing demand and NOW accounts) increased slightly as a percentage of total deposits, representing 71.3% of total deposits at December 31,
2007, compared to 69.4% of total deposits at December 31, 2006.

Borrowings decreased $41.7 million, or 30.2%, to $96.4 million at December 31,
2007, from $138.1 million at December 31, 2006, primarily due to our decision to repay $66.0 million in maturing FHLB of Chicago advances. Overall, FHLB of Chicago advances decreased $48.5 million, or 37.3%, to $81.5 million, from $130.0
million at December 31, 2006.

Total stockholders equity totaled $291.1 million at December 31, 2007, compared to $326.0 million at
December 31, 2006. The decrease on total stockholders equity was primarily due to our repurchase of 2,077,923 shares of our common stock at an aggregate cost of $34.0 million, the declaration and payment of cash dividends totaling $6.5
million, and a $7.2 million decrease in accumulated other comprehensive income due principally to a change in the fair value of our investments in Freddie Mac preferred stock. These changes were partially offset by our 2007 net income of $7.2
million and a $5.6 million increase resulting from the vesting of stock based compensation and ESOP shares earned.

Loan Portfolio

We originate multi-family mortgage loans, nonresidential real estate loans, commercial loans, commercial leases, and construction and land loans. In addition, we
originate one- to four-family residential mortgage loans and consumer loans. We also 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 mortgages totaled approximately $291.4 million, or 23.1% of our total loan portfolio at
December 31, 2007. 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.

Nonresidential Real Estate Loans.Loans secured by
nonresidential real estate totaled $325.9 million, or 25.8% of our total loan portfolio at December 31, 2007. 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 $83.2 million, or 6.6% of our total loan portfolio at December 31, 2007. These totals include unsecured
commercial loans with an aggregate outstanding balance of $9.4 million. We



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generally make 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 a lending rate that is determined
internally, or a short-term market rate index.

Commercial Leases.Commercial leases totaled $144.8 million, or 11.5% of our total
loan portfolio at December 31, 2007. Our commercial leases are secured primarily by technology equipment, material handling equipment, and other capital equipment through an assignment of the lease and a security interest in the equipment being
leased. Leases generally are non-recourse to the leasing company. Consequently, we underwrite leases by examining the creditworthiness of the lessee rather than the lessor. The lessee acknowledges our security interest in the leased equipment and
generally agrees to send lease payments directly to us. Lessees tend to be publicly-traded companies with a public debt rating or companies that have not issued public debt and therefore do not have a public debt rating. As of December 31,
2007, 53.1% of our commercial lease portfolio involved lessees with investment-grade rated debt, 5.5% involved lessees with debt rated below investment-grade, and 41.4% involved lessees with no public debt rating. We require that a maximum of 10% of
our commercial lease portfolio can involve lessees with debt rated below investment-grade. Ratings are determined by Moodys, Standard & Poors, Fitch, or AM Bests or an equivalent rating. Commercial leases have a maximum maturity
of nine years and a maximum outstanding credit exposure of $11.4 million to any single entity. Leases to companies without public debt ratings generally involve companies with net worth in excess of $25.0 million and are subjected to the same
internal credit analysis as any other commercial customer. Commercial leases to these lessees have a maximum maturity of seven years and a maximum outstanding credit exposure of $11.4 million.

Construction and Land Loans. Construction and land loans amounted to $64.5 million, or 5.1% of the total loan portfolio at December 31, 2007. These
loans generally consist of land acquisition loans to help finance the purchase of land intended for further development, including single-family houses, 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. 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 a 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 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.

One- to Four-Family Residential Mortgage Lending.Conforming and non-conforming fixed-rate and adjustable-rate residential mortgage loans totaled $345.2 million, or 27.3% of our total loan portfolio at
December 31, 2007, including home equity loans and lines of credit totaling $17.2 million, or 1.4% of our total loan portfolio, and $77.2 million, or 6.1% of our total loan portfolio, respectively. We generally originate 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%. At December 31, 2007, our adjustable-rate residential mortgage loan portfolio totaled $175.9 million, and included $71.5 million in loans that reprice once a year and $104.4 million in loans that reprice periodically after an
initial fixed-rate period of three years or more. During 2007 and 2005, we securitized some of our conforming adjustable-rate residential mortgage loans and retained the servicing rights. In addition to traditional one- to four-family residential
mortgage loans, we offer home equity loans and home equity lines of credit that are secured by the borrowers primary residence.

We also originate
loans above conforming limits, 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 our market, the Chicago metropolitan area, larger residential loans are not uncommon. We also originate loans that do not fully meet the credit standards of Fannie Mae if they are deemed to be 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.



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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,        |          
|                                    |  | 2007                   |           |   | 2006    |        |   | 2005   |   |           | 2004    |  |        | 2003   | 
|                                    |  | Amount                 |           |   | Percent |        |   | Amount |   |           | Percent |  |        | Amount |  |   | Percent   |   |  | Amount |   |  | Percent |           |   | Amount |        |   | Percent |  
|                                    |  | (Dollars in thousands) |          
|One- to four-family residential     |  | $                      | 345,245   |   |         | 27.33  | % |        | $ | 397,545   |         |  | 29.71  | %      |  | $ | 404,196   |   |  | 32.63  | % |  | $       | 362,701   |   |        | 32.97  | % |         | $ | 350,275   |   |  | 32.54  | %
|Multi-family mortgage               |  |                        | 291,395   |   |         | 23.07  |   |        |   | 297,131   |         |  | 22.20  |        |  |   | 280,238   |   |  | 22.62  |   |  |         | 241,713   |   |        | 21.97  |   |         |   | 240,733   |   |  | 22.36  |  
|Nonresidential real estate          |  |                        | 325,885   |   |         | 25.80  |   |        |   | 320,729   |         |  | 23.97  |        |  |   | 275,418   |   |  | 22.23  |   |  |         | 277,380   |   |        | 25.22  |   |         |   | 270,128   |   |  | 25.09  |  
|Construction and land               |  |                        | 64,483    |   |         | 5.10   |   |        |   | 85,222    |         |  | 6.37   |        |  |   | 80,705    |   |  | 6.52   |   |  |         | 59,369    |   |        | 5.40   |   |         |   | 64,403    |   |  | 5.98   |  
|Commercial loans                    |  |                        | 83,233    |   |         | 6.59   |   |        |   | 89,346    |         |  | 6.68   |        |  |   | 68,988    |   |  | 5.58   |   |  |         | 63,727    |   |        | 5.79   |   |         |   | 67,950    |   |  | 6.31   |  
|Commercial leases                   |  |                        | 144,841   |   |         | 11.47  |   |        |   | 139,164   |         |  | 10.40  |        |  |   | 121,898   |   |  | 9.84   |   |  |         | 86,362    |   |        | 7.85   |   |         |   | 72,962    |   |  | 6.78   |  
|Consumer                            |  |                        | 3,506     |   |         | 0.28   |   |        |   | 4,045     |         |  | 0.30   |        |  |   | 2,022     |   |  | 0.16   |   |  |         | 2,755     |   |        | 0.25   |   |         |   | 3,502     |   |  | 0.32   |  
|Other (1)                           |  |                        | 4,544     |   |         | 0.36   |   |        |   | 4,959     |         |  | 0.37   |        |  |   | 5,219     |   |  | 0.42   |   |  |         | 6,044     |   |        | 0.55   |   |         |   | 6,621     |   |  | 0.62   |  
|                                    |  |                        |           |   |         |        |   |        |   |           |         |  |        |        |  |   |           |   |  |        |   |  |         |           |   |        |        |   |         |   |           |   |  |        |  
|Total loans                         |  |                        | 1,263,132 |   |         | 100.00 | % |        |   | 1,338,141 |         |  | 100.00 | %      |  |   | 1,238,684 |   |  | 100.00 | % |  |         | 1,100,051 |   |        | 100.00 | % |         |   | 1,076,574 |   |  | 100.00 | %
|                                    |  |                        |           |   |         |        |   |        |   |           |         |  |        |        |  |   |           |   |  |        |   |  |         |           |   |        |        |   |         |   |           |   |  |        |  
|                                    |  |                        |           |   |         |        |   |        |   |          
|Loans in process                    |  |                        | (168      | ) |         |        |   |        |   | 148       |         |  |        |        |  |   | 2,180     |   |  |        |   |  |         | 824       |   |        |        |   |         |   | 993       |   |  |        |  
|Net deferred loan origination costs |  |                        | 2,086     |   |         |        |   |        |   | 2,424     |         |  |        |        |  |   | 2,541     |   |  |        |   |  |         | 2,096     |   |        |        |   |         |   | 1,715     |   |  |        |  
|Allowance for loan losses           |  |                        | (11,051   | ) |         |        |   |        |   | (10,622   | )       |  |        |        |  |   | (11,514   | ) |  |        |   |  |         | (11,019   | ) |        |        |   |         |   | (12,034   | ) |  |        |  
|                                    |  |                        |           |   |         |        |   |        |   |           |         |  |        |        |  |   |           |   |  |        |   |  |         |           |   |        |        |   |         |   |           |   |  |        |  
|Total loans, net                    |  | $                      | 1,253,999 |   |         |        |   |        | $ | 1,330,091 |         |  |        |        |  | $ | 1,231,891 |   |  |        |   |  | $       | 1,091,952 |   |        |        |   |         | $ | 1,067,248 |   |  |        |  
|                                    |  |                        |           |   |         |        |   |        |   |           |         |  |        |        |  |   |           |   |  |        |   |  |         |           |   |        |        |   |         |   |           |   |  |        |  



|(1) | Includes municipal loans.
|--- | -------------------------



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Loan Portfolio Maturities

The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2007. Demand loans, loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less.



|                                     |  |                        |         |                           |   |                  |  |       |         |  |   |          
|------------------------------------ |  | ---------------------- | ------- | ------------------------- | - | ---------------- |  | ----- | ------- |  | - | ---------
|                                     |  | Within OneYear         |         | One YearThroughFive Years |   | Beyond FiveYears |  | Total
|                                     |  | (Dollars in thousands)
|Scheduled Repayments of Loans:       |  |                        |        
|One- to four-family residential      |  | $                      | 40,429  |                           | $ | 62,328           |  | $     | 242,488 |  | $ | 345,245  
|Multi-family mortgage                |  |                        | 18,548  |                           |   | 97,919           |  |       | 174,928 |  |   | 291,395  
|Nonresidential real estate           |  |                        | 100,565 |                           |   | 189,952          |  |       | 35,368  |  |   | 325,885  
|Construction and land                |  |                        | 55,842  |                           |   | 8,394            |  |       | 247     |  |   | 64,483   
|Commercial loans, leases and other   |  |                        | 135,510 |                           |   | 91,561           |  |       | 5,547   |  |   | 232,618  
|Consumer                             |  |                        | 2,346   |                           |   | 745              |  |       | 415     |  |   | 3,506    
|                                     |  |                        |         |                           |   |                  |  |       |         |  |   |          
|Total loans                          |  | $                      | 353,240 |                           | $ | 450,899          |  | $     | 458,993 |  | $ | 1,263,132
|                                     |  |                        |         |                           |   |                  |  |       |         |  |   |          
|                                     |  |                        |         |                          
|                                     |  |                        |         |                           |   |                  |  | Total
|Loans maturing after one year:       |  |                        |         |                           |   |                  |  |       |         |  |   |          
|Predetermined (fixed) interest rates |  |                        |         |                           |   |                  |  |       |         |  | $ | 463,401  
|Adjustable interest rates            |  |                        |         |                           |   |                  |  |       |         |  |   | 446,491  
|                                     |  |                        |         |                           |   |                  |  |       |         |  |   |          
|Total loans                          |  |                        |         |                           |   |                  |  |       |         |  | $ | 909,892  
|                                     |  |                        |         |                           |   |                  |  |       |         |  |   |          

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 believe that
there is sufficient reason to question the borrowers ability to continue to meet contractual principal or interest payment obligations. 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 polices. We may have loans classified as 90 days or more delinquent and still accruing. Generally, the Bank does not utilize this
category of loan classification unless: (1) the loan is repaid in full shortly after period end date or; (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,
2007 and 2006, we had no loans in this category.

At December 31, 2007, we had nonaccrual loans of $12.1 million, an increase of $2.8 million from
December 31, 2006. Increases in nonaccrual loans occurred in multifamily real estate loans ($3.0 million), commercial loans ($332,000), construction and land loans ($988,000) and commercial leases ($65,000). Decreases in nonaccrual loans
occurred in nonresidential real estate loans ($1.6 million) and one- to four-family residential loans ($16,000). At December 31, 2007, no accrued interest on nonaccrual loans has been recognized. The increase in nonaccrual multifamily loans was
due in substantial part to our placing on non-accrual status a $2.7 million loan that is secured by an apartment building located in a northern Chicago suburb. We placed the loan on non-accrual status because the borrowers used the investment
property cash flow to make equity investor distributions rather than to make scheduled loan payments that were due on or before December 31, 2007. We subsequently entered into a forbearance agreement with the borrowers that is expected to
restore the loan to accrual status by the end of the first quarter of 2008. The same borrowers have a second loan that is secured by a similarly-situated apartment building that remained on accrual status as of December 31, 2007. At
December 31, 2007, the gross non-accrued interest totaled $470,000.



32



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Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned
(REO) until such time as 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 estimated costs of disposal. If the fair value of the property is less than
the loan balance, the difference is charged against the allowance for loan losses. At December 31, 2007, we had REO consisting of a one- to four- family residential property with a fair value of $252,000 and two nonresidential real estate
properties with a fair value of $568,000; at December 31, 2006 we had no REO. The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets at the dates indicated.



|                                     |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                     |  | At December 31,        |       
|                                     |  | 2007                   |        |   | 2006 |   |       | 2005 |  |   | 2004  |   |  | 2003 |      
|                                     |  | (Dollars in thousands) |       
|Nonaccrual loans:                    |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|One- to four-family residential      |  | $                      | 2,196  |   |      | $ | 2,212 |      |  | $ | 1,484 |   |  | $    | 1,725 |   |  | $ | 2,793 |  
|Multi-family mortgage                |  |                        | 4,186  |   |      |   | 1,165 |      |  |   | 477   |   |  |      | 1,226 |   |  |   |      |  
|Nonresidential real estate           |  |                        | 2,823  |   |      |   | 4,378 |      |  |   | 2,464 |   |  |      | 2,093 |   |  |   | 3,616 |  
|Construction and land                |  |                        | 988    |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   | 345   |  
|Commercial loans                     |  |                        | 1,751  |   |      |   | 1,419 |      |  |   | 1,159 |   |  |      | 1,259 |   |  |   | 366   |  
|Commercial leases                    |  |                        | 112    |   |      |   | 47    |      |  |   | 139   |   |  |      | 221   |   |  |   |      |  
|Consumer                             |  |                        | 2      |   |      |   | 5     |      |  |   |      |   |  |      |      |   |  |   |      |  
|                                     |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total nonperforming loans            |  |                        | 12,058 |   |      |   | 9,226 |      |  |   | 5,723 |   |  |      | 6,524 |   |  |   | 7,120 |  
|                                     |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                     |  |                        |        |   |     
|Real estate owned:                   |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|One- to four-family residential      |  |                        | 252    |   |      |   |      |      |  |   | 153   |   |  |      |      |   |  |   | 749   |  
|Nonresidential real estate           |  |                        | 568    |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Land                                 |  |                        |       |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   | 885   |  
|                                     |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total real estate owned              |  |                        | 820    |   |      |   |      |      |  |   | 153   |   |  |      |      |   |  |   | 1,634 |  
|                                     |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                     |  |                        |        |   |     
|Total nonperforming assets           |  | $                      | 12,878 |   |      | $ | 9,226 |      |  | $ | 5,876 |   |  | $    | 6,524 |   |  | $ | 8,754 |  
|                                     |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                     |  |                        |        |   |     
|Ratios:                              |  |                        |        |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonperforming loans to total loans   |  |                        | 0.95   | % |      |   | 0.69  | %    |  |   | 0.46  | % |  |      | 0.59  | % |  |   | 0.66  | %
|Nonperforming assets to total assets |  |                        | 0.87   |   |      |   | 0.57  |      |  |   | 0.36  |   |  |      | 0.44  |   |  |   | 0.60  |  

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. An asset is
considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, 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 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.

On the basis of our review of our assets at December 31, 2007, classified assets consisted of substandard assets of $27.4 million and doubtful assets
of $562,000, and we had no loans classified as loss assets. The classified assets total includes $8.5 million of nonperforming loans. Included in substandard assets are $16.7 million of loans to healthcare providers. As of December 31, 2007, we
had not taken any charge-offs on loans to healthcare providers, but we established a specific loan loss reserve allowance in the amount of $259,000 for loans to one healthcare provider with an aggregate principal balance of $6.3 million. As of
December 31, 2007, we had $9.6 million of assets designated as special mention, which includes $9.2 million of loans to healthcare providers.



33



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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, 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 later events change. We assess
the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

We 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 which, in
our judgment, deserve current recognition in estimating probable incurred losses. We regularly review the loan portfolio and make provisions for loan losses in order 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 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general allowances for loan losses for each loan type 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 losses for each loan type.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 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 regularly review our loan portfolio to
determine whether any loans require classification in accordance with applicable regulations. When we classify loans as either substandard or doubtful, 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 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 amount. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the
evaluations. Our determination as to the risk classification of our loans and the amount of our loss allowances are subject to review by our regulatory agencies, which can require that we establish additional loss allowances.



34



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



|                                                          |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|--------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | ---
|                                                          |  | At or For the Years Ended December 31, |       
|                                                          |  | 2007                                   |        |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|                                                          |  | (Dollars in thousands)                 |       
|Balance at beginning of year                              |  | $                                      | 10,622 |   |      | $ | 11,514 |      |  | $ | 11,019 |   |  | $    | 12,034 |   |  | $ | 12,461 |    
|                                                          |  |                                        |        |   |     
|Charge-offs:                                              |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|One- to four-family residential                           |  |                                        | (10    | ) |      |   |       |      |  |   |       |   |  |      |       |   |  |   | (29    | )  
|Multi-family mortgage                                     |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |    
|Nonresidential real estate                                |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      | (1,127 | ) |  |   |       |    
|Construction and land                                     |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |    
|Commercial loans                                          |  |                                        | (237   | ) |      |   | (946   | )    |  |   | (49    | ) |  |      | (218   | ) |  |   | (368   | )  
|Commercial leases                                         |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |    
|Consumer                                                  |  |                                        | (58    | ) |      |   | (26    | )    |  |   | (66    | ) |  |      | (48    | ) |  |   | (36    | )  
|                                                          |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|Total charge-offs                                         |  |                                        | (305   | ) |      |   | (972   | )    |  |   | (115   | ) |  |      | (1,393 | ) |  |   | (433   | )  
|                                                          |  |                                        |        |   |     
|Recoveries:                                               |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|One- to four-family residential                           |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      | 68     |   |  |   | 26     |    
|Multi-family mortgage                                     |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |    
|Nonresidential real estate                                |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 275    | (1)
|Construction and land                                     |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |    
|Commercial loans                                          |  |                                        | 14     |   |      |   |       |      |  |   | 88     |   |  |      | 311    |   |  |   | 278    |    
|Commercial leases                                         |  |                                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |    
|Consumer                                                  |  |                                        | 23     |   |      |   | 4      |      |  |   | 4      |   |  |      | 21     |   |  |   | 6      |    
|                                                          |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|Total recoveries                                          |  |                                        | 37     |   |      |   | 4      |      |  |   | 92     |   |  |      | 400    |   |  |   | 585    |    
|                                                          |  |                                        |        |   |     
|Net (charge-offs) recoveries                              |  |                                        | (268   | ) |      |   | (968   | )    |  |   | (23    | ) |  |      | (993   | ) |  |   | 152    |    
|Allowance of acquired bank                                |  |                                        |       |   |      |   | 212    |      |  |   |       |   |  |      |       |   |  |   |       |    
|Provision (credit) for loan losses                        |  |                                        | 697    |   |      |   | (136   | )    |  |   | 518    |   |  |      | (22    | ) |  |   | (579   | )  
|                                                          |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|Balance at end of year                                    |  | $                                      | 11,051 |   |      | $ | 10,622 |      |  | $ | 11,514 |   |  | $    | 11,019 |   |  | $ | 12,034 |    
|                                                          |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|                                                          |  |                                        |        |   |     
|Ratios:                                                   |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |    
|Net charge-offs (recoveries) to average loans outstanding |  |                                        | 0.02   | % |      |   | 0.07   | %    |  |   | 0.00   | % |  |      | 0.09   | % |  |   | (0.01  | )% 
|Allowance for loan losses to nonperforming loans          |  |                                        | 91.65  |   |      |   | 115.13 |      |  |   | 201.19 |   |  |      | 168.90 |   |  |   | 169.02 |    
|Allowance for loan losses to total loans                  |  |                                        | 0.87   |   |      |   | 0.79   |      |  |   | 0.93   |   |  |      | 1.00   |   |  |   | 1.12   |    



|(1) | Recoveries relate to loans previously charged off by Success Bancshares.
|--- | ------------------------------------------------------------------------

Net Charge-offs and Recoveries

Net charge-offs decreased by $700,000 to $268,000 for the year ended December 31, 2007, from $968,000
for the year ended December 31, 2006. Total charge-offs decreased by $667,000 to $305,000 for the year ended December 31, 2007, from $972,000 for the year ended December 31, 2006. Total recoveries in 2007 increased by $33,000 to
$37,000, compared to $4,000 in 2006.

Net charge-offs increased by $945,000 to $968,000 for the year ended December 31, 2006, from $23,000 for the
year ended December 31, 2005. Total charge-offs increased by $857,000 to $972,000 for the year ended December 31, 2006, from $115,000 for the year ended December 31, 2005. Total recoveries in 2006 decreased by $88,000, compared to
2005.

We recorded a provision for loan losses of $697,000 in 2007, compared to a credit for loan losses of $136,000 in 2006 and a provision for loan
losses of $518,000 in 2005.



35



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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,          |       
|                                |  | 2007                     |        |                          | 2006 |                                               |  | 2005   |                         
|                                |  | Allowance forLoan Losses |        | Loan Balancesby Category |      | Percent ofLoans in EachCategory toTotal Loans |  |        | Allowance forLoan Losses |  | Loan Balancesby Category |        | Percent ofLoans in EachCategory toTotal Loans |   |           | Allowance forLoan Losses |        | Loan Balancesby Category |  | Percent ofLoans in EachCategory toTotal Loans |       
|                                |  | (Dollars in thousands)   |       
|One- to four-family residential |  | $                        | 1,823  |                          | $    | 345,245                                       |  | 27.33  | %                        |  | $                        | 1,855  |                                               | $ | 397,545   |                          | 29.71  | %                        |  | $                                             | 1,418  |  | $ | 404,196   |  | 32.63  | %
|Multi-family mortgage           |  |                          | 2,206  |                          |      | 291,395                                       |  | 23.07  |                          |  |                          | 1,908  |                                               |   | 297,131   |                          | 22.20  |                          |  |                                               | 2,102  |  |   | 280,238   |  | 22.62  |  
|Nonresidential real estate      |  |                          | 3,055  |                          |      | 325,885                                       |  | 25.80  |                          |  |                          | 2,846  |                                               |   | 320,729   |                          | 23.97  |                          |  |                                               | 3,423  |  |   | 275,418   |  | 22.23  |  
|Construction and land           |  |                          | 937    |                          |      | 64,483                                        |  | 5.10   |                          |  |                          | 1,120  |                                               |   | 85,222    |                          | 6.37   |                          |  |                                               | 1,210  |  |   | 80,705    |  | 6.52   |  
|Commercial loans                |  |                          | 1,726  |                          |      | 83,233                                        |  | 6.59   |                          |  |                          | 1,667  |                                               |   | 89,346    |                          | 6.68   |                          |  |                                               | 2,362  |  |   | 68,988    |  | 5.58   |  
|Commercial leases               |  |                          | 1,174  |                          |      | 144,841                                       |  | 11.47  |                          |  |                          | 1,112  |                                               |   | 139,164   |                          | 10.40  |                          |  |                                               | 718    |  |   | 121,898   |  | 9.84   |  
|Consumer                        |  |                          | 45     |                          |      | 3,506                                         |  | 0.28   |                          |  |                          | 40     |                                               |   | 4,045     |                          | 0.30   |                          |  |                                               | 17     |  |   | 2,022     |  | 0.16   |  
|Other (1)                       |  |                          | 85     |                          |      | 4,544                                         |  | 0.36   |                          |  |                          | 74     |                                               |   | 4,959     |                          | 0.37   |                          |  |                                               | 104    |  |   | 5,219     |  | 0.42   |  
|Unallocated                     |  |                          |       |                          |      |                                              |  |       |                          |  |                          |       |                                               |   |          |                          |       |                          |  |                                               | 160    |  |   |          |  |       |  
|                                |  |                          |        |                          |      |                                               |  |        |                          |  |                          |        |                                               |   |           |                          |        |                          |  |                                               |        |  |   |           |  |        |  
|Total                           |  | $                        | 11,051 |                          | $    | 1,263,132                                     |  | 100.00 | %                        |  | $                        | 10,622 |                                               | $ | 1,338,141 |                          | 100.00 | %                        |  | $                                             | 11,514 |  | $ | 1,238,684 |  | 100.00 | %
|                                |  |                          |        |                          |      |                                               |  |        |                          |  |                          |        |                                               |   |           |                          |        |                          |  |                                               |        |  |   |           |  |        |  
|                                |  |                          |        |                         
|                                |  | At December 31,          |        |                          |      |                                               |  |        |                          | 
|                                |  | 2004                     |        |                          | 2003 |                                               |  |        |                          |  |                          |        |                                              
|                                |  | Allowance forLoan Losses |        | Loan Balancesby Category |      | Percent ofLoans in EachCategory toTotal Loans |  |        | Allowance forLoan Losses |  | Loan Balancesby Category |        | Percent ofLoans in EachCategory toTotal Loans |   |           |                          |        |                          |  |                                               |       
|                                |  | (Dollars in thousands)   |        |                          |      |                                               |  |        |                          | 
|One- to four-family residential |  | $                        | 1,289  |                          | $    | 362,701                                       |  | 32.97  | %                        |  | $                        | 1,322  |                                               | $ | 350,275   |                          | 32.54  | %                        |  |                                               |        |  |   |           |  |        |  
|Multi-family mortgage           |  |                          | 1,950  |                          |      | 241,713                                       |  | 21.97  |                          |  |                          | 1,797  |                                               |   | 240,733   |                          | 22.36  |                          |  |                                               |        |  |   |           |  |        |  
|Nonresidential real estate      |  |                          | 3,304  |                          |      | 277,380                                       |  | 25.22  |                          |  |                          | 4,313  |                                               |   | 270,128   |                          | 25.09  |                          |  |                                               |        |  |   |           |  |        |  
|Construction and land           |  |                          | 899    |                          |      | 59,369                                        |  | 5.40   |                          |  |                          | 976    |                                               |   | 64,403    |                          | 5.98   |                          |  |                                               |        |  |   |           |  |        |  
|Commercial loans                |  |                          | 2,736  |                          |      | 63,727                                        |  | 5.79   |                          |  |                          | 2,908  |                                               |   | 67,950    |                          | 6.31   |                          |  |                                               |        |  |   |           |  |        |  
|Commercial leases               |  |                          | 543    |                          |      | 86,362                                        |  | 7.85   |                          |  |                          | 365    |                                               |   | 72,962    |                          | 6.78   |                          |  |                                               |        |  |   |           |  |        |  
|Consumer                        |  |                          | 18     |                          |      | 2,755                                         |  | 0.25   |                          |  |                          | 26     |                                               |   | 3,502     |                          | 0.32   |                          |  |                                               |        |  |   |           |  |        |  
|Other (1)                       |  |                          | 121    |                          |      | 6,044                                         |  | 0.55   |                          |  |                          | 166    |                                               |   | 6,621     |                          | 0.62   |                          |  |                                               |        |  |   |           |  |        |  
|Unallocated                     |  |                          | 159    |                          |      |                                              |  |       |                          |  |                          | 161    |                                               |   |          |                          |       |                          |  |                                               |        |  |   |           |  |        |  
|                                |  |                          |        |                          |      |                                               |  |        |                          |  |                          |        |                                               |   |           |                          |        |                          |  |                                               |        |  |   |           |  |        |  
|Total                           |  | $                        | 11,019 |                          | $    | 1,100,051                                     |  | 100.00 | %                        |  | $                        | 12,034 |                                               | $ | 1,076,574 |                          | 100.00 | %                        |  |                                               |        |  |   |           |  |        |  
|                                |  |                          |        |                          |      |                                               |  |        |                          |  |                          |        |                                               |   |           |                          |        |                          |  |                                               |        |  |   |           |  |        |  



|(1) | Includes municipal loans.
|--- | -------------------------



36



---

Investment 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, 2007, our debt securities consisted of mortgage-backed pass-through securities issued or sponsored by Fannie Mae, Freddie Mac or
Ginnie Mae, collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, SBA guaranteed loan participation certificates, and municipal
securities. Our equity securities consisted almost entirely of shares of two floating rate preferred stocks issued by Freddie Mac, a government-sponsored enterprise and one Freddie Mac fixed-rate preferred stock. All securities were classified as
available for sale pursuant to SFAS No. 115 as of December 31, 2007, 2006 and 2005.

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 and fair value of our FHLBC common stock as of December 31, 2007 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, 2007 with a par value that was $8.4 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). During 2006, the FHLBC undertook limited redemptions of excess or
voluntary capital stock. We redeemed $9.6 million of excess or voluntary FHLBC capital stock in 2006.

On October 10, 2007, the FHLBC entered into a
consensual cease and desist order with the Federal Housing Finance Board. Under the terms of the order, capital stock repurchases and redemptions, including redemptions upon membership withdrawal or other termination, are prohibited unless the FHLBC
receives the prior approval of the Director of the Office of Supervision of the Federal Housing Finance Board (the Director). The order also provides that dividend declarations are subject to the prior written approval of the Director
and that the FHLBC must submit a Capital Structure Plan to the Federal Housing Finance Board. Since that time, the FHLBC has announced that it would not pay a dividend in the fourth quarter of 2007, and that it is engaged in merger discussions with
the Federal Home Loan Bank of Dallas but has not yet entered into a merger agreement.



37



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



|                                                    |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|--------------------------------------------------- |  | ---------------------- | ------ | ---------- | - | ------------- |  | ---------- | ------- | ------------- | - | ---------- |  | - | ------- |  | - | -------
|                                                    |  | At December 31,       
|                                                    |  | 2007                   |        | 2006       |   | 2005         
|                                                    |  | AmortizedCost          |        | Fair Value |   | AmortizedCost |  | Fair Value |         | AmortizedCost |   | Fair Value
|                                                    |  | (Dollars in thousands)
|Investment Securities:                              |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Municipal securities                                |  | $                      | 2,210  |            | $ | 2,272         |  | $          | 2,660   |               | $ | 2,711      |  | $ | 3,085   |  | $ | 3,145  
|SBA guaranteed loan participation certificates      |  |                        | 595    |            |   | 592           |  |            | 628     |               |   | 623        |  |   | 1,859   |  |   | 1,853  
|Equity securities:                                  |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Freddie Mac                                         |  |                        | 38,275 |            |   | 31,225        |  |            | 38,275  |               |   | 43,112     |  |   | 65,600  |  |   | 67,375 
|Fannie Mae                                          |  |                        |       |            |   |              |  |            |        |               |   |           |  |   | 18,360  |  |   | 19,795 
|Other debt securities                               |  |                        |       |            |   |              |  |            | 45,746  |               |   | 45,723     |  |   |        |  |   |       
|                                                    |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total investment securities available-for-sale      |  |                        | 41,080 |            |   | 34,089        |  |            | 87,309  |               |   | 92,169     |  |   | 88,904  |  |   | 92,168 
|                                                    |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|                                                    |  |                        |        |            |   |              
|Mortgage-Backed Securities:                         |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Pass-through securities:                            |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Fannie Mae                                          |  |                        | 34,536 |            |   | 34,522        |  |            | 14,506  |               |   | 14,630     |  |   | 146,433 |  |   | 143,098
|Freddie Mac                                         |  |                        | 3,633  |            |   | 3,641         |  |            | 3,967   |               |   | 3,971      |  |   | 10,182  |  |   | 10,009 
|Ginnie Mac                                          |  |                        | 1,138  |            |   | 1,114         |  |            | 1,238   |               |   | 1,202      |  |   | 1,349   |  |   | 1,321  
|CMOs and REMICs                                     |  |                        | 3,649  |            |   | 3,683         |  |            | 5,841   |               |   | 5,881      |  |   | 1,615   |  |   | 1,642  
|                                                    |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total mortgage-backed securities available-for-sale |  |                        | 42,956 |            |   | 42,960        |  |            | 25,552  |               |   | 25,684     |  |   | 159,579 |  |   | 156,070
|                                                    |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total securities available-for-sale                 |  | $                      | 84,036 |            | $ | 77,049        |  | $          | 112,861 |               | $ | 117,853    |  | $ | 248,483 |  | $ | 248,238
|                                                    |  |                        |        |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        

We determine the fair value of our investment securities in accordance with the guidance set forth in SFAS
No. 115,Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. Pursuant to this guidance, we determine fair value based on
the most recent quoted market price, if available, for the security as of the applicable balance sheet date. If a quoted market price for a specific security is not currently available, we estimate the fair value based on the quoted market price of
another security with similar characteristics, adjusted to reflect objectively measurable differences such as coupon rates and reset dates. In the absence of current quoted market prices for the same or a similar security, we use other valuation
techniques to determine fair value, such as obtaining broker-dealer valuations or estimating fair value based on valuation modeling. 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 investment securities. Similarly, if we determine that a security is other-than-temporarily impaired under Securities and Exchange Commission Codification of Staff Accounting Bulletins, Topic
5: Miscellaneous Accounting  Item M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, we use the fair value of the security to determine the amount of the impairment loss and the adjusted cost
basis for the security.

The only securities in our investment portfolio that had significant declines in fair value at December 31, 2007 were our
Freddie Mac preferred stocks. The adjusted cost basis for these securities was $38.3 million at December 31, 2007, and their fair value at that date was $31.2 million, based on quoted market prices for these securities. The quoted market prices
for these securities have been volatile in recent months on generally low trading volumes. We evaluated these securities for impairment at December 31, 2007 and concluded that the declines were primarily attributable to changes in market
volatility and market interest rates rather than credit quality or other issuer-specific factors. Since the Company has the ability and intent at December 31, 2007, to hold these investments until a recovery occurs and the carrying cost of
these securities is projected to recover as market interest rates change and or the securities approach maturity, the Company did not consider the declines in fair value to be other-than-temporary impairments. A number of factors or combinations of
factors could cause us to conclude, in one or more future reporting periods, that an existing unrealized loss constitutes an impairment that is other than temporary with respect to these securities. SeeRisk Factors, We Could Record Future Losses
on Our Holdings of Freddie Mac Preferred Stock.No significant unrealized losses existed at December 31, 2006 with respect to our marketable



38



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equity securities, including our Freddie Mac floating rate preferred stocks.



39



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Portfolio Maturities and Yields.The composition and maturities of the investment securities portfolio and the
mortgage-backed securities portfolio at December 31, 2007 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                                     |  | $                      |    |                      |                                     | % |               | $                                     |                     |  |                    | %             |  | $                    | 1,637 |  | 5.21          | % |                      | $ | 32,899 |               | 4.91 | %                    |  | $ | 34,536     |  | 4.93 | % |  | $ | 34,522
|Freddie Mac                                    |  |                        | 15  |                      | 6.50                                 |   |               |                                       | 7                    |  | 6.25                |               |  |                      | 788   |  | 6.38          |   |                      |   | 2,823  |               | 5.78 |                      |  |   | 3,633      |  | 5.93 |   |  |   | 3,641 
|Ginnie Mae                                     |  |                        |    |                      |                                     |   |               |                                       |                     |  |                    |               |  |                      |      |  |              |   |                      |   | 1,138  |               | 5.06 |                      |  |   | 1,138      |  | 5.06 |   |  |   | 1,114 
|CMOs and REMICs                                |  |                        |    |                      |                                     |   |               |                                       | 951                  |  | 4.63                |               |  |                      | 56    |  | 5.45          |   |                      |   | 2,642  |               | 5.33 |                      |  |   | 3,649      |  | 5.14 |   |  |   | 3,683 
|                                               |  |                        |     |                      |                                      |   |               |                                       |                      |  |                     |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |            |  |      |   |  |   |       
|Total                                          |  |                        | 15  |                      | 6.50                                 |   |               |                                       | 958                  |  | 4.64                |               |  |                      | 2,481 |  | 5.58          |   |                      |   | 39,502 |               | 5.01 |                      |  |   | 42,956     |  | 5.03 |   |  |   | 42,960
|                                               |  |                        |     |                      |                                      |   |               |                                       |                      |  |                     |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |            |  |      |   |  |   |       
|Investment Securities:                         |  |                        |     |                      |                                      |   |               |                                       |                      |  |                     |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |            |  |      |   |  |   |       
|Municipal securities                           |  |                        | 475 |                      | 4.20                                 |   |               |                                       | 1,385                |  | 4.37                |               |  |                      | 350   |  | 4.53          |   |                      |   |       |               |     |                      |  |   | 2,210      |  | 4.36 |   |  |   | 2,272 
|SBA guaranteed loan participation certificates |  |                        |    |                      |                                     |   |               |                                       |                     |  |                    |               |  |                      | 126   |  | 5.75          |   |                      |   | 469    |               | 5.46 |                      |  |   | 595        |  | 5.52 |   |  |   | 592   
|Equity securities                              |  |                        |    |                      |                                     |   |               |                                       |                     |  |                    |               |  |                      |      |  |              |   |                      |   | 38,275 |               | 4.98 |                      |  |   | 38,275     |  | 4.98 |   |  |   | 31,225
|                                               |  |                        |     |                      |                                      |   |               |                                       |                      |  |                     |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |            |  |      |   |  |   |       
|Total                                          |  |                        | 475 |                      | 4.20                                 |   |               |                                       | 1,385                |  | 4.37                |               |  |                      | 476   |  | 4.47          |   |                      |   | 38,744 |               | 4.98 |                      |  |   | 41,080     |  | 4.95 |   |  |   | 34,089
|                                               |  |                        |     |                      |                                      |   |               |                                       |                      |  |                     |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |            |  |      |   |  |   |       
|Total securities available-for-sale            |  | $                      | 490 |                      | 4.27                                 | % |               | $                                     | 2,343                |  | 4.48                | %             |  | $                    | 2,957 |  | 5.46          | % |                      | $ | 78,246 |               | 5.00 | %                    |  | $ | 84,036     |  | 4.99 | % |  | $ | 77,049
|                                               |  |                        |     |                      |                                      |   |               |                                       |                      |  |                     |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |            |  |      |   |  |   |       



40



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Sources of Funds

Deposits.At December 31, 2007, our deposits totaled $1.074 billion. Interest-bearing deposits totaled $962.1 million and noninterest-bearing demand deposits totaled $111.6 million. NOW, savings and money market deposits
totaled $654.5 million at December 31, 2007. Demand deposits at December 31, 2007 included $5.0 million in internal checking accounts, such as bank cashier checks and money orders and $3.5 million in title insurance escrow funds. At
December 31, 2007, we had a total of $307.6 million in certificates of deposit, of which $269.5 million had maturities of one year or less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, we
monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a significant portion of these accounts upon maturity.

Our deposits are obtained predominantly from the areas in which 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 $100,000 for which we may provide preferential rates, we generally do not solicit such deposits because they are more
difficult to retain than core deposits. At December 31, 2007, we had a total of $2.0 million of brokered certificates of deposits.

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



|                        |  |                          |           |         |        |   |                     |      |   |                |   |           |  |        |                     |  |      |                |  |         |           |  |                     |   |  |      |  
|----------------------- |  | ------------------------ | --------- | ------- | ------ | - | ------------------- | ---- | - | -------------- | - | --------- |  | ------ | ------------------- |  | ---- | -------------- |  | ------- | --------- |  | ------------------- | - |  | ---- | -
|                        |  | Years Ended December 31, |          
|                        |  | 2007                     |           |         | 2006   |   |                     | 2005 |  
|                        |  | AverageBalance           |           | Percent |        |   | WeightedAverageRate |      |   | AverageBalance |   | Percent   |  |        | WeightedAverageRate |  |      | AverageBalance |  | Percent |           |  | WeightedAverageRate |  
|                        |  | (Dollars in thousands)   |          
|Demand deposits:        |  |                          |           |         |        |   |                     |      |   |                |   |           |  |        |                     |  |      |                |  |         |           |  |                     |   |  |      |  
|Retail                  |  | $                        | 29,936    |         | 2.74   | % |                     |     | % |                | $ | 33,020    |  | 3.00   | %                   |  |     | %              |  | $       | 23,512    |  | 2.10                | % |  |     | %
|Commercial              |  |                          | 86,620    |         | 7.91   |   |                     |     |   |                |   | 90,594    |  | 8.24   |                     |  |     |                |  |         | 85,435    |  | 7.62                |   |  |     |  
|                        |  |                          |           |         |        |   |                     |      |   |                |   |           |  |        |                     |  |      |                |  |         |           |  |                     |   |  |      |  
|Total demand deposits   |  |                          | 116,556   |         | 10.65  |   |                     |     |   |                |   | 123,614   |  | 11.24  |                     |  |     |                |  |         | 108,947   |  | 9.72                |   |  |     |  
|NOW deposits            |  |                          | 282,670   |         | 25.82  |   |                     | 2.42 |   |                |   | 241,378   |  | 21.95  |                     |  | 1.71 |                |  |         | 268,404   |  | 23.93               |   |  | 0.85 |  
|Savings deposits        |  |                          | 106,870   |         | 9.76   |   |                     | 0.78 |   |                |   | 123,413   |  | 11.22  |                     |  | 0.83 |                |  |         | 128,867   |  | 11.49               |   |  | 0.78 |  
|Money market deposits   |  |                          | 260,256   |         | 23.77  |   |                     | 4.25 |   |                |   | 252,109   |  | 22.93  |                     |  | 4.00 |                |  |         | 223,334   |  | 19.92               |   |  | 2.84 |  
|Certificates of deposit |  |                          | 328,371   |         | 30.00  |   |                     | 4.48 |   |                |   | 359,119   |  | 32.66  |                     |  | 4.10 |                |  |         | 391,883   |  | 34.94               |   |  | 2.79 |  
|                        |  |                          |           |         |        |   |                     |      |   |                |   |           |  |        |                     |  |      |                |  |         |           |  |                     |   |  |      |  
|Total deposits          |  | $                        | 1,094,723 |         | 100.00 | % |                     |      |   |                | $ | 1,099,633 |  | 100.00 | %                   |  |      |                |  | $       | 1,121,435 |  | 100.00              | % |  |      |  
|                        |  |                          |           |         |        |   |                     |      |   |                |   |           |  |        |                     |  |      |                |  |         |           |  |                     |   |  |      |  

The following table sets forth certificates of deposit by time remaining until maturity at December 31, 2007.



|                                            |  |                        |         |                   |   |                    |  |               |        |       |   |        |  |   |        
|------------------------------------------- |  | ---------------------- | ------- | ----------------- | - | ------------------ |  | ------------- | ------ | ----- | - | ------ |  | - | -------
|                                            |  | 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  |  | $                      | 74,950  |                   | $ | 60,013             |  | $             | 70,670 |       | $ | 32,381 |  | $ | 238,014
|Certificates of deposit of $100,000 or more |  |                        | 26,088  |                   |   | 22,502             |  |               | 15,229 |       |   | 5,784  |  |   | 69,603 
|                                            |  |                        |         |                   |   |                    |  |               |        |       |   |        |  |   |        
|Total of certificates of deposit            |  | $                      | 101,038 |                   | $ | 82,515             |  | $             | 85,899 |       | $ | 38,165 |  | $ | 307,617
|                                            |  |                        |         |                   |   |                    |  |               |        |       |   |        |  |   |        



41



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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, |        
|                                              |  | 2007                                   |         |   | 2006 |   |         | 2005 | 
|                                              |  | (Dollars in thousands)                 |        
|Balance at end of year                        |  | $                                      | 96,433  |   |      | $ | 138,148 |      |  | $ | 191,388 |  
|Average balance during year                   |  |                                        | 104,782 |   |      |   | 183,286 |      |  |   | 229,355 |  
|Maximum outstanding at any month end          |  |                                        | 139,366 |   |      |   | 241,048 |      |  |   | 274,311 |  
|Weighted average interest rate at end of year |  |                                        | 4.71    | % |      |   | 4.30    | %    |  |   | 3.72    | %
|Average interest rate during year             |  |                                        | 4.64    | % |      |   | 4.11    | %    |  |   | 3.58    | %

At December 31, 2007, we had the ability to borrow an additional $206.9 million under our credit facilities
with the FHLBC. Furthermore, we had unpledged securities that could be used to support borrowings in excess of $25.0 million.

At December 31, 2007,
we had available pre-approved overnight federal funds borrowing capacity of $65.0 million. At December 31, 2007, there were no outstanding federal funds borrowings. At December 31, 2007, we also had a line of credit available with the
Federal Reserve Bank of Chicago for $3.1 million. At December 31, 2007, there was no outstanding balance on the line of credit.

Comparison of
Operating Results For the Years Ended December 31, 2007, 2006 and 2005

Net Income

Comparison of Year 2007 to 2006. We recorded net income of $7.2 million for the year ended December 31, 2007, compared to net income of $10.0
million for the year ended December 31, 2006. The principal factors affecting the change in net income from year to year included a $2.9 million, or 5.2%, decrease in our net interest income; an $833,000 increase in our provision for loan
losses, a $861,000, or 8.2%, decrease in noninterest income, and a $112,000, or 0.2%, increase in noninterest expense; These reductions to income were offset by a $1.9 million, or 38.6%, decrease in income tax expense. Our operating results for 2007
were unfavorably impacted by a pre-tax charge of $1.2 million, which reflected our proportionate share of Visas estimated litigation obligations. The charge was recorded because the Bank, like other Visa USA members, is obligated to share
expenses resulting from certain Visa litigation, proportionately with its ownership interests in Visa USA. If Visa USAs initial public offering is completed as planned, our proportionate share of the proceeds of the initial offering is
expected to offset or exceed the amount of this charge. Our operating results for 2007 also included $5.1 million in expenses for equity-based compensation and benefits, compared to $5.4 million for 2006. Our earnings per share of common stock for
year ended December 31, 2007 was $0.35 per share. Earnings per share for the year ended December 31, 2006 was $0.45.

Comparison of Year
2006 to 2005. We recorded net income of $10.0 million for the year ended December 31, 2006, compared to net income of $11.1 million for the year ended December 31, 2005. The principal factors affecting the change in net
income from year to year included a $5.2 million, or 10.1%, increase in our net interest income; a $1.8 million, or 21.3%, increase in noninterest income; and a $654,000 decrease in our provision for loan losses. These increases were offset by an
$8.2 million, or 18.5%, increase in noninterest expense; and a $548,000, or 12.8%, increase in income tax expense. Our net income for the full year 2006 and for the last six months of 2005 was favorably affected by the completion of our
mutual-to-stock conversion on June 23, 2005, and reflected increased interest income and reduced interest expense on borrowings resulting from our deployment of the net proceeds from the subscription offering undertaken in connection with the
mutual-to-stock conversion, which totaled $220.7 million (excluding the $19.6 million in stock purchased by our ESOP), to increase average interest-earning assets and reduce average borrowings and wholesale deposits. Our operating results for 2006
included $5.4 million in expenses for equity-based compensation and benefits, compared to $717,000 for 2005, relating to equity-based awards that were made during the third and fourth quarters of 2006 pursuant to the Equity Incentive Plan that



42



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our stockholders approved in June of 2006, and additional expenses arising from our first full year of making contributions to the ESOP that we established
in connection with our mutual-to-stock conversion in June of 2005. Our 2005 net income was also negatively affected by a $388,000 yield adjustment amortization expense, pre-tax, relating to our restructuring of $170.0 million of Federal Home Loan
Bank borrowings in July 2003. There was no remaining yield adjustment amortization expense recorded during 2006. Our earnings per share of common stock for year ended December 31, 2006 was $0.45 per share. Earnings per share for the year ended
December 31, 2005 was $0.29 and only includes the net income for the period for which common shares were outstanding which was from the completion of our mutual-to-stock conversion on June 23, 2005 through December 31, 2005.

Net Interest Income

Comparison of Year 2007 to
2006. Net interest income decreased by $2.9 million, or 5.2%, to $53.6 million for the year ended December 31, 2007, from $56.6 million for the year ended December 31, 2006. Our net interest rate spread increased by five
basis points to 2.94% for the year ended December 31, 2007, from 2.89% for the year ended December 31, 2006. Our net interest margin increased by 10 basis points to 3.78% for the year ended December 31, 2007, from 3.68% for the year
ended December 31, 2006. Our average interest-earning assets decreased $119.9 million to $1.418 billion in 2007, from $1.538 billion in 2006, and our average interest-bearing liabilities decreased $76.4 million to $1.083 billion in 2007, from
$1.159 billion in 2006.

Interest income decreased by $2.1 million, or 2.3%, to $92.0 million for the year ended December 31, 2007, from $94.1 million
for the year ended December 31, 2006. The decrease in interest income resulted primarily from a $119.9 million decrease in total average interest-earning assets to $1.418 billion for the year ended December 31, 2007, from $1.538 billion
for the year ended December 31, 2006. This decrease in total average interest-earning assets was partially offset by a 36 basis point increase in the average yield on interest earning assets to 6.48% for the year ended December 31, 2007,
from 6.12% for the year ended December 31, 2006.

Interest income on loans increased by $2.1 million, or 2.5%, to $85.6 million for the year ended
December 31, 2007, from $83.5 million for the year ended December 31, 2006. The increase in interest income on loans resulted primarily from a 17 basis point increase in the average yield on loans to 6.60% for the year ended
December 31, 2007, from 6.43% for the year ended December 31, 2006, due to higher market interest rates. The increase in the average yield on loans was partially offset by a $2.3 million, or 0.2%, decrease in the average balance of loans
outstanding to $1.297 billion for the year ended December 31, 2007, from $1.300 billion for the year ended December 31, 2006.

Interest income on
securities available-for-sale decreased $4.1 million, or 44.9%, to $5.1 million for the year ended December 31, 2007, from $9.2 million for the year ended December 31, 2006. The decrease resulted primarily from a planned $117.0 million
decrease, or 57.4%, in the average balance of securities available-for-sale to $86.9 million for the year ended December 31, 2007, from $203.9 million for the year ended December 31, 2006, based on our determination in the latter half of
2006 that the flat or inverted yield curve environment did not present profitable opportunities for carrying such additional investments.

Dividend income
on our FHLBC common stock decreased $365,000, or 50.4%, to $359,000 for the year ended December 31, 2007, from $724,000 for the year ended December 31, 2006. The average balance of these securities decreased by $6.2 million to $15.6
million for the year ended December 31, 2007, due to the redemption of $9.8 million of these securities in 2006. The FHLBC did not pay any dividends in the fourth quarter of 2007. As a result, the average annual dividend yield on our FHLBC
common stock decreased to 2.30% for the year ended December 31, 2007, from 3.32% for the year ended December 31, 2006.

Interest income on
interest-bearing deposits in other financial institutions increased $261,000, or 38.6%, to $937,000 for the year ended December 31, 2007, from $676,000 for the year ended December 31, 2006. The average balance of these interest-bearing
deposits increased by $5.5 million to $18.2 million for the year ended December 31, 2007. The average yield on our interest-bearing deposits decreased to 5.14% for the year ended December 31, 2007, from 5.32% for the year ended
December 31, 2006.



43



---

Interest expense increased by $815,000, or 2.2%, to $38.3 million for the year ended December 31, 2007, from $37.5
million for the year ended December 31, 2006. The increase was due to increased interest expense on deposits, which was partially offset by decreased interest expense on borrowings.

Interest expense on deposits increased by $3.5 million, or 11.6%, to $33.4 million for the year ended December 31, 2007, from $30.0 million for the year ended December 31, 2006. The increase in interest
expense on deposits was primarily due to a 35 basis point increase in the average rates paid on deposits, and a $2.1 million, or 0.2%, net increase in the average balance of deposits. The average balances of money market deposits increased $8.1
million, or 3.2%, and NOW deposits increased $41.3 million, or 17.1%, for the year ended December 31, 2007, respectively. The average balances of savings accounts decreased $16.5 million, or 13.4%, and the average balances of certificates of
deposit decreased $30.7 million, or 8.6%, respectively, for the year ended December 31, 2007. The average balance of wholesale certificates of deposit decreased $18.8 million, or 67.1%, due to our decision to reduce these types of deposits. The
average cost of deposits was 3.42% for the year ended December 31, 2007, compared to 3.07% for the year ended December 31, 2006. The average rate on savings accounts decreased five basis points to 0.78% from 0.83%, but all other categories
of interest-bearing deposit accounts showed increases in average rates paid for 2007 compared to 2006. On a year over year basis, the average cost of money market accounts increased 25 basis points to 4.25%, from 4.00%, the average cost of NOW
accounts increased 71 basis points to 2.42%, from 1.71%, and the average cost of certificates of deposit increased 38 basis points to 4.48%, from 4.10%.

Interest expense on borrowings decreased by $2.7 million, or 35.5%, to $4.9 million for the year ended December 31, 2007, from $7.5 million for the year ended December 31, 2006. This decrease was due in principal part to a $78.5
million, or 42.8%, decrease in the average balance of borrowings resulting from our decision to repay $66.0 million in maturing FHLB of Chicago advances. This decrease in the average balance of borrowings was partially offset by a 53 basis point
increase in the average cost of such borrowings to 4.64% for the year ended December 31, 2007, from 4.11% for the year ended December 31, 2006.

Comparison of Year 2006 to 2005. Net interest income increased by $5.2 million, or 10.1%, to $56.6 million for the year ended December 31, 2006, from $51.4 million for the year ended December 31,
2005. Our net interest rate spread decreased by 15 basis points to 2.89% for the year ended December 31, 2006, from 3.04% for 2005. The decrease resulted primarily from the flattening and inverting of the yield curve that has occurred, and
increasing competition in the Chicago banking market for loans and deposits. Notwithstanding these market conditions and the resulting decrease in our net interest rate spread, our net interest margin increased by 24 basis points to 3.68% for 2006,
from 3.44% for 2005, due to our deployment of the $220.7 million in net proceeds of our subscription offering to retire term debt and reduce borrowings and wholesale deposits, and our replacement of a significant portion of the short-term securities
and interest-bearing deposits in which the offering proceeds were initially invested with higher yielding loans. As expected, our acquisition of University National Bank on April 5, 2006, helped to mitigate the adverse impact that these market
conditions had on our net interest margin. In addition, our average interest earning assets increased $42.2 million to $1.538 billion in 2006, from $1.496 billion in 2005, and our average interest-bearing liabilities decreased $82.5 million to
$1.159 billion in 2006, from $1.242 billion in 2005, principally as a result of our deployment of the net proceeds of our subscription offering. Our net interest income for the year ended December 31, 2005, included approximately $450,000 in
net interest spread that we earned on the investment of approximately $167.1 million in subscription order receipts that we subsequently refunded to depositors whose subscription orders could not be filled.

Interest income increased by $13.9 million, or 17.3%, to $94.1 million for the year ended December 31, 2006, from $80.2 million for the year ended December 31,
2005. The increase in interest income resulted primarily from a 76 basis point increase in the average yield on interest earning assets to 6.12% for the year ended December 31, 2006, from 5.36% for the year ended December 31, 2005, and
from a $42.2 million increase in total average interest-earning assets to $1.538 billion for the year ended December 31, 2006, from $1.496 billion for the year ended December 31, 2005.

Interest income on loans increased by $16.9 million, or 25.3%, to $83.5 million for the year ended December 31, 2006, from $66.6 million for the year ended
December 31, 2005. The increase in interest income on loans resulted primarily from a 54 basis point increase in the average yield on loans to 6.43% for the year ended December 31, 2006, from 5.89% for the year ended December 31,
2005, due to higher market interest rates, and from a $168.2



44



---

million, or 14.9%, increase in the average balance of loans outstanding to $1.300 billion for the year ended December 31, 2006, from $1.131 billion for
the year ended December 31, 2005.

Interest income on securities available-for-sale decreased $2.4 million, or 21.1%, to $9.2 million for the year
ended December 31, 2006, from $11.6 million for the year ended December 31, 2005. The decrease resulted primarily from a decrease of $111.5 million, or 35.3%, in the average balance of securities available-for-sale to $203.9 million for
the year ended December 31, 2006, from $315.4 million for the year ended December 31, 2005. This decrease in average balances since 2005 reflected the impact of holding and investing approximately $436.8 million of subscription order
receipts in short-term government agency securities until the subscription offering was completed on June 23, 2005. Thereafter, funds representing accepted subscription orders were paid to the Company, and funds due the subscribers for unfilled
subscription orders were refunded. By the end of the third quarter of 2005, substantially all of the subscription order refunds had been paid. We also decided to reduce our portfolio of investment securities available-for-sale during 2006 as the
flat or inverted yield curve did not present profitable opportunities for carrying such additional investments. Partially offsetting the decrease in average balances was an 81 basis point increase in the yield on securities available-for-sale to
4.50% for the year ended December 31, 2006, from 3.69% for the year ended December 31, 2005, due to increases in the coupon rates for certain securities.

Dividend income on our FHLBC stock decreased $484,000, or 40.1%, to $724,000 for the year ended December 31, 2006, from $1.2 million for the year ended December 31, 2005. The average balance of these securities decreased by $3.1
million to $21.8 million for the year ended December 31, 2006, due to the redemption of $9.8 million of these securities in 2006. The FHLBC also reduced its dividend rate from 5.5% as of the first quarter of 2005 to 3.10% as of the fourth
quarter of 2006. As a result, the average dividend yield on our FHLBC stock decreased to 3.32% for the year ended December 31, 2006, from 4.86% for the year ended December 31, 2005.

Interest income on interest-bearing deposit accounts that we owned decreased $70,000, or 9.4%, to $676,000 for the year ended December 31, 2006, from $746,000 for
the year ended December 31, 2005. The average balance of these interest-bearing deposits decreased by $11.5 million to $12.7 million for the year ended December 31, 2006. The average yield on our interest-bearing deposits increased to
5.32% for the year ended December 31, 2006, from 3.08% for the year ended December 31, 2005.

Interest expense increased by $8.7 million, or
30.2%, to $37.5 million for the year ended December 31, 2006, from $28.8 million for the year ended December 31, 2005. The increase was primarily due to increased interest expense on deposits, which was partially offset by decreased
interest expense on borrowings.

Interest expense on deposits increased by $9.4 million, or 45.4%, to $30.0 million for the year ended December 31,
2006, from $20.6 million for the year ended December 31, 2005. The increase in interest expense on deposits was primarily due to a 104 basis point increase in the average rates paid on deposits, which was partially offset by a $36.5 million, or
3.6%, decrease in the average balance of deposits. The average balances of money market deposits increased $28.8 million, or 12.9% for the year ended December 31, 2006. The average balances of savings accounts, NOW deposits and certificates of
deposit decreased $5.5 million, or 4.2%, $27.0 million, or 10.1%, and $32.8 million, or 8.4%, respectively, for the year ended December 31, 2006. The average cost of deposits was 3.07% for the year ended December 31, 2006, compared to
2.03% for the year ended December 31, 2005. All categories of interest-bearing deposit accounts showed increases in average rates paid for 2006 compared to 2005. The average cost of certificates of deposits increased 131 basis points to 4.10%
for the year ended December 31, 2006, from 2.79% for the year ended December 31, 2005. The average cost of all other interest-bearing deposit accounts also increased for the year ended December 31, 2006, with the most significant
increase occurring with respect to money market accounts. The average cost of money market accounts increased 116 basis points to 4.00% for the year ended December 31, 2006, from 2.84% for the year ended December 31, 2005.

Interest expense on borrowings decreased by $672,000, or 8.2%, to $7.5 million for the year ended December 31, 2006, from $8.2 million for the year ended
December 31, 2005. This decrease was due in part to a $46.1 million, or 20.1%, decrease in the average balance of borrowings, which was offset by a 53 basis point increase in the average cost of such borrowings to 4.11% for the year ended
December 31, 2006, from 3.58% for the year ended December 31, 2005. The decrease in average borrowings is due in part to our use of a portion of the net proceeds of the sale of investment securities to repay wholesale borrowings. Interest
expense for the year ended December 31, 2005 also included $388,000 in yield adjustment amortization expense relating to the prepayment penalty that we incurred in



45



---

restructuring our Federal Home Loan Bank borrowings in July of 2003, while there was no yield adjustment expense recorded in 2006 in connection with the
restructuring as final amortization was completed in 2005.



46



---

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 were 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 and Federal Home Loan Bank advance prepayment penalties
that are amortized or accreted to interest income or expense.



|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|---------------------------------------------------------------- | ------------------------- | ------------------------ | --------- | -------- |  | ---------- | ------ |  | ------------------------- | - |  | -------- | --------- | ---------- |  | - | ------------------------- |  | ---- | -------- |  | ---------- | --------- | - |  | - | ------ |  | ---- | -
|                                                                 |                           | Years Ended December 31, |          
|                                                                 | 2007                      |                          |           | 2006     |  |            | 2005   | 
|                                                                 | AverageOutstandingBalance |                          |           | Interest |  | Yield/Rate |        |  | AverageOutstandingBalance |   |  | Interest |           | Yield/Rate |  |   | AverageOutstandingBalance |  |      | Interest |  | Yield/Rate |          
|                                                                 |                           | (Dollars in thousands)   |          
|Interest-earning assets:                                         |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Loans                                                            |                           | $                        | 1,297,299 |          |  | $          | 85,601 |  | 6.60                      | % |  | $        | 1,299,597 |            |  | $ | 83,502                    |  | 6.43 | %        |  | $          | 1,131,374 |   |  | $ | 66,618 |  | 5.89 | %
|Securities available-for-sale                                    |                           |                          | 86,946    |          |  |            | 5,056  |  | 5.82                      |   |  |          | 203,900   |            |  |   | 9,184                     |  | 4.50 |          |  |            | 315,379   |   |  |   | 11,640 |  | 3.69 |  
|Stock in FHLB                                                    |                           |                          | 15,598    |          |  |            | 359    |  | 2.30                      |   |  |          | 21,813    |            |  |   | 724                       |  | 3.32 |          |  |            | 24,870    |   |  |   | 1,208  |  | 4.86 |  
|Other                                                            |                           |                          | 18,245    |          |  |            | 937    |  | 5.14                      |   |  |          | 12,713    |            |  |   | 676                       |  | 5.32 |          |  |            | 24,219    |   |  |   | 746    |  | 3.08 |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Total interest-earning assets                                    |                           |                          | 1,418,088 |          |  |            | 91,953 |  | 6.48                      |   |  |          | 1,538,023 |            |  |   | 94,086                    |  | 6.12 |          |  |            | 1,495,842 |   |  |   | 80,212 |  | 5.36 |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Noninterest-earning assets                                       |                           |                          | 114,668   |          |  |            |        |  |                           |   |  |          | 102,220   |            |  |   |                           |  |      |          |  |            | 88,837    |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Total assets                                                     |                           | $                        | 1,532,756 |          |  |            |        |  |                           |   |  | $        | 1,640,243 |            |  |   |                           |  |      |          |  | $          | 1,584,679 |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                          
|Interest-bearing liabilities:                                    |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Savings deposits                                                 |                           | $                        | 106,870   |          |  |            | 833    |  | 0.78                      |   |  | $        | 123,413   |            |  |   | 1,019                     |  | 0.83 |          |  | $          | 128,867   |   |  |   | 1,005  |  | 0.78 |  
|Money market deposits                                            |                           |                          | 260,256   |          |  |            | 11,072 |  | 4.25                      |   |  |          | 252,109   |            |  |   | 10,096                    |  | 4.00 |          |  |            | 223,334   |   |  |   | 6,350  |  | 2.84 |  
|NOW deposits                                                     |                           |                          | 282,670   |          |  |            | 6,837  |  | 2.42                      |   |  |          | 241,378   |            |  |   | 4,128                     |  | 1.71 |          |  |            | 268,404   |   |  |   | 2,290  |  | 0.85 |  
|Certificates of deposit                                          |                           |                          | 328,371   |          |  |            | 14,704 |  | 4.48                      |   |  |          | 359,119   |            |  |   | 14,714                    |  | 4.10 |          |  |            | 391,883   |   |  |   | 10,953 |  | 2.79 |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Total deposits                                                   |                           |                          | 978,167   |          |  |            | 33,446 |  | 3.42                      |   |  |          | 976,019   |            |  |   | 29,957                    |  | 3.07 |          |  |            | 1,012,488 |   |  |   | 20,598 |  | 2.03 |  
|Borrowings                                                       |                           |                          | 104,782   |          |  |            | 4,858  |  | 4.64                      |   |  |          | 183,286   |            |  |   | 7,532                     |  | 4.11 |          |  |            | 229,355   |   |  |   | 8,204  |  | 3.58 |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Total interest-bearing liabilities                               |                           |                          | 1,082,949 |          |  |            | 38,304 |  | 3.54                      |   |  |          | 1,159,305 |            |  |   | 37,489                    |  | 3.23 |          |  |            | 1,241,843 |   |  |   | 28,802 |  | 2.32 |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Noninterest-bearing deposits                                     |                           |                          | 116,556   |          |  |            |        |  |                           |   |  |          | 123,614   |            |  |   |                           |  |      |          |  |            | 108,947   |   |  |   |        |  |      |  
|Noninterest-bearing liabilities                                  |                           |                          | 21,831    |          |  |            |        |  |                           |   |  |          | 25,110    |            |  |   |                           |  |      |          |  |            | 20,257    |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Total liabilities                                                |                           |                          | 1,221,336 |          |  |            |        |  |                           |   |  |          | 1,308,029 |            |  |   |                           |  |      |          |  |            | 1,371,047 |   |  |   |        |  |      |  
|Equity                                                           |                           |                          | 311,420   |          |  |            |        |  |                           |   |  |          | 332,214   |            |  |   |                           |  |      |          |  |            | 213,632   |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Total liabilities and equity                                     |                           | $                        | 1,532,756 |          |  |            |        |  |                           |   |  | $        | 1,640,243 |            |  |   |                           |  |      |          |  | $          | 1,584,679 |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                          
|Net interest income                                              |                           |                          |           |          |  | $          | 53,649 |  |                           |   |  |          |           |            |  | $ | 56,597                    |  |      |          |  |            |           |   |  | $ | 51,410 |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Net interest rate spread (1)                                     |                           |                          |           |          |  |            |        |  | 2.94                      | % |  |          |           |            |  |   |                           |  | 2.89 | %        |  |            |           |   |  |   |        |  | 3.04 | %
|Net interest-earning assets (2)                                  |                           | $                        | 335,139   |          |  |            |        |  |                           |   |  | $        | 378,718   |            |  |   |                           |  |      |          |  | $          | 253,999   |   |  |   |        |  |      |  
|                                                                 |                           |                          |           |          |  |            |        |  |                           |   |  |          |           |            |  |   |                           |  |      |          |  |            |           |   |  |   |        |  |      |  
|Net interest margin (3)                                          |                           |                          |           |          |  |            |        |  | 3.78                      | % |  |          |           |            |  |   |                           |  | 3.68 | %        |  |            |           |   |  |   |        |  | 3.44 | %
|Ratio of interest-earning assets to interest-bearing liabilities |                           |                          | 130.95    | %        |  |            |        |  |                           |   |  |          | 132.67    | %          |  |   |                           |  |      |          |  |            | 120.45    | % |  |   |        |  |      |  



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



47



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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,  |       
|                                   |  | 2007 vs. 2006             |        |   | 2006 vs. 2005           |  
|                                   |  | Increase (Decrease) Dueto |        |   | TotalIncrease(Decrease) |   |       | Increase (Decrease) Dueto |        |   | TotalIncrease(Decrease) |     
|                                   |  | Volume                    |        |   | Rate                    |   |       |                           | Volume |   |                         | Rate |  |  
|                                   |  | (Dollars in thousands)    |       
|Interest-earning assets:           |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Loans                              |  | $                         | (148   | ) |                         | $ | 2,247 |                           |        | $ | 2,099                   |      |  | $ | 10,465 |   |  | $ | 6,419  |   |  | $ | 16,884 |  
|Securities available-for-sale      |  |                           | (6,285 | ) |                         |   | 2,157 |                           |        |   | (4,128                  | )    |  |   | (4,673 | ) |  |   | 2,217  |   |  |   | (2,456 | )
|Stock in FHLB                      |  |                           | (176   | ) |                         |   | (189  | )                         |        |   | (365                    | )    |  |   | (135   | ) |  |   | (349   | ) |  |   | (484   | )
|Other                              |  |                           | 285    |   |                         |   | (24   | )                         |        |   | 261                     |      |  |   | (456   | ) |  |   | 386    |   |  |   | (70    | )
|                                   |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total interest-earning assets      |  |                           | (6,324 | ) |                         |   | 4,191 |                           |        |   | (2,133                  | )    |  |   | 5,201  |   |  |   | 8,673  |   |  |   | 13,874 |  
|                                   |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  
|                                   |  |                           |        |   |                         |  
|Interest-bearing liabilities:      |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Savings deposits                   |  |                           | (131   | ) |                         |   | (55   | )                         |        |   | (186                    | )    |  |   | (44    | ) |  |   | 58     |   |  |   | 14     |  
|Money market deposits              |  |                           | 333    |   |                         |   | 643   |                           |        |   | 976                     |      |  |   | 898    |   |  |   | 2,848  |   |  |   | 3,746  |  
|NOW deposits                       |  |                           | 792    |   |                         |   | 1,917 |                           |        |   | 2,709                   |      |  |   | (252   | ) |  |   | 2,090  |   |  |   | 1,838  |  
|Certificates of deposit            |  |                           | (1,316 | ) |                         |   | 1,306 |                           |        |   | (10                     | )    |  |   | (981   | ) |  |   | 4,742  |   |  |   | 3,761  |  
|Borrowings                         |  |                           | (3,544 | ) |                         |   | 870   |                           |        |   | (2,674                  | )    |  |   | (1,789 | ) |  |   | 1,117  |   |  |   | (672   | )
|                                   |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total interest-bearing liabilities |  |                           | (3,866 | ) |                         |   | 4,681 |                           |        |   | 815                     |      |  |   | (2,168 | ) |  |   | 10,855 |   |  |   | 8,687  |  
|                                   |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  
|Change in net interest income      |  | $                         | (2,458 | ) |                         | $ | (490  | )                         |        | $ | (2,948                  | )    |  | $ | 7,369  |   |  | $ | (2,182 | ) |  | $ | 5,187  |  
|                                   |  |                           |        |   |                         |   |       |                           |        |   |                         |      |  |   |        |   |  |   |        |   |  |   |        |  

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 later
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 2007 to 2006. We recorded a provision for loan losses of $697,000 for the year ended December 31, 2007, compared to a credit for loan losses of $136,000 for the year ended December 31, 2006.
The provision for loan losses recorded for 2007 reflected increased specific reserves against certain loans, and a $25,000 net increase in the general loan loss reserves that we establish pursuant to SFAS No. 5 based on changes to the economic
factors utilized in our model. The portion of the allowance for loan losses that we allocate to impaired loans pursuant to SFAS No. 114 increased $404,000 to $806,000 at December 31, 2007, from $402,000 at December 31, 2006. We
increased specific reserves primarily due to our receipt of current appraisals reflecting decreases in the value of certain real estate collateral, combined with ongoing business continuity concerns on several commercial credits. Net loan
charge-offs for 2007 were $268,000, or 0.02% of average loans, compared to $968,000, or 0.07% of average loans, in 2006.



48



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Nonperforming loans increased by $2.8 million to $12.1 million at December 31, 2007, from $9.2 million at
December 31, 2006. The increase was due in substantial part to our placing on non-accrual status a $2.7 million loan that is secured by an apartment building located in a northern Chicago suburb. We placed the loan on non-accrual status because
the borrowers used the investment property cash flow to make equity investor distributions rather than to make scheduled loan payments that were due on or before December 31, 2007. We subsequently entered into a forbearance agreement with the
borrowers that is expected to restore the loan to accrual status by the end of the first quarter of 2008. The same borrowers have a second loan that is secured by a similarly-situated apartment building that remained on accrual status as of
December 31, 2007. Our allowance for loan losses was $11.1 million, or 0.87% of total loans, at December 31, 2007, compared to $10.6 million, or 0.79% of total loans, at December 31, 2006. The allowance for loan losses represented
91.65% of nonperforming loans at December 31, 2007, and 115.13% of nonperforming loans at December 31, 2006. To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate for each reporting
period.

Comparison of Year 2006 to 2005. We recorded a credit for loan losses of $136,000 for the year ended
December 31, 2006, compared to a provision for loan losses of $518,000 for the year ended December 31, 2005. The credit for loan losses recorded for 2006 reflected lower specific reserves against certain loans due to higher collateral
levels, and offset by net growth in total loans of $99.3 million during 2006. The portion of the allowance for loan losses that we allocate to impaired loans pursuant to SFAS No. 114 decreased $1.4 million to $402,000 at December 31, 2006
from $1.8 million at December 31, 2005. Recoveries of $576,000 specific reserves were primarily due to our receipt of current appraisals reflecting increases in the value of certain non-residential real estate securing loans to two health care
borrowers. The loans to these borrowers are also partially secured by additional collateral, including home equity and other personal assets, and in the case of one of the borrowers, by marketable securities. Fluctuations in the specific reserves
attributable to loans to these borrowers should be expected to occur in the future due to possible changes in the market value of the collateral, and any declines in their market value could result in future provisions for additional specific
reserves. Of the $1.4 million decrease in reserves allocated pursuant to SFAS No. 114, we charged off $836,000, which included a $693,000 charge-off of a fully reserved commercial loan due to the conclusion of legal proceedings. We acquired
this loan in our acquisition of Success Bancshares in 2001 and have been maintaining specific reserves against it since we closed that acquisition. Net loan charge-offs for 2006 were $968,000, or 0.07% of average loans compared to $23,000, or 0.00%
of average loans, in 2005. Nonperforming loans increased by $3.5 million to $9.2 million at December 31, 2006, from $5.7 million at December 31, 2005. The allowance for loan losses was $10.6 million, or 0.79% of total loans, at
December 31, 2006, compared to $11.5 million, or 0.93% of total loans, at December 31, 2005. The allowance for loan losses represented 115.13% of nonperforming loans at December 31, 2006, and 201.19% of nonperforming loans at
December 31, 2005. 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, |       |   | Percent Change |  
|                                                |  | 2007                     |       |   | 2006           |   |        | 2005 |  |   | 2007/2006 |   |  | 2006/2005 |   
|                                                |  | (Dollars in thousands)   |       |   |                |   |        |      | 
|Noninterest income:                             |  |                          |       |   |                |   |        |      |  |   |           |   |  |           |    |  |      |  
|Deposit fees and service charges                |  | $                        | 3,606 |   |                | $ | 4,198  |      |  | $ | 3,888     |   |  | (14.1     | )% |  | 8.0  | %
|Other fee income                                |  |                          | 1,939 |   |                |   | 1,916  |      |  |   | 1,852     |   |  | 1.2       |    |  | 3.5  |  
|Insurance commissions and annuities income      |  |                          | 1,007 |   |                |   | 1,321  |      |  |   | 848       |   |  | (23.8     | )  |  | 55.8 |  
|Gain on sale of loans                           |  |                          | 126   |   |                |   | 246    |      |  |   | 206       |   |  | (48.8     | )  |  | 19.4 |  
|Gain on sales of securities                     |  |                          | 399   |   |                |   | 101    |      |  |   |          |   |  | 295.0     |    |  | N.M. |  
|Gain on disposition of premises and equipment   |  |                          | 9     |   |                |   | 395    |      |  |   | 21        |   |  | (97.7     | )  |  | N.M. |  
|Loan servicing fees                             |  |                          | 811   |   |                |   | 938    |      |  |   | 1,031     |   |  | (13.5     | )  |  | (9.0 | )
|Amortization and impairment of servicing assets |  |                          | (396  | ) |                |   | (448   | )    |  |   | (508      | ) |  | (11.6     | )  |  | 11.8 |  
|Operations of real estate owned                 |  |                          | (17   | ) |                |   | (45    | )    |  |   | 4         |   |  | (62.2     | )  |  | N.M. |  
|Earnings on Bank Owned Life Insurance (BOLI)    |  |                          | 585   |   |                |   |       |      |  |   |          |   |  | N.M.      |    |  |     |  
|Other                                           |  |                          | 1,579 |   |                |   | 1,887  |      |  |   | 1,323     |   |  | (16.3     | )  |  | 42.6 |  
|                                                |  |                          |       |   |                |   |        |      |  |   |           |   |  |           |    |  |      |  
|Total noninterest income                        |  | $                        | 9,648 |   |                | $ | 10,509 |      |  | $ | 8,665     |   |  | (8.2      | )  |  | 21.3 |  
|                                                |  |                          |       |   |                |   |        |      |  |   |           |   |  |           |    |  |      |  



N.M. = not meaningful



49



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Comparison of Year 2007 to 2006. Our noninterest income decreased by $861,000 to $9.6 million for
the year ended December 31, 2007, from $10.5 million for the year ended December 31, 2006. We experienced a $592,000, or 14.1%, decrease in deposit service charges and fees to $3.6 million, and a $23,000, or 1.2%, increase in other fee
income to $1.9 million. Returned check and non-sufficient funds charges decreased $401,000 in 2007, from $3.5 million in 2006, compared to $3.1 million in 2007. The decrease can be partially attributed to a $7.1 million decrease in the average
balance of non-interest bearing deposits. Income from insurance commissions and annuities decreased by $314,000, or 23.8%, to $1.0 million for the year ended December 31, 2007, compared to $1.3 million for 2006. Gains on sales of loans
decreased by $120,000, or 48.8%, to $126,000 for 2007, from $246,000 for 2006, primarily because of lower loan sale volumes in 2007. We recorded a $399,000 gain on the redemption of MasterCard Class B common stock in 2007, compared to a $55,000 gain
on the same common stock in 2006. We recorded no net gains on the sale of investment securities during 2007, compared to $46,000 in gains in 2006. We recognized $9,000 in net gains on the disposition of premises and equipment during 2007, compared
to $395,000 in 2006. Loan servicing fees decreased $127,000, or 13.5%, to $811,000 for the year ended December 31, 2007, from $938,000 for 2006. Mortgage servicing rights amortization expense decreased $52,000, or 11.6%, to $396,000 for the
year ended December 31, 2007, compared to $448,000 for the same period in 2006. Net expenses from real estate owned totaled $17,000 for the year ended December 31, 2007, compared to $45,000 in 2006. Non-interest income for 2007 included
$585,000 in earnings on Bank-Owned Life Insurance that we purchased in June 2007, compared to no such earnings in 2006. Other income decreased $308,000, or 16.3%, to $1.6 million for the year ended December 31, 2007, from $1.9 million for 2006,
partially attributable to a $92,000 net decrease in title insurance agency commissions and fees earned by Financial Title Services, a division of our subsidiary, Financial Assurance Services.

Comparison of Year 2006 to 2005. Our noninterest income increased by $1.8 million to $10.5 million for the year ended December 31, 2006, from
$8.7 million for the year ended December 31, 2005. Noninterest income for the year ended December 31, 2006 included approximately $400,000 in noninterest income relating to the operations of the two former University National Bank
facilities. We experienced a $310,000, or 8.0%, increase in deposit service charges and fees to $4.2 million, and a $64,000, or 3.5%, increase in other fee income to $1.9 million, of which $218,000 and $77,000, respectively, related to those two
facilities. Income from insurance commissions and annuities increased by $473,000, or 55.8%, to $1.3 million for the year ended December 31, 2006, compared to $848,000 for 2005, due to increased activity resulting from the availability of
higher market interest rates on fixed annuities and successful sales initiatives. Gains on sales of loans increased by $40,000, or 19.4%, to $246,000 for 2006, from $206,000 for 2005, primarily because of higher loan sale volumes. We recorded a
$55,000 gain on the redemption of MasterCard Class B common stock and $46,000 in net gains on the sale of investment securities during 2006, while there were no such gains in 2005. We recognized $395,000 in net gains on the disposition of premises
and equipment during 2006 compared to $21,000 recognized in 2005. Loan servicing fees decreased $93,000, or 9.0%, to $938,000 for the year ended December 31, 2006, from $1.0 million for 2005. Mortgage servicing rights amortization expense
decreased $177,000, or 26.0% to $506,000 for the year ended December 31, 2006, compared to $683,000 for the same period in 2005. We recorded a mortgage servicing rights valuation reserve recovery of $58,000 for the year ended December 31,
2006, compared to a recovery of $175,000 for the same period in 2005. Net expenses from real estate owned totaled $45,000 for the year ended December 31, 2006, compared to net revenues of $4,000 for the same period in 2005. Other income
increased $564,000, or 42.6%, to $1.9 million for the year ended December 31, 2006, from $1.3 million for 2005, due in part to $106,000 in fees that we recorded in connection with the sale of surplus real estate, a recovery of $42,000 in
connection with a prior fraud loss, and a $395,000, or 40.6%, net increase in title insurance agency commissions and fees earned by Financial Title Services, a division of our subsidiary, Financial Assurance Services.



50



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Noninterest Expense



|                                 |  |                          |        |                |   |        |  |           |        |  |           |    |  |      |  
|-------------------------------- |  | ------------------------ | ------ | -------------- | - | ------ |  | --------- | ------ |  | --------- | -- |  | ---- | -
|                                 |  | Years Ended December 31, |        | Percent Change |  
|                                 |  | 2007                     |        | 2006           |   | 2005   |  | 2007/2006 |        |  | 2006/2005 |   
|                                 |  | (Dollars in thousands)   |        |                |   |        |  |          
|Noninterest Expense:             |  |                          |        |                |   |        |  |           |        |  |           |    |  |      |  
|Compensation and benefits        |  | $                        | 32,276 |                | $ | 34,454 |  | $         | 28,227 |  | (6.3      | )% |  | 22.1 | %
|Office occupancy and equipment   |  |                          | 5,949  |                |   | 5,602  |  |           | 5,058  |  | 6.2       |    |  | 10.8 |  
|Advertising and public relations |  |                          | 1,412  |                |   | 1,193  |  |           | 841    |  | 18.4      |    |  | 41.9 |  
|Information technology           |  |                          | 3,241  |                |   | 3,341  |  |           | 2,967  |  | (3.0      | )  |  | 12.6 |  
|Supplies, telephone and postage  |  |                          | 2,109  |                |   | 2,100  |  |           | 1,901  |  | 0.4       |    |  | 10.5 |  
|Amortization of intangibles      |  |                          | 1,879  |                |   | 1,873  |  |           | 1,634  |  | 0.3       |    |  | 14.6 |  
|Visa litigation                  |  |                          | 1,240  |                |   |       |  |           |       |  | N.M.      |    |  |     |  
|Other                            |  |                          | 4,376  |                |   | 3,807  |  |           | 3,578  |  | 14.9      |    |  | 6.4  |  
|                                 |  |                          |        |                |   |        |  |           |        |  |           |    |  |      |  
|Total noninterest expense        |  | $                        | 52,482 |                | $ | 52,370 |  | $         | 44,206 |  | 0.2       |    |  | 18.5 |  
|                                 |  |                          |        |                |   |        |  |           |        |  |           |    |  |      |  



N.M. = not meaningful

Comparison of Year 2007 to 2006. For the year ended December 31, 2007, noninterest expense
increased by $112,000, or 0.2%, to $52.5 million, from $52.4 million for the year ended December 31, 2006. Compensation expense decreased by $2.2 million, or 6.3%, to $32.3 million for the year ended December 31, 2007, from $34.5 million
for the year ended December 31, 2006. The decrease can be partially attributed to a decrease of 29 average full time equivalent employees (FTE) from 450 FTE in 2006 to 421 FTE in 2007. Expense relating to equity-based compensation
and benefits was $5.1 million in 2007, compared to $5.4 million during 2006. Information technology expenses decreased by $100,000, or 3.0%, to $3.2 million for 2007, compared to $3.3 million for 2006. Occupancy and equipment increased $347,000, or
6.2%, to $5.9 million for 2007 compared to $5.6 million for 2006, primarily due to a $94,000 increase in rental expense and the write-off of $91,000 in feasibility and design costs related to a possible remodeling project and repair work performed
at several branches. Advertising and public relations expenses increased $219,000, or 18.4% to $1.4 million. Supplies, telephone and postage expenses increased $9,000, or 0.4%, to $2.1 million, and intangible amortization expense increased by
$6,000. Our noninterest expense for 2007 included a charge of $1.2 million, which reflected our proportionate share of Visas estimated litigation obligations. The charge was recorded because the Bank, like other Visa USA members, is obligated
to share expenses, resulting from certain indemnified Visa litigation, proportionately with its ownership interests in Visa USA. If Visa USAs initial public offering is completed as planned, our proportionate share of the proceeds of the
initial offering is expected to offset or exceed the amount of this charge. Other expenses increased by $569,000, or 14.9%, in 2007, and the increase included a $250,000 fraud loss that we recorded in connection with claims that we settled with the
bankruptcy trustee and our blanket bond carrier for defalcations committed by a third party loan servicing company.

Comparison of Year 2006 to
2005. For the year ended December 31, 2006, noninterest expense increased by $8.2 million, or 18.5%, to $52.4 million, from $44.2 million for the year ended December 31, 2005. The operations of the two former University
National Bank facilities contributed approximately $1.4 million to this increase in noninterest expense. Compensation expense increased by $6.3 million, or 22.1%, to $34.5 million for the year ended December 31, 2006, from $28.2 million for the
year ended December 31, 2005. Expense relating to equity-based compensation and benefits was $5.4 million in 2006, compared to $717,000 during 2005, primarily due to equity-based awards that were made pursuant to our Equity Incentive Plan and
additional expenses arising from our first full year of making contributions to our ESOP. In addition, $925,000 of compensation expense related to general merit increases, staff additions and incentive programs, $319,000 represented increased
non-ESOP employee benefit costs, including health care expenses, payroll taxes and 401(k) plan expenses, and approximately $496,000 of increased compensation and commission-related expense at Financial Assurance and its division, Financial Title
Services, partially due to higher levels of insurance, annuity and title insurance agency activities. Except for merit increases, we generally target base compensation increases to compare to the consumer price index. Information technology expenses
increased by $374,000, or 12.6%, to $3.3 million for 2006, compared to $3.0 million for 2005, primarily due to approximately $132,000 related to our need to maintain a separate core banking data processing system for the two former University
National Bank facilities pending the completion of the conversion of that system into our core banking data processing system in the third quarter of 2006 and for expenses paid to an outside consultant for a Sarbanes-Oxley compliant internal
controls review, including the design and implementation of enhancements to our corporate performance management and reporting systems. Occupancy and



51



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equipment increased $544,000, or 10.8%, to $5.6 million for 2006 compared to $5.1 million for 2005 primarily due to a $185,000 expense for feasibility and
design costs related to a possible reconstruction of an existing branch office, to increased maintenance expenses, real estate taxes and energy costs and to the operation of the two former University National Bank facilities. Advertising and public
relations expenses increased $352,000, or 41.9% to $1.2 million. Of this amount, approximately $40,000 related to our first Annual Meeting of Stockholders in June of 2006, including the preparation and mailing of proxy materials and our annual
report to our stockholders, proxy solicitation and other annual meeting expenses, and approximately $52,000 of this increase related to our acquisition of University National Bank. The remainder of the increase in advertising and public relations
was principally due to a cross-media campaign to increase retail and small business deposit relationships at targeted branches. Supplies, telephone and postage expenses increased $199,000, or 10.5%, to $2.1 million. Our acquisition of University
National Bank resulted in the recording of a core deposit intangible of $3.3 million, and increased our intangible amortization expense by $239,000 for the year ended December 31, 2006. Other expenses increased by $229,000, or 6.4%, due a
$97,000 adjustment to franchise taxes payable to the State of Illinois due to the extent to which our mutual-to-stock conversion increased our paid-in capital, and to higher insurance, legal and accounting and auditing costs.

Income Tax Expense

Comparison of Year 2007 to
2006. For the year ended December 31, 2007, we recorded income tax expense of $3.0 million, compared to $4.8 million for the year ended December 31, 2006. The effective tax rate for 2007 was 29.3% compared to 32.5% in 2006.
Items that cause the effective tax rate to be less than the statutory tax rate include the dividends received deduction on preferred stock dividends received, income earned on Bank-Owned Life Insurance and interest income on municipal bonds and
municipal loans, respectively.

Comparison of Year 2006 to 2005. For the year ended December 31, 2006, we recorded income tax
expense of $4.8 million, compared to $4.3 million for the year ended December 31, 2005. The income tax expense for 2005 reflects $500,000 in tax benefits relating to prior years, the majority of which relates to tax returns for which the
applicable statute of limitations expired during the third quarter of 2005. The effective tax rate for 2006 was 32.5% compared to 27.9% in 2005.

Impact
of Inflation and Changing Prices

The financial statements and related notes of the Company 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 consideration for changes in the relative purchasing
power of money over time due to inflation. The impact of inflation 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. We believe that our most 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



52



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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.

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
increased our focus on the origination of adjustable-rate residential mortgage loans, as well as the origination of nonresidential mortgage loans, adjustable rate construction loans and commercial loans. 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 US 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, 2007, 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.



53



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|                                        |  |      |        |              |         |                                     |                     |         |                             |        |                                                     |    |         |   |        |  |   |        |   |  |        |   
|--------------------------------------- |  | ---- | ------ | ------------ | ------- | ----------------------------------- | ------------------- | ------- | --------------------------- | ------ | --------------------------------------------------- | -- | ------- | - | ------ |  | - | ------ | - |  | ------ | --
|                                        |  |      |        | NPV          |         |                                     | Net Interest Income |        
|                                        |  |      |        | EstimatedNPV |         | Estimated Increase (Decrease)in NPV |                     |         | EstimatedNet InterestIncome |        | Increase (Decrease) inEstimated Net Interest Income |   
|Change in Interest Rates (basis points) |  |      | Amount |              |         | Percent                             |                     |         |                             | Amount |                                                     |    | Percent |  
|                                        |  |      |        |              |         |                                     |                     |         | (Dollars in thousands)      |        |                                                     |    |         |   |        |  |   |       
|                                        |  | +300 |        | $            | 273,259 |                                     | $                   | (13,466 | )                           |        | (4.70                                               | )% |         | $ | 43,061 |  | $ | (6,080 | ) |  | (12.37 | )%
|                                        |  | +200 |        |              | 278,053 |                                     |                     | (8,671  | )                           |        | (3.02                                               | )  |         |   | 45,350 |  |   | (3,791 | ) |  | (7.71  | ) 
|                                        |  | +100 |        |              | 282,271 |                                     |                     | (4,454  | )                           |        | (1.55                                               | )  |         |   | 47,329 |  |   | (1,812 | ) |  | (3.69  | ) 
|                                        |  | 0    |        |              | 286,724 |                                     |                     |        |                             |        |                                                    |    |         |   | 49,141 |  |   |       |   |  |       |   
|                                        |  | -100 |        |              | 288,120 |                                     |                     | 1,396   |                             |        | 0.49                                                |    |         |   | 50,945 |  |   | 1,804  |   |  | 3.67   |   
|                                        |  | -200 |        |              | 287,653 |                                     |                     | 929     |                             |        | 0.32                                                |    |         |   | 52,341 |  |   | 3,200  |   |  | 6.51   |   
|                                        |  | -300 |        |              | 284,741 |                                     |                     | (1,983  | )                           |        | (0.69                                               | )  |         |   | 52,917 |  |   | 3,776  |   |  | 7.68   |   

The table set forth above indicates that at December 31, 2007, in the event of an immediate 200 basis point
decrease in interest rates, the Bank would be expected to experience a 0.32% increase in NPV and a $3.2 million increase in net interest income. In the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to
experience a 3.02% decrease in NPV and a $3.8 million 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.

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, commercial and
other loans, and the purchase of investment securities and mortgage-backed securities. During the years ended December 31, 2007, 2006 and 2005, our loans originated for sale totaled $26.6 million, $23.9 million and $20.8 million, respectively.
During the years ended December 31, 2007, 2006 and 2005, our loans originated for investment totaled $752.8 million, $659.9 million and $493.5 million, respectively. Purchases of loans totaled $3.9



54



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million, $34.5 million and $113.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Purchases of securities available-for-sale
totaled $1.446 billion, $95.1 million and $10.657 billion for the years ended December 31, 2007, 2006 and 2005, respectively. The significantly high level of purchases in 2007 and 2005 reflects the impact of investing in short-term discounts
notes.

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, 2007, 2006 and 2005, principal repayments on loans totaled $807.7 million, $614.6 million and $442.5 million, respectively. During the years ended December 31, 2007, 2006 and 2005, principal repayments on securities
available-for-sale totaled $5.9 million, $30.0 million and $45.8 million, respectively. During the years ended December 31, 2007, 2006 and 2005, proceeds from maturities on securities available-for-sale totaled $1.492 billion, $51.8 million and
$10.657 billion, respectively. During the years ended December 31, 2007, 2006 and 2005, the proceeds from the sale of loans totaled $26.9 million, $24.7 million and $26.1 million, respectively. In addition, during the years ended
December 31, 2007 and 2005 we securitized $23.4 million and $24.2 million of conforming adjustable-rate residential mortgage loans, respectively. During the year ended December 31, 2006, the proceeds from the sale of securities
available-for-sale totaled $230.0 million and from the redemption of Federal Home Loan Bank of Chicago stock totaled $9.8 million.

Loan origination
commitments totaled $17.6 million at December 31, 2007, and consisted of $13.6 million of fixed-rate loans and $4.0 million of adjustable-rate loans. Unused lines of credit and standby letters of credit granted to customers were $218.8 million
and $4.1 million, respectively, at December 31, 2007. At December 31, 2007, commitments to sell mortgages totaled $2.8 million.

Deposit flows
are generally affected by the level of market interest rates, the interest rates and other conditions on deposit products offered by our banking competitors, and other factors. We had net deposit outflows of $56.0 million, $41.8 million, and $47.8
million for the years ended December 31, 2007, 2006 and 2005, respectively. 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 repayment of one- to four-family residential mortgage loans. With the completion of our subscription offering during June of 2005, we specifically allowed the level of wholesale certificates of deposit to decline as we deployed these
proceeds over the short term. Certificates of deposit that are scheduled to mature in one year or less from December 31, 2007 totaled $269.5 million. Based upon prior experience and our current pricing strategy, we believe that a significant
portion of these deposits will remain with us.

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 reinvested with us. We generally remain fully invested and utilize additional sources of funds through FHLBC advances, of which $81.5 million were outstanding at December 31, 2007. At
December 31, 2007 we had the ability to borrow an additional $206.9 million under our credit facilities with the FHLBC. Furthermore, we have unpledged securities that could be used to support borrowings in excess of $25.0 million. Finally, at
December 31, 2007 we had available pre-approved overnight federal funds borrowing lines of $65.0 million and a line of credit available with the Federal Reserve Bank of Chicago of $3.1 million. At December 31, 2007, 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. During 2007, we securitized $23.5 million of such loans. 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-weight than the underlying loans, the securitizations also lower our regulatory capital requirements.

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 $44.2 million of cash and cash equivalents and periodic cash dividends from the Bank.



55



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During 2007, there were $47.5 million of dividends paid to the Company by 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
mutual-to-stock conversion. The Bank may pay dividends without the approval of the OTS so long as 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 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. At January 1, 2008, the Bank had the ability to pay dividends of $2.0 million to the Company without the prior approval of the OTS.

During 2007, we used $34.0 million to repurchase shares of our common stock and paid $6.5 million in cash dividends to stockholders funded by existing cash and cash
equivalents held by the Company.

As of December 31, 2007, we were not aware of any known trends, events or uncertainties that have or are reasonably
likely to have a material impact on our liquidity. As of December 31, 2007, 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 writedowns 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 regulators
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 are limited, as is asset growth and expansion, and plans for capital restoration are required.

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



|                                                 |  |              |   |  |                                            |   |  |                                                                               |  
|------------------------------------------------ |  | ------------ | - |  | ------------------------------------------ | - |  | ----------------------------------------------------------------------------- | -
|                                                 |  | Actual Ratio |   |  | MinimumRequired forCapitalAdequacyPurposes |   |  | Minimum Required toBe Well CapitalizedUnder PromptCorrective ActionProvisions |  
|December 31, 2007                                |  |              |   |  |                                            |   |  |                                                                               |  
|Total capital (to risk-weighted assets)          |  | 16.54        | % |  | 8.00                                       | % |  | 10.00                                                                         | %
|Tier 1 (core) capital (to risk-weighted assets)  |  | 15.74        |   |  | 4.00                                       |   |  | 6.00                                                                          |  
|Tier 1 (core) capital (to adjusted total assets) |  | 13.95        |   |  | 4.00                                       |   |  | 5.00                                                                          |  
|                                                 |  |              |  
|December 31, 2006                                |  |              |   |  |                                            |   |  |                                                                               |  
|Total capital (to risk-weighted assets)          |  | 20.09        | % |  | 8.00                                       | % |  | 10.00                                                                         | %
|Tier 1 (core) capital (to risk-weighted assets)  |  | 19.26        |   |  | 4.00                                       |   |  | 6.00                                                                          |  
|Tier 1 (core) capital (to adjusted total assets) |  | 15.05        |   |  | 4.00                                       |   |  | 5.00                                                                          |  



56



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See Note 14  Regulatory Matters in our Consolidated Financial Statements for a reconciliation of regulatory
capital.

As of December 31, 2007 and 2006, 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 those notifications that management believes have changed the institution's 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
(net of offering expenses). The Company contributed $120.9 million of the net proceeds to the Bank, paid off $30 million of term debt, loaned $19.6 million to our ESOP and retained the remaining proceeds of approximately $72 million. As a result of
this offering, the Company has capital levels substantially above that required to support the current size and risk profile of the Company and its subsidiary, the Bank.

Total stockholders equity totaled $291.1 million at December 31, 2007, compared to $326.0 million at December 31, 2006. The decrease on total stockholders equity was primarily due to our
repurchase of 2,077,923 shares of our common stock at an aggregate cost of $34.0 million, the declaration and payment of cash dividends totaling $6.5 million, and a $7.2 million decrease in accumulated other comprehensive income. These changes were
partially offset by our 2007 net income of $7.2 million and a $5.6 million increase resulting 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 to which the Company must comply. 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
tangible equity ratio was 17.95% at December 31, 2007, compared to 18.58% at December 31, 2006.

As stated in our Prospectus dated April 15,
2005, our strategy for utilizing the capital raised in the offering 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.

Our Board of Directors has authorized the repurchase of up to 3,605,384 shares of the Companys 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, such as price and other internal limitations established by the
Companys Board of Directors. On September 28, 2007 the Board of Directors again extended the expiration date of the Companys share repurchase authorization until March 31, 2008. As of December 31, 2007, we had repurchased
3,055,223 shares of common stock at an aggregate cost of $51.2 million under this authorization. For additional information, see Part II. Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities. Repurchases of Our Equity Securities.

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 accorded to loans made by us. Although we consider commitments to



57



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extend credit in determining our allowance for loan losses, at December 31, 2007, 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 15, Loan Commitments and Other Related Activities, to our Consolidated Financial Statements.



58



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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, 2007. 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 thanOne Year      |         | One to ThreeYears |   | Three to FiveYears |  | More thanFive Years |       | Total
|                             |  | (Dollars in thousands)
|Certificates of deposit      |  | $                      | 269,452 |                   | $ | 37,174             |  | $                   | 991   |       | $ |      |  | $ | 307,617
|Borrowings                   |  |                        | 59,433  |                   |   | 37,000             |  |                     |      |       |   |      |  |   | 96,433 
|Standby letters of credit    |  |                        | 3,719   |                   |   | 381                |  |                     | 40    |       |   |      |  |   | 4,140  
|Operating leases             |  |                        | 573     |                   |   | 743                |  |                     | 703   |       |   | 7,583 |  |   | 9,602  
|                             |  |                        |         |                   |   |                    |  |                     |       |       |   |       |  |   |        
|Total                        |  | $                      | 333,177 |                   | $ | 75,298             |  | $                   | 1,734 |       | $ | 7,583 |  | $ | 417,792
|                             |  |                        |         |                   |   |                    |  |                     |       |       |   |       |  |   |        
|                             |  |                        |         |                   |  
|Commitments to extend credit |  | $                      | 236,428 |                   | $ |                   |  | $                   |      |       | $ |      |  | $ | 236,428
|                             |  |                        |         |                   |   |                    |  |                     |       |       |   |       |  |   |        



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

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



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



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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, 2007, 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, 2007, 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 Executive Officer and President |  |  |  | Executive Vice President and Chief Financial Officer



60



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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, 2007 and 2006, and the related
statements of income, changes in stockholders equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2007. We also have audited the Companys internal control over
financial reporting as of December 31, 2007, 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, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007 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, 2007, based on criteria established inInternal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Crowe Chizek and Company LLC

Oak Brook, Illinois

March 8, 2008



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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 2007 and 2006

(In thousands, except share and per share data)







|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                   |  | December 31,2007 |           |   | December 31,2006 |  
|ASSETS                                                                                                                                             |  |                  |           |   |                  |   |           |  
|Cash and due from other financial institutions                                                                                                     |  | $                | 28,279    |   |                  | $ | 38,286    |  
|Interest-bearing deposits in other financial institutions                                                                                          |  |                  | 669       |   |                  |   | 29,051    |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                          |  |                  | 28,948    |   |                  |   | 67,337    |  
|Securities available-for-sale, at fair value                                                                                                       |  |                  | 77,049    |   |                  |   | 117,853   |  
|Loans held-for-sale                                                                                                                                |  |                  | 173       |   |                  |   | 298       |  
|Loans receivable, net of allowance for loan losses:                                                                                                |  |                  |           |   |                  |   |           |  
|December 31, 2007, $11,051; and December 31, 2006, $10,622                                                                                         |  |                  | 1,253,999 |   |                  |   | 1,330,091 |  
|Stock in Federal Home Loan Bank, at cost                                                                                                           |  |                  | 15,598    |   |                  |   | 15,598    |  
|Premises and equipment, net                                                                                                                        |  |                  | 34,487    |   |                  |   | 35,005    |  
|Accrued interest receivable                                                                                                                        |  |                  | 7,090     |   |                  |   | 7,869     |  
|Goodwill                                                                                                                                           |  |                  | 22,566    |   |                  |   | 22,579    |  
|Core deposit intangible                                                                                                                            |  |                  | 7,769     |   |                  |   | 9,648     |  
|Bank Owned Life Insurance                                                                                                                          |  |                  | 19,585    |   |                  |   |          |  
|Other assets                                                                                                                                       |  |                  | 13,280    |   |                  |   | 7,020     |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|Total assets                                                                                                                                       |  | $                | 1,480,544 |   |                  | $ | 1,613,298 |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|                                                                                                                                                   |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                               |  |                  |           |   |                  |   |           |  
|Liabilities                                                                                                                                        |  |                  |           |   |                  |   |           |  
|Deposits                                                                                                                                           |  |                  | 1,073,650 |   |                  |   | 1,129,585 |  
|Borrowings                                                                                                                                         |  |                  | 96,433    |   |                  |   | 138,148   |  
|Advance payments by borrowers taxes and insurance                                                                                                  |  |                  | 7,488     |   |                  |   | 8,461     |  
|Accrued interest payable and other liabilities                                                                                                     |  |                  | 11,836    |   |                  |   | 11,089    |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|Total liabilities                                                                                                                                  |  |                  | 1,189,407 |   |                  |   | 1,287,283 |  
|                                                                                                                                                   |  |                 
|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, shares authorized: 100,000,000; shares issued at December 31, 2007, 22,244,477 and at December 31,
2006, 24,304,950 |  |                  | 222       |   |                  |   | 243       |  
|Additional paid-in capital                                                                                                                         |  |                  | 198,449   |   |                  |   | 227,741   |  
|Retained earnings, substantially restricted                                                                                                        |  |                  | 113,802   |   |                  |   | 113,128   |  
|Unearned Employee Stock Ownership Plan shares                                                                                                      |  |                  | (17,126   | ) |                  |   | (18,105   | )
|Accumulated other comprehensive income (loss)                                                                                                      |  |                  | (4,210    | ) |                  |   | 3,008     |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                         |  |                  | 291,137   |   |                  |   | 326,015   |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                         |  | $                | 1,480,544 |   |                  | $ | 1,613,298 |  
|                                                                                                                                                   |  |                  |           |   |                  |   |           |  





See accompanying notes to consolidated financial statements.



62



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2007, 2006, and
2005

(In thousands, except per share data)







|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                             |  | 2007 |            |   | 2006 |   |            | 2005 | 
|Interest and dividend income                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Loans, including fees                                        |  | $    | 85,601     |   |      | $ | 83,502     |      |  | $ | 66,618     |  
|Securities                                                   |  |      | 5,056      |   |      |   | 9,184      |      |  |   | 11,640     |  
|Other                                                        |  |      | 1,296      |   |      |   | 1,400      |      |  |   | 1,954      |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest income                                        |  |      | 91,953     |   |      |   | 94,086     |      |  |   | 80,212     |  
|                                                             |  |      |           
|Interest expense                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Deposits                                                     |  |      | 33,446     |   |      |   | 29,957     |      |  |   | 20,598     |  
|Borrowings                                                   |  |      | 4,858      |   |      |   | 7,532      |      |  |   | 8,204      |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest expense                                       |  |      | 38,304     |   |      |   | 37,489     |      |  |   | 28,802     |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|                                                             |  |      |           
|Net interest income                                          |  |      | 53,649     |   |      |   | 56,597     |      |  |   | 51,410     |  
|                                                             |  |      |           
|Provision (credit) for loan losses                           |  |      | 697        |   |      |   | (136       | )    |  |   | 518        |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|                                                             |  |      |           
|Net interest income after provision (credit) for loan losses |  |      | 52,952     |   |      |   | 56,733     |      |  |   | 50,892     |  
|                                                             |  |      |           
|Noninterest income                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Deposit service charges and fees                             |  |      | 3,606      |   |      |   | 4,198      |      |  |   | 3,888      |  
|Other fee income                                             |  |      | 1,939      |   |      |   | 1,916      |      |  |   | 1,852      |  
|Insurance commissions and annuities income                   |  |      | 1,007      |   |      |   | 1,321      |      |  |   | 848        |  
|Gain on sale of loans                                        |  |      | 126        |   |      |   | 246        |      |  |   | 206        |  
|Gain on sale of securities                                   |  |      | 399        |   |      |   | 101        |      |  |   |           |  
|Gain on disposition of premises and equipment                |  |      | 9          |   |      |   | 395        |      |  |   | 21         |  
|Loan servicing fees                                          |  |      | 811        |   |      |   | 938        |      |  |   | 1,031      |  
|Amortization and impairment of servicing assets              |  |      | (396       | ) |      |   | (448       | )    |  |   | (508       | )
|Operations of real estate owned                              |  |      | (17        | ) |      |   | (45        | )    |  |   | 4          |  
|Earnings on BOLI                                             |  |      | 585        |   |      |   |           |      |  |   |           |  
|Other                                                        |  |      | 1,579      |   |      |   | 1,887      |      |  |   | 1,323      |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest income                                     |  |      | 9,648      |   |      |   | 10,509     |      |  |   | 8,665      |  
|                                                             |  |      |           
|Noninterest expense                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Compensation and benefits                                    |  |      | 32,276     |   |      |   | 34,454     |      |  |   | 28,227     |  
|Office occupancy and equipment                               |  |      | 5,949      |   |      |   | 5,602      |      |  |   | 5,058      |  
|Advertising and public relations                             |  |      | 1,412      |   |      |   | 1,193      |      |  |   | 841        |  
|Information technology                                       |  |      | 3,241      |   |      |   | 3,341      |      |  |   | 2,967      |  
|Supplies, telephone, and postage                             |  |      | 2,109      |   |      |   | 2,100      |      |  |   | 1,901      |  
|Amortization of intangibles                                  |  |      | 1,879      |   |      |   | 1,873      |      |  |   | 1,634      |  
|Visa Litigation                                              |  |      | 1,240      |   |      |   |           |      |  |   |           |  
|Other                                                        |  |      | 4,376      |   |      |   | 3,807      |      |  |   | 3,578      |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest expense                                    |  |      | 52,482     |   |      |   | 52,370     |      |  |   | 44,206     |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|                                                             |  |      |           
|Income before income taxes                                   |  |      | 10,118     |   |      |   | 14,872     |      |  |   | 15,351     |  
|                                                             |  |      |           
|Income tax expense                                           |  |      | 2,963      |   |      |   | 4,826      |      |  |   | 4,278      |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|                                                             |  |      |           
|Net income                                                   |  | $    | 7,155      |   |      | $ | 10,046     |      |  | $ | 11,073     |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|                                                             |  |      |           
|Basic earnings per common share                              |  | $    | 0.35       |   |      | $ | 0.45       |      |  | $ | 0.29       |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted earnings per common share                            |  | $    | 0.35       |   |      | $ | 0.45       |      |  | $ | 0.29       |  
|                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|                                                             |  |      |           
|Weighted average common shares outstanding                   |  |      | 20,659,587 |   |      |   | 22,368,032 |      |  |   | 22,539,693 |  
|Diluted weighted average common shares outstanding           |  |      | 20,659,587 |   |      |   | 22,372,228 |      |  |   | 22,539,693 |  





See accompanying notes to consolidated financial statements.



63



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2007, 2006, and 2005

(In thousands)







|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|--------------------------------------------------------------- |  | ----------- | --- | - | ------------------------ | - | ------- | ---------------- |  | - | ----------------------------------------- | - |  | ------------------------------------------ | ------- | - | ----- | - | ------ | -------------------------- |  | - | ------- | - |  | - | ------
|                                                                |  | CommonStock |     |   | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | UnearnedEmployeeStockOwnershipPlan Shares |   |  | AccumulatedOtherComprehensiveIncome (Loss) |         |   | Total |   |        | ComprehensiveIncome (Loss)
|Balance at December 31, 2004                                    |  | $           |    |   |                          | $ |        |                  |  | $ | 96,455                                    |   |  | $                                          |        |   |       | $ | (1,567 | )                          |  | $ | 94,888  |   |  |   |       
|Comprehensive income                                            |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Net income                                                      |  |             |    |   |                          |   |        |                  |  |   | 11,073                                    |   |  |                                            |        |   |       |   |       |                            |  |   | 11,073  |   |  | $ | 11,073
|Change in other comprehensive income (loss), net of tax effects |  |             |    |   |                          |   |        |                  |  |   |                                          |   |  |                                            |        |   |       |   | 1,420  |                            |  |   | 1,420   |   |  |   | 1,420 
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Total comprehensive income                                      |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  | $ | 12,493
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Net proceeds from common stock issued                           |  |             | 245 |   |                          |   | 240,007 |                  |  |   |                                          |   |  |                                            | (19,573 | ) |       |   |       |                            |  |   | 220,679 |   |  |   |       
|ESOP shares earned                                              |  |             |    |   |                          |   | 228     |                  |  |   |                                          |   |  |                                            | 489     |   |       |   |       |                            |  |   | 717     |   |  |   |       
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Balance at December 31, 2005                                    |  | $           | 245 |   |                          | $ | 240,235 |                  |  | $ | 107,528                                   |   |  | $                                          | (19,084 | ) |       | $ | (147   | )                          |  | $ | 328,777 |   |  |   |       
|Comprehensive income:                                           |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Net income                                                      |  |             |    |   |                          |   |        |                  |  |   | 10,046                                    |   |  |                                            |        |   |       |   |       |                            |  |   | 10,046  |   |  | $ | 10,046
|Change in other comprehensive income (loss), net of tax effects |  |             |    |   |                          |   |        |                  |  |   |                                          |   |  |                                            |        |   |       |   | 3,155  |                            |  |   | 3,155   |   |  |   | 3,155 
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Total comprehensive income                                      |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  | $ | 13,201
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Purchase and retirement of common stock (977,300 shares)        |  |             | (10 | ) |                          |   | (17,280 | )                |  |   |                                          |   |  |                                            |        |   |       |   |       |                            |  |   | (17,290 | ) |  |   |       
|Nonvested stock awards:                                         |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Issuance of shares of restricted stock (816,000 shares)         |  |             | 8   |   |                          |   | (8      | )                |  |   |                                          |   |  |                                            |        |   |       |   |       |                            |  |   |        |   |  |   |       
|Stock-based compensation Expense                                |  |             |    |   |                          |   | 4,030   |                  |  |   |                                          |   |  |                                            |        |   |       |   |       |                            |  |   | 4,030   |   |  |   |       
|Cash dividends declared on common stock ($0.18 per share)       |  |             |    |   |                          |   |        |                  |  |   | (4,446                                    | ) |  |                                            |        |   |       |   |       |                            |  |   | (4,446  | ) |  |   |       
|ESOP shares earned                                              |  |             |    |   |                          |   | 764     |                  |  |   |                                          |   |  |                                            | 979     |   |       |   |       |                            |  |   | 1,743   |   |  |   |       
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       
|Balance at December 31, 2006                                    |  | $           | 243 |   |                          | $ | 227,741 |                  |  | $ | 113,128                                   |   |  | $                                          | (18,105 | ) |       | $ | 3,008  |                            |  | $ | 326,015 |   |  |   |       
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |       





(Continued)



64



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2007, 2006, and 2005

(In thousands)







|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  
|--------------------------------------------------------------- |  | ----------- | --- | - | ------------------------ | - | ------- | ---------------- |  | - | ----------------------------------------- | - |  | ------------------------------------------ | ------- | - | ----- | - | ------ | -------------------------- |  | - | ------- | - |  | - | ------ | -
|                                                                |  | CommonStock |     |   | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | UnearnedEmployeeStockOwnershipPlan Shares |   |  | AccumulatedOtherComprehensiveIncome (Loss) |         |   | Total |   |        | ComprehensiveIncome (Loss) | 
|Balance at December 31, 2006                                    |  | $           | 243 |   |                          | $ | 227,741 |                  |  | $ | 113,128                                   |   |  | $                                          | (18,105 | ) |       | $ | 3,008  |                            |  | $ | 326,015 |   |  |   |        |  
|Comprehensive income (loss):                                    |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  
|Net income                                                      |  |             |    |   |                          |   |        |                  |  |   | 7,155                                     |   |  |                                            |        |   |       |   |       |                            |  |   | 7,155   |   |  | $ | 7,155  |  
|Change in other comprehensive income (loss), net of tax effects |  |             |    |   |                          |   |        |                  |  |   |                                          |   |  |                                            |        |   |       |   | (7,218 | )                          |  |   | (7,218  | ) |  |   | (7,218 | )
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  
|Total comprehensive income (loss)                               |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  | $ | (63    | )
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  
|Purchase and retirement of common stock (2,077,923 shares)      |  |             | (21 | ) |                          |   | (33,936 | )                |  |   |                                          |   |  |                                            |        |   |       |   |       |                            |  |   | (33,957 | ) |  |   |        |  
|Nonvested stock awards:                                         |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  
|Issuance of shares of restricted stock (17,450 shares)          |  |             |    |   |                          |   |        |                  |  |   |                                          |   |  |                                            |        |   |       |   |       |                            |  |   |        |   |  |   |        |  
|Stock-based compensation Expense                                |  |             |    |   |                          |   | 4,075   |                  |  |   |                                          |   |  |                                            |        |   |       |   |       |                            |  |   | 4,075   |   |  |   |        |  
|Cash dividends declared on common stock ($0.28 per share)       |  |             |    |   |                          |   |        |                  |  |   | (6,481                                    | ) |  |                                            |        |   |       |   |       |                            |  |   | (6,481  | ) |  |   |        |  
|ESOP shares earned                                              |  |             |    |   |                          |   | 569     |                  |  |   |                                          |   |  |                                            | 979     |   |       |   |       |                            |  |   | 1,548   |   |  |   |        |  
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  
|Balance at December 31, 2007                                    |  | $           | 222 |   |                          | $ | 198,449 |                  |  | $ | 113,802                                   |   |  | $                                          | (17,126 | ) |       | $ | (4,210 | )                          |  | $ | 291,137 |   |  |   |        |  
|                                                                |  |             |     |   |                          |   |         |                  |  |   |                                           |   |  |                                            |         |   |       |   |        |                            |  |   |         |   |  |   |        |  





See accompanying notes to consolidated financial statements.



65



---

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006,
and 2005

(In thousands)







|                                                               |  |      |            |   |      |   |          |      |  |   |             |  
|-------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | ---- |  | - | ----------- | -
|                                                               |  | 2007 |            |   | 2006 |   |          | 2005 | 
|Cash flows from operating activities                           |  |      |            |   |      |   |          |      |  |   |             |  
|Net income                                                     |  | $    | 7,155      |   |      | $ | 10,046   |      |  | $ | 11,073      |  
|Adjustments to reconcile to net income to net cash             |  |      |            |   |      |   |          |      |  |   |             |  
|From operating activities                                      |  |      |            |   |      |   |          |      |  |   |             |  
|Provision (credit) for loan losses                             |  |      | 697        |   |      |   | (136     | )    |  |   | 518         |  
|ESOP shares earned                                             |  |      | 1,548      |   |      |   | 1,743    |      |  |   | 717         |  
|Stock-based compensation expense                               |  |      | 4,075      |   |      |   | 4,030    |      |  |   |            |  
|Depreciation and amortization                                  |  |      | 3,863      |   |      |   | 3,441    |      |  |   | 3,561       |  
|Amortization of premiums and discounts on securities and loans |  |      | (319       | ) |      |   | (3       | )    |  |   | 269         |  
|Amortization of core deposit and other intangible assets       |  |      | 1,874      |   |      |   | 1,888    |      |  |   | 2,109       |  
|Amortization and impairment of servicing assets                |  |      | 396        |   |      |   | 448      |      |  |   | 508         |  
|Amortization of premium on early extinguishment of debt        |  |      |           |   |      |   |         |      |  |   | 388         |  
|Net change in net deferred loan origination costs              |  |      | 338        |   |      |   | 117      |      |  |   | (445        | )
|Net loss on sale of real estate owned                          |  |      |           |   |      |   | 18       |      |  |   |            |  
|Net gain on sale of loans                                      |  |      | (126       | ) |      |   | (246     | )    |  |   | (206        | )
|Net gain on sale of securities                                 |  |      | (399       | ) |      |   | (101     | )    |  |   |            |  
|Net gain on disposition of premises and equipment              |  |      | (9         | ) |      |   | (395     | )    |  |   | (21         | )
|Loans originated for sale                                      |  |      | (26,637    | ) |      |   | (23,888  | )    |  |   | (20,775     | )
|Proceeds from sale of loans                                    |  |      | 26,888     |   |      |   | 24,711   |      |  |   | 26,137      |  
|Federal Home Loan Bank of Chicago stock dividends              |  |      |           |   |      |   |         |      |  |   | (1,208      | )
|Net change in:                                                 |  |      |            |   |      |   |          |      |  |   |             |  
|Deferred income tax                                            |  |      | (438       | ) |      |   | 2,458    |      |  |   | 633         |  
|Accrued interest receivable                                    |  |      | 779        |   |      |   | (721     | )    |  |   | (1,178      | )
|BOLI Income                                                    |  |      | (585       | ) |      |   |         |      |  |   |            |  
|Other assets                                                   |  |      | (1,989     | ) |      |   | (2,287   | )    |  |   | (410        | )
|Accrued interest payable and other liabilities                 |  |      | 623        |   |      |   | (7,725   | )    |  |   | 8,046       |  
|                                                               |  |      |            |   |      |   |          |      |  |   |             |  
|Net cash from operating activities                             |  |      | 17,734     |   |      |   | 13,398   |      |  |   | 29,716      |  
|                                                               |  |      |           
|Cash flows from investing activities                           |  |      |            |   |      |   |          |      |  |   |             |  
|Securities available-for-sale                                  |  |      |            |   |      |   |          |      |  |   |             |  
|Proceeds from sales                                            |  |      | 399        |   |      |   | 229,990  |      |  |   |            |  
|Proceeds from maturities                                       |  |      | 1,492,371  |   |      |   | 51,839   |      |  |   | 10,656,891  |  
|Proceeds from principal repayments                             |  |      | 5,866      |   |      |   | 30,001   |      |  |   | 45,821      |  
|Purchases of securities                                        |  |      | (1,445,649 | ) |      |   | (95,086  | )    |  |   | (10,656,506 | )
|Loans receivable                                               |  |      |            |   |      |   |          |      |  |   |             |  
|Principal payments on loans receivable                         |  |      | 807,683    |   |      |   | 614,604  |      |  |   | 442,486     |  
|Purchases of loans                                             |  |      | (3,848     | ) |      |   | (34,455  | )    |  |   | (113,877    | )
|Originated for investment                                      |  |      | (752,752   | ) |      |   | (659,864 | )    |  |   | (493,514    | )
|Proceeds from redemption of stock in Federal Home Loan Bank    |  |      |           |   |      |   | 9,836    |      |  |   |            |  
|Investment BOLI                                                |  |      | (19,000    | ) |      |   |         |      |  |   |            |  
|Proceeds from sale of real estate owned                        |  |      |           |   |      |   | 114      |      |  |   |            |  
|Purchase of premises and equipment, net                        |  |      | (2,115     | ) |      |   | (1,154   | )    |  |   | (2,299      | )
|Cash paid, net of cash and cash equivalents, in acquisition    |  |      |           |   |      |   | (13,368  | )    |  |   |            |  
|                                                               |  |      |            |   |      |   |          |      |  |   |             |  
|Net cash from investing activities                             |  |      | 82,955     |   |      |   | 132,457  |      |  |   | (120,998    | )





(Continued)



66



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BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006,
and 2005

(In thousands)







|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|---------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                       |  | 2007 |          |   | 2006 |   |          | 2005 | 
|Cash flows from financing activities                                   |  |      |          |   |      |   |          |      |  |   |         |  
|Net change in deposits                                                 |  | $    | (55,952  | ) |      | $ | (41,812  | )    |  | $ | (47,822 | )
|Net change in advance payments by borrowers for taxes and insurance    |  |      | (973     | ) |      |   | 244      |      |  |   | 895     |  
|Net change in borrowings                                               |  |      | (41,715  | ) |      |   | (53,240  | )    |  |   | (73,742 | )
|Net proceeds from sale of common stock                                 |  |      |         |   |      |   |         |      |  |   | 220,679 |  
|Repurchase and retirement of common stock                              |  |      | (33,957  | ) |      |   | (17,290  | )    |  |   |        |  
|Cash dividends paid on common stock                                    |  |      | (6,481   | ) |      |   | (4,446   | )    |  |   |        |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|Net cash from financing activities                                     |  |      | (139,078 | ) |      |   | (116,544 | )    |  |   | 100,010 |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|Net change in cash and cash equivalents                                |  |      | (38,389  | ) |      |   | 29,311   |      |  |   | 8,728   |  
|                                                                       |  |      |         
|Beginning cash and cash equivalents                                    |  |      | 67,337   |   |      |   | 38,026   |      |  |   | 29,298  |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|                                                                       |  |      |         
|Ending cash and cash equivalents                                       |  | $    | 28,948   |   |      | $ | 67,337   |      |  | $ | 38,026  |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|                                                                       |  |      |         
|Supplemental disclosures:                                              |  |      |          |   |      |   |          |      |  |   |         |  
|Interest paid                                                          |  | $    | 38,508   |   |      | $ | 37,366   |      |  | $ | 28,247  |  
|Income taxes paid                                                      |  |      | 3,492    |   |      |   | 3,670    |      |  |   | 3,200   |  
|Loans transferred to other real estate                                 |  |      | 820      |   |      |   |         |      |  |   | 153     |  
|Loans securitized to securities                                        |  |      | 23,482   |   |      |   |         |      |  |   | 24,213  |  
|Due to broker                                                          |  |      | 158      |   |      |   |         |      |  |   |        |  
|                                                                       |  |      |         
|Supplemental Disclosures of Noncash Investing Activities - Acquisition |  |      |          |   |      |   |          |      |  |   |         |  
|                                                                       |  |      |         
|Noncash assets acquired:                                               |  |      |          |   |      |   |          |      |  |   |         |  
|Investment securities available for sale                               |  | $    |         |   |      | $ | 81,014   |      |  | $ |        |  
|Loans, net                                                             |  |      |         |   |      |   | 17,782   |      |  |   |        |  
|Premises and equipment, net                                            |  |      |         |   |      |   | 2,878    |      |  |   |        |  
|Goodwill, net                                                          |  |      |         |   |      |   | 11,714   |      |  |   |        |  
|Other intangible assets, net                                           |  |      |         |   |      |   | 3,272    |      |  |   |        |  
|Other assets                                                           |  |      |         |   |      |   | 999      |      |  |   |        |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|Total noncash assets acquired                                          |  |      |         |   |      |   | 117,659  |      |  |   |        |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|                                                                       |  |      |         
|Liabilities assumed:                                                   |  |      |          |   |      |   |          |      |  |   |         |  
|Deposits                                                               |  | $    |         |   |      | $ | 103,485  |      |  | $ |        |  
|Accrued expenses and other liabilities                                 |  |      |         |   |      |   | 806      |      |  |   |        |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|Total liabilities assumed                                              |  |      |         |   |      |   | 104,291  |      |  |   |        |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  
|Cash paid, net of cash and cash equivalents, in acquisition            |  | $    |         |   |      | $ | 13,368   |      |  | $ |        |  
|                                                                       |  |      |          |   |      |   |          |      |  |   |         |  





See accompanying notes to consolidated financial statements.



67



---

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 organized in 2004 (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, upon the consummation of a plan of conversion and reorganization adopted by the predecessor holding companies for the
Bank, BankFinancial MHC, Inc. (BankFinancial MHC) and BankFinancial Corporation, a federal corporation.

Pursuant to the plan of conversion and
reorganization, BankFinancial MHC converted from the mutual form of ownership to the stock form of ownership through a series of transactions that terminated the separate corporate existences of BankFinancial MHC and BankFinancial Corporation, the
federal corporation. BankFinancial Corporation, the Maryland corporation, then sold 24,466,250 shares of common stock in a subscription offering for $10.00 per share, and became the sole stockholder of the Bank. For a further discussion of
BankFinancial Corporation, the Maryland corporation, and the operations of BankFinancial MHC, BankFinancial Corporation, the federal corporation, and the Bank for certain periods prior to the consummation of the conversion and reorganization, see
the Companys Prospectus as filed on April 29, 2005 with the Securities and Exchange Commission pursuant to Rule 424(b)(3) of the Rules and Regulations of the Securities Act of 1933 (File Number 333-119217).

BankFinancial Corporation, the Maryland corporation, did not engage in any business prior to the consummation of the conversion and reorganization on June 23, 2005.
Consequently, the 2005 consolidated financial statements reflect the operating results of BankFinancial MHC, Inc., BankFinancial Corporation, the federal corporation, and their subsidiaries until June 23, 2005, and of BankFinancial Corporation,
the Maryland corporation, and its subsidiaries thereafter. The words Company, we and our are therefore intended to refer to BankFinancial MHC, BankFinancial Corporation, the federal corporation, and their
subsidiaries, including the Bank, with respect to matters and time periods occurring on or before June 23, 2005, and to refer to BankFinancial Corporation, the Maryland corporation, and its subsidiaries, including the Bank, with respect to
matters and time periods occurring thereafter.

Principles of Consolidation: The consolidated financial statements include the accounts of
and transactions of BankFinancial MHC, Inc., BankFinancial Corporation, the federal corporation, BankFinancial Corporation, the Maryland corporation, the Bank, and the Banks wholly-owned subsidiaries, Financial Assurance Services, Inc. and
BankFinancial 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 as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Loan origination customers are mainly located in the greater
Chicago metropolitan area. To supplement loan originations, the Company purchases mortgage loans for which the underlying collateral is predominantly located in Illinois. 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, 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 and are carried at cost.







68



---

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)



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, 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) the Companys ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Federal Home Loan Bank Stock: The Bank is a
member of the FHLB 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. FHLB stock is carried at cost and classified as a restricted security. Because
this stock is viewed as a long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair 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 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. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.







69



---

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)



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. 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. Commercial 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.

Mortgage Servicing Rights: Mortgage servicing rights are
recognized separately when they are acquired through sales of loans. For sales of mortgage loans prior to January 1, 2007, a portion of the cost of the loan was allocated to the servicing right based on relative fair values. The Company adopted
SFAS No. 156 on January 1, 2007, and for sales of mortgage loans beginning in 2007, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. 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 cost to service, the discount rate, the custodial earnings 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 income statement. 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 which is reported on the income statement 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.

Real Estate Owned: Real
estate properties acquired in collection of a loan are initially recorded at fair value at acquisition, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Expenses,
gains and losses on disposition, and changes in the valuation allowance are reported in noninterest income.







70



---

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)

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, 10 to 20
years for routine building improvements, 5 to 15 years for furniture and equipment, 2 to 5 years for computer hardware and software and no greater than 4 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: Goodwill results from business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period
identified. There was no impairment to goodwill for the years ended December 31, 2007, 2006 and 2005.

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.

Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be
realized). Upon adoption of EITF 06-5, which is discussed further below, 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.

In September 2006, the FASB Emerging Issues Task Force finalized Issue
No. 06-5, Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance){Issue}.This Issue requires
that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual
policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual
restrictions on the Companys ability to surrender a policy.

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.

The Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), as of January 1, 2007. 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. The adoption
had no material effect on the Companys financial statements. At December 31, 2007 the Company had unrecognized tax benefits of $108,000.

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 2004 for federal







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 (continued)



income tax and 2003 for the State of Illinois. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the
next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. At December 31, 2007, the
Company had recorded a cumulative accrual of $20,000 pursuant to FIN 48 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 Per Common Share: Basic earnings per common share is net income divided by
the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Dilutive earnings per common share is net income 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 now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $14.7 million and $11.8 million was required to meet regulatory reserve and clearing requirements at December 31, 2007 and 2006,
respectively. These 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
available-for-sale, which are also recognized as separate components of stockholders equity.

Stock-based Compensation: In 2006, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-based Payment following stockholder approval of the 2006 Equity Incentive Plan. Accordingly, the Company has recorded stock-based employee
compensation cost using the fair value method. Prior to June 27, 2006, there was no stock-based compensation plan.

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.







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)

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

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use
of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of
FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The Company is in the process of evaluating the impact of adoption in 2008 to determine the impact on the Companys consolidated financial position or results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies
with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar
types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants employment or retirement. The
required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The impact of adoption in 2008
did not have a material impact on the Companys consolidated financial position or results of operations.

On November 5, 2007, the SEC issued
Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings(SAB 109). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the
fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related
to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not
be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The impact of
adoption in 2008 did not have a material impact on the Companys consolidated financial position or results of operations.

NOTE 2 
ACQUISITIONS

On April 5, 2006, the Company acquired University National Bank, a privately held community bank with approximately $113 million in
assets, including $10.7 million in cash and cash equivalents, and $104 million in deposits, and two banking offices in the Hyde Park community in Chicago, Illinois, for approximately $24 million in cash pursuant to the terms of a Stock Purchase
Agreement with University Bancorporation dated November 29,







73



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



NOTE 2  ACQUISITIONS
(continued)



2005. The Company believes that the acquisition of University National Bank will be beneficial as it expands our
presence in metropolitan Chicago, compliments our existing branch network and allows for the extension of our products and services into these communities. Immediately upon the completion of the stock purchase, University National Bank was merged
into the Bank. The acquisition, which was accounted for under the purchase method of accounting, resulted in goodwill of $11.7 million and an other intangible of $3.3 million. The core deposit intangible will be amortized over its estimated useful
life. Goodwill will not be amortized but instead evaluated periodically for impairment. The transaction was treated, for federal and state income tax purposes, as a purchase of University National Banks assets pursuant to applicable provisions
of the Internal Revenue Code, making the goodwill and core deposit intangible arising from the transaction tax-deductible over a period of 15 years. University National Banks results of operations have been included in the Companys
results of operations only since the effective date of the acquisition. The acquisition was deemed to be an immaterial acquisition under GAAP, as such additional disclosures have been omitted. The 2007 adjustment of $13,000 to goodwill is the result
of the final settlement of the transition compensation payments and applicable taxes.







74



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 3  EARNINGS PER SHARE

Amounts reported in earnings per share reflect earnings 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. Earnings per share for the year ended December 31, 2005 is calculated based on the period of time from the completion date of our mutual-to-stock conversion, June 23, 2005, through the period ended
December 31, 2005.



|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                              |  | Year Ended December 31, |           
|                                                                                              |  | 2007                    |            |   | 2006 |   |            | 2005 | 
|Net income                                                                                    |  | $                       | 7,155      |   |      | $ | 10,046     |      |  | $ | 11,073     |  
|Less: net income before conversion                                                            |  |                         |           |   |      |   |           |      |  |   | 4,457      |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income available to common stockholders                                                   |  | $                       | 7,155      |   |      | $ | 10,046     |      |  | $ | 6,616      |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Average common shares outstanding                                                             |  |                         | 23,037,710 |   |      |   | 24,468,293 |      |  |   | 24,466,250 |  
|Less: Unearned ESOP shares                                                                    |  |                         | (1,765,359 | ) |      |   | (1,863,247 | )    |  |   | (1,926,557 | )
|Unvested restricted stock shares                                                              |  |                         | (612,764   | ) |      |   | (237,014   | )    |  |   |           |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted average common shares outstanding                                                    |  |                         | 20,659,587 |   |      |   | 22,368,032 |      |  |   | 22,539,693 |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Basic earnings per common share                                                               |  | $                       | 0.35       |   |      | $ | 0.45       |      |  | $ | 0.29       |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              | 
|                                                                                              |  | Year Ended December 31, |           
|                                                                                              |  | 2007                    |            |   | 2006 |   |            | 2005 | 
|Net income                                                                                    |  | $                       | 7,155      |   |      | $ | 10,046     |      |  | $ | 11,073     |  
|Less: net income before conversion                                                            |  |                         |           |   |      |   |           |      |  |   | 4,457      |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income available to common stockholders                                                   |  | $                       | 7,155      |   |      | $ | 10,046     |      |  | $ | 6,616      |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Weighted average common shares outstanding                                                    |  |                         | 20,659,587 |   |      |   | 22,368,032 |      |  |   | 22,539,693 |  
|Add: net effect of dilutive stock options and unvested restricted stock                       |  |                         |           |   |      |   | 4,196      |      |  |   |           |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted average dilutive common shares outstanding                                           |  |                         | 20,659,587 |   |      |   | 22,372,228 |      |  |   | 22,539,693 |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Dilutive earnings per common share                                                            |  | $                       | 0.35       |   |      | $ | 0.45       |      |  | $ | 0.29       |  
|                                                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                                              |  |                         |           
|Number of antidilutive stock options excluded from the diluted earnings per share calculation |  |                         | 1,597,400  |   |      |   | 1,301,000  |      |  |   | N.A.       |  
|Weighted average exercise price of anti-dilutive option shares                                |  | $                       | 17.40      |   |      | $ | 17.63      |      |  |   | N.A.       |  



N.A.  not applicable







75



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 4  SECURITIES

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



|                                               |  |            |         |                      |   |                       |  |   |        |  
|---------------------------------------------- |  | ---------- | ------- | -------------------- | - | --------------------- |  | - | ------ | -
|                                               |  | Fair Value |         | GrossUnrealizedGains |   | GrossUnrealizedLosses | 
|2007                                           |  |            |         |                      |   |                       |  |   |        |  
|Municipal                                      |  | $          | 2,272   |                      | $ | 62                    |  | $ |       |  
|Mortgage-backed securities                     |  |            | 39,277  |                      |   | 132                   |  |   | (162   | )
|Collateralized mortgage obligations            |  |            | 3,683   |                      |   | 35                    |  |   | (1     | )
|SBA-guaranteed loan participation certificates |  |            | 592     |                      |   | 1                     |  |   | (4     | )
|Equity securities                              |  |            | 31,225  |                      |   |                      |  |   | (7,050 | )
|                                               |  |            |         |                      |   |                       |  |   |        |  
|                                               |  | $          | 77,049  |                      | $ | 230                   |  | $ | (7,217 | )
|                                               |  |            |         |                      |   |                       |  |   |        |  
|                                               |  |            |        
|2006                                           |  |            |         |                      |   |                       |  |   |        |  
|Municipal                                      |  | $          | 2,711   |                      | $ | 52                    |  | $ | (1     | )
|Mortgage-backed securities                     |  |            | 19,803  |                      |   | 161                   |  |   | (69    | )
|Collateralized mortgage obligations            |  |            | 5,881   |                      |   | 41                    |  |   | (1     | )
|SBA-guaranteed loan participation certificates |  |            | 623     |                      |   | 1                     |  |   | (6     | )
|Corporate bonds and other securities           |  |            | 45,723  |                      |   |                      |  |   | (23    | )
|Equity securities                              |  |            | 43,112  |                      |   | 4,837                 |  |   |       |  
|                                               |  |            |         |                      |   |                       |  |   |        |  
|                                               |  | $          | 117,853 |                      | $ | 5,092                 |  | $ | (100   | )
|                                               |  |            |         |                      |   |                       |  |   |        |  

Mortgage-backed securities and collateralized mortgage obligations consist of Federal Home Loan Mortgage
Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae) and Government National Mortgage Association (Ginnie Mae) issues at December 31, 2007 and 2006. Equity securities consist of
Freddie Mac preferred stock at December 31, 2007 and 2006. All of our investment securities reflected in the preceding table were classified as available-for-sale.

The fair values of securities available-for-sale at December 31, 2007 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.



|                                               |  |      |       
|---------------------------------------------- |  | ---- | ------
|                                               |  | 2007
|Due in one year or less                        |  | $    | 476   
|Due after one year through five years          |  |      | 1,424 
|Due after five years through ten years         |  |      | 372   
|                                               |  |      |       
|                                               |  |      | 2,272 
|                                               | 
|Mortgage-backed securities                     |  |      | 39,277
|Collateralized mortgage obligations            |  |      | 3,683 
|SBA-guaranteed loan participation certificates |  |      | 592   
|Equity securities                              |  |      | 31,225
|                                               |  |      |       
|Total                                          |  | $    | 77,049
|                                               |  |      |       

Securities pledged at December 31, 2007 and 2006 had a carrying amount of $40.0 million and $36.9 million,
respectively, and were pledged to secure certain depository relationships, advances from the FHLB of Chicago, and a line of credit with the Federal Reserve Bank of Chicago.







76



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 4  SECURITIES (continued)



Sale of securities available-for-sale were as follows:



|             |  |      |     |      |   |         |      |  |   |  
|------------ |  | ---- | --- | ---- | - | ------- | ---- |  | - | -
|             |  | 2007 |     | 2006 |   |         | 2005
|Proceeds     |  | $    | 399 |      | $ | 229,990 |      |  | $ | 
|Gross gains  |  |      | 399 |      |   | 3,746   |      |  |   | 
|Gross losses |  |      |    |      |   | (3,645  | )    |  |   | 

Securities with unrealized losses at December 31, 2007 and 2006 not recognized in income are as follows:



|                                               |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      
|---------------------------------------------- |  | ------------------- | ------ | ----------------- | - | ---------- |  | -------------- | ----- | ---------- | - | -------------- |  | - | ------ |  | - | -----
|                                               |  | Less than 12 Months |        | 12 Months or More |   | Total     
|                                               |  | Fair Value          |        | UnrealizedLoss    |   | Fair Value |  | UnrealizedLoss |       | Fair Value |   | UnrealizedLoss
|2007                                           |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      
|Municipal                                      |  | $                   |       |                   | $ |           |  | $              |      |            | $ |               |  | $ |       |  | $ |     
|Mortgage-backed securities                     |  |                     | 25,465 |                   |   | 137        |  |                | 1,513 |            |   | 25             |  |   | 26,978 |  |   | 162  
|Collateralized mortgage obligations            |  |                     |       |                   |   |           |  |                | 269   |            |   | 1              |  |   | 269    |  |   | 1    
|SBA-guaranteed loan participation certificates |  |                     |       |                   |   |           |  |                | 137   |            |   | 4              |  |   | 137    |  |   | 4    
|Equity securities                              |  |                     | 31,225 |                   |   | 7,050      |  |                |      |            |   |               |  |   | 31,225 |  |   | 7,050
|                                               |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      
|Total temporarily impaired                     |  | $                   | 56,690 |                   | $ | 7,187      |  | $              | 1,919 |            | $ | 30             |  | $ | 58,609 |  | $ | 7,217
|                                               |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      
|                                               |  |                     |        |                   |   |           
|2006                                           |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      
|Municipal                                      |  | $                   |       |                   | $ |           |  | $              | 139   |            | $ | 1              |  | $ | 139    |  | $ | 1    
|Mortgage-backed securities                     |  |                     | 2,254  |                   |   | 9          |  |                | 2,740 |            |   | 60             |  |   | 4,994  |  |   | 69   
|Collateralized mortgage obligations            |  |                     |       |                   |   |           |  |                | 42    |            |   | 1              |  |   | 42     |  |   | 1    
|SBA-guaranteed loan participation certificates |  |                     | 345    |                   |   | 1          |  |                | 144   |            |   | 5              |  |   | 489    |  |   | 6    
|Corporate bonds and equity securities          |  |                     | 45,723 |                   |   | 23         |  |                |      |            |   |               |  |   | 45,723 |  |   | 23   
|                                               |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      
|Total temporarily impaired                     |  | $                   | 48,322 |                   | $ | 33         |  | $              | 3,065 |            | $ | 67             |  | $ | 51,387 |  | $ | 100  
|                                               |  |                     |        |                   |   |            |  |                |       |            |   |                |  |   |        |  |   |      

Securities with significant declines in fair value are evaluated on a quarterly basis to determine whether they
should be considered other-than-temporarily impaired under Securities and Exchange Commission Codification Staff Accounting Bulletins, Topic 5: Miscellaneous Accounting  Item M, Other Than Temporary Impairment of Certain Investments in Debt
and Equity Securities, which 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 must assess whether the impairment is
other-than-temporary. The Company has developed a methodology for conducting periodic impairment testing on marketable equity securities with dividends that adjust periodically based on market interest rate indices (Freddie Mac preferred stocks
included in equity securities). A determination of the severity of the impairment and the continuous duration of the impairment (generally as well as the continuous duration of any impairment exceeding 5%) is made.







77



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 4  SECURITIES (continued)



The Company evaluated the securities in our investment portfolio that had significant declines in fair value at
December 31, 2007 and 2006, and concluded that the declines were primarily attributable to changes in interest rates rather than credit quality or other issuer-specific factors. Since the Company had the ability and intent at December 31,
2007 and 2006, to hold these investments until a recovery occurred or the securities matured, and the carrying cost of these securities was projected to recover as market interest rates change and or the securities approached maturities, the Company
did not consider the declines in fair value to be other-than-temporary impairments. At December 31, 2007, there were unrealized losses aggregating $7.1 million on the Freddie Mac preferred stocks, but the Company concluded from impairment
testing that the unrealized losses did not constitute an other-than-temporary impairment and thus did not record an impairment charge on these securities for the year ended December 31, 2007. No unrealized losses existed at December 31,
2006 with respect to our marketable equity securities.

NOTE 5LOANS RECEIVABLE

Loans receivable are as follows:



|                                                       |  |      |           |   |      |   |           |  
|------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                       |  | 2007 |           |   | 2006 |  
|Secured by one- to four-family residential real estate |  | $    | 345,245   |   |      | $ | 397,545   |  
|Secured by multi-family mortgage loans                 |  |      | 291,395   |   |      |   | 297,131   |  
|Nonresidential real estate                             |  |      | 325,885   |   |      |   | 320,729   |  
|Construction and land loans                            |  |      | 64,483    |   |      |   | 85,222    |  
|Commercial loans                                       |  |      | 83,233    |   |      |   | 89,346    |  
|Commercial leases                                      |  |      | 144,841   |   |      |   | 139,164   |  
|Consumer loans                                         |  |      | 3,506     |   |      |   | 4,045     |  
|Other loans (including municipal)                      |  |      | 4,544     |   |      |   | 4,959     |  
|                                                       |  |      |           |   |      |   |           |  
|Total loans                                            |  |      | 1,263,132 |   |      |   | 1,338,141 |  
|Loans in process                                       |  |      | (168      | ) |      |   | 148       |  
|Net deferred loan origination costs                    |  |      | 2,086     |   |      |   | 2,424     |  
|Allowance for loan losses                              |  |      | (11,051   | ) |      |   | (10,622   | )
|                                                       |  |      |           |   |      |   |           |  
|Loans, net                                             |  | $    | 1,253,999 |   |      | $ | 1,330,091 |  
|                                                       |  |      |           |   |      |   |           |  

As of December 31, 2007 and 2006, there were approximately $213.2 million and $243.1 million, respectively,
of loans purchased from other financial institutions included in the amount of loans secured by one- to four-family residential real estate.

Activity in
the allowance for loan losses is as follows:



|                                   |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                   |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Beginning balance                  |  | $    | 10,622 |   |      | $ | 11,514 |      |  | $ | 11,019 |  
|Allowance of acquired bank         |  |      |       |   |      |   | 212    |      |  |   |       |  
|Provision (credit) for loan losses |  |      | 697    |   |      |   | (136   | )    |  |   | 518    |  
|Loans charged off                  |  |      | (305   | ) |      |   | (972   | )    |  |   | (115   | )
|Recoveries                         |  |      | 37     |   |      |   | 4      |      |  |   | 92     |  
|                                   |  |      |        |   |      |   |        |      |  |   |        |  
|Ending balance                     |  | $    | 11,051 |   |      | $ | 10,622 |      |  | $ | 11,514 |  
|                                   |  |      |        |   |      |   |        |      |  |   |        |  







78



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 5  LOANS RECEIVABLE (continued)



Impaired loans were as follows:



|                                                           |  |      |        |      |   |       
|---------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                           |  | 2007 |        | 2006
|Year-end loans with allocated allowance for loan losses    |  | $    | 6,590  |      | $ | 4,639 
|Year-end loans with no allocated allowance for loan losses |  |      | 18,060 |      |   | 17,481
|                                                           |  |      |        |      |   |       
|Total                                                      |  | $    | 24,650 |      | $ | 22,120
|                                                           |  |      |        |      |   |       
|                                                           |  |     
|Amount of the allowance for loan losses allocated          |  | $    | 806    |      | $ | 402   
|Average of impaired loans during the year                  |  | $    | 22,090 |      | $ | 16,409

Cash basis interest income received on impaired loans was approximately $2.3 million, $1.4 million, and $881,000
for the years ended December 31, 2007, 2006, and 2005.

Nonperforming loans were as follows:



|                                             |  |      |        |      |   |      
|-------------------------------------------- |  | ---- | ------ | ---- | - | -----
|                                             |  | 2007 |        | 2006
|Loans past due over 90 days still on accrual |  | $    |       |      | $ |     
|Nonaccrual loans                             |  |      | 12,058 |      |   | 9,226

Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories,
whereas other loans may only be included in one category.







79



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 6  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 approximately $292.7 million, $304.4 million, and $366.1 million at December 31, 2007, 2006, and 2005, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $6.1 million, $7.0
million, and $7.7 million at December 31, 2007, 2006, and 2005, 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.



|                                            |  |      |       |   |      |   |       |  
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                            |  | 2007 |       |   | 2006 |  
|Servicing rights                            |  |      |       |   |      |   |       |  
|Beginning of year                           |  | $    | 2,209 |   |      | $ | 2,526 |  
|Additions                                   |  |      | 348   |   |      |   | 189   |  
|Amortized to expense                        |  |      | (396  | ) |      |   | (506  | )
|                                            |  |      |       |   |      |   |       |  
|Balance, end of year                        |  | $    | 2,161 |   |      | $ | 2,209 |  
|                                            |  |      |       |   |      |   |       |  
|                                            |  |     
|Valuation allowance                         |  |      |       |   |      |   |       |  
|Beginning of year                           |  | $    |      |   |      | $ | 58    |  
|Additions expensed                          |  |      | 31    |   |      |   |      |  
|Reductions credited to expense              |  |      | (31   | ) |      |   | (58   | )
|                                            |  |      |       |   |      |   |       |  
|Balance, end of year                        |  | $    |      |   |      | $ |      |  
|                                            |  |      |       |   |      |   |       |  
|Carrying value of mortgage servicing rights |  | $    | 2,161 |   |      | $ | 2,209 |  
|                                            |  |      |       |   |      |   |       |  
|Fair value of mortgage servicing rights     |  | $    | 2,841 |   |      | $ | 3,021 |  
|                                            |  |      |       |   |      |   |       |  

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:



|                                |  |      |       |   |      |   |       |  
|------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                |  | 2007 |       |   | 2006 |  
|Prepayment speed                |  |      | 30.22 | % |      |   | 20.79 | %
|Discount rate                   |  |      | 12.00 | % |      |   | 12.00 | %
|Average servicing cost per loan |  | $    | 59.00 |   |      | $ | 60.00 |  
|Escrow float rate               |  |      | 3.28  | % |      |   | 5.16  | %







80



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 6  SECONDARY MORTGAGE MARKET ACTIVITIES (continued)



Key economic assumptions used in measuring the fair value of the Companys mortgage servicing rights as of
December 31, 2007 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        |  | $ | 2,841 |  
|Weighted average annual prepayment speed       |  |   | 30.22 | %
|Decrease in fair value from 10% adverse change |  |   | 126   |  
|Decrease in fair value from 20% adverse change |  |   | 242   |  
|Weighted-average annual discount rate          |  |   | 12.00 | %
|Decrease in fair value from 10% adverse change |  |   | 99    |  
|Decrease in fair value from 20% adverse change |  |   | 191   |  

These sensitivities are hypothetical and should be used with caution. As the figures indicate, 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, in the above table, the effect of a variation in a particular assumption on
the fair value of the retained interest is calculated 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 33 months. The estimated amortization expense for each of the next five years is as follows:



|     |  |   |    
|---- |  | - | ---
|2008 |  | $ | 454
|2009 |  |   | 358
|2010 |  |   | 283
|2011 |  |   | 225
|2012 |  |   | 179

NOTE 7  SECURITIZATIONS

The Company securitizes conforming adjustable rate residential mortgage loans with Fannie Mae. The Company retains servicing responsibilities for these securitizations. The Company receives annual servicing fees
approximating 0.25 percent of the outstanding balance. Fannie Mae has no recourse to the Companys other assets for failure of debtors to pay loans when due. The Company receives securities in exchange for loans in these transactions and
records no gain or loss. During 2007, $23.5 million of adjustable rate residential mortgage loans were securitized and $24.2 million of adjustable rate residential mortgage loans were securitized in 2005 and the securities received in exchange were
classified as available-for-sale. There were no loans securitized during 2006.







81



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 8  ACCRUED INTEREST RECEIVABLE

Accrued interest receivable is summarized as follows:



|                 |  |      |       |      |   |      
|---------------- |  | ---- | ----- | ---- | - | -----
|                 |  | 2007 |       | 2006
|Securities       |  | $    | 214   |      | $ | 426  
|Loans receivable |  |      | 6,876 |      |   | 7,443
|                 |  |      |       |      |   |      
|                 |  | $    | 7,090 |      | $ | 7,869
|                 |  |      |       |      |   |      

NOTE 9  PREMISES AND EQUIPMENT

Premises and equipment are as follows:



|                           |  |      |         |   |      |   |         |  
|-------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                           |  | 2007 |         |   | 2006 |  
|Land and land improvements |  | $    | 11,565  |   |      | $ | 11,515  |  
|Buildings and improvements |  |      | 30,521  |   |      |   | 29,729  |  
|Furniture and equipment    |  |      | 9,755   |   |      |   | 9,058   |  
|Computer equipment         |  |      | 12,047  |   |      |   | 11,620  |  
|                           |  |      |         |   |      |   |         |  
|                           |  |      | 63,888  |   |      |   | 61,922  |  
|Accumulated depreciation   |  |      | (29,401 | ) |      |   | (26,917 | )
|                           |  |      |         |   |      |   |         |  
|                           |  | $    | 34,487  |   |      | $ | 35,005  |  
|                           |  |      |         |   |      |   |         |  

Depreciation of premises and equipment was $2.6 million, $2.2 million, and $2.5 million for the years ended
December 31, 2007, 2006, and 2005, respectively.

The Company leases certain branch facilities under noncancelable operating lease agreements expiring
through 2032. Rent expense, net of sublease income, for facilities was $378,000, $284,000, and $208,000 in 2007, 2006, and 2005, respectively, excluding taxes, insurance, and maintenance. The projected minimum rental under existing leases, not
including taxes, insurance, and maintenance, as of December 31, 2007 is as follows:



|                    |  |   |      
|------------------- |  | - | -----
|2008                |  | $ | 573  
|2009                |  |   | 406  
|2010                |  |   | 337  
|2011                |  |   | 341  
|2012 and thereafter |  |   | 7,945
|                    |  |   |      
|Total               |  | $ | 9,602
|                    |  |   |      

The Company has subleased some of these branch facilities and currently is entitled to receive income of
approximately:



|      |  |   |    
|----- |  | - | ---
|2008  |  | $ | 96 
|2009  |  |   | 7  
|2010  |  |   | 6  
|      |  |   |    
|Total |  | $ | 109
|      |  |   |    







82



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 10  CORE DEPOSIT INTANGIBLE

Core deposit intangible assets were as follows:



|                                                       |  |                     |        |                         |   |                     |  |                         |        |  |   |      
|------------------------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ------------------- |  | ----------------------- | ------ |  | - | -----
|                                                       |  | 2007                |        | 2006                   
|                                                       |  | GrossCarryingAmount |        | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets  core deposit intangibles |  | $                   | 18,612 |                         | $ | 10,843              |  | $                       | 18,612 |  | $ | 8,964
|                                                       |  |                     |        |                         |   |                     |  |                         |        |  |   |      

Aggregate amortization expense was $1.9 million, $1.9 million and $1.6 million for 2007, 2006, and 2005,
respectively.

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



|     |  |   |      
|---- |  | - | -----
|2008 |  | $ | 1,784
|2009 |  |   | 1,690
|2010 |  |   | 1,595
|2011 |  |   | 1,404
|2012 |  |   | 252  

NOTE 11  DEPOSITS

Year-end deposits are as follows:



|                            |  |      |           |      |   |          
|--------------------------- |  | ---- | --------- | ---- | - | ---------
|                            |  | 2007 |           | 2006
|Non-interest-bearing demand |  | $    | 111,554   |      | $ | 134,097  
|Interest-bearing NOW        |  |      | 306,517   |      |   | 274,391  
|Money market                |  |      | 250,682   |      |   | 260,796  
|Savings                     |  |      | 97,280    |      |   | 114,851  
|Certificates of deposit     |  |      | 307,617   |      |   | 345,450  
|                            |  |      |           |      |   |          
|                            |  | $    | 1,073,650 |      | $ | 1,129,585
|                            |  |      |           |      |   |          

Certificates of deposit of $100,000 or more were approximately $69.6 million and $94.8 million at year-end 2007
and 2006, respectively.

Certificates of deposit include brokered accounts of $2.0 million, all internet certificates of deposit, and $10.4 million,
including $4.2 million of internet certificates of deposit, at December 31, 2007 and 2006, respectively.

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



|     |  |   |        
|---- |  | - | -------
|2008 |  | $ | 269,452
|2009 |  |   | 28,106 
|2010 |  |   | 7,954  
|2011 |  |   | 1,114  
|2012 |  |   | 991    







83



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 11  DEPOSITS (continued)



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



|                        |  |      |        |      |   |        |  |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                        |  | 2007 |        | 2006 |   | 2005  
|Interest-bearing NOW    |  | $    | 6,838  |      | $ | 4,128  |  | $ | 2,290 
|Money market accounts   |  |      | 11,072 |      |   | 10,096 |  |   | 6,350 
|Savings                 |  |      | 833    |      |   | 1,019  |  |   | 1,005 
|Certificates of deposit |  |      | 14,703 |      |   | 14,714 |  |   | 10,953
|                        |  |      |        |      |   |        |  |   |       
|                        |  | $    | 33,446 |      | $ | 29,957 |  | $ | 20,598
|                        |  |      |        |      |   |        |  |   |       

NOTE 12  BORROWINGS

Borrowed funds are summarized as follows:



|                                               |                                |                   |   |                                |      |   |        |      |                                |  |   |        |  |      |   |  |   |        
|---------------------------------------------- | ------------------------------ | ----------------- | - | ------------------------------ | ---- | - | ------ | ---- | ------------------------------ |  | - | ------ |  | ---- | - |  | - | -------
|                                               |                                | December 31, 2007 |   | December 31, 2006             
|                                               | Contractual Interest RateRange |                   |   | WeightedAverageContractualRate |      |   | Amount |      | WeightedAverageContractualRate |  |   | Amount
|Fixed-rate advance from FHLB due:              |                                |                   |   |                                |      |   |        |      |                                |  |   |        |  |      |   |  |   |        
|Within 1 year                                  |                                | 5.14              | % |                                | 5.14 | % |        | 5.14 | %                              |  | $ | 10,000 |  | 3.61 | % |  | $ | 95,000 
|1 to 2 years                                   |                                | 3.84              |   |                                | 4.06 |   |        | 3.97 |                                |  |   | 8,000  |  | 5.14 |   |  |   | 10,000 
|2 to 3 years                                   |                                | 3.91              |   |                                | 6.44 |   |        | 6.09 |                                |  |   | 29,000 |  |     |   |  |   |       
|3 to 4 years                                   |                                |                  |   |                                |     |   |        |     |                                |  |   |       |  | 6.44 |   |  |   | 25,000 
|                                               |                                |                   |   |                                |      |   |        |      |                                |  |   |        |  |      |   |  |   |        
|Total fixed rate advances                      |                                | 3.84              | % |                                | 6.44 | % |        | 5.53 | %                              |  |   | 47,000 |  | 4.27 | % |  |   | 130,000
|Open Line advance, due on demand               |                                | 3.96              |   |                                | 3.96 |   |        | 3.96 |                                |  |   | 34,500 |  |     |   |  |   |       
|                                               |                                |                   |   |                                |      |   |        |      |                                |  |   |        |  |      |   |  |   |        
|Total FHLB funds                               |                                | 3.84              |   |                                | 6.44 |   |        | 4.86 |                                |  |   | 81,500 |  | 4.27 |   |  |   | 130,000
|Securities sold under agreements to repurchase |                                | 3.84              |   |                                | 3.84 |   |        | 3.84 |                                |  |   | 14,933 |  | 4.82 |   |  |   | 8,148  
|                                               |                                |                   |   |                                |      |   |        |      |                                |  |   |        |  |      |   |  |   |        
|Total borrowings                               |                                | 3.84              | % |                                | 6.44 | % |        | 4.71 | %                              |  | $ | 96,433 |  | 4.30 | % |  | $ | 138,148
|                                               |                                |                   |   |                                |      |   |        |      |                                |  |   |        |  |      |   |  |   |        

In July 2003, 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 $25.0 million of Federal Home Loan Bank (FHLB) advances and replacing the other $145.0 million with new FHLB advances with a weighted average coupon of
1.38% and a weighted average maturity of approximately one year. The Company incurred a net pre-tax prepayment penalty of $15.4 million, recognized an immediate loss of $8.3 million on the early extinguishment of debt, and deferred the remaining
prepayment penalty in accordance with Emerging Issues Task Force 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. The remaining portion of the prepayment penalty was amortized as a yield adjustment over the
life of the refinanced borrowings. Certain of the Companys borrowings would be subject to prepayment penalties should they be repaid prior to maturity. The prepayment penalty was completely amortized during 2005.

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 FHLB of Chicago. All stock in the FHLB of Chicago is pledged as additional
collateral for these advances. At December 31, 2007, $207.0 million and $99.3 million of first mortgage and multi-family mortgage loans, respectively, collateralized the advances. At December 31, 2007, we had the ability to borrow an
additional $206.9 million under our credit facilities with the FHLB of Chicago. Furthermore, we have unpledged securities that could be used to support borrowings in excess of $25.0 million.







84



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 12  BORROWINGS (continued)



At December 31, 2007 and 2006, the Company had available pre-approved overnight federal funds borrowing and
repurchase agreement lines of $65 million. At December 31, 2007 and 2006, the Company also had a line of credit available with the Federal Reserve Bank of Chicago for $3.1 million and $20.3 million, respectively. At December 31, 2007 and
2006, there was no outstanding balance on these lines.

NOTE 13  INCOME TAXES

The income tax expense is as follows:



|                         |  |      |       |   |      |   |       |  |   |      
|------------------------ |  | ---- | ----- | - | ---- | - | ----- |  | - | -----
|                         |  | 2007 |       |   | 2006 |   | 2005 
|Current                  |  | $    | 3,401 |   |      | $ | 2,368 |  | $ | 3,645
|Deferred                 |  |      | (438  | ) |      |   | 2,458 |  |   | 633  
|                         |  |      |       |   |      |   |       |  |   |      
|Total income tax expense |  | $    | 2,963 |   |      | $ | 4,826 |  | $ | 4,278
|                         |  |      |       |   |      |   |       |  |   |      

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



|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Provision computed at the statutory federal tax rate |  | $    | 3,440 |   |      | $ | 5,056 |      |  | $ | 5,219 |  
|State taxes and other, net                           |  |      | 97    |   |      |   | 326   |      |  |   | (272  | )
|BOLI                                                 |  |      | (199  | ) |      |   |      |      |  |   |      |  
|ESOP                                                 |  |      | 194   |   |      |   | 260   |      |  |   | 78    |  
|Dividends received deduction                         |  |      | (569  | ) |      |   | (816  | )    |  |   | (747  | )
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|                                                     |  | $    | 2,963 |   |      | $ | 4,826 |      |  | $ | 4,278 |  
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|                                                     |  |      |      
|Effective income tax rate                            |  |      | 29.29 | % |      |   | 32.45 | %    |  |   | 27.87 | %

Retained earnings at December 31, 2007 and 2006 include approximately $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.







85



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 13  INCOME TAXES (continued)



The net deferred tax asset is as follows:



|                                                       |  |      |        |   |      |   |         |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------- | -
|                                                       |  | 2007 |        |   | 2006 |  
|Gross deferred tax assets                              |  |      |        |   |      |   |         |  
|Allowance for loan losses                              |  | $    | 4,261  |   |      | $ | 4,121   |  
|Visa litigation reserve                                |  |      | 478    |   |      |   |        |  
|Alternative minimum tax and capital loss carryforwards |  |      | 876    |   |      |   | 1,960   |  
|Impairment of securities available for sale            |  |      | 3,403  |   |      |   | 3,424   |  
|Unrealized loss on securities available-for-sale       |  |      | 2,777  |   |      |   |        |  
|Other                                                  |  |      | 771    |   |      |   | 636     |  
|                                                       |  |      |        |   |      |   |         |  
|                                                       |  |      | 12,566 |   |      |   | 10,141  |  
|                                                       |  |     
|Gross deferred tax liabilities                         |  |      |        |   |      |   |         |  
|Net deferred loan origination costs                    |  |      | (1,389 | ) |      |   | (1,635  | )
|FHLB stock dividends                                   |  |      | (1,818 | ) |      |   | (1,829  | )
|Purchase accounting adjustments                        |  |      | (2,497 | ) |      |   | (3,094  | )
|Accumulated depreciation                               |  |      | (227   | ) |      |   | (394    | )
|Mortgage servicing rights                              |  |      | (833   | ) |      |   | (857    | )
|Unrealized gain on securities available for sale       |  |      |       |   |      |   | (1,984  | )
|Goodwill                                               |  |      | (508   | ) |      |   |        |  
|Other                                                  |  |      | (360   | ) |      |   | (613    | )
|                                                       |  |      |        |   |      |   |         |  
|                                                       |  |      | (7,632 | ) |      |   | (10,406 | )
|                                                       |  |      |        |   |      |   |         |  
|Net deferred tax asset (liability)                     |  | $    | 4,934  |   |      | $ | (265    | )
|                                                       |  |      |        |   |      |   |         |  

At December 31, 2007, the Company included in deferred tax assets a $876,000 asset for capital loss
carryforwards, which expires in 2011. The alternative minimum tax credits were fully utilized in 2007. Based upon projections of future taxable income, including capital gains, management believes that it is more likely than not that the deferred
tax assets 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:



|                                                             |  |   |     |  
|------------------------------------------------------------ |  | - | --- | -
|Balance at January 1, 2007                                   |  | $ | 192 |  
|Additions based on tax positions related to the current year |  |   | 37  |  
|Additions for tax positions of prior years                   |  |   | 9   |  
|Reductions for tax positions of prior years                  |  |   | (66 | )
|Reductions due to the statute of limitations                 |  |   | (64 | )
|Settlements                                                  |  |   |    |  
|                                                             |  |   |     |  
|                                                             | 
|Balance at December 31, 2007                                 |  | $ | 108 |  
|                                                             |  |   |     |  







86



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 13  INCOME TAXES(Continued)



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 income statement for the year ended December 31, 2007 was $25,000,
and the amount accrued for interest and penalties at December 31, 2007 was $20,000.

The Company and its subsidiaries 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 2004 for federal income tax and 2003 for the State of Illinois.

NOTE 14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 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. If adequately capitalized, regulatory approval is required to
accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.







87



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 14REGULATORY MATTERS (continued)



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



|                                                 |  |        |         |       |                                              |   |        |                                                                                |         |  |      |        |  |       |         |  |       |  
|------------------------------------------------ |  | ------ | ------- | ----- | -------------------------------------------- | - | ------ | ------------------------------------------------------------------------------ | ------- |  | ---- | ------ |  | ----- | ------- |  | ----- | -
|                                                 |  | Actual |         |       | Minimum Required forCapital AdequacyPurposes |   |        | Minimum Required to BeWell Capitalized UnderPrompt Corrective ActionProvisions |        
|                                                 |  | Amount |         | Ratio |                                              |   | Amount |                                                                                | Ratio   |  |      | Amount |  | Ratio |        
|December 31, 2007                                |  |        |         |       |                                              |   |        |                                                                                |         |  |      |        |  |       |         |  |       |  
|Total capital (to risk-weighted assets)          |  | $      | 213,458 |       | 16.54                                        | % |        | $                                                                              | 103,259 |  | 8.00 | %      |  | $     | 129,074 |  | 10.00 | %
|Tier 1 (core) capital (to risk-weighted assets)  |  |        | 203,213 |       | 15.74                                        |   |        |                                                                                | 51,630  |  | 4.00 |        |  |       | 77,445  |  | 6.00  |  
|Tier 1 (core) capital (to adjusted total assets) |  |        | 203,213 |       | 13.95                                        |   |        |                                                                                | 58,278  |  | 4.00 |        |  |       | 72,847  |  | 5.00  |  
|                                                 |  |        |         |       |                                              |  
|December 31, 2006                                |  |        |         |       |                                              |   |        |                                                                                |         |  |      |        |  |       |         |  |       |  
|Total capital (to risk-weighted assets)          |  | $      | 247,253 |       | 20.09                                        | % |        | $                                                                              | 98,479  |  | 8.00 | %      |  | $     | 123,098 |  | 10.00 | %
|Tier 1 (core) capital (to risk-weighted assets)  |  |        | 237,033 |       | 19.26                                        |   |        |                                                                                | 49,239  |  | 4.00 |        |  |       | 73,859  |  | 6.00  |  
|Tier 1 (core) capital (to adjusted total assets) |  |        | 237,033 |       | 15.05                                        |   |        |                                                                                | 63,017  |  | 4.00 |        |  |       | 78,771  |  | 5.00  |  

The following is a reconciliation of the Banks equity under GAAP to regulatory capital.



|                                                        |  |      |         |   |      |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                        |  | 2007 |         |   | 2006 |  
|GAAP equity                                             |  | $    | 226,828 |   |      | $ | 268,433 |  
|Disallowed intangible assets                            |  |      | (27,825 | ) |      |   | (28,392 | )
|Unrealized (gain) loss on securities available-for-sale |  |      | 4,210   |   |      |   | (3,008  | )
|                                                        |  |      |         |   |      |   |         |  
|Tier I capital                                          |  |      | 203,213 |   |      |   | 237,033 |  
|General regulatory loan loss reserves                   |  |      | 10,245  |   |      |   | 10,220  |  
|                                                        |  |      |         |   |      |   |         |  
|Total regulatory capital                                |  | $    | 213,458 |   |      | $ | 247,253 |  
|                                                        |  |      |         |   |      |   |         |  

As of December 31, 2007 and 2006, 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.

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, FHLB advances, and dividends or the institution must convert to a commercial bank charter. Management considers
the QTL test to have been met.

The Bank is subject to restrictions on the amount of dividends it may declare without prior regulatory approval. The Bank
has obtained approval for a $2.0 million dividend as of January 1, 2008.

NOTE 15  EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan (ESOP).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 common shares issued in the subscription offering at $10.00 per share. The loan
is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Banks discretionary contributions to the ESOP and







88



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 15  EMPLOYEE BENEFIT PLANS (continued)



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 2007 and 2006 were $1.9 million each year. Expense related to the ESOP, net of dividends received on unallocated ESOP
shares, was $1.0 million, $1.4 million and $718,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

Shares held by the ESOP were
as follows:



|                              |  |      |           |   |      |   |          
|----------------------------- |  | ---- | --------- | - | ---- | - | ---------
|                              |  | 2007 |           |   | 2006
|Allocated to participants     |  |      | 244,663   |   |      |   | 146,797  
|Distributed to participants   |  |      | (1,715    | ) |      |   |         
|Unearned                      |  |      | 1,712,637 |   |      |   | 1,810,503
|                              |  |      |           |   |      |   |          
|Total ESOP shares             |  |      | 1,955,585 |   |      |   | 1,957,300
|                              |  |      |           |   |      |   |          
|                              |  |     
|Fair value of unearned shares |  | $    | 27,094    |   |      | $ | 32,245   
|                              |  |      |           |   |      |   |          

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 matches employee contributions up to 5% of an
employees wages. The Company may also contribute an additional amount annually at the discretion of the Board of Directors. Contributions totaling $566,000, $728,000, and $791,000 were made for the years ended 2007, 2006, and 2005,
respectively.

NOTE 16  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.
The Company has adopted the requirements of SFAS No. 123R, Share-Based Payment.

The Human Resources Committee grants 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 was determined using historical volatilities based on historical data for the NASDAQ Bank Index because the Company lacked sufficient
history in its stock. Estimated forfeitures were assumed to be zero due to the lack of historical experience for the Company.







89



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 16  EQUITY INCENTIVE PLANS (continued)



The Company estimated the grant date fair value of options awarded in fiscal 2007 and 2006 using the Black-Scholes
Option-Pricing model with the following assumptions:



|                                                           |  |                 |       |   |                 |   |       |  
|---------------------------------------------------------- |  | --------------- | ----- | - | --------------- | - | ----- | -
|                                                           |  | 2007Assumptions |       |   | 2006Assumptions |  
|Risk-free interest rate                                    |  |                 | 4.47  | % |                 |   | 4.69  | %
|Expected option life (years)                               |  |                 | 3.42  |   |                 |   | 3.57  |  
|Expected stock price volatility                            |  |                 | 11.06 | % |                 |   | 11.29 | %
|Current quarterly cash dividend                            |  | $               | 0.07  |   |                 | $ | 0.06  |  
|Projected dividend growth                                  |  |                 | 5.00  | % |                 |   | 5.00  | %
|Weighted average fair value of options granted during year |  | $               | 0.853 |   |                 | $ | 1.458 |  

The Company recognized $498,000 and $413,000 of stock-based compensation expenses relating to the granting of
stock options for the year ended December 31, 2007 and 2006, respectively. As of December 31, 2007, the Company had $1.2 million of total unrecognized compensation cost related to unvested stock options. The cost is expected to be
recognized over a weighted average period of 1.5 years as follows:



|     |  |   |    
|---- |  | - | ---
|2008 |  | $ | 458
|2009 |  |   | 401
|2010 |  |   | 369
|2011 |  |   | 17 



|                                               |  |                 |   |  |                               |        |   |                                                   |     |                             |   |    
|---------------------------------------------- |  | --------------- | - |  | ----------------------------- | ------ | - | ------------------------------------------------- | --- | --------------------------- | - | ---
|Stock Options                                  |  | Number ofShares |   |  | WeightedAverageExercise Price |        |   | WeightedAverageRemainingContractualTerm (inyears) |     | AggregateIntrinsicValue (1)
|Stock options outstanding at December 31, 2006 |  | 1,301,000       |   |  | $                             | 17.63  |   |                                                   | 4.7 |                             | $ | 234
|                                               |  |                 |   | 
|Stock options granted                          |  | 301,200         |   |  |                               | 15.89  |   |                                                   |     |                             |   |    
|Stock options exercised                        |  |                |   |  |                               |       |   |                                                   |     |                             |   |    
|Stock options forfeited                        |  | (4,800          | ) |  |                               | (16.00 | ) |                                                   |     |                             |   |    
|                                               |  |                 |   |  |                               |        |   |                                                   |     |                             |   |    
|                                               |  |                 |   | 
|Stock options outstanding at December 31, 2007 |  | 1,597,400       |   |  | $                             | 17.40  |   |                                                   | 3.9 |                             | $ |   
|                                               |  |                 |   |  |                               |        |   |                                                   |     |                             |   |    
|                                               |  |                 |   | 
|Stock options exercisable at December 31, 2007 |  | 617,120         |   |  | $                             | 17.48  |   |                                                   | 4.0 |                             | $ |   
|                                               |  |                 |   | 
|Fully vested and expected to vest              |  | 1,597,400       |   |  | $                             | 17.40  |   |                                                   | 3.9 |                             | $ |   



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







90



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 16  EQUITY INCENTIVE PLANS (continued)



The Company grants 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 $3.6 million of expenses relating to the grant of shares of restricted stock during each of the years ended December 31, 2007 and 2006. As of December 31, 2007 and 2006, the total unrecognized
compensation cost related to unvested shares of restricted stock was $7.4 million and $10.8 million, respectively. The cost is expected to be recognized over a weighted average period of 1.3 years is as follows:



|     |  |   |      
|---- |  | - | -----
|2008 |  | $ | 3,531
|2009 |  |   | 2,151
|2010 |  |   | 1,767



|                                        |  |                     |   |  |                                        |       |                                       |     |                             |   |       
|--------------------------------------- |  | ------------------- | - |  | -------------------------------------- | ----- | ------------------------------------- | --- | --------------------------- | - | ------
|Restricted Stock                        |  | Number ofShares (2) |   |  | WeightedAverage FairValue atGrant Date |       | WeightedAverageTerm to Vest(in years) |     | AggregateIntrinsicValue (3)
|Shares outstanding at December 31, 2005 |  |                    |   |  | $                                      |      |                                       |     |                             |   |       
|Shares granted                          |  | 816,000             |   |  |                                        | 17.63 |                                       |     |                             |   |       
|Shares vested                           |  | (174,050            | ) |  |                                        | 17.63 |                                       |     |                             |   |       
|Shares forfeited                        |  |                    |   |  |                                        |      |                                       |     |                             |   |       
|                                        |  |                     |   |  |                                        |       |                                       |     |                             |   |       
|Shares outstanding at December 31, 2006 |  | 641,950             |   |  | $                                      | 17.63 |                                       | 2.2 |                             | $ | 11,433
|                                        |  |                     |   | 
|Shares granted                          |  | 17,450              |   |  |                                        | 15.41 |                                       |     |                             |   |       
|Shares vested                           |  | (224,250            | ) |  |                                        | 17.63 |                                       |     |                             |   |       
|Shares forfeited                        |  |                    |   |  |                                        |      |                                       |     |                             |   |       
|                                        |  |                     |   |  |                                        |       |                                       |     |                             |   |       
|Shares outstanding at December 31, 2007 |  | 435,150             |   |  | $                                      | 17.57 |                                       | 1.8 |                             | $ | 6,884 
|                                        |  |                     |   |  |                                        |       |                                       |     |                             |   |       



|(2) | The end of period balances consist only of unvested shares.
|--- | -----------------------------------------------------------

|(3) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







91



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 17  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:



|                                                                        |  |      |         |      |   |        
|----------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                        |  | 2007 |         | 2006
|Financial instruments wherein contractual amounts represent credit risk |  |      |         |      |   |        
|Commitments to extend credit                                            |  | $    | 17,608  |      | $ | 22,849 
|Standby letters of credit                                               |  |      | 4,140   |      |   | 3,464  
|Unused lines of credit                                                  |  |      | 218,820 |      |   | 233,229
|Commitments to sell mortgages                                           |  |      | 2,796   |      |   | 2,836  

Commitments to extend credit are generally made for periods of 60 days or less. The fixed-rate loans commitment
totaled $13.6 million with interest rates ranging from 5.25% to 6.875% and maturities ranging from 1 to 30 years.

Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future 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 counterparty. The collateral held varies, but primarily consists of single-family residential real estate.

Pursuant to the bylaws of Visa USA, the Company is obligated to indemnify Visa, Inc. for certain litigation losses. On October 3, 2007, a Loss Sharing Agreement
became effective which reaffirmed the Companys obligation to indemnify Visa, Inc. for potential future settlement of certain litigation. The Companys indemnification obligation is limited to its proportionate equity interest in Visa USA.
During 2007, Visa announced that it had recognized liabilities for probable settlements for two of the covered suits. The Company has accrued its proportionate share of these anticipated settlements. In addition, the Company has recognized a
guarantee liability for the other covered suits. As of December 31, 2007, the Companys estimated liability related to its obligation to indemnify Visa for covered litigation was $1.24 million.







92



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 18  FAIR VALUES OF FINANCIAL INSTRUMENTS

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



|                                                   |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|-------------------------------------------------- |  | -------------- | --------- | - | ------------------- | - | --------- | -------------- |  | - | ------------------- | - |  | - | --------- | -
|                                                   |  | 2007           |           |   | 2006                |  
|                                                   |  | CarryingAmount |           |   | EstimatedFair Value |   |           | CarryingAmount |  |   | EstimatedFair Value |  
|Financial assets                                   |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Cash and cash equivalents                          |  | $              | 28,948    |   |                     | $ | 28,948    |                |  | $ | 67,337              |   |  | $ | 67,337    |  
|Securities                                         |  |                | 77,049    |   |                     |   | 77,049    |                |  |   | 117,853             |   |  |   | 117,853   |  
|Loans held-for-sale                                |  |                | 173       |   |                     |   | 173       |                |  |   | 298                 |   |  |   | 298       |  
|Loans receivable, net of allowance for loan losses |  |                | 1,253,999 |   |                     |   | 1,262,624 |                |  |   | 1,330,091           |   |  |   | 1,330,778 |  
|FHLB stock                                         |  |                | 15,598    |   |                     |   | 15,598    |                |  |   | 15,598              |   |  |   | 15,598    |  
|Accrued interest receivable                        |  |                | 7,090     |   |                     |   | 7,090     |                |  |   | 7,869               |   |  |   | 7,869     |  
|Mortgage servicing rights                          |  |                | 2,161     |   |                     |   | 2,841     |                |  |   | 2,209               |   |  |   | 3,021     |  
|                                                   |  |                |           |  
|Financial liabilities                              |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Non-interest-bearing demand deposits               |  | $              | (111,554  | ) |                     | $ | (111,554  | )              |  | $ | (134,097            | ) |  | $ | (134,097  | )
|NOW and money market deposits                      |  |                | (557,199  | ) |                     |   | (557,199  | )              |  |   | (535,187            | ) |  |   | (535,187  | )
|Savings                                            |  |                | (97,280   | ) |                     |   | (97,280   | )              |  |   | (114,851            | ) |  |   | (114,851  | )
|Certificates of deposit                            |  |                | (307,617  | ) |                     |   | (309,522  | )              |  |   | (345,450            | ) |  |   | (346,481  | )
|Borrowings                                         |  |                | (96,433   | ) |                     |   | (98,406   | )              |  |   | (138,148            | ) |  |   | (138,805  | )
|Accrued interest payable                           |  |                | (980      | ) |                     |   | (980      | )              |  |   | (1,184              | ) |  |   | (1,184    | )

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.

Securities: The estimated fair values of securities are based on quoted market prices when they are currently
available. If a quoted market price for a specific security is not currently available, the Company estimates the fair value based on the quoted market price of another security with similar characteristics, adjusted to reflect objectively
measurable differences such as coupon rates and reset dates. In the absence of current quoted market prices for the same or a similar security, the Company uses other valuation techniques to determine fair value, such as obtaining broker-dealer
valuations or estimating fair value based on valuation modeling. Significant judgment is involved in determining fair value in the absence of current quoted market prices.

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.

Mortgage servicing rights: 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.

Deposit
Liabilities: The estimated fair value for certificate deposits 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.







93



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 18FAIR VALUES OF FINANCIAL INSTRUMENTS(continued)



Borrowings: The estimated fair values of advances from the FHLB and note 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.

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 19OTHER COMPREHENSIVE INCOME (LOSS)

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



|                                                                                 |  |      |         |   |      |   |        |      |  |   |       |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                                 |  | 2007 |         |   | 2006 |   |        | 2005 | 
|Unrealized holding gains (losses) on securities available-for-sale               |  | $    | (11,979 | ) |      | $ | 5,237  |      |  | $ | 2,355 |  
|Tax effect                                                                       |  |      | 4,994   |   |      |   | (2,020 | )    |  |   | (935  | )
|                                                                                 |  |      |         |   |      |   |        |      |  |   |       |  
|Unrealized holding gains (losses) on securities available-for-sale, net of tax   |  |      | (6,985  | ) |      |   | 3,217  |      |  |   | 1,420 |  
|                                                                                 |  |      |         |   |      |   |        |      |  |   |       |  
|Less reclassification adjustments for net gains recognized in income             |  |      | (399    | ) |      |   | (101   | )    |  |   |      |  
|Tax effect                                                                       |  |      | 166     |   |      |   | 39     |      |  |   |      |  
|                                                                                 |  |      |         |   |      |   |        |      |  |   |       |  
|Less reclassification adjustments for net gains recognized in income, net of tax |  |      | (233    | ) |      |   | (62    | )    |  |   |      |  
|                                                                                 |  |      |         |   |      |   |        |      |  |   |       |  
|Other comprehensive income (loss)                                                |  | $    | (7,218  | ) |      | $ | 3,155  |      |  | $ | 1,420 |  
|                                                                                 |  |      |         |   |      |   |        |      |  |   |       |  







94



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 20  COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of BankFinancial Corporation as of December 31, 2007, 2006 and 2005 follows:

Condensed Statements of Financial Condition



|                                           |  |      |         |      |   |        
|------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                           |  | 2007 |         | 2006
|ASSETS                                     |  |      |         |      |   |        
|Cash in subsidiary                         |  | $    | 44,232  |      | $ | 36,805 
|Loan receivable from ESOP                  |  |      | 18,341  |      |   | 18,870 
|Investment in subsidiary                   |  |      | 226,827 |      |   | 268,433
|Other assets                               |  |      | 1,928   |      |   | 1,907  
|                                           |  |      |         |      |   |        
|Total assets                               |  | $    | 291,328 |      | $ | 326,015
|                                           |  |      |         |      |   |        
|                                           |  |     
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |      |         |      |   |        
|Accrued expenses and other liabilities     |  |      | 191     |      |   |       
|Total stockholders equity                 |  |      | 291,137 |      |   | 326,015
|                                           |  |      |         |      |   |        
|Total liabilities and stockholders equity |  | $    | 291,328 |      | $ | 326,015
|                                           |  |      |         |      |   |        







95



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 20  COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)



Condensed Statements of Income



|                                                                 |  |      |         |   |      |   |        |      |  |   |       
|---------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------
|                                                                 |  | 2007 |         |   | 2006 |   |        | 2005
|Interest income                                                  |  | $    | 1,321   |   |      | $ | 1,355  |      |  | $ | 717   
|Dividends from subsidiary                                        |  |      | 47,500  |   |      |   | 10,500 |      |  |   |      
|Other expense                                                    |  |      | 1,864   |   |      |   | 1,529  |      |  |   | 377   
|                                                                 |  |      |         |   |      |   |        |      |  |   |       
|Income before income tax and undistributed subsidiary income     |  |      | 46,957  |   |      |   | 10,326 |      |  |   | 340   
|Income tax expense (benefit)                                     |  |      | (209    | ) |      |   | (66    | )    |  |   | 128   
|                                                                 |  |      |         |   |      |   |        |      |  |   |       
|Income before equity in undistributed subsidiary income          |  |      | 47,166  |   |      |   | 10,392 |      |  |   | 212   
|Equity in undistributed subsidiary income (excess distributions) |  |      | (40,011 | ) |      |   | (346   | )    |  |   | 10,861
|                                                                 |  |      |         |   |      |   |        |      |  |   |       
|Net income                                                       |  | $    | 7,155   |   |      | $ | 10,046 |      |  | $ | 11,073
|                                                                 |  |      |         |   |      |   |        |      |  |   |       

Condensed Statements of Cash Flows



|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                 |  | 2007 |         |   | 2006 |   |         | 2005 | 
|Cash flows from operating activities             |  |      |         |   |      |   |         |      |  |   |          |  
|Net income                                       |  | $    | 7,155   |   |      | $ | 10,046  |      |  | $ | 11,073   |  
|Adjustments                                      |  |      |         |   |      |   |         |      |  |   |          |  
|Equity in undistributed subsidiary income        |  |      | 40,011  |   |      |   | 346     |      |  |   | (10,861  | )
|Change in other assets                           |  |      | (21     | ) |      |   | 387     |      |  |   | (2,232   | )
|Change in accrued expenses and other liabilities |  |      | 191     |   |      |   | (1,111  | )    |  |   | 1,111    |  
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash from operating activities               |  |      | 47,336  |   |      |   | 9,668   |      |  |   | (909     | )
|                                                 |  |      |        
|Cash flows from investing activities             |  |      |         |   |      |   |         |      |  |   |          |  
|Cash paid in acquisition                         |  |      |        |   |      |   | (23,943 | )    |  |   |         |  
|Principal payments received on ESOP loan         |  |      | 529     |   |      |   | 495     |      |  |   | 208      |  
|Capital contribution to subsidiary bank          |  |      |        |   |      |   |        |      |  |   | (147,859 | )
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash from investing activities               |  |      | 529     |   |      |   | (23,448 | )    |  |   | (147,651 | )
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|                                                 |  |      |        
|Cash flows from financing activities             |  |      |         |   |      |   |         |      |  |   |          |  
|Repurchase and retirement of common stock        |  |      | (33,957 | ) |      |   | (17,290 | )    |  |   |         |  
|Cash dividends paid on common stock              |  |      | (6,481  | ) |      |   | (4,446  | )    |  |   |         |  
|Net proceeds from sale of common stock           |  |      |        |   |      |   |        |      |  |   | 220,679  |  
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash from financing activities               |  |      | (40,438 | ) |      |   | (21,736 | )    |  |   | 220,679  |  
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net change in cash and cash equivalents          |  |      | 7,427   |   |      |   | (35,516 | )    |  |   | 72,119   |  
|Beginning cash and cash equivalents              |  |      | 36,805  |   |      |   | 72,321  |      |  |   | 202      |  
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Ending cash and cash equivalents                 |  | $    | 44,232  |   |      | $ | 36,805  |      |  | $ | 72,321   |  
|                                                 |  |      |         |   |      |   |         |      |  |   |          |  







96



---

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 21  SELECTED QUARTERLY FINANCIAL DATA(Unaudited)



|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|---------------------------------- |  | ---------------------------- | ------ | ------------- | - | ------ | ------------ |  | ------------- | ------ |  | - | ------ | -
|                                   |  | Year Ended December 31, 2007 |       
|                                   |  | FirstQuarter                 |        | SecondQuarter |   |        | ThirdQuarter |  | FourthQuarter |       
|Interest Income                    |  | $                            | 23,793 |               | $ | 23,111 |              |  | $             | 23,124 |  | $ | 21,925 |  
|Interest Expense                   |  |                              | 9,765  |               |   | 9,760  |              |  |               | 9,899  |  |   | 8,880  |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Net interest income                |  |                              | 14,028 |               |   | 13,351 |              |  |               | 13,225 |  |   | 13,045 |  
|Provision (credit) for loan losses |  |                              | 581    |               |   | (354   | )            |  |               | 460    |  |   | 10     |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Net interest income                |  |                              | 13,447 |               |   | 13,705 |              |  |               | 12,765 |  |   | 13,035 |  
|Non interest income                |  |                              | 2,042  |               |   | 2,327  |              |  |               | 2,777  |  |   | 2,502  |  
|Non interest expense               |  |                              | 13,122 |               |   | 12,666 |              |  |               | 12,383 |  |   | 14,311 |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Income before income taxes         |  |                              | 2,367  |               |   | 3,366  |              |  |               | 3,159  |  |   | 1,226  |  
|Income tax expense                 |  |                              | 716    |               |   | 1,028  |              |  |               | 922    |  |   | 297    |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Net Income                         |  | $                            | 1,651  |               | $ | 2,338  |              |  | $             | 2,237  |  | $ | 929    |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|                                   |  |                              |        |              
|Basic earnings per common share    |  | $                            | 0.08   |               | $ | 0.11   |              |  | $             | 0.11   |  | $ | 0.05   |  
|Diluted earnings per common share  |  | $                            | 0.08   |               | $ | 0.11   |              |  | $             | 0.11   |  | $ | 0.05   |  
|                                   | 
|                                   |  | Year Ended December 31, 2006 |       
|                                   |  | FirstQuarter                 |        | SecondQuarter |   |        | ThirdQuarter |  | FourthQuarter |       
|Interest Income                    |  | $                            | 22,292 |               | $ | 23,683 |              |  | $             | 24,244 |  | $ | 23,867 |  
|Interest Expense                   |  |                              | 8,480  |               |   | 9,363  |              |  |               | 9,792  |  |   | 9,854  |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Net interest income                |  |                              | 13,812 |               |   | 14,320 |              |  |               | 14,452 |  |   | 14,013 |  
|Provision (credit) for loan losses |  |                              | 196    |               |   | 156    |              |  |               | 49     |  |   | (537   | )
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Net interest income                |  |                              | 13,616 |               |   | 14,164 |              |  |               | 14,403 |  |   | 14,550 |  
|Non interest income                |  |                              | 2,731  |               |   | 2,587  |              |  |               | 2,658  |  |   | 2,533  |  
|Non interest expense               |  |                              | 11,628 |               |   | 12,457 |              |  |               | 12,895 |  |   | 15,390 |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Income before income taxes         |  |                              | 4,719  |               |   | 4,294  |              |  |               | 4,166  |  |   | 1,693  |  
|Income tax expense                 |  |                              | 1,579  |               |   | 1,390  |              |  |               | 1,371  |  |   | 486    |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|Net Income                         |  | $                            | 3,140  |               | $ | 2,904  |              |  | $             | 2,795  |  | $ | 1,207  |  
|                                   |  |                              |        |               |   |        |              |  |               |        |  |   |        |  
|                                   |  |                              |        |              
|Basic earnings per common share    |  | $                            | 0.14   |               | $ | 0.13   |              |  | $             | 0.12   |  | $ | 0.06   |  
|Diluted earnings per common share  |  | $                            | 0.14   |               | $ | 0.13   |              |  | $             | 0.12   |  | $ | 0.06   |  

We had net income of $929,000 for the fourth quarter of 2007. Our operating results for the fourth quarter of 2007
included a pre-tax charge of $1.2 million, which reflected our proportionate share of Visas estimated litigation obligations. The charge was recorded because BankFinancial, like other Visa USA members, is obligated to share expenses, resulting
from certain indemnified Visa litigation, proportionately with its ownership interests in Visa USA.

Our operating results for the fourth quarter of 2007
included a $1.2 million pre-tax expense for equity-based compensation and benefits, compared to a $3.5 million amount recorded in the fourth quarter of 2006. These expenses relate in substantial part to the vesting of equity-based awards that were
made in 2006 pursuant to the Equity Incentive Plan that our stockholders approved, and to expenses arising from the ESOP that we established in connection with our mutual-to-stock conversion in June of 2005.







97



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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





NOTE 22  MUTUAL TO STOCK CONVERSION

On June 23, 2005, the Company completed the conversion from a mutual holding company form of organization to the stock form of organization and sold 24,466,250 shares of common stock at $10.00 per share in a
subscription offering to eligible account holders, the Companys tax-qualified employee benefit plans, supplemental eligible account holders and other members of the Company.

At the time of conversion, the Company established a liquidation account in an amount equal to its net worth as of December 31, 2004. The liquidation account represents a calculated amount for the purposes
described below, and it does not represent actual funds included in the consolidated financial statements of the Company. The liquidation account will be maintained for the benefit of eligible depositors who continue to maintain their accounts at
the Company after conversion. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holders interest in the
liquidation account. In the unlikely event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for the
accounts held. Accordingly, retained earnings of the Company are deemed to be restricted up to the balance of the liquidation account.







98



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|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 (the 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 period covered by this report 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.



99



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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 is attached as Exhibit 14 to our Annual Report on Form 10-K for the year
ended December 31, 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.

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, 2007:



|                                                       |  |                                                                                       |  |                                                                         |       |                                                                                                                                      |        
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------ | -------
|                                                       |  | (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     |  | 2,032,550                                                                             |  | $                                                                       | 17.40 |                                                                                                                                      | 994,525
|Equity compensation plans not approved by stockholders |  |                                                                                      |  |                                                                         |      |                                                                                                                                      |       
|                                                       |  |                                                                                       |  |                                                                         |       |                                                                                                                                      |        
|Total                                                  |  | 2,032,550                                                                             |  |                                                                         | 17.40 |                                                                                                                                      | 994,525

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, 2007.



100



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|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, 2007 and 2006
| | --- | ----------------------------------------------------------------------------



| | (C) | Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
| | --- | ------------------------------------------------------------------------------------------



| | (D) | Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
| | --- | ---------------------------------------------------------------------------------------------------------------



| | (E) | Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
| | --- | ------------------------------------------------------------------------------------------



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



|(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 (file no. 333-119217), 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 (file no. 333-119217), 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 (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23, 2004



101



---

|      |  |                                                               |  |                                                                                                                                                                                 
|----- |  | ------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.4   |  | Restated Bylaws of BankFinancial Corporation                  |  | Exhibit 3.4 to the Annual Report on Form 10K of the Company (file no. 0001193125-07-054748), 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 (file no. 333-119217), 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 (file no. 333-119217), 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 (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004 
|      |  |                                                              
|10.3  |  | Employment Agreement with F. Morgan Gasior                    |  | Exhibit 10.3 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004 
|      |  |                                                              
|10.4  |  | Employment Agreement with James J. Brennan                    |  | Exhibit 10.4 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004 
|      |  |                                                              
|10.5  |  | Employment Agreement with Paul A. Cloutier                    |  | Exhibit 10.5 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004 
|      |  |                                                              
|10.6  |  | Employment Agreement with Robert J. OShaughnessy             |  | Exhibit 10.6 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004 
|      |  |                                                              
|10.7  |  | Employment Agreement with Christa N. Calabrese                |  | Exhibit 10.7 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004 
|      |  |                                                              
|10.8  |  | Form of Employment Agreement with F. Morgan Gasior            |  | Exhibit 10.10 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004
|      |  |                                                              
|10.9  |  | Form of Employment Agreement with Senior Executive Officers   |  | Exhibit 10.11 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004
|      |  |                                                              
|10.11 |  | Form of Employment Agreement for Named Executive Officers     |  | Exhibit 10.14 to the Registration Statement on Form S-1 of the Company (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23,
2004
|      |  |                                                              
|10.12 |  | Form of Incentive Stock Option Award Terms                    |  | Exhibit 10.1 to the Report on Form 8-K of the Company 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 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 filed with the Securities and Exchange                                                                                    



102



---

|      |  |                                                                                                                                 |  |                                                                                                                                                                              
|----- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                 |  | 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 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 filed with the Securities and Exchange Commission on September 5, 2006                                                 
|      |  |                                                                                                                                
|10.17 |  | Form of Restricted Stock Unit Award Agreement                                                                                   |  | Exhibit 10.5 to the Report on Form 8-K of the Company 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 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 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 filed with the Securities and Exchange Commission on September 5, 2006                                                 
|      |  |                                                                                                                                
|14    |  | Code of Ethics for Senior Financial Officers                                                                                    |  | Exhibit 14 to the Annual Report on Form 10-K of the Company (file no. 0001193125-06-064000), 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 (file no. 333-119217), originally filed with the Securities and Exchange Commission on September 23, 2004
|      |  |                                                                                                                                
|23    |  | Consent of Crowe Chizek and Company LLC                                                                                         |  | 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.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



103



---

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 12, 2008 |  | 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     |  | Chairman of the Board, Chief Executive Officer and President |  | March 12, 2008
|F. Morgan Gasior         |  | (Principal Executive Officer)                                |  |               
|                         |  |                                                             
|/s/ Paul A. Cloutier     |  | Executive Vice President and Chief Financial Officer         |  | March 12, 2008
|Paul A. Cloutier         |  | (Principal Financial and Accounting Officer)                 |  |               
|                         |  |                                                             
|/s/ Cassandra J. Francis |  | Director                                                     |  | March 12, 2008
|Cassandra J. Francis     |  |                                                              |  |               
|                         |  |                                                             
|/s/ John M. Hausmann     |  | Director                                                     |  | March 12, 2008
|John M. Hausmann         |  |                                                              |  |               
|                         |  |                                                             
|/s/ Sherwin R. Koopmans  |  | Director                                                     |  | March 12, 2008
|Sherwin R. Koopmans      |  |                                                              |  |               
|                         |  |                                                             
|/s/ Joseph A. Schudt     |  | Director                                                     |  | March 12, 2008
|Joseph A. Schudt         |  |                                                              |  |               
|                         |  |                                                             
|/s/ Terry R. Wells       |  | Director                                                     |  | March 12, 2008
|Terry R. Wells           |  |                                                              |  |               
|                         |  |                                                             
|/s/ Glen R. Wherfel      |  | Director                                                     |  | March 12, 2008
|Glen R. Wherfel          |  |                                                              |  |               



104