BankFinancial (BFIN)

Subsequent Event

We acquired a portfolio of highly-seasoned residential mortgage loans in 2006 with an approximate balance of $16.2 million from a loan servicing company. We also acquired a portfolio of commercial loans in 2005 with an approximate balance of $4.6 million from the same loan servicing company. The loan servicing company filed a Chapter 11 bankruptcy petition in late December, 2006, thus creating substantial doubt as to the value of its recourse obligation if we experience any losses in the acquired residential loan portfolio. The bankruptcy court appointed a bankruptcy trustee in late January, 2007. The bankruptcy trustee has suspended servicing remittances to all loan servicing clients of the debtor pending further direction from the bankruptcy court, and as a result, we have not received the monthly scheduled servicing remittances that were due in January, 2007 and February, 2007, which approximate $350,000 each month. The bankruptcy trustee recently reported that the loan servicing trust account has a current balance in excess of $4.6 million, but that the trust account is substantially out of balance and is insufficient to pay all of the debtor’s obligations to its servicing clients. We have engaged counsel to seek termination of the existing loan servicing agreements and a turnover of future servicing remittances and the past servicing remittances that have not been paid, and to defend against competing claims that have been asserted to the serviced loans or the servicing remittances. We have not yet established any specific reserves for these purchased loans pending the receipt of additional information and future developments in the bankruptcy proceeding, including the outcome of hearings scheduled for March, 2007.

Note 10 – Subsequent Event

During July, 2006, the Company sold $86.1 million in investment securities, which in the aggregate resulted in the recording of a net pre-tax gain of approximately $89,000. The securities sold included approximately $67.7 million of mortgage-backed securities and $18.4 million of Fannie Mae floating rate preferred stocks. The securities sold represented approximately 34% of the Company’s investment portfolio. The Company invested the proceeds of the sale in higher yielding shorter duration securities. The immediate net effect of these transactions was a modest improvement in net interest margin, liquidity and interest rate risk sensitivity. The Company may reinvest a portion of the proceeds in bank-owned life insurance in an effort to mitigate existing and potential employee benefits expenses. In addition, the Company may also use the proceeds to further reduce its balances of higher-cost borrowings or wholesale deposits that are scheduled to reprice within the next six to twelve months.

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