UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Persuant to Section 13 or 15(d)of

the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

Commission file number 0-18121

___________________________

MAF BANCORP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State of Incorporation)	36-3664868 (I.R.S. Employer Identification No.)

55th Street & Holmes Avenue, Clarendon Hills, Illinois 60514-1500
Telephone Number (630) 325-7300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X] No[ ]

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 [X] No[ ]

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, 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 amendments to this Form 10-K.

[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ] 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]

Based opon closing price of the registrant's common stock as of June 30, 2006, the aggregate market value of the voting stock held by non affiliates of the reistrant was $1.3 billion. *

The number of shares of Common Stock outstanding as of February 23, 2007: 32,926,938

Document Incorporated by Reference

PART III - Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2007 are incorporated by reference into Part III hereof.

*Solely for purposes of this calculation, all executive officers and directors of the registrant are considered to be affiliates. Except to the extent shares have been allocated to the plan accounts of directors and executive officers, the affiliate holdings do not include shares held in certain employee benefit plans administered by plan committees the include executive officers.

MAF BANCORP, INC. AND SUBSIDIARIES

FORM 10-K

Page

PART I.


Item 1.	Business	2
Item 1A.	Risk Factors	28
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
	PART II

Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	33
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 8.	Financial Statements and Supplementary Data	59
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99
Item 9A.	Controls and Procedures	99
Item 9B.	Other Informtion	99
	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	99
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100
Item 13.	Certain Relationships and Related Transactions, and Director Independence	100
Item 14.	Principle Accountant Fees and Services	101
	PART IV
Item 15.	Exhibits and Financial Statements Schedules	101
SIGNATURES		105

PART I

Item 1. Business

General

MAF Bancorp, Inc. was incorporated under the laws of the state of Delaware in 1989, as the holding company for Mid America Bank, fsb (“Bank”), our banking subsidiary. The Bank, which was organized as a mutual savings and loan association and has been operating in the Chicago area since 1922, formed the holding company in connection with its conversion from a mutual to stock savings institution. Over the last five years, the Bank has grown from 32 branches and $5.60 billion in total assets at December 31, 2001 to 82 branches and $11.12 billion in assets at December 31, 2006. Today, the Bank is one of the largest community-oriented financial institutions in the Chicago and Milwaukee metropolitan areas, serving both retail and business banking customers. We also engage in residential real estate land development through our subsidiary, MAF Developments, Inc., or MAFD, a business we have been active in for over 30 years.

The Company’s executive offices are located at 55th Street and Holmes Avenue, Clarendon Hills, Illinois 60514-1500. The Company’s telephone number is (630) 325-7300.

We have grown our franchise through de novo branching, as well as acquisitions of other financial institutions and branch acquisitions. We have opened 13 denovo branches in the past five years. The table below summarizes information regarding the acquisitions we have completed during the past five years.

Acquired Company		Market Area	Acquisition Date	Total Assets at Closing
				(In thousands)
EFC Bancorp, Inc.	7	Elgin, IL	February 2006	$	1,052,943	703,435
Chesterfield Financial Corp	3	Chicago, IL	November 2004		354,221	270,711
St. Francis Capital Corporation	23	Milwaukee, WI	December 2003		2,190,627	1,294,517
Fidelity Bancorp, Inc.	4	Chicago, IL	July 2003		612,869	434,573

We may continue to consider selective acquisition opportunities to strengthen our market share in the greater Chicago and Milwaukee metropolitan areas or to pursue strategic growth opportunities in other attractive markets.

As we have grown, we have successfully transitioned our business from a traditional savings and loan engaged primarily in one- to four-family residential mortgage lending to a more diversified community bank, servicing both consumer and business customers, while retaining our emphasis on relationship-driven, responsive customer service. We offer a wide variety of checking, savings and other deposit accounts as well as investment services and securities brokerage, general insurance services and other financial services targeted to individuals, families and small- to medium-sized businesses in our primary market areas. All of our locations are full-service branches, many of which offer customers the convenience of drive-up facilities.

We launched our Business Banking unit in 2001 and have steadily grown commercial deposits and business banking loans over the past six years. We have also emphasized home equity lending in recent years as part of our strategy to diversify our loan portfolio with higher-yielding loan categories. We continue to originate, and to a lesser extent purchase, residential one- to four-family mortgage loans primarily in our market areas through our residential loan origination platform. While we expect to keep more of our adjustable rate mortgage originations in our portfolio, we have migrated to more of an originate-and-sell model in our mortgage business. The acquisitions of Fidelity, St. Francis and EFC Bancorp contributed significantly to the change in our asset mix, increasing our multi-family mortgages, home equity loans, commercial real estate and business loans and reducing the concentration of one- to four-family mortgage loans in our total loan portfolio. At December 31, 2006, 54% of total loans were comprised of one- to four-family mortgages compared to 79% at December 31, 2002.

For segment information regarding the Company’s two lines of business (banking and land development), see “Note 18. Segment Information” to the audited consolidated financial statements of the Company included in “Item 8. Financial Statements and Supplementary Data.”

Lending Activities

Loan Portfolio Composition. The following table sets forth the composition of the Bank’s loan portfolio by loan type at the dates indicated. The table reflects the change in the loan portfolio mix over the last four years resulting from increased emphasis on equity lines of credit, the successful growth of our Business Banking unit and the impact from acquisitions.

	At December 31,
	2006					2005					2004					2003					2002
	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
One- to four-family	$	4,012,468		53	.87%	$	4,256,913		59.03	%	$	4,036,826		58	.69%	$	3,899,222		61.33	%	$	3,463,298		79	.02%
Equity lines of credit
and home equity loans		1,301,665		17	.47		1,346,750		18.67			1,336,090		19	.42		965,571		15.18			419,145		9	.56
Multi-family		801,866		10	.77		698,659		9.69			646,269		9	.40		622,207		9.78			258,464		5	.90
Commercial real
estate		628,957		8	.44		492,307		6.83			476,796		6	.93		521,438		8.20			142,493		3	.25
Construction		194,254		2	.61		109,691		1.52			134,759		1	.96		110,860		1.74			33,418		0	.76
Land		304,685		4	.09		171,580		2.38			92,779		1	.35		73,365		1.15			40,011		0	.92
Commercial
business loans		198,853		2	.67		129,771		1.80			147,345		2	.14		128,251		2.02			20,705		0	.47
Consumer		5,843		0	.08		5,566		0.08			7,650		0	.11		38,237		0.60			5,101		0	.12

	$	7,448,591		100	.00%	$	7,211,237		100.00	%	$	6,878,514		100	.00%	$	6,359,151		100.00	%	$	4,382,635		100	.00%

The following table shows the breakdown of fixed-rate and adjustable-rate loans in our portfolio for loan categories other than our residential lending categories as of the dates indicated:

	At December 31,
	2006					2005					2004
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Multi-family:
Adjustable-rate	$	656,385		81	.9%	$	604,235		86	.5%	$	571,524		88	.4%
Fixed-rate		145,481		18	.1		94,424		13	.5		74,745		11	.6

Total multi-family	$	801,866		100	.0%	$	698,659		100	.0%	$	646,269		100	.0%

Commercial real estate:
Adjustable-rate		300,021		47	.7%	$	305,761		62	.1%	$	353,612		74	.2%
Fixed-rate		328,936		52	.3		186,546		37	.9		123,184		25	.8

Total commercial
real estate	$	628,957		100	.0%	$	492,307		100	.0%	$	476,796		100	.0%

Construction and Land:
Adjustable-rate	$	397,928		79	.8%	$	190,522		67	.7%	$	165,365		72	.7%
Fixed-rate		101,011		20	.2		90,749		32	.3		62,173		27	.3

Total construction
and land	$	498,939		100	.0%	$	281,271		100	.0%	$	227,538		100	.0%

Commercial business loans:
Adjustable-rate	$	100,905		50	.7%	$	69,246		53	.4%	$	74,664		50	.7%
Fixed-rate		97,948		49	.3		60,525		46	.6		72,681		49	.3

Total commercial
business	$	198,853		100	.0%	$	129,771		100	.0%	$	147,345		100	.0%

Loan Maturity. The following table shows the principal amount of loans for loan categories other than one- to four-family mortgages, home equity lines of credit, home equity loans, and consumer loans by contractual final maturity at December 31, 2006. This table is not indicative of the timing of expected repayments on these loans.

	At December 31, 2006
	Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years		Total due after 1 year		Total Amount Due
	(Dollars in thousands)
Multi-family	$	12,720		81,721		707,425		789,146		801,866
Commercial real estate		52,797		284,597		291,563		576,160		628,957
Construction		101,959		49,644		42,651		92,295		194,254
Land		115,513		145,788		43,384		189,172		304,685
Commercial business loans		111,647		81,892		5,314		87,206		198,853

Total	$	394,636		643,642		1,090,337		1,733,979		2,128,615

Of the $1.73 billion of loans shown in the table above with contractual final maturities after one year, $1.17 billion, or 67%, are adjustable rate loans and $568.8 million or 33%, are fixed rate loans.

Residential Lending. At December 31, 2006, we had approximately $4.01 billion of one- to four-family mortgage loans in our loan portfolio. We sell the majority of our one- to four-family fixed rate

mortgage production into the secondary market, as well as a significant portion of our conforming and Alt-A adjustable-rate loan originations. For this reason, we generally underwrite our residential loans to investor criteria and typically price our loans to secondary market rates. We have developed a broad base of investors to include not only Fannie Mae, Freddie Mac and the Federal Home Loan Bank Mortgage Finance Partnership program (“MPF”), but also commercial and investment banks and other private investors, to provide outlets for most of our products. This allows us to limit liquidity risk and interest rate risk.

We currently attract most of our residential mortgage loan customers through commissioned loan officers and cross-selling to banking customers. We are working to expand our telemarketing and web-based offerings in an effort to attract more business through alternative channels. We also offer subprime loans for prospective borrowers with substandard credit through a small group of specialized officers, and we have broker and correspondent lending relationships with other mortgage companies who purchase the subprime loans that we originate through these programs. Our policy is not to retain these loans in portfolio.

We offer ARM loans with 30- and 40-year amortization terms with initial rates that are fixed for a period of one to ten years, with annual adjustments (and periodic and lifetime caps) thereafter, to the extent they do not refinance. At December 31, 2006, $3.13 billion, or 78% of our one- to four-family portfolio were adjustable rate loans, including $1.14 billion of 3/1 ARMs, $1.62 billion of 5/1 ARMs, and $377.0 million of 7/1 and 10/1 ARMs. At December 31, 2006 the ARM loan portfolio included $625.9 million of loans with 40-year amortization terms. Despite the benefits of ARM loans for asset/liability management purposes, particularly those with shorter initial fixed-rate periods, adjustable rate loans do pose potentially greater credit risks than fixed rate loans, since as interest rates rise, the underlying payment requirements of the borrower rise, increasing the potential risk of default.

For traditional mortgage loans with loan-to-value ratios (LTVs) in excess of 80%, to better manage our credit risk we generally require that a customer maintain private mortgage insurance (PMI), and/or we obtain lender paid private mortgage insurance. In situations where we believe the credit risks associated with higher LTV loans are mitigated by the borrower’s FICO score, we may self insure. If the customer does not obtain PMI, we charge the customer a higher interest rate on the loan to compensate us for the cost of insurance we pay or the greater risk of the loan. For loans with PMI, the Bank has a mortgage reinsurance subsidiary that shares in a portion of insurance premiums earned by various private mortgage insurance companies on loans originated by the Bank, in return for assuming a second-tier layer of risk on insured portions of these loans. To date, the Bank has experienced no losses through our assumed risk layers. For the years ended December 31, 2006, 2005 and 2004 this activity generated pre-tax income of $2.5 million, $2.3 million and $1.9 million, respectively. We have also invested in various debt instruments issued by one of the PMI companies where the interest rate earned on the note is based on the performance and loss experience of the underlying pool of insured loans. During the years ended December 31, 2006, 2005 and 2004, we received interest income of $630,000, $985,000 and $1.4 million, respectively, on these instruments.

Over the past few years, we have expanded our offerings of non-traditional mortgage products to include a variety of interest-only products for primary residences, investment properties and vacation homes. We also offer products for up to 100% combined LTVs that use alternative underwriting standards without relying on standard income verifications. We have developed a particular niche originating no-income-verification loans for homeowners in ethnic communities. We have not offered payment- option-ARMs or other loans involving negative amortization. Interest-only loans accounted for approximately 24% of our 2006 originations and comprised approximately 12% of our residential mortgage portfolio at year end. While non-traditional mortgages, particularly high LTV interest-only loans, may pose a higher risk of loss than conventional one- to four-family loans, we generally earn a higher interest rate on these loans to compensate us for the risk.

An important part of our business strategy is our commitment to community lending initiatives. We offer various innovative and flexible home mortgage products and participate in or actively support many special lending programs designed to promote affordable homeownership and address the needs of underserved communities in the markets we serve. These programs include single and multi-family home mortgage loans in low-to-moderate income census tracts, loans in predominantly minority communities, and loans to borrowers whose income is below 80% of median income. Many loans we make in our community lending programs tend to have higher LTVs.

Home Equity Lending. Home equity lending totaled $1.30 billion, or 17.5% of our loan portfolio. Several years ago, we made a strategic decision to expand our level of equity line activity in an effort to capitalize on our penetration of residential lending production in our primary market areas, diversify our asset mix and reduce our interest rate risk exposure, as home equity lines are variable rate products generally tied to the Prime rate. At December 31, 2006, the average utilization rate on our equity line portfolio was 51.5% compared to 53.8% at December 31, 2005 and 55.7% at December 31, 2004. The rising interest rates over the past year made growth in this portfolio more challenging as consumers repaid balances or refinanced into fixed rate mortgage products. We underwrite our home equity loans similarly to our one- to four-family production, by evaluating a customer’s ability to repay the loan, including FICO score, and by reviewing the combined loan-to-value ratio (CLTVs) of the loan taking into account any first mortgage loan. Our underwriting procedures limit the combined loan-to-value ratio to 100% or less. We generally determine the rate on an equity line of credit using a tiered pricing schedule based on a combination of a customer’s FICO score and CLTV ratios. Under applicable regulatory guidelines, we maintain higher capital levels to support second lien home equity lines of credit than are required for first lien residential mortgages, taking into account the entire approved amount of the equity line, not just the amount drawn at any given time. We do not normally obtain PMI insurance on home equity products. As part of our originate- and-sell strategy in residential lending, in 2005 and 2006 we sold some of our home equity-line production to generate gain on sale income. We have considered home equity line sales from time to time when market pricing has been attractive relative to our prepayment speed projections, and to reduce credit risk exposure on higher CLTV product. In these transactions, we have endeavored to select for sale loans we have made to “single-service” customers whose business relationships with the Bank are limited to their home equity lines.

Multi-family Lending. Our multi-family real estate loans totaled $801.9 million at December 31, 2006, or 10.8% of our loan portfolio. We originate multi-family residential mortgage loans in our market areas. These residential mortgage loans are generally ARM loans having interest rates with initial fixed rate terms of three to ten years, amortization periods of up to 25 years and balloon maturity dates of five to ten years. Our underwriting standards for these loans generally require a loan-to-value ratio not greater than 80% and net operating income to debt service coverage ratio that is not less than 1.0 for loans secured by less than 24 units and 1.15 for loans secured by more than 24 units. In cases where the debt service ratios are lower, we may charge a higher yield, require additional collateral, require a lower LTV or verify the overall cash flow of the borrower or guarantor to cover any debt service shortfall. The multi-family loans typically carry more risk than single family loans as the loan balances are larger and the repayment of loans is dependent in part on the cash flow of the property securing the loan.

To a lesser extent, we also offer equity lines secured by multi-family properties, which permit equity borrowing up to 80% LTV.

Commercial Real Estate Lending. Our commercial real estate loans totaled $629.0 million at December 31, 2006, or 8.4% of our loan portfolio. We lend on various commercial properties, including small office buildings, warehouses, industrial/manufacturing buildings, land acquisition and development, and other improved residential and non-residential properties. Commercial real estate loans that are adjustable-rate in nature have floating interest rates that are generally tied to Prime or LIBOR. Payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties or their primary tenants, and as such, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We seek to minimize these risks by lending primarily to experienced developers, or existing income-producing properties and generally restrict such loans to properties in our market areas.

Commercial real estate loans tend to be much larger than our average residential loan, and involve a greater degree of risk than residential mortgage loans with respect to the determination of the market value of the collateral and underlying cash flow assumptions. This increased risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions, and the increased difficulty of evaluating and monitoring these loans. Furthermore, the repayment of loans secured by non-residential property is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. See “Business — Delinquent, Non-performing and Classified Assets.”

Our underwriting of commercial real estate loans is a robust process and is less homogeneous than generally found in our residential loan underwriting. We use a combination of inside and outside

appraisers with pertinent expertise to appraise our commercial real estate properties. Our credit analysis includes a review of the property’s ability to service debt, the capacity of the borrower to generate income elsewhere and where applicable, the strength of any personal guarantor(s). We generally seek a net operating income to debt coverage ratio that is not less than 1.20, exclusive of other outside income. In instances where the coverage ratio is lower, we seek a higher rate of interest or collect additional fees to compensate us for the increased level of risk or require other compensating factors such as additional collateral, personal guarantees or strong overall cash flow from borrowers and guarantors.

Construction and Land Lending. Our commercial real estate construction, single-family construction and land loans totaled $498.9 million at December 31, 2006, or 6.7% of our loan portfolio. Our construction and land lending are both focused primarily on one- to four-family residences and residential land developments in our market areas. This lending focuses on construction of properties where qualified contractors are involved, and loans are structured to be repaid or converted to permanent loans at the end of the construction phase. Our construction loans tend to be adjustable-rate, with interest-only payments during the construction phase.

The maximum loan-to-value during construction is generally limited to 80% LTV. Loan proceeds are disbursed in increments as construction progresses, inspections are completed and lien waivers obtained. Our land lending includes loans to developers for the initial purchase and land development for residential subdivisions in our market area, as well as loans to builders and individuals. Under our policy, the loan-to-value ratio for development loans may not exceed 80%. The majority of these loans are floating rate based on the Prime rate or LIBOR. We require an appraisal of the property, and feasibility studies may also be required to determine the profit potential of the development project.

Construction and land development loans involve higher risks than residential mortgages because the uncertainties inherent in estimating construction costs, as well as variations in the market value of the completed project and the effects of local governmental regulation of real property, make it relatively difficult to precisely estimate the total funds required to complete a project and the related loan-to-value ratio. Construction and land development lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we have to foreclose on a project, especially if prior to completion, we may have difficulty recovering all of the unpaid balance of and accrued interest on the loan, as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. We have attempted to address these risks through our underwriting procedures and monitoring of construction lending on multi-family and commercial real estate properties.

Commercial Business Lending. Our commercial business loans totaled $198.9 million at December 31, 2006, or 2.7% of our loan portfolio. We originate a variety of commercial business loans, including working capital financing, equipment loans, and selected personal loans for executives, professionals and entrepreneurs with floating interest rates typically tied to Prime or LIBOR and fixed rates indexed to Treasury rates or LIBOR. Supporting collateral can take many forms, such as accounts receivable, inventory equipment and other business or personal assets, or in some cases loans may be unsecured. Typically, we target small-to medium-sized, privately held businesses in our primary market areas and seek to establish full service commercial loan and deposit relationships. Growing our commercial lending portfolio is key to the success of our asset diversification strategy, since this type of lending typically provides higher yield opportunities than residential loans and is an important component in achieving a more balanced loan portfolio.

Loans to commercial business entities involve risk factors unique to the business of each borrower. In order to mitigate these risks, we seek to gain an understanding of the business of each borrower; understand the cash flow generated by the business, place appropriate value on collateral taken and structure the loan properly to make sure that collateral values and financial conditions are maintained while loans are outstanding. Appropriate documentation of commercial business loans is also important to protect our interests. Our credit approval process for commercial loans is comprehensive and our underwriting process includes an evaluation of the borrower’s historical and projected balance sheet, income statement, liquidity and cash flow as well as the strength of the collateral to determine the level of creditworthiness of the borrower. We typically review the current and future cash needs of the borrower, its business strategy, management’s ability to execute the strategies, and the strength of any guarantors. While our loan policy has guidelines for advances on different types of collateral, we establish eligible asset values on a case-by-case basis for each borrower. Generally, the commercial business loans are

secured by a first priority security interest in all the assets of the borrower and also include the personal guarantees of business owners. The repayment of a commercial business loan depends primarily on the ability of the borrower to generate cash and the creditworthiness of the borrower, since liquidation of collateral is often a secondary and potentially insufficient source of repayment due to inventory or assets being obsolete, or accounts receivable becoming uncollectible.

We may also provide letter of credit services to certain borrowers on a case-by-case basis. Underwriting, structuring and collateralization of letters of credit are similar to that used in other commercial loans.

Lending Concentrations. Our largest lending relationship at December 31, 2006, involved $68.4 million of credit exposure, the majority of which is comprised of construction and land loans relating to residential developments. Aggregate credit exposure to our ten largest lending relationships at December 31, 2006, was approximately $373 million. The majority of our loans are made in our Chicago and Milwaukee market areas. Of our total loan portfolio at December 31, 2006, 76.3% are loans secured by property located in Illinois and 20.2% by property located in Wisconsin.

Environmental Issues. We encounter certain environmental risks in our lending activities. Under federal and state environmental laws, and in certain circumstances, lenders may become liable for the costs of cleaning up hazardous materials found on security property. To mitigate environmental related risks to us, our loan policies call for management to consider all relevant factors in order to determine whether an environmental review is needed and, if so, the scope and detail, prior to our origination of commercial and multi-family loans. Although environmental risks are usually associated with industrial and commercial loans, there are also risks for residential lenders like us if environmental contamination makes the collateral property unsuitable or has an adverse effect on nearby property values.

No assurance can be given that the values of properties securing loans in our portfolio will not be adversely affected by unforeseen environmental risks, although we are unaware of any such environmental issues which subject us to potential material liability at this time.

Secondary Market and Loan Servicing Activities

Originations, Purchases and Sales of Mortgage Loans. Our mortgage origination volumes, and the mix of fixed-rate and ARM products in our originations, are significantly dependent on the interest rate environment, consumer preferences and the expected level of future interest rates. We originate the majority of our production, through our internal sales force of commissioned loan originators. In addition, in the past several years we have worked to establish relationships with a number of selected mortgage brokers operating in our market areas from whom we purchase loans, primarily home equity products, based on our published rate sheets and in conformity with our underwriting guidelines and usually in whole loan transactions where we assume the servicing.

Our strategy regarding loan sales is dependent on a number of factors and varies from time to time depending on the impact of these factors on our operations. We consider the profit margin on sale compared to the spread income expected to be earned on a loan in determining whether we sell certain production. We also sell loans as a means of managing our overall level of interest-rate risk as well as the credit risk profile of our residential loan portfolio. We may also sell loans as a means of providing liquidity to our operations. In managing our interest-rate and liquidity risks, we generally sell most of our fixed-rate residential mortgage originations, and tend to sell more ARM originations when the yield curve is flatter. During 2006, we sold a larger percentage of our ARM loan production as part of our strategy to limit portfolio growth in the inverted yield curve environment, intended to mitigate net interest margin pressure. Based on our current interest rate outlook, we may retain more of our ARM loan production in portfolio in 2007 as we work to grow interest earning assets at acceptable spreads.

We began selling home equity loans on a servicing-released basis two years ago, selling $139.3 million in 2005 and $114.5 million in 2006. We sold home equity loans to realize the attractive gain on sale margins available in the secondary market for this product. In addition, the sales were used to help manage our credit risk by selling more of the higher loan-to-value production, particularly in 2006 as we started to see negative asset quality trends and higher loss experience on these loans due to the weakening housing market conditions. We expect to continue this strategy in 2007.

The following table shows the Bank’s one- to four-family mortgage and home equity originations and purchases and loan sale activity for the periods indicated:

	At or For the Year Ended December 31,
	2006						2005						2004
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
One- to Four-Family Originations and Purchases:

Fixed-rate	$	632,762			40	%	$	674,882			33	%	$	905,182			38	%
Adjustable-rate		932,336			60			1,363,816			67			1,481,547			62

Total	$	1,565,098			100	%	$	2,038,698			100	%	$	2,386,729			100	%

Equity lines of credit⁽¹⁾	$	793,550					$	1,201,936					$	1,151,971
Home equity loans		133,490						48,389						17,381
Loans Sales:
One- to four-family loans:
Fixed-rate⁽²⁾		638,903			55	%		661,641			96	%		649,789			71	%
Adjustable-rate⁽²⁾		525,186			45			24,839			4			264,292			29

Total	$	1,164,089			100	%	$	686,480			100	%	$	914,081			100	%

Equity loans	$	114,538					$	139,270					$	—

Gain (loss) on sale or writedown of:
One- to four-family loans	$	11,204					$	7,100					$	9,294
Lower of cost or market
adjustment on
loans transferred to held for
sale		(4,156	)					—						—
Home equity loans		1,745						3,575						—

Total loan sale gains	$	8,793					$	10,675					$	9,294

Margin on loan sales:
One- to four-family loans
(exclusive of lower of
cost or market adjustment)		.96	%					1.03	%					1.02	%
Equity loans		1.52						2.57						—

⁽¹⁾	Represents total disbursements during the year on all home equity lines, including amounts related to lines newly originated during the year and lines previously outstanding. This does not reflect any unused amounts that remain available at year end.

⁽²⁾	Loans sold includes one- to four-family originations that are swapped into mortgage-backed securities and sold simultaneously and does not include $37.2 million in 2005 of Bank-originated loans swapped into mortgage-backed securities and held in portfolio.

Of our fixed-rate originations in 2006, $613.3 million, or 97%, conformed to the requirements for sale to Fannie Mae and Freddie Mac and $19.5 million, or 3%, were non-conforming. Our “non-conforming” loans are generally designated as such because the principal loan balance exceeds $417,000, which is the Freddie Mac, Fannie Mae, and MPF purchase limit, and not because the loans present increased risk of default. Non-conforming loans, or jumbo loans with such higher balances, generally carry interest rates from one-eighth to one quarter of one percent higher than similar, conforming fixed-rate loans. Jumbo loans are priced higher to compensate for their higher risks of prepayment.

We generally sell our conforming long-term fixed-rate production to Freddie Mac, Fannie Mae, or the MPF program of the Federal Home Loan Bank of Chicago, commonly referred to as “GSEs,” or government sponsored entities. Since 2002, we have been selling most of our non-conforming long-term fixed-rate production to private investors. During 2006 we sold $525.2 million of adjustable rate loans, or 56% of our ARM originations as spreads to funding costs narrowed as a means to hold down growth in lower-yielding assets and mitigate pressure on the net interest margin.

We often enter into forward commitments for loan sales with various investors based on our mortgage production pipeline as our primary hedge of price risk. The majority of our loans are sold without recourse, except those loans sold through the MPF program, where we retain a limited level of risk in exchange for better pricing on the loans sold and a credit enhancement fee. At December 31, 2006, we had approximately $16.8 million in net credit risk exposure on loans we have sold through the MPF program.

Loan servicing. We have generally retained servicing rights on single family mortgage loans that we sell into the secondary market, but to date, not on equity lines that we sell. When we retain the servicing, we generate loan servicing fee income from fees the investors pay us to collect and remit mortgage payments, insurance premiums and real estate taxes. The monthly servicing fees we receive are equal to at least .25% of the outstanding principal balance of the sold loans being serviced. Costs of servicing loans for others are charged to expense as incurred, while we capitalize mortgage servicing rights upon the sale of loans based on assumptions as to fee income earned, estimated prepayment

speeds of the underlying mortgage loans, and the cost of servicing. Mortgage servicing rights are intangible assets and are amortized based on the estimated life of the loan servicing income stream, which is recorded as a decrease to loan servicing fee income. Our mortgage servicing rights are assessed quarterly for impairment, with any impairment or recovery recognized through a valuation allowance and a related charge to earnings.

The following table shows the components of loan servicing fee income in dollars and as a percentage of loans serviced for others, as well as other information regarding loans serviced for others for the years indicated:

	Year Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Gross servicing revenue	$	8,728			9,302			9,312
Amortization of mortgage servicing rights		(5,319	)		(7,041	)		(8,081	)

Loan servicing fee income	$	3,409			2,261			1,231

As a percentage of average loans serviced for
others:
Gross servicing revenue		.275	%		.260			.277
Amortization of mortgage servicing rights		(.168	)		(.197	)		(.241	)

Loan servicing fee income		.107	%		.063			.036

Average balance of loans serviced for others	$	3,168,668			3,582,886			3,357,002
Loans serviced for others at end of year⁽¹⁾		2,680,242			2,919,075			3,641,445
Mortgage servicing rights at end of year, net		17,549			20,007			25,697
Average service fee at year end		.28	%		.26			.28
Mortgage servicing rights as a percentage of
mortgage loans serviced for others		.65			.69			.71
Multiple of average servicing fee at year end		2.3	x		2.6	x		2.5	x
Weighted-average interest rate on loans
serviced for others		5.98	%		5.69			5.70


Loan Servicing:
Gain on sale of mortgage servicing rights	$	3,600			2,400			—
Valuation recovery on mortgage servicing rights		—			171			2,072

⁽¹⁾	One- to four-family loans serviced for other investors which are primarily GSE and to a lesser extent private investors.

The loans we service for others are loans we have sold, typically without recourse, and are not included in our loan portfolio composition totals or in our consolidated statements of financial condition. The following table shows delinquency information about mortgage loans we serviced for others at the dates shown:

	Loan Serviced for Others⁽¹⁾
	61-90 Days Delinquencies						> 90 Days Delinquencies
	Number of Loans		Principal Balance of Delinquent Loans		As a Percent of Total Loans⁽²⁾		Number of Loans		Principal Balance of Delinquent Loans		As a Percent of Total Loans⁽²⁾
	(Dollars in thousands)
December 31, 2006		29	$	4,124		.15%		79	$	12,366		.46%
December 31, 2005		26		3,207		.11		60		8,413		.29
December 31, 2004		17		2,363		.07		53		6,484		.18

⁽¹⁾	Sold loans are serviced for other investors which are primarily GSE’s and to a lesser extent, private investors.

⁽²⁾	Principal balance of delinquent loans serviced for others as a percentage of total loans serviced for others.

From time to time, we may sell all or a portion of our servicing portfolio if we believe market valuations of servicing rights offer us a better return than our outlook for servicing fee income streams on the loans serviced for others. Servicing rights valuations are significantly dependent on loan prepayment speed assumptions. We completed a sale of servicing rights on $963.1 million of loans, approximately 27% of our one- to four-family mortgage loans serviced for others portfolio, during the fourth quarter of 2006 at a pre-tax gain of $3.6 million. The loan servicing rights were sold to take advantage of an increase in servicing valuations early in the fourth quarter and represented primarily single service customers we had determined were unlikely prospects for additional business based on the outcome of our cross-selling efforts. We sold servicing rights on $751 million of loans in 2005 at a pre-tax gain of $2.4 million for similar reasons.

Asset Quality and Allowance for Loan Losses

We work with consumers and business clients to provide a wide range of lending products designed to meet their individual needs, while adhering to our internal underwriting standards that have allowed us to maintain strong credit quality and minimize credit losses historically.

Delinquent Loans. When a borrower fails to make a required payment by the end of the month in which the payment is due, we commence collection efforts through borrower notifications and other collection procedures. When a loan payment is delinquent for three or more monthly installments, we will generally initiate foreclosure proceedings and cease accruing interest. At the dates shown delinquencies in our portfolio were as follows:

	61-90 Days						> 90 Days⁽²⁾
	Number of Loans		Principal Balance of Delinquent Loans		As a Percent of Total Loans⁽¹⁾		Number of Loans		Principal Balance of Delinquent Loans		As a Percent of Total Loans⁽¹⁾
	(Dollars in thousands)
December 31, 2006		199	$	18,073		.23%		620	$	66,486		.85%
December 31, 2005		79		9,039		.12		356		31,160		.43
December 31, 2004		93		8,557		.12		283		31,473		.46

⁽¹⁾	Reflects principal balance of delinquent loans as a percentage of total loans outstanding.

⁽²⁾	The more than 90 days category includes all loans on non-accrual regardless of days past due.

Non-Performing Assets. The table below sets forth information regarding non-performing assets in our portfolio at the dates shown:

	At December 31,
	2006			2005		2004		2003		2002
	(Dollars in thousands)
Non-accrual loans:⁽¹⁾
One- to four-family	$	41,756			21,535		23,629		27,106		22,448
Equity lines of credit and home equity loans		13,761			7,484		4,324		2,651		1,121
Multi-family		2,505			341		1,826		478		32
Commercial real estate		6,784			1,639		1,294		1,503		742
Construction		—			—		—		—		153
Land		—			—		—		—		—
Commercial business loans		1,649			134		321		578		860
Consumer loans		31			27		79		471		38

Total	$	66,486			31,160		31,473		32,787		25,394

Non-performing loans to total loans		.89	%		.43		.46		.51		.58

Non-accrual investment securities		—			—		—		7,697		—

Foreclosed real estate:
One- to four-family	$	3,245			789		1,487		3,200		2,366
Commercial real estate		697			—		—		—		—

Total foreclosed real estate	$	3,942			789		1,487		3,200		2,366

Total non-performing assets	$	70,428			31,949		32,960		43,684		27,760

Total non-performing assets to total assets		.63	%		.30		.34		.49		.47

⁽¹⁾	Consists of loans in the process of foreclosure or for which interest is otherwise deemed uncollectible.

Non-accrual loans. Generally, when a loan is more than 90 days or more past due, in the process of foreclosure, or in bankruptcy, or when collectibility is otherwise in doubt, the full amount of previously accrued but unpaid interest on such non-accrual loan is deducted from interest income. Income is subsequently recorded to the extent cash payments are received, or at the time when the loan is brought current in accordance with its original terms. This policy is applied consistently for all types of loans in the Bank’s loan portfolio. There were no loans over 90 days delinquent and still accruing at any year end shown in the table above.

For the year ended December 31, 2006, the amount of interest income that would have been recorded on non-accrual loans if these loans were performing in accordance with their terms amounted to $2.6 million for 2006 and $1.4 million for each of the years ended December 31, 2005 and 2004. For the years ended December 31, 2006, 2005 and 2004, interest income on non-accrual loans that was actually collected and recorded amounted to $2.0 million, $563,000 and $630,000.

The majority of our non-performing loans are secured by one- to four-family residential real estate in our market area with current loan-to-value ratios less than 90% or with private mortgage insurance.

We generally regard these loans as presenting lower risk of credit loss due to the nature of the collateral. Approximately 17% of our non-accrual loans at December 31, 2006, are covered by private mortgage insurance. Ratios for loans secured by one- to four-family residential properties were as follows:

	At December 31,
	2006			2005
One- to four-family, equity lines of credit and home equity loans as a percentage of total loans		71	.3%		77	.7%
Non-performing one- to four-family, equity lines of credit and home equity loans as percentage of total non-performing loans		83	.5		93	.1
Percentage of non-performing one - to four-family, equity lines of credit and home equity loans
with private mortgage insurance or other guarantees		16	.6		26	.4
Percentage of one- to four-family, equity lines of credit and home equity loans without
private mortgage insurance and with combined loan- to-value greater than 90%		8	.1		7	.7

Impaired Loans. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. Impairment for loans considered individually significant and that exhibit probable or observed credit weaknesses are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. If the determined fair value of an impaired loan is less than the carrying value of the loan and a loss has deemed to have occurred, we charge off the principal amount of the loan in excess of fair value or net realizable value. For loans that are not individually significant, loans $1.0 million or less, and represent a homogeneous population, we evaluate impairment collectively based on management reports on the level and extent of delinquencies, as well as historical loss experience for these types of loans. These homogeneous loans are excluded from the impaired loan disclosures. We use these criteria on one- to four-family residential loans, consumer loans, smaller multi-family residential loans, and land loans. At December 31, 2006 and 2005, the Company had $8.7 million and $2.1 million of impaired loans. Impaired loans at December 31, 2006 includes $5.6 million related to a loan on a commercial office building that resulted from the Bank advancing funds under a standby letter of credit in December 2006. Earlier in the year we had recorded a $1.0 million writedown on the letter of credit obligation and we charged off an additional $200,000 on the loan in the fourth quarter. This loan was paid off in January 2007. The average balance of impaired loans for 2006 and 2005 was $3.6 million and $2.4 million, respectively.

Classified Assets. The federal regulators have adopted a classification system for problem assets of insured institutions, which covers all problem assets and requires certain reserves. Under this classification system, problem assets of insured institutions are classified as “substandard,” “doubtful,” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the value of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present 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 without the establishment of a specific loss reserve is not warranted. In addition, a “special mention” category consists of assets, which currently do not expose the Company to a sufficient degree of risk to warrant adverse classification, but do possess credit deficiencies deserving management’s close attention.

In connection with our filing of periodic reports with the OTS, we regularly review the problem assets in our portfolio to determine whether any loans or investments require classification in accordance with applicable regulations. At December 31, 2006 all our non-performing loans were classified as substandard, except $676,000 classified as doubtful. In addition, at December 31, 2006, we had classified $9.8 million of multi-family loans, $3.8 million of commercial loans, $74,000 of land loans, $2.5 million of construction loans and $1.5 million of commercial business loans as that were still accruing interest as substandard for regulatory purposes. At December 31, 2005 all of our non-performing loans were classified as substandard except $12,000 classified as doubtful. At December 31, 2005, we had classified $3.5 million of multi-family loans, $8.2 million of commercial real estate loans and $2.5 million of commercial business loans that were accruing interest as substandard for regulatory purposes. Special mention loans at December 31, 2006 and 2005 totaled $49.6 million and $23.9 million, respectively.

Allowance for Loan Losses. In evaluating the adequacy of the allowance for loan losses and determining the related provision for loan losses, if any, management considers: (1) historical loss

experience and change in the size and mix of the overall portfolio composition, (2) specific allocations based upon probable losses identified during the review of the portfolio, (3) delinquency trends in the portfolio and the composition of non-performing loans, including the percent of non-performing loans with supplemental mortgage insurance, and (4) subjective factors, including local and general economic business factors and trends, industry and interest rate trends, new lending products and changes in underwriting criteria and portfolio concentrations. Larger loans, typically secured by commercial real estate, that exhibit probable or observed credit weaknesses are subject to individual review. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. While we use available information to recognize inherent losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions and other factors and the impact of such changes on the Bank’s borrowers. The allowance for loan losses totaled $39.9 million at December 31, 2006, or .54% of total loans receivable, exclusive of loans held for sale, and $36.5 million, or .51% of total loans receivable at December 31, 2005. An analysis of the changes in the allowance for loan losses for the years indicated is presented in the table below.

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Balance at beginning of year	$	36,495			36,255			34,555			19,483			19,607
Charge-offs:
One- to four-family		(397	)		(113	)		(241	)		(67	)		(78	)
Equity lines of credit and
home equity loans		(4,153	)		(1,030	)		(244	)		(44	)		(93	)
Multi-family		—			—			(174	)		—			—
Commercial real estate		(344	)		(667	)		(41	)		—			—
Constuction		—			—			—			—			—
Land		—			—			—			—			—
Commercial business loans		(398	)		(117	)		(311	)		(148	)		(424	)
Consumer		(44	)		(121	)		(80	)		(110	)		(22	)

		(5,336	)		(2,048	)		(1,091	)		(369	)		(617	)

Recoveries:
One- to four-family		39			96			54			29			60
Equity lines of credit and
home equity loans		431			132			19			26			10
Multi-family		—			—			93			—			—
Commercial real estate		21			7			8			—			15
Construction		—			—			—			—			—
Land		—			—			—			—			—
Commercial business loans		81			51			76			11			106
Consumer		6			22			29			4			2

		578			308			279			70			193

Charge-offs, net of recoveries		(4,758	)		(1,740	)		(812	)		(299	)		(424	)
Provision for loan losses		3,900			1,980			1,215			—			300
Additions related to acquisitions		4,294			—			1,297			15,371			—

Balance at end of year	$	39,931			36,495			36,255			34,555			19,483

Net charge-offs to average loans
outstanding		.06	%		.02			.01			.01			.01
Allowance for loan losses to
total loans receivable,
exclusive of one- to
four-family loans held for sale		.54			.51			.53			.54			.44
Allowance for loan losses to
total non-performing loans		60.06			117.12			115.18			105.39			76.72

The following table sets forth our allocation of allowance for loan losses. This allocation is based on management’s subjective estimates. The amount of reserves allocated to a particular category may not be indicative of actual future losses, and amounts allocated to particular categories may change from year to year based on changes in management’s assessment of the risk characteristics of the loan portfolio. During 2006, we refined the methodology we use to evaluate the impact of the various factors described above in establishing allowance allocations for each loan category. The portion of the reserve that is unallocated reflects management’s recognition of the imprecision in measuring and estimating loss when evaluating reserves for individual loans or categories of loans. The allowance allocation as a percentage of one- to four-family loans was relatively unchanged from December 31, 2005 and the decrease in the allocation amount is primarily related to portfolio shrinkage. At December 31, 2006, the

allowance allocation amount and as a percentage of equity lines of credit and home equity loans was up significantly compared to December 31, 2005 due to the higher level of non-performing loans and delinquencies and a much higher level of charge-offs in 2006, the increased risk characteristics in the portfolio related to new products, the increase in high LTV loans in the loan mix, and changes in underwriting criteria. The allowance allocations as a percentage of the commercial real estate, and commercial business portfolios were lower, reflecting a healthy corporate sector environment, very low levels of non-performing loans, excellent delinquency trends and extremely low levels of net charge-offs, particularly in the commercial real estate portfolio. The allowance allocations as a percentage of the multi-family, construction and land portfolios were also lower, reflecting very low levels of non-performing loans and delinquencies and another year of no charge-offs in these portfolios. We have not experienced any charge-offs in the construction and land portfolios in the last five years. The increase in the allowance allocation amounts for the land, construction and commercial business loans is due to portfolio growth. The decrease in the allowance amounts for the multi-family and commercial real estate portfolios was primarily due to the lower percentage allocations for the reasons described above offsetting the impact of growth in these portfolios.

	At December 31,
	2006					2005					2004					2003					2002
	Allowance		Loan category as % of Total Loans			Allowance		Loan category as % of Total Loans			Allowance		Loan category as % of Total Loans			Allowance		Loan category as % of Total Loans			Allowance		Loan category as % of Total Loans
	(Dollars in thousands)

One- to four-family	$	8,505		53.87	%	$	9,009		59.03	%	$	8,627		58.69	%	$	8,594		61.33	%	$	9,062		79.02	%
Equity lines of credit
and home equity
loans		13,248		17.47			7,338		18.67			7,087		19.42			5,740		15.18			2,296		9.56
Multi-family		3,790		10.77			4,198		9.69			3,912		9.40			3,721		9.78			2,030		5.90
Commercial real
estate		7,348		8.44			9,970		6.83			10,610		6.93			11,304		8.20			2,846		3.25
Construction		1,573		2.61			1,371		1.52			1,691		1.96			759		1.74			426		.76
Land		2,466		4.09			2,145		2.38			1,157		1.35			870		1.15			531		.92
Commercial
business		2,432		2.67			1,971		1.80			2,180		2.14			2,087		2.02			397		.47
Consumer		87		.08			46		.08			47		.11			191		.60			80		.12
Unallocated
reserve		482		N/A			447		N/A			944		N/A			1,289		N/A			1,815		N/A

Total	$	39,931		100.00	%	$	36,495		100.00	%	$	36,255		100.00	%	$	34,555		100.00	%	$	19,483		100.00	%

At December 31, 2006, 17% of our non-performing residential loans carried private mortgage insurance or government guarantees and the average loan-to-value ratio on the one- to four-family, equity lines of credit and home equity non-performing loans without supplemental mortgage insurance was 86%. Our net income could be affected if our estimate of the amount of loan loss that may be incurred is materially different than actual results, which could require an additional provision for loan losses and a respective charge to earnings. We believe the allowance for loan losses is adequate at December 31, 2006. However, future adjustments to the allowance may be necessary based on changes in economic conditions and the impact of such changes may have on our borrowers.

Investment Activities

Our strategy is to use our investment and mortgage-backed securities portfolios as stable sources of interest income and to provide flexibility in managing our interest rate risk and liquidity needs. For this reason, we keep our investment portfolios relatively short-term in nature and seek to limit exposure to credit risk. These portfolios represented a combined 17.4% of our total assets at December 31, 2006 compared to 21.0% at December 31, 2005. We maintain a majority of our investment and mortgage-backed securities in an available-for-sale portfolio, and we may sell these securities for liquidity needs, to alter asset/liability management strategies or to manage risk-based capital levels. The classification of investments and mortgage-backed securities as held to maturity, available for sale or trading is made at the time of purchase based upon management’s intent at that time.

At December 31, 2006, our investment securities classified as available for sale had a fair market value of $530.0 million and a cost basis of $529.3 million. Mortgage-backed securities available for sale had a fair value of $1.20 billion with a cost basis of $1.21 billion. At December 31, 2006, we had $212.3 million of mortgage-backed securities in a held to maturity portfolio in which the loans underlying these securities are loans we originated and swapped into mortgage-backed securities. See “Note 4, Mortgage-Backed Securities Available for Sale and Held to Maturity” in “Item 8. Financial Statements and Supplementary Data,” for further information regarding our balance sheet restructuring.

We owned $146.4 million of stock in the Federal Home Loan Bank of Chicago, or FHLBC, at December 31, 2006, which is carried at cost, representing 1.3% of total assets and 13.7% of stockholders’ equity. At December 31, 2006, we were required to hold $107.7 million of stock, based on our outstanding credit obligations to the FHLBC. We may, subject to the regulatory and capital constraints of the FHLBC, redeem at par any capital stock greater than our required investment. While our voluntary investment in FHLBC stock yielded us a higher than market return in past years, the current yield on this investment no longer represents an attractive rate compared to alternative investments. In mid-2004, we began reducing our voluntary FHLBC stock position at the recommendation of our asset liability committee (“ALCO”) in order to lower the investment concentration that resulted from our 2003 acquisitions. We redeemed $31.9 million of FHLBC stock in 2006, $125.6 million in 2005 and $125.7 million in 2004. We expect to redeem any remaining excess investment if and when the FHLBC allows further redemptions. See “Regulation and Supervision-Federal Home Loan Bank System.”

The following table sets forth certain information regarding the carrying value of our investment and mortgage-backed securities portfolios at the dates indicated.

	At December 31,
	2006		2005		2004
	(Dollars in thousands)
Investment securities available
for sale:
U.S. Government securities	$	128,805		119,487		118,217
Municipal securities		50,316		20,082		9,565
U.S. Agency securities		208,829		238,221		154,871
Asset-backed securities		14,468		15,942		19,988
Corporate debt securities		7,000		6,551		7,320
Bank trust preferred securities		91,694		61,922		61,928
GSE preferred stock and other		28,886		12,947		17,070

Total investment securities	$	529,998		475,152		388,959

Stock in FHLB of Chicago	$	146,407		165,663		278,916

Mortgage-backed securities
Available for sale	$	1,195,494		1,313,409		948,168
Held to maturity		212,302		243,161		245,021

Total mortgage-backed
securities	$	1,407,796		1,556,570		1,193,189

The table below sets forth information regarding the carrying value and weighted average yields based on amortized cost and expected maturities for our investment and mortgage-backed securities.

	At December 31, 2006
	One Year or Less				1 to 5 Years						5 to 10 Years						More than 10 Years						Total Investment Securities
	Carrying Value		Weighted Average Yield		Carrying Value			Weighted Average Yield			Carrying Value			Weighted Average Yield			Carrying Value			Weighted Average Yield			Average Life in Years		Carrying Value			Fair Value			Weighted Average Yield
	(Dollars in thousands)
U.S. Government
securities	$	44,516	3	.86%		$	84,289		4	.16%		$	—			—		$	—			—%		1.34		$	128,805			128,805		4	.05%
Municipal securities⁽⁵⁾		1,816	4	.11			11,914		3	.88			29,567		3	.88			7,018		4	.26		7.42			50,316			50,316		3	.94
U.S. Agency
securities		59,420	3	.63			149,410		4	.06			—			—			—			—		1.57			208,829			208,829		3	.94
Asset-backed
securities		12,500	5	.75			1,968		7	.08			—			—			—			—		.062			14,468			14,468		5	.93
Corporate debt
securities		6,233	6	.23			767		34	.09			—			—			—			—		.70			7,000			7,000		9	.28
Bank trust preferred
securities		—		—			—			—			20,917		7	.15			70,777		6	.98		22.87			91,694			91,694		7	.02
Marketable equity securities:
GSE preferred
stock		—		—			—			—			—			—			27,935		6	.07		—			27,935			27,935		6	.07
Other		—		—			—			—			—			—			951		1	.47		—			951			951		1	.47
Stock in FHLB of
Chicago⁽¹⁾⁽²⁾		—		—			—			—			—			—			146,407		3	.10		—			146,407			146,407		3	.10
Mortgage-backed
securities⁽³⁾:
Available for sale⁽⁴⁾		73,485	4	.43			1,045,831		4	.73			76,178		4	.91			—			—		2.95			1,195,494			1,195,494		4	.72
Held to maturity⁽⁴⁾		—		—			212,302		4	.66			—			—			—			—		4.09			212,302			205,620		4	.66

Total	$	197,970	4	.20%		$	1,506,481		4	.63%		$	126,662		5	.04%		$	253,088		4	.54%		3.52		$	2,084,201		$	2,077,519		4	.60%

⁽¹⁾

Marketable equity securities and stock in the FHLBC with no stated maturity are included in the “More than 10 Years” category. These securities are excluded in the calculation of average life. Actual repricings and yields of the securities may differ from that reflected in the table depending upon actual interest rates and callable features of those investments.

⁽²⁾

The yield reflects the dividend declared for the fourth quarter of 2006.

⁽³⁾

Mortgage-backed securities available for sale and held to maturity are categorized for maturity purposes by their individual weighted average lives.

⁽⁴⁾

The yields to maturity of mortgage-backed securities are based upon estimated future cash flow and prepayments. The yields on these securities may differ from that reflected in the table depending upon actual interest rates and prepayment experience.

⁽⁵⁾

The yields exclude any tax equivalent adjustment.

The bank trust preferred securities shown in the tables above represent investments in several different pools of collateralized debt securities consisting of primarily 30-year capital securities issued by various banks, thrifts and insurance companies. The underlying pool of issuers of the collateralized debt securities are well diversified as to asset size and geography. These securities are primarily LIBOR-indexed floating-rate securities and contain an issuer call provision at par anytime after five years from the issuance date. The individual issuers of trust preferred securities have the ability to defer interest payments for up to 20 consecutive quarters in certain circumstances. At December 31, 2006, the $91.7 million of bank trust preferred securities classified as available for sale had a cost basis of $91.2 million.

During 2004, we recorded a $2.0 million other-than-temporary impairment on two Freddie Mac floating-rate preferred stock securities with an aggregate carrying value of $8.8 million. We recorded the write-down because the current yield on these securities was below market interest rates, the fair value was below cost for an extended period, and a recovery in fair value was not assumed within a reasonably short period of time. We determined that an impairment charge on these securities was not necessary during 2006 and 2005.

Investment Subsidiary. The Bank has a wholly-owned subsidiary organized as a Nevada corporation that was acquired in the St. Francis acquisition. This subsidiary holds and manages a portfolio of our investment securities that are included in the tables above. At December 31, 2006, the Bank’s total investment in the Nevada subsidiary was approximately $448.5 million, and the subsidiary had assets of $448.9 million consisting primarily of mortgage-backed securities.

Wisconsin does not require consolidated tax returns and because the investment subsidiary is out of state, its income has not been subject to state income tax in Wisconsin. Representatives of the Wisconsin Department of Revenue have indicated that the Department may revoke its previously issued favorable tax rulings relating to such Nevada subsidiaries, even though there has not been any intervening change in law. The Department also has implemented a program for the audit of financial institutions operating in Wisconsin that have subsidiaries incorporated and located in Nevada and is asserting a basis for imposition of Wisconsin income taxes on income from those operations. Although the Bank is not currently under audit by the Department, we are in discussions with the Department concerning an agreement to finalize prior years’ tax liabilities relating to the Nevada subsidiary that remain subject to audit, which, if agreement is reached, may among other things place certain limitations on the operations of the Nevada subsidiary in future periods.

Other Investments. In addition to our investment securities and mortgage-backed securities portfolios, we maintain a portion of our assets in more liquid investments for daily liquidity management. Our liquid investments include interest-bearing deposits, primarily at the Federal Home Loan Bank of Chicago, federal funds sold and U.S. Government and federal agency obligations. We invest overnight federal funds with two large commercial banks in Chicago, based upon periodic review of these institutions’ financial condition. We generally limit overnight federal funds sold investments to $100.0 million at any one institution.

Deposits

We offer a variety of deposit accounts having a wide range of interest rates and terms. Our deposits consist of passbook accounts, interest-bearing and non-interest bearing checking accounts, money market and certificate accounts. We rely primarily on competitive pricing policies, advertising, and customer service to attract and retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. At December 31, 2006, core deposits, defined as commercial and non-interest bearing checking accounts, interest-bearing checking accounts, money market accounts and passbooks, accounted for approximately 49.4% of our total deposits. While this core deposit ratio is lower than our core deposit ratio of 53.4% at December 31, 2005, reflecting our pricing strategies in the face of rising interest rates during the year, we continue to benefit from a favorable core deposit ratio.

The following table sets forth the composition of deposits by type at the dates indicated and the change in the dollar amount of our deposits for the periods shown:

	At or For the Year Ended December 31, 2006									At or For the Year Ended December 31, 2005								At or For the Year Ended December 31, 2004
	Amount			% of Deposits			Increase (Decrease)			Amount		% of Deposits			Increase (Decrease)			Amount		% of Deposits
	(Dollars in thousands)
Commercial checking	$	300,624			4	.4%	$	41,992		$	258,632		4	.2%	$	19,383		$	239,249		4	.0%
Non-interest bearing checking		303,480			4	.3		12,018			291,462		4	.7		40,893			250,569		4	.2
Interest-bearing checking		739,149			10	.5		(77,238	)		816,387		13	.2		(155,622	)		972,009		16	.4
Commercial money markets		105,783			1	.5		45,719			60,064		1	.0		(4,746	)		64,810		1	.1
Money markets		900,959			12	.8		285,679			615,280		9	.9		3,773			611,507		10	.3
Passbooks		1,113,980			15	.9		(154,700	)		1,268,680		20	.4		(130,419	)		1,399,099		23	.6

Total core deposits		3,463,975			49	.4		153,470			3,310,505		53	.4		(226,738	)		3,537,243		59	.6
Certificates of deposit		3,554,317			50	.6		668,319			2,885,998		46	.6		490,393			2,395,605		40	.4
Unamortized premium		(282	)			—		(1,282	)		1,000			—		(1,860	)		2,860		—

Total deposits	$	7,018,010			100	.0%	$	820,507		$	6,197,503		100	.0%	$	261,795		$	5,935,708		100	.0%

The following table sets forth the distribution and the weighted-average interest rates of our average deposits for the years indicated:

	Year Ended
	December 31, 2006							December 31, 2005								December 31, 2004
	Average Balance		Percent of Total Deposits			Weighted Average Rate		Average Balance		Percent of Total Deposits			Weighted Average Rate			Average Balance		Percent of Total Deposits			Weighted Average Rate
	(Dollars in thousands)
Commercial checking	$	295,021		4.33	%		—	$	266,948		4	.40%			—	$	236,300		4	.15%			—
Non-interest bearing checking		285,961		4.20			—		257,524		4	.24			—		226,661		3	.98			—
Interest-bearing checking		763,530		11.22			1.06		860,332		14	.17		0	.93		824,603		14	.49		0	.84
Commercial money markets		84,846		1.25			3.88		75,911		1	.25		2	.39		72,062		1	.27		1	.13
Money markets		719,439		10.57			2.98		656,092		10	.81		1	.77		690,950		12	.14		0	.76
Passbooks		1,237,691		18.18			0.69		1,347,958		22	.21		0	.58		1,364,904		24	.00		0	.58

Total checking, money market
and passbook accounts		3,386,488		49.75			1.22		3,464,765		57	.08		0	.85		3,415,480		60	.03		0	.62

Certificates with original
maturities of:
6 months or less		388,929		5.71			3.93		419,368		6	.91		2	.49		406,613		7	.15		1	.25
7 to 12 months		1,514,043		22.25			4.40		830,933		13	.69		3	.13		730,816		12	.85		2	.26
Greater than 1 to 3 years		1,327,713		19.50			4.10		1,159,786		19	.11		2	.98		956,551		16	.81		2	.41
Greater than 3 years		190,115		2.79			4.19		195,083		3	.21		4	.19		179,802		3	.16		4	.36

Total certificates of
deposits		3,420,800		50.25			4.22		2,605,170		42	.92		3	.04		2,273,782		39	.97		2	.31

Total average deposits
	$	6,807,288		100.00	%		2.73	$	6,069,935		100	.00%		1	.79	$	5,689,262		100	.00%		1	.29

The following table presents, by various interest rate categories, the amount of our certificates of deposit outstanding at December 31, 2006, 2005, and 2004, and the periods to maturity of the certificates of deposit outstanding at December 31, 2006. Certificates of deposit in our portfolio represent predominately retail deposits attracted from households in our market areas as we have not sought to attract internet certificates of deposit nor have we pursued brokered certificates of deposit as a funding source. For this reason we believe our certificate of deposit portfolio reflects a stable part of our deposit base.

	At December 31,						Time to Maturity at December 31, 2006
	2006		2005		2004		Within One Year		1 to 3 Years		Over 3 Years		Total
	(Dollars in thousands)
Certificates of deposit:
Up to 2.99%	$	52,119		491,212		1,753,439	$	41,665		10,350		104		52,119
3.00% to 3.99%		406,470		1,505,743		394,822		280,659		116,743		9,068		406,470
4.00% to 4.99%		1,377,666		852,544		180,784		1,166,747		169,745		41,174		1,377,666
5.00% and greater		1,718,062		36,499		66,560		1,295,565		416,336		6,161		1,718,062

Total	$	3,554,317		2,885,998		2,395,605	$	2,784,636		713,174		56,507		3,554,317

At December 31, 2006, we had outstanding $1.04 billion in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:

Period to Maturity	Amount
	(Dollars in thousands)
Three months or less	$	343,910
Over three through six months		249,082
Over six through 12 months		231,730
Over 12 months		219,707

Total	$	1,044,429

Borrowed Funds and Junior Subordinated Debentures

The following table is a summary of the Company's borrowed funds and junior subordinated debentures at December 31, 2006 and 2005. The unamortized premium (discount) was recorded as a result of purchase accounting adjustments for the acquisitions of St. Francis in 2003 and EFC in 2006.

	At December 31, 2006							At December 31, 2005
	Interest Rate Range	Weighted Average Rate			Amount			Weighted Average Rate			Amount
	(Dollars in thousands)
Fixed-rate advances from FHLBC
due:
Within 1 year	2.76 - 5.14%		4	.21%	$	945,000			3	.48%	$	510,000
1 to 2 years	2.78 - 5.24		4	.44		564,000			4	.19		767,000
2 to 3 years	3.53 - 4.85		4	.52		36,000			4	.70		713,000
3 to 4 years	4.28 - 4.28		4	.28		50,000			5	.43		76,000
4 to 5 years	4.36 - 4.36		4	.36		10,000			3	.85		155,000

Total fixed-rate advances	2.76 - 5.24		4	.30		1,605,000			4	.21		2,221,000

Adjustable-rate advances from FHLBC due:
Within 1 year	5.29 - 5.52		5	.33		550,000			4	.44		150,000
1 to 2 years	—			—		—			4	.39		100,000

Total adjustable-rate
advances	5.29 - 5.52		5	.33		550,000			4	.42		250,000

Total advances from FHLBC	2.76 - 5.52		4	.56		2,155,000			4	.23		2,471,000

Unsecured term bank loan			6	.32		147,500			5	.14		63,000
Other borrowings			4	.91		470,750			4	.20		523,379
Junior subordinated debentures			6	.92		67,011			6	.05		67,011
Unamortized premium				—		(58	)			—		290

Total borrowed funds and
junior subordinated
debentures			4	.77%	$	2,840,203			4	.28%	$	3,124,680

Federal Home Loan Bank of Chicago Advances. Although deposits are our primary source of funds, our membership in the FHLBC has provided us another attractive funding source. We obtain advances from the FHLBC secured by our capital stock investment in the FHLBC and a blanket pledge of certain of our residential mortgage loans. See “Regulation and Supervision — Federal Home Loan Bank System.” We borrow under several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLBC will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLBC. The maximum amount of FHLBC advances to a member institution generally is reduced by secured borrowings from any other source. At December 31, 2006, the Bank’s FHLBC advances totaled $2.16 billion, or 19.4% of our total assets, compared to $2.47 billion, or 23.6% of total assets at December 31, 2005.

Included in FHLBC advances at December 31, 2006 are $40.0 million of fixed-rate advances with original scheduled maturities of 10 years at interest rates ranging from 5.12% to 5.24%, which are callable quarterly at the discretion of the FHLBC until maturity and are currently expected to be put which may require us to refinance these borrowings. At inception, we receive a lower cost of borrowing on such advances than on similar-termed non-callable advances, in return for granting the FHLBC the option to call the advances prior to their final maturity. If called, the FHLBC will provide replacement funding, should we want or need to refinance the borrowing, at the then prevailing market rate of interest for the remaining term to maturity of the advances, subject to standard terms and conditions.

The interest rate on $100.0 million of adjustable-rate advances is tied to the Prime rate and ranges from Prime minus 280 basis points to prime minus 287 basis points. At December 31, 2006, we had a $50.0 million adjustable-rate advance that is indexed at three-month London interbank offering rate (“LIBOR”) minus 6 basis points. The remaining $400.0 million of adjustable-rate advances is indexed at the FHLBC effective federal funds rate minus 3 basis points, which was 5.29% at December 31, 2006. This borrowing was funded in late December as part of the balance sheet restructuring transaction and was repaid in January 2007 with the proceeds from the sale of investments and mortgage-backed securities.

Reverse Repurchase Agreements. We enter into sales of securities under agreements to repurchase the identical securities (“reverse repurchase agreements”) with nationally recognized primary securities dealers. These reverse repurchase agreements are treated as financings and are reflected on our balance sheet as other borrowings. The securities underlying the agreements are delivered to the

dealers who arrange the transaction and continue to be reflected as assets on our balance sheet. The following table presents certain information regarding reverse repurchase agreements as of the end of and for the periods indicated:

	Year Ended December 31,
	2006			2005		2004
	(Dollars in thousands)
Balance at end of period	$	400,000			500,000		300,000
Maximum month-end balance		550,000			500,000		300,000
Average balance		442,260			394,931		195,492
Weighted average rate at end of
period		4.94	%		4.24		2.42
Weighted average rate on average
balance		4.67			3.41		1.69

At December 31, 2006, $300 million of the reverse repurchase agreements were floating-rate and have maturities ranging from three months to four years. The interest rate on $75 million of these agreements is tied to Prime and ranges from Prime minus 280 basis points to Prime minus 284 basis points. The remaining $225 million have interest rates ranging from three-month LIBOR minus 26 basis points to three-month LIBOR minus 58.5 basis points. The LIBOR-indexed repurchase agreements are putable at the discretion of the lender quarterly in 2007 and are currently expected to be put which may require us to refinance these borrowings. At December 31, 2006, reverse repurchase agreements were collateralized by investment and collateralized mortgage obligation (“CMO”) securities with a carrying value of $429.7 million and a market value of $425.8 million. We intend to continue to use reverse repurchase agreements as an additional funding source.

Retail Repurchase Agreements. For certain customers with significant funds available for deposit at the Bank, we offer “retail” repurchase agreements under which we collateralize our obligation to repay the customer funds with U.S. government or agency securities. The retail repurchases, which totaled $69.8 million at December 31, 2006, are collateralized by three U.S. government agency and ten CMO securities with a carrying and fair value of $74.7 million.

Unsecured Term Bank Loan and Line of Credit. During 2006, we twice refinanced the unsecured term bank loan and revolving line of credit that we maintain from an unaffiliated lender to increase our holding company borrowings. The first refinancing was to fund a portion of our acquisition of EFC Bancorp, Inc. and the second quarter refinancing was to fund a portion of our stock buyback program.

We increased our unsecured term bank loan from $63.0 million outstanding at December 31, 2005, to $155.0 million during 2006 and increased our revolving line of credit from $55.0 million to $60.0 million. We made a scheduled principal payment on the term loan of $7.5 million on December 31, 2006 reducing the balance to $147.5 million. At December 31, 2006 and 2005, there were no amounts outstanding under the line. The loan agreement provides for an interest rate on the term loan at our option of one, two, three, six or twelve-month LIBOR plus 95 basis points. The term loan is unsecured and matures on December 31, 2015, with the next scheduled payment of principal due on December 31, 2007, and annually thereafter. Prepayments of principal are allowed without penalty at the end of any repricing period.

The revolving line of credit is also unsecured, bears an interest rate at our option at Prime minus .50% or one, two, three, six or twelve-month LIBOR plus 80 basis points and matures on June 30, 2007.

The credit agreement for both the unsecured term loan and the secured revolving line of credit contains covenants that, among other things, require the Company to maintain a minimum stockholders’ equity balance and to obtain certain minimum operating results, as well as requiring the Bank to maintain “well capitalized” regulatory capital levels and certain non-performing asset ratios. In addition, the Company has agreed to certain restrictions on additional indebtedness and agreed not to pledge any stock of the Bank or MAF Developments for any purpose.

Junior Subordinated Debentures. In 2005, we issued $67.0 million of junior subordinated debentures through two privately-offered trust preferred financings. This debt, which matures in 30 years and is callable at par in 2010, provides an attractive alternative to equity capital. Interest on the junior subordinated debentures is payable quarterly at a floating rate tied to three-month LIBOR and is tax deductible. At December 31, 2006, the interest rate for $30.9 million of the debentures was 7.11% and for $36.1 million was 6.76%.

Real Estate Development

We engage in the business of purchasing unimproved land for development into residential subdivisions of single-family lots through MAFD, a wholly-owned subsidiary of the Company. We started this business in 1974 and since that time have developed and sold over 6,600 lots in 24 different subdivisions primarily in the western suburbs of Chicago. MAFD typically acts as sole principal or as a joint venture partner in our development projects. Historically, we have provided essentially all of the capital for a joint venture and receive in exchange an ownership interest in the joint venture which entitles us to a market rate of return on invested capital plus a percentage of the profit or loss generated by the project, generally 50-60%, with the exact percentage based upon a number of factors, including characteristics of the venture, the perceived risks involved, and the time to completion. In addition, MAFD from time to time invests in residential real estate projects, either individually or structured as limited partnership investments, managed by unaffiliated parties.

Springbank of Plainfield. Currently, our only active development is our Springbank project. This joint venture project consists of 950 acres in Plainfield, Illinois, located in Will County, southwest of Chicago along the fast-developing I-55 corridor. Delayed receipt of local zoning and plan approvals in 2005 and 2006 has prolonged the original timeline expected for lot sale closings in the project. Based on the current plans for this project, future development costs are currently estimated to be $78.0 million. The investment balance shown in the table above includes land purchases, engineering, survey and other development costs incurred to date. With the recent weakness in new and existing home sales, development of this project is currently expected to continue over the next four to six years.

	At December 31, 2006
Description of Project	Number of Lots Closed to Date		Number of Lot Sales Pending		Lots Remaining For Sale⁽¹⁾		Investment Balance
	(Dollars in thousands)
Springbank of Plainfield
1,599 residential lots; 281 multi-family units and
45.8 acres for commercial development		206		33		1,360	$	74,201
Other⁽²⁾		—		—		—		8,848

							$	83,049

⁽¹⁾	Lots remaining for sale reflects planned single-family lots in the current project that have not yet been sold and does not include commercial or multi-family units. The units are being developed in phases, and lots are generally not offered for sale until unit development is near completion.

⁽²⁾	Reflects investment in 160 acres of unimproved land for potential future development. Development plan has not yet been established.

Regulation and Supervision

General. The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS under the Home Owners’ Loan Act, or the HOLA. In addition, the activities of savings institutions, like us, are governed by the HOLA and the Federal Deposit Insurance Act, or the FDI Act.

We are subject to extensive regulation, examination and supervision by the OTS, as our primary federal regulator, and the FDIC, as the deposit insurer. We are a member of the Federal Home Loan Bank System, or FHLBC System and our deposit accounts are insured up to applicable limits by the Deposit Insurance Fund, or SAIF, managed by the FDIC. We must file reports with the OTS and the FDIC concerning our activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test our compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in

which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on our operations. Certain regulatory requirements applicable to us are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on our business.

Holding Company Regulation. The Company is a non-diversified unitary savings and loan holding company within the meaning of the HOLA. As a unitary savings and loan holding company, the Company generally will not be restricted under existing laws as to the types of business activities in which it may engage, provided that we continue to be a qualified thrift lender, or QTL. See “Federal Savings Institution Regulation — QTL Test.” Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its uninsured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, or the BHC Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. No multiple savings and loan holding company may acquire more than 5% of the voting stock of a company engaged in impermissible activities.

The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved the effect of the acquisition on the institution, the risk to the insurance funds, the convenience and needs of the community and competitive factors.

Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, HOLA does prescribe such restrictions on subsidiary savings institutions, as described below. We must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of uninsured subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Federal Savings Institution Regulation

Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core capital) ratio for institutions receiving the highest rating on the CAMEL financial institution rating system, and a 4% leverage (core capital) ratio for all other institutions, like the Bank, and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage (core capital) ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier I risk-based capital standard. The OTS regulations also require that, in meeting the leverage ratio, tangible and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively.

At December 31, 2006 and 2005, the Bank was in compliance with the current capital requirements as follows:

	At December 31, 2006					At December 31, 2005
	Amount		Percent of Assets			Amount		Percent of Assets
	(Dollars in thousands)
Stockholder's equity of the Bank	$	1,191,066		10	.81%	$	1,012,304		9	.72%

Tangible capital of the Bank	$	789,888		7	.44%	$	715,105		7	.07%
Tangible capital requirement		159,286		1	.50		151,807		1	.50

Excess	$	630,602		5	.94%	$	563,298		5	.57%

Core capital of the Bank	$	789,888		7	.44%	$	715,105		7	.07%
Core capital requirement		424,763		4	.00		404,818		4	.00

Excess	$	365,125		3	.44%	$	310,287		3	.07%

Core and supplementary capital of the
Bank	$	804,554		11	.01%	$	735,996		11	.15%
Risk based capital requirement		584,478		8	.00		528,112		8	.00

Excess	$	220,076		3	.01%	$	207,884		3	.15%

Total Bank assets	$	11,020,484				$	10,417,886
Adjusted total Bank assets		10,619,074					10,120,457
Total risk weighted Bank assets		7,707,379					6,898,826
Adjusted total risk weighted Bank
assets		7,305,969					6,601,398

The following table reflects the adjustments required to reconcile the Bank’s stockholder’s equity to the Bank’s regulatory capital at December 31, 2006:

	Tangible			Core			Risk-Based
	(Dollars in thousands)
Stockholder's equity of the Bank	$	1,191,066		$	1,191,066		$	1,191,066
Goodwill and core deposit intangibles		(407,312	)		(407,312	)		(407,312	)
Non-permissible subsidiary deduction		(400	)		(400	)		(400	)
Non-includible purchased mortgage
servicing rights		(1,755	)		(1,755	)		(1,755	)
Adjustment for available for
sale securities		8,289			8,289			8,289
Recourse on loan sales		—			—			(25,265	)
General allowance for loan losses		—			—			39,931

Regulatory capital of the Bank	$	789,888		$	789,888		$	804,554

Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. For this purpose, a savings association is placed in one of the following five categories based on its capital:

o “well capitalized” if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted assets is at least 6%, its ratio of core capital to total assets is at least 5%, and it is not subject to any order or directive by the OTS to meet a specific capital level;

o “adequately capitalized” if its ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%, its ratio of core capital to total assets is at least 4% (3% if the institution receives highest rating on the CAMELS financial institution rating system) and it does not meet the definition of “well capitalized”;

o “undercapitalized” if its ratio of total capital to risk-weighted assets is less than 8%, its ratio of Tier I (core) capital to risk-weighted assets is less than 4% or its ratio of core capital to total assets is less than 4% (3% or less for institutions with highest rating on the CAMELS financial institution rating system);

o “significantly undercapitalized” if its ratio of total capital to risk-weighted assets is less than 6%, its ratio of Tier I (core) capital to risk-weighted assets is less than 3% or its ratio of core capital to total assets is less than 3%; or

o “critically undercapitalized” if its tangible capital to assets ratio is equal to or less than 2%.

Subject to a narrow exception, the OTS is required to appoint a receiver or conservator within specified time frames for an institution 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 savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, investment activities, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2006, the Bank met the criteria for being considered “well capitalized.”

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund, or DIF, of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The Bank’s deposits, therefore, are subject to FDIC deposit insurance assessment.

The FDIC recently amended its risk-based deposit assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005, or the Reform Act. Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include more than 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.

The FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.5% of estimated insured deposits, in contrast to the statutorily fixed ratio of 1.25% under the old system. The ratio, which is viewed by the FDIC as the level that the funds should achieve, was established by the agency at 1.25% for 2007. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits. The Reform Act also provided for a one-time credit for eligible institutions based on their assessment base as of December 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits can be used to offset future assessments until exhausted. The Bank’s one-time credit is estimated by the FDIC to be approximately $6.5 million.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980‘s by the Financing Corporation, or FICO, to recapitalize the predecessor to the Savings Association Insurance Fund. The payment is established quarterly and during the calendar year ending December 31, 2006 averaged 1.28 basis points of assessable deposits.

The Bank’s total assessment paid for this period (including the FICO payments) was $907,000. The FDIC has the authority and is expected to increase insurance assessments as described above. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management can not predict what insurance assessment rates will be in the future.

Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. Our management does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Community Reinvestment. Under the Community Reinvestment Act, or the CRA, every insured depository institution, including the Bank, has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community that are consistent with the CRA. Institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three

areas: (a) lending, which evaluates the institution’s record of making loans in its assessment areas; (b) investment, which evaluates the institution’s record of investing in community development projects, affordable housing and programs benefiting low- or moderate-income individuals and businesses; and (c) service, which evaluates the institution’s delivery of services to residents of its communities through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take this record into account in evaluating certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions publicly disclose their CRA ratings. The Bank received an “outstanding” rating on its CRA performance evaluation prepared by the OTS dated July 18, 2005, the most recent report we have received.

Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act, or the GLB Act, significantly reformed various aspects of the financial services business, including, but not limited to: (i) the establishment of a new framework under which bank holding companies and, subject to numerous restrictions, banks can own securities firms, insurance companies and other financial companies; (ii) subjecting banks to the same securities regulation as other providers of securities products; and (iii) prohibiting new unitary savings and loan holding companies from engaging in nonfinancial activities or affiliating with nonfinancial entities.

The provisions in the GLB Act permitting full affiliations between bank holding companies or banks and other financial companies do not increase the Company’s authority to affiliate with securities firms, insurance companies or other financial companies. As a unitary savings and loan holding company, the Company was generally permitted to have such affiliations prior to the enactment of the GLB Act. It is expected, however, that these provisions will benefit the Company’s competitors.

The prohibition on the ability of new unitary savings and loan holding companies to engage in nonfinancial activities or affiliating with nonfinancial entities generally applies only to savings and loan holding companies that were not, or had not submitted an application to become, savings and loan holding companies as of May 4, 1999. Since the Company was treated as a unitary savings and loan holding company prior to that date, the GLB Act will not prohibit the Company from engaging in nonfinancial activities or acquiring nonfinancial subsidiaries. However, the GLB Act generally restricts any nonfinancial entity from acquiring the Company unless such nonfinancial entity was, or had submitted an application to become a savings and loan holding company as of May 4, 1999.

The GLB Act imposed new requirements on financial institutions with respect to customer privacy by generally prohibiting disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. The Company has developed policies and procedures to comply with the implementing regulations promulgated by the OTS and the other federal regulators with regard to customer privacy.

To the extent the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves.

USA Patriot Act of 2001/Bank Secrecy Act. The USA Patriot Act of 2001, or the Patriot Act, was enacted in response to the terrorist attacks that occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. By way of amendments to the Bank Secrecy Act, the Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. The OTS is required to consider a financial institution’s compliance with the Bank Secrecy Act when reviewing applications from financial institutions.

Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 2006, our legal lending limit on loans to any one borrower was $122.0 million. At December 31, 2006, the Bank’s largest amount of loans to any one related borrower group was $68.4 million.

QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2006, the Bank maintained 83.3% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test.

Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash out merger and other distributions charged against capital, if the institution would not be well-capitalized after the distribution. The regulations provide that an institution (i) which is not eligible for expedited treatment under the application processing rules of the OTS; or (ii) for which its total amount of capital distributions for the applicable calendar year exceeds its net income for that year to date plus its retained income for the preceding two years; or (iii) which would not be at least adequately capitalized following the distribution; or (iv) which would violate a prohibition contained in a statute, regulation or agreement between the institution and the OTS by performing the capital distribution, must submit an application to the OTS to receive approval of the capital distribution. Under any other circumstances, the Bank would be required to provide a written notice to the OTS 30 days prior to the capital distribution. As of December 31, 2006, the Bank’s capital distributions have met the foregoing conditions and no prior applications to the OTS have been required.

Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the Bank’s latest quarterly thrift financial report. The assessments paid by the Bank were $1.6 million, $1.5 million and $1.3 million in 2006, 2005 and 2004, respectively.

Branching. OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. Generally, a federal savings institution which meets the QTL test, may establish or acquire branches in states other than its home state. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions.

Transactions with Related Parties. The Bank’s authority to engage in transactions with related parties or “affiliates” (e.g., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act, or FRA, and Regulation W thereunder. Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible

for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Bank’s authority to extend credit to executive officers, directors and 10% shareholders, as well as entities such persons control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are generally required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to such persons based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed.

Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all “institution affiliated parties,” including certain shareholders, and any 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 for removal of officers and/or directors to institution of proceedings for receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and may amount to as much as $1 million per day in certain circumstances. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness, or the Guidelines, and a final rule to implement safety and soundness standards required under the FDI Act. 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 standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings and 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, as required by the FDI Act. The OTS requires that a savings association file a written safety and soundness compliance plan within 30 days of receiving a request for a compliance plan from the OTS.

Consumer Lending Laws. We also are subject to many federal and state consumer protection statutes and regulations including the Equal Credit Opportunity Act, the Fair Housing Act, the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act. Among other things, these acts:

o require lenders to disclose credit terms in meaningful and consistent ways;

o prohibit discrimination against an applicant in any consumer or business credit transaction;

o prohibit discrimination in housing-related lending activities;

o require certain lenders to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;

o require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;

o prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and

o prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.

In addition to private actions by aggrieved borrowers or applicants for actual and punitive damages, the U.S. Department of Justice and other regulatory agencies can take enforcement action seeking injunctive and other equitable relief for alleged violations. The Bank is subject to an Agreed

Consent Order that it entered into on December 30, 2002, to resolve allegations by the Department of Justice that the Bank had violated the fair lending laws based on the level of the Bank’s lending in minority areas during the period 1996-2000. The Bank denied all alleged violations. The Agreed Consent Order requires the Bank to undertake a number of actions over the five year period of 2003-2008 to promote its home mortgage lending in communities with significant minority populations, including:

o Open or acquire two branch offices in minority areas by June 30, 2005.

o Implement a targeted advertising campaign to increase home mortgage lending.

o Provide $10 million in benefits to borrowers under special lending programs to help residents of minority areas achieve home ownership (which may include subsidized interest rates, down payment and closing cost assistance, and Prime rate loans to borrowers with below Prime credit).

o Contribute $500,000 over the five year period 2003-2008 to homebuyer education and counseling programs, and conduct an assessment of the home mortgage credit needs of residents in minority areas.

The Bank is in compliance with all terms of the Order. Since the Order was entered by the court, the Bank has opened two branch offices within minority areas, conducted an assessment of home mortgage credit needs of residents in minority areas, and implemented a targeted marketing campaign to increase mortgage lending. The Bank fully satisfied the $10 million financial benefits requirement in 2003 through special lending programs designed to help minority residents achieve homeownership and is continuing to offer special community lending programs targeted to minority and low-income borrowers in its market areas.

Federal Home Loan Bank System

The Bank is a member of the FHLBC System, which consists of 12 regional Federal Home Loan Banks. The FHLBC 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 advances (borrowings) from the FHLBC, whichever is greater. Regulatory directives, capital requirements and net income of the FHLBC affect its ability to pay dividends to us. In addition, the FHLBs are required to provide funds to cover certain obligations on bonds issued by the Resolution Funding Corporation to fund the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. From an average of 6.125% paid in 2004, the FHLBC has reduced its dividend to 3.10% in 2006.

We currently have an investment in FHLBC stock in excess of our required investment by approximately $38.7 million at December 31, 2006. Excess investments are redeemable at par upon notice to the FHLBC, subject to regulatory or capital constraints of the FHLBC. During 2006, we redeemed $31.9 million of FHLB stock. FHLBC has indicated that it is not currently redeeming additional stock, but we intend to redeem our excess investment if and when redemption opportunities resume.

At December 31, 2006, the Bank had advances from the FHLBC with aggregate outstanding principal balances of $2.16 billion, and the Bank’s investment in FHLBC stock totaled $146.4 million. FHLBC advances must be secured by specified types of collateral and are available to member institutions primarily for the purpose of providing funds for residential housing finance. We also sell mortgages to the FHLBC through the FHLBC’s MPF program. See the discussion under “Secondary Market and Loan Servicing Activities” for more information.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $45.8 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $45.8 million, the reserve

requirement is currently $1,119,000 plus 10% (subject to adjustment by the Federal Reserve Board) against that portion of total transaction accounts in excess of $45.8 million. The first $8.5 million of otherwise reserveable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing 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.

Executive Officers of the Registrant

Information regarding the executive officers of the Company and the Bank are listed below.

Name		Year of Employment	Position and Background
Allen H. Koranda	60	1972	Chairman of the Board and Chief Executive Officer.
Kenneth Koranda	57	1972	Vice Chairman of the Board and President of the Company; President and Director of the Bank. Mr. Koranda is the brother of Allen Koranda.


Jerry A. Weberling	55	1984	Senior Executive Vice President, Chief Financial Officer and Treasurer. Prior to joining the Bank, Mr. Weberling, a CPA, conducted audits of financial institutions, mortgage banking and real estate companies for a large public accounting firm for ten years.
James E. Allen	48	2001	Executive Vice President-Business Banking. Mr. Allen was previously Senior Vice President - Corporate Banking at Old Kent Bank where he worked in northern Illinois commercial markets from 1997 to 2001.


Gerard J. Buccino	45	1990	Executive Vice President-Risk Management. Prior to joining the Bank, Mr. Buccino, a CPA, conducted audits of financial institutions, brokerage and mutual funds for a large public accounting firm where he worked for six years.
Jennifer R. Evans	48	2004	Executive Vice President and General Counsel. Prior to joining the Company, Ms. Evans was a partner/shareholder in the law firm of Vedder, Price, Kaufman & Kammholz, P.C., Chicago, Illinois, where she practiced from 1984 to 2004.



James S. Eckel	51	2003	Executive Vice President-Marketing. Mr. Eckel joined the Bank in conjuction with the acquisition of St. Francis Capital Corp. Prior to that, he held various management positions with St. Francis Bank, most recently as Executive Vice President - Mortgage Banking.
William G. Haider	56	1984	Executive Vice President; President of MAFD.
Michael J. Janssen	47	1989	Executive Vice President-Investor Relations and Taxation.
Edward A. Karasek	53	2003	Executive Vice President-Operations. He was Senior Vice President - Audit and Compliance from December 2003 until January 2006. Prior to joining the Company, Mr. Karasek was involved in internal audit consulting with INARMA. Previously, he was Senior Vice President - Corporate Audit Director for Bank One Corporation from 1998 to 2001.

David W. Kohlsaat	52	1976	Executive Vice President-Administration.
Thomas C. Miers	55	1979	Executive Vice President-Retail Banking.
Sharon M. Wheeler	54	1971	Executive Vice President-Residential Lending.

Employees

We employed a total of 2,152 full-time equivalent employees as of December 31, 2006. Management considers its relationship with its employees to be excellent.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This report, including the discussion in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, contains, and other periodic reports and press releases of the Company may contain, certain forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve certain risks and uncertainties. The Company intends 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 is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. Please see “Risk Factors” below for a discussion of the risks and uncertainties that could affect management’s outlook or future prospects of the Company

Item 1A. Risk Factors

The Company is subject to certain risks. In addition to the factors discussed below, please see the discussion under “Item 7A. Quantitative and Qualitative Disclosure about Market Risk” beginning on page 55. These risks and uncertainties, along with the other information in our Form 10-K, should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.

Unanticipated changes in interest rates and/or continuation of the inverted yield curve environment could reduceour profitability and affect the value of our assets.

Our net interest income, which is our primary source of revenue, depends on the spread between the interest we earn on loans and investments and the interest we pay on deposits and borrowings. For this reason, the level of our earnings is highly susceptible to changes in interest rates which generally impact our interest-earning assets and our interest-bearing liabilities differently. While we actively manage this sensitivity to interest rate risk as a key part of our business strategy, unanticipated changes in interest rates and changes in the yield curve may have a material adverse effect on our results of operations. Changes in the level of interest rates also may negatively affect the level of our mortgage loan originations, the value of our assets and our ability to realize gains from the sale of loans.

In addition, further prolonging of the current inverted treasury yield curve environment may continue to pressure our net interest margin and could have a material adverse effect on our results of operations.

Weakening of the real estate markets in the Chicago and Milwaukee metropolitan areas could have a material adverse effect on us.

With most of our real estate loans concentrated in suburban Chicago and suburban Milwaukee areas, a decline in local economic conditions or declining demand for real estate in these markets could adversely affect the value of the collateral securing our loans and may cause us to suffer loan losses, particularly if loans we originated at higher loan-to value ratios default. For example, recent weakness in housing prices and the slowdown in home purchase activity in our markets have made it more difficult to fully recover on some of our defaulted residential mortgage and home equity loans through the sale of the residential real estate collateral and have increased our cost associated with the sale of foreclosed real estate. A decline in local economic and market conditions may have a greater effect on our earnings and capital than on the earnings and capital of institutions whose real estate loan portfolios are more geographically diverse.

In addition, the residential mortgage business, historically a strong part of our operations, is largely dependent on home sales activity. With the considerable slowdown of home purchases nationwide, the mortgage industry has slowed dramatically. Our mortgage loan origination volumes dropped 23% in 2006 to $1.6 billion, generally in line with the overall decline industry-wide. Until the housing market improves, we expect continued pressure on our one- to four-family loan origination volume and mortgage banking revenues.

High loan-to-value ratios on a portion of our residential mortgage and home equity portfolios expose us togreater risk of loss.

Some of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity, which may lead to a higher incidence of default on these loans. Our product offerings include certain mortgage and home equity loans or lines of credit that allow qualifying

borrowers to obtain loans with combined loan-to-value ratios at origination of up to 100% of the value of the home securing the loan. At December 31, 2006, approximately $428.1 million, or 8%, of our $5.31 billion single-family residential mortgage loan portfolio, including equity lines of credit and home equity loans, had combined loan-to-value ratios in excess of 90% (based on total line available) and no private mortgage insurance. There was an additional approximately $40 million of undrawn amounts remaining available under high CLTV equity lines in our portfolio at December 31, 2006. During 2006, we experienced a higher loss rate on high CLTV loans than our residential portfolio as a whole, and we are likely to continue to experience a higher risk of loss on these loans that we elect to keep in portfolio, since our ability to recover against the collateral is more sensitive to declining property values than for loans with lower combined loan-to-value ratios.

Competition from financial institutions and other financial service providers may adversely affect our growth and profitability.

The financial services business is highly competitive and we experience competition in each of our markets from many other financial institutions. The Chicago metropolitan market, in particular, is regarded as one of the most competitive banking markets in the country due to fragmented market share among many competing institutions which also tends to attract new entrants to the market. We compete with community banks, savings and loan associations, credit unions, mortgage banking firms, mortgage brokers, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other regional, super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of lesser geographic diversification and inability to spread our marketing costs across a broader market.

We compete with these institutions both in attracting deposits and in originating loans. A key part of our strategy is to compete through concentrated marketing in our primary markets with local advertisements, broad product offerings, community support, personal contacts, and flexibility and responsiveness in working with local customers, but competition has made it more difficult for us to grow our customer base without adjusting our pricing. We have experienced increased competition from larger commercial banks which have refocused their marketing efforts on the retail banking customers. In addition, in recent years we have encountered many de novo banks in our market areas that tend to price their loans and deposits aggressively in order to attract customers. Price competition for loans and deposits causes us to earn less on our loans and pay more on our deposits, which reduces net interest income.

Income from our real estate development business may continue to be adversely affected by housing marketconditions and other uncertainties.

Historically, a significant source of our non-interest income for us has been income from our real estate development projects involving the acquisition and development of raw land into residential lots for sale to home builders. We often develop these projects in multiple phases over a period of years and our initial projections regarding the time to completion and development cost involved may prove to be inaccurate. For example, in our Springbank project in Plainfield, Illinois, delays in the approval process, weak housing market conditions and other factors outside our control, have extended the project timeline, increased our development costs and reduced our expected returns on investment over the life of the project. The weakness in new and existing home sales activity that we experienced in 2006, along with softening real estate prices, contributed to significantly lower income from real estate operations in 2006. Without improved housing market conditions, we are likely to continue to experience weaker income from real estate in 2007 and beyond.

Our allowance for loan losses is based on our estimates of future losses inherent in our portfolio, and actual losses we incur could exceed these estimates.

We maintain an allowance for loan losses we deem adequate to cover losses inherent in our portfolio from loans that may not be repaid in their entirety. In evaluating the adequacy of our allowance for loan losses on a quarterly basis, in addition to numerous quantitative factors we take into account, we also consider many qualitative factors, such as general business and economic conditions, general real

estate market trends and other matters which are by their nature more subjective and susceptible to change. In addition, our estimates of the risk of loss and amount of loss on some of our commercial loans require us to assess our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors outside our control. Because of the degree of uncertainty in the assumptions we make and the factors we consider, the losses we actually incur may exceed our estimates and our allowance for loan losses may prove insufficient to absorb these losses.

Breaches of our computer and network security may result in compromises of information which could have amaterial adverse effect on our business.

We depend heavily in our daily operations on our automated information systems, networks and telecommunications systems which support the evaluation, acquisition, monitoring, collection and administration of our loan and deposit servicing portfolios, general accounting and other management controls. We also outsource some data and payment processing to third parties. While we have implemented extensive policies and procedures designed to limit the impact of system failures or disruptions as well as information security measures to safeguard these systems, technological difficulties or security breaches involving our systems or those of any of our vendors could compromise our ability to protect customer personal information and could interfere with our ability to accurately process and account for customer transactions, and this could potentially expose us to significant loss. In addition, a failure or interruption of these systems or a failure of data integrity could subject us to customer complaints, potential lawsuits or increased regulatory scrutiny and could damage our reputation, making it more difficult for us to compete successfully.

Our ability to service our holding company debt and pay dividends to our shareholders is substantially dependent on dividends from the Bank, and these dividends are subject to regulatory limits.

Since January 1, 2005, we increased debt at our holding company $135 million as a result of acquisitions and as part of our capital management strategy designed to increase shareholder returns. The Company is largely dependent on the receipt of dividends from the Bank in order to service this debt and the availability of dividends from the Bank is limited by various statutes and regulations. In the event that the Bank is unable to pay dividends to us, we may not be able to service our debt, fund additional real estate development activities, complete stock buybacks, if any, or pay dividends on our common stock.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

The Bank is subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, its chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of its deposits. Such regulation and supervision govern the activities in which an institution and its holding company may engage, and are not intended to protect the interests of investors in our common stock. Regulatory authorities have broad discretion in their supervisory and enforcement activities, including the authority to impose restrictions on our operations, to classify our assets which may affect the level of our allowance for loan losses, to limit our dividends or impose higher capital requirements on us, to limit acquisition activities we may propose and to impose penalties for noncompliance. In addition, we are likely to continue to incur significant operational costs related to compliance as the risks and burden of regulatory compliance have increased significantly in recent years. Regulatory changes, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Our acquisition strategy exposes us to certain risks.

We have acquired a number of other banking companies in recent years and we may pursue selective acquisitions of other financial institutions in the future. Acquisitions can present certain managerial and operational challenges. While we evaluate acquisition opportunities across a variety of parameters, including our assessment of the potential impact on our financial condition as well as our prospective financial performance, our results may suffer as a result of an acquisition if we are not

effective in integrating the acquired operations into our business and converting data processing systems to our platform as planned, or if we fail to achieve anticipated cost savings or revenue enhancements. In addition, we anticipate that future acquisitions, if any, will likely be valued at a premium to book value and at a premium to current market value, which may result in book value per share or tangible book value per share dilution and possible short-term earnings per share dilution for our shareholders depending on the transaction structure and pricing.

Item 1B. Unresolved Staff Comments

None.

Available Information

Our internet address is www.mafbancorp.com. We make available through this address, free of charge, our annual report on Form 10-K, proxy statement, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our Code of Ethics and other corporate governance information is also available on our website.

Item 2. Properties

All of our facilities are located in the greater Chicago and Milwaukee metropolitan areas. At December 31, 2006, we own the majority of our 82 banking offices and lease others under individual lease arrangements. We also own our executive office building in Clarendon Hills, Illinois, and lease additional corporate offices in Downers Grove, Illinois, both located in the western suburbs of Chicago. We believe that all of our facilities are suitable and adequate for our operational needs.

See Note 8 in “Item 8. Financial Statement and Supplementary Data” for additional information about the Company’s properties.

Item 3. Legal Proceedings

There are various actions pending against the Company or its subsidiaries in the normal course of business, but in the opinion of management, none of these actions is likely to have a material adverse effect on our consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Our common stock trades on the NASDAQ Stock Market under the symbol “MAFB.” As of February 23, 2007, we had 3,800 shareholders of record. The table below shows the reported high and low sales prices of the common stock during the periods indicated as well as the period end closing sales prices.

	Year ended December 31, 2006											Year ended December 31, 2005
	High			Low			Close			Dividend		High			Low			Close			Dividend
First Quarter	$	44	.21		40	.74		43	.77		.25	$	44	.98		40	.63		41	.54		.23
Second Quarter		45	.00		41	.72		42	.84		.25		43	.99		38	.38		42	.63		.23
Third Quarter		42	.99		40	.15		41	.29		.25		44	.81		40	.08		40	.98		.23
Fourth Quarter		46	.75		40	.95		44	.69		.25		43	.52		39	.14		41	.38		.23

We declared $1.00 per share in dividends during the year ended December 31, 2006 and $0.92 per share in dividends for the year ended December 31, 2005. During the first quarter of 2007, we announced an increase in our quarterly dividend to $0.27 per share, or $1.08 per share on an annualized basis. Our ability to pay cash dividends depends largely on cash dividends received from the Bank. Dividend payments from the Bank are subject to various regulatory restrictions. See “Item 1. Business -Regulation and Supervision — Federal Savings Institution Regulation — Limitation on Capital Distributions.”

Stock Performance Graph

The following graph shows a comparison of cumulative total shareholder return (including reinvested dividends) on the Company’s common stock, with the cumulative total returns of both a broad-market index and a peer group index for the period December 31, 2001 through December 29, 2006.

The broad-market index chosen was the Nasdaq Market Index, and the peer group index chosen was the Hemscott Industry Group, comprised of savings and loan institutions, which is the same peer group index used in past years. The data was provided by Hemscott, Inc. (formerly known as Core Data, Inc.). The shareholder returns are measured based on an assumed investment of $100 on December 31, 2001.

Comparison of Cumulative Total Return Among MAF Bancorp,
Peer Group Index and Nasdaq Market Index


MAF Bancorp	100	.00	117	.26	147	.29	161	.29	152	.16	168	.17
Peer Group Index	100	.00	117	.85	163	.92	181	.54	185	.46	211	.94
Nasdaq Market Index	100	.00	69	.75	104	.88	113	.70	116	.19	128	.12

The lines represent yearly index levels derived from compounded returns that include all dividends.

If the fiscal year end is not a trading day, the preceding day is used. C. The index level for all series was set to $100.00 on 12/31/01.

The index level for all series was set to $100.00 on 12/31/01.

The following table sets forth information in connection with purchases of common stock made by or on behalf of us during the fourth quarter of the year ended December 31, 2006.

Period		Average Price Paid per Share				Maximum Number of Shares that May Yet be Purchased under the Plans or Programs
October 1, 2006 through October 31,
2006	—		—		—	—
November 1, 2006 through November 30,
2006	2,747	$	43	.67	—	—
December 1, 2006 through December 31,
2006	2,705		44	.30	—	—

Total	5,452	$	43	.98	—

(1)

Reflects 5,452 shares that were surrendered to us in payment of option exercise prices. The table does not include 1,706 shares that were surrendered in payment of withholding tax in connection with the exercise of related options during the quarter.

Item 6. Selected Financial Data

The following tables set forth certain summary consolidated financial data, performance ratios and other data at or for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements and notes thereto included herein. See “Item 8. Financial Statements and Supplementary Data.” We also have presented certain Non-GAAP financial information that management believes is helpful to an understanding of our financial results. See “Non GAAP Financial Information” following these tables for a reconciliation of these items to GAAP measures.

	At December 31,
	2006		2005		2004		2003		2002
	(Dollars in thousands, except per share data)
Selected Balance Sheet Data:

Total assets	$	11,120,499		10,487,504		9,681,384		8,933,585		5,937,181
Loans receivable, net		7,408,660		7,174,742		6,842,259		6,324,596		4,363,152
Mortgage-backed securities available
for sale		1,195,494		1,313,409		948,168		971,969		365,638
Mortgage-backed securities held to
maturity		212,302		243,161		245,021		—		—
Interest bearing deposits		67,883		38,491		56,089		57,988		28,210
Federal funds sold		64,944		23,739		42,854		19,684		100,205
Investment securities available for sale		529,998		475,152		388,959		365,334		308,235
Stock in Federal Home Loan Bank of
Chicago		146,407		165,663		278,916		384,643		169,708
Real estate held for development or sale		83,049		50,066		35,091		32,093		14,938
Goodwill and core deposit intangibles		407,312		314,414		318,231		276,549		101,967
Deposits		7,018,010		6,197,503		5,935,708		5,580,455		3,751,237
Borrowed funds		2,773,192		3,057,669		2,600,667		2,299,427		1,556,500
Junior subordinated debentures		67,011		67,011		—		—		—
Stockholders' equity		1,072,145		978,179		974,386		901,604		501,458
Book value per share		32.59		30.50		29.28		27.27		21.57
Tangible book value per share⁽¹⁾		20.21		20.70		19.72		18.90		17.18
Common shares outstanding		32,895,846		32,066,721		33,273,235		33,063,853		23,252,815

⁽¹⁾

See Non-GAAP Financial Information below.

	For the Year Ended December 31,
	2006		2005		2004		2003		2002
	(Dollars and shares in thousands, except per share data)
Selected Income Statement Data:

Interest income	$	595,200		478,656		421,173		316,430		329,490
Interest expense		335,571		213,897		159,885		136,952		171,465

Net interest income		259,629		264,759		261,288		179,478		158,025
Provision for loan losses		3,900		1,980		1,215		—		300

Net interest income after provision
for loan losses		255,729		262,779		260,073		179,478		157,725
Total non-interest income		75,918		81,176		78,054		73,519		58,737
Total non-interest expense		198,070		186,074		185,816		122,083		101,716

Income before income taxes		133,577		157,881		152,311		130,914		114,746

Income taxes		48,994		54,528		50,789		47,481		40,775

Net income	$	84,583		103,353		101,522		83,433		73,971

Net income as adjusted for balance sheet
restructuring and certain tax charges	$	100,651		103,353		101,522		83,433		73,971

Net income per common share:
Basic earnings per share	$	2.55		3.20		3.09		3.35		3.19
Diluted earnings per share		2.51		3.13		3.01		3.26		3.11
Diluted earnings per share as adjusted for balance
sheet restructuring and certain tax charges		2.99		3.13		3.01		3.26		3.11
Average common and common equivalent
shares outstanding:
Basic		33,177,226		32,307,390		32,897,164		24,920,150		23,162,422
Diluted		33,765,012		32,983,962		33,706,569		25,592,745		23,748,411

(see footnote on following page)

	At or For the Years Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars and shares in thousands, except per share data)
Average Balance Data:
Average interest-earning assets	$	10,317,994			9,193,692			8,551,351			6,065,772			5,409,877
Average interest-bearing liabilities		9,487,371			8,360,019			7,714,028			5,420,900			4,895,818
Average loans to average deposits		1.28	x		1.26			1.29			1.30			1.30
Average stockholders' equity	$	1,051,984			961,538			924,462			588,263			467,182
Average stockholders' equity to average
assets		9.31	%		9.62			9.98			9.09			8.14
Average interest-earning assets to average
interest-bearing liabilities		108.76			109.97			110.85			110.90			110.50
Interest rate spread		2.23			2.65			2.85			2.69			2.59
Net interest margin		2.52			2.88			3.06			2.96			2.92

Performance Ratios:
Return on average assets		.75			1.03			1.10			1.29			1.29
Return on average assets, exclusive of balance sheet
restructuring and certain tax charges⁽¹⁾		.89			1.03			1.10			1.29			1.29
Return on average equity		8.04			10.75			10.98			14.18			15.83
Return on average equity, exclusive of balance sheet
restructuring and certain tax charges⁽¹⁾		9.57			10.75			10.98			14.18			15.83
Return on average tangible equity⁽²⁾		12.99			16.03			15.81			18.37			20.33
Return on average tangible equity, exclusive of balance
sheet restructuring and certain tax charges⁽¹⁾⁽²⁾		15.46			16.03			15.81			18.37			20.33
Stockholders' equity to total assets		9.64			9.33			10.06			10.09			8.45
Tangible stockholders' equity to tangible
assets⁽³⁾		6.21			6.52			7.01			7.22			6.85
Tangible and core capital to total assets
(Bank only)		7.44			7.07			7.14			7.16			6.78
Risk based capital ratio (Bank only)		11.01			11.15			11.30			11.45			11.85
Non-interest expense to average assets		1.75			1.86			2.01			1.89			1.77

Non-interest expense exclusive of balance sheet
restructuring to average assets⁽¹⁾		1.73			1.86			2.01			1.89			1.77
Efficiency ratio, exclusive of balance sheet restructuring ⁽¹⁾⁽⁴⁾		56.07			54.31			54.97			48.08			47.02
Ratio of earnings to fixed charges:
Including interest on deposits		1.39	x		1.71	x		1.91	x		1.93	x		1.66	x
Excluding interest on deposits		1.84	x		2.40	x		2.61	x		2.65	x		2.38	x

Asset Quality Data (at year-end):
Non-performing loans to total loans		.89	%		.43			.46			.51			.58
Non-performing assets to total assets		.63			.30			.34			.49			.47
Allowance for loan loss to total loans		.54			.51			.53			.54			.44
Allowance for loan loss to non-performing
loans		60.06			117.12			115.18			105.39			76.72

Other Data (at year-end):
Number of deposit accounts		639,812			600,851			586,590			564,696			393,801
Mortgage loans serviced for others	$	2,680,242			2,919,075			3,641,445			3,330,039			2,021,512
Number of retail banking offices		82			75			72			66			34
Number of FTEs		2,152			2,044			2,160			1,969			1,376
Cumulative one-year gap		(7.38	)		(1.31	)		(3.98	)		(1.59	)		10.23

Stock Price and Dividend Information:
High	$	46.75			44.98			47.25			44.80			40.11
Low		40.15			38.38			39.27			32.61			28.60
Close		44.69			41.38			44.82			41.90			34.00
Cash dividends declared per share		1.00			.92			.84			.72			.60
Dividend payout ratio		39.84	%		29.39			27.91			22.09			19.29

⁽¹⁾	Exclusive of balance sheet restructuring and certain tax charges. See “Non-GAAP Financial Information” below for related reconciliations.

⁽²⁾	Return on average tangible equity is calculated by dividing net income by the difference of average shareholder equity less average goodwill and core deposit intangibles. See “Non-GAAP Financial Information” below for related reconciliations.

⁽³⁾	See “Non-GAAP Financial Information.”

⁽⁴⁾

The efficiency ratio is calculated by dividing non-interest expense exclusive of restructuring charges by the sum of net interest income and non-interest income, exclusive of restructuring charges and net gain/(loss) on sale and write-down of mortgage-backed and investment securities, gain on sale of mortgage servicing rights and fixed assets.

Non-GAAP Financial Information

This report contains certain financial information determined by methods other than in accordance with U.S. generally accepted accounting principles, or GAAP. The Company’s management uses tangible book value per share, tangible stockholders’ equity to tangible assets ratio and return on average tangible equity in its analysis of the Company’s performance and financial condition and believes this presentation provides useful supplemental information that is helpful in understanding our financial condition and results, as it provides a method to assess management’s success in managing alternatives for the utilization of tangible capital.

The Company believes net income, non-interest income and non-interest expense adjusted for the 2006 balance sheet restructuring and certain 2006 tax charges recorded in the fourth quarter of 2006 is useful supplemental information to better understand the core operating performance of the Company. See “Management's Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the restructuring plan we announced in the fourth quarter of 2006. The excluded tax charges relate to adjustments to tax reserves for prior year periods that were recorded in the fourth quarter of 2006 because of uncertainties that recently arose relating to an unresolved tax authority audit and other developments. See “Management’s Discussion & Analysis of Financial Condition — Results of Operations — Income Taxes.”

These disclosures should not be considered an alternative to GAAP, nor are they necessarily comparable to Non-GAAP performance measures that might be presented by other companies.

Tangible Book Value Per Share. Tangible book value per share is calculated by dividing (a) stockholders’ equity less the sum of goodwill and core deposit intangibles, by (b) common shares outstanding. The following table presents a reconciliation of stockholders’ equity to tangible stockholders’ equity (in thousands):

	12/31/06						12/31/05
	Amount			Per share			Amount			Per share
Stockholders' equity - as reported	$	1,072,145			32.59		$	978,179			30.50
Goodwill		(387,980	)		(11.79	)		(304,251	)		(9.48	)
Core deposit intangibles		(19,333	)		(0.59	)		(10,164	)		(0.32	)

Tangible stockholders' equity	$	664,832			20.21		$	663,764			20.70

Tangible Stockholders’ Equity to Tangible Assets. Tangible stockholders’ equity to tangible assets is calculated by dividing (a) stockholders’ equity less the sum of goodwill and core deposit intangibles, by (b) total assets less the sum of goodwill and core deposit intangibles. The following table presents a reconciliation of total assets to tangible assets (in thousands):

	12/31/06			12/31/05
Total assets - as reported	$	11,120,499		$	10,487,504
Goodwill		(387,980	)		(304,251	)
Core deposit intangibles		(19,333	)		(10,164	)

Tangible total assets	$	10,713,186		$	10,173,089

Return on Average Stockholders’ Equity and Return on Average Tangible Stockholders’ Equity. Return on average stockholders’ equity is calculated by dividing (a) net income adjusted for balance sheet restructuring charges and certain tax charges (see below) by (b) average stockholders’ equity. Return on average tangible stockholders’ equity is calculated by dividing (a) net income adjusted for balance sheet restructuring charges and certain tax charges by (b) average stockholders’ equity less average goodwill and core deposit intangibles. The following table presents a reconciliation of average stockholders’ equity to average tangible stockholders’ equity (in thousands):

	Year Ended December 31,
	2006			2005
Average stockholders' equity	$	1,051,984			961,538
Average goodwill		(380,489	)		(304,950	)
Average core deposit intangibles		(20,503	)		(11,712	)

Average tangible stockholders' equity	$	650,992			644,876

The following three tables reconcile net income, non-interest income and non-interest expense to net income, non-interest income and non-interest expense as adjusted for the balance sheet restructuring and certain tax charges (in thousands):

Net income adjusted for balance sheet restructuring and certain tax charges. Diluted earnings per share as adjusted for balance sheet restructuring and certain tax charges is calculated by dividing net income as adjusted for balance sheet restructuring and certain tax charges by the weighted average number of diluted shares outstanding.

	Year Ended December 31, 2006
Net income - as reported	$	84,583
Lower of cost of market adjustment on loans
transferred to held for sale		4,156
Loss on mortgage-backed securities		9,316
Loss on investment securities		3,618
Prepayment charge related to repayment
of borrowings		2,813
Tax benefits related to balance sheet
restructuring charges		(7,798	)
Certain tax charges		3,963

Net income adjusted for balance sheet restructuring
and certain tax charges	$	100,651

Return on average assets is calculated by dividing (a) net income adjusted for balance sheet restructuring and certain tax charges by (b) average total assets.

Non-interest income adjusted for balance sheet restructuring charges

	Year Ended December 31, 2006
Non-interest income - as reported	$	75,918
Lower of cost of market adjustment on loans
transferred to held for sale		4,156
Loss on mortgage-backed securities		9,316
Loss on investment securities		3,618

Non-interest income adjusted for balance sheet
restructuring charges	$	93,008

Non-interest expense adjusted for balance sheet restructuring charges

	Year Ended December 31, 2006
Non-interest expense - as reported	$	198,070
Prepayment charge related to repayment
of borrowings		(2,813	)

Non-interest expense adjusted for balance sheet
restructuring charges	$	195,257

The ratio of non-interest expense to average assets is calculated by dividing (a) non-interest expense adjusted for balance sheet restructuring charges by (b) average total assets.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

We encourage you to read the following discussion in conjunction with the selected financial information as of and for the three years ended December 31, 2006, included in Item 6. “Selected Financial Data” and the financial information as of and for the three years ended December 31, 2006, included in Item 8. “Financial Statements and Supplementary Data.”

Overview

Our net income was $84.6 million in 2006 compared to $103.4 million in 2005 and $101.5 million in 2004. Net income for 2006 was reduced by $12.1 million, or $.36 per diluted share due to the balance sheet restructuring plan we implemented in the fourth quarter. In addition, 2006 results were reduced by certain tax charges of $4.0 million, or $.12 per diluted share, primarily relating to reserves established in connection with uncertainties arising from a recent tax authority audit. Exclusive of these charges, 2006 net income was $100.7 million, or $2.99 per diluted share compared to $3.13 per diluted share in 2005 and $3.01 in 2004. The decline in earnings during 2006 primarily reflects the difficult operating environment that our industry faces in the inverted yield curve environment in weak mortgage and housing market conditions.

Our primary source of revenue is net interest income which is driven by the volume of our interest-earning assets and our net interest margin. During 2006, the increasing and flat to inverted interest rate yield curve had a negative impact on our net interest income as the increase in the average cost of our interest-bearing liabilities out-paced increases in our average interest-earning asset yields. In light of the unfavorable interest rate environment, a key part of the interest rate risk management strategies we pursued in 2006 was to limit balance sheet growth of our one-to-four family mortgages, which mitigated some of the margin pressures. Gravitating to more of an originate-and-sell model in our residential lending business, we sold a significant portion of our ARM loans as well as the majority of our fixed-rate mortgage production which generate income from gains on sales. However, significantly lower mortgage origination volumes resulting from rising interest rates and slowing housing sales during the year limited growth in this source of income.

Due to the extended duration of the inverted yield curve environment, we undertook a balance sheet restructuring plan in the fourth quarter to reposition our balance sheet for improved earnings in the future. As described more fully below, we sold certain lower-yielding loans and investment securities, repaid certain higher-cost wholesale borrowings, and reinvested remaining proceeds in short-term investment securities to eliminate negative interest rate spread that had been reducing our net interest income. While this deleveraging caused us to recognize restructuring charges in the fourth quarter of 2006 and will shrink our balance sheet for the near term, management believes the restructuring will benefit the Company by allowing us to reinvest certain funds into higher yielding short-term securities and over time to redeploy capital in more favorable investment opportunities as we continue our strategy of increasing the concentration of business and home equity loans in our portfolio.

Exclusive of restructuring charges, we grew non-interest income approximately 14% in 2006 largely due to stronger deposit account service fees and higher gains on sale of loans in our mortgage banking operation which more than offset a $2.1 million decline in income from real estate operations. Lot sales activity has been adversely impacted by the slow down in the housing market. We anticipate that 2007 will also be a difficult year for our land development operations.

As expected, non-interest expense in 2006 increased with the additional costs of operating two de novo branches that we opened in December 2005 and the seven branches we added in our acquisition of EFC Bancorp, Inc. in February 2006. However, we were able to limit the increase in our total non-interest expense through cost containment efforts that we pursued in the face of the challenging operating environment. Exclusive of expense related to the balance sheet restructuring, our ratio of non-interest expense to average assets improved in 2006 to 1.73% from 1.86% in 2005 and 2.01% in 2004. We are continuing to address our cost structure and are pursuing additional cost control initiatives in 2007.

Recent Acquisitions

We have acquired a number of other financial institutions in recent years, including EFC Bancorp in early 2006. The following table summarizes financial information relating to our recent acquisitions:

Selling Entity	Acquisition Date	Data Processing Conversion Completion	Acquired Deposits
	(In thousands)
EFC Bancorp, Inc.⁽¹⁾	February 1, 2006	February 2006	$	703,435	860,680	97,368
Chesterfield Financial Corp.
⁽²⁾	November 1, 2004	November 2004		270,711	140,699	45,918
St. Francis Capital
Corporation⁽³⁾	December 1, 2003	May 2004		1,294,517	1,243,549	130,819
Fidelity Bancorp, Inc.⁽⁴⁾	July 21, 2003	August 2003		434,573	338,123	44,057

⁽¹⁾	We acquired EFC Bancorp for $176.6 million. We issued 2.3 million shares of stock and paid $67.3 million in cash, $52 million of which was funded with increased borrowings under our unsecured term loan.

⁽²⁾	We acquired Chesterfield Financial Corp. for $128.4 million. We issued 981,467 shares of stock and paid $85.7 million in cash for the purchase, $25 million of which was funded by an increase in borrowings under our unsecured term loan.

⁽³⁾	We acquired St. Francis Capital Corporation by issuing 7.5 million shares in an all-stock transaction valued at $358 million.

⁽⁴⁾	We acquired Fidelity Bancorp by issuing 2.8 million shares in an all-stock transaction valued at $115 million.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, and are more fully described in Note 1 of the consolidated financial statements found in “Item 8. Financial Statements and Supplementary Data.” The preparation of these consolidated financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense, as well as related disclosures of contingencies. Management’s judgment is based on historical experience, terms of existing contracts, market trends and other information available. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity:

Allowance for loan losses. In evaluating the adequacy of the allowance for loan losses and determining the related provision for loan losses on a quarterly basis, management considers: (1) historical loss experience and change in the size and mix of the overall portfolio composition, (2) specific allocations based upon probable losses identified during the review of the portfolio, (3) delinquency trends in the portfolio and the composition of non-performing loans, including the percent of non-performing loans with supplemental mortgage insurance, and (4) subjective factors, including local and general economic business factors and trends, industry and interest rate trends, new lending products and changes in underwriting criteria, and portfolio concentrations. A provision for loan losses is recorded as a charge to current earnings. The allowance for loan losses is management’s estimate of probable losses inherent in the Bank’s loan portfolio at the assessment date. If actual losses ultimately exceed management’s estimate, the allowance may not be sufficient to absorb probable losses in the loan portfolio and may result in an additional provision for loan losses. The allowance is also subject to examination and adequacy testing by regulatory agencies, which may consider such factors as the methodology used to determine the adequacy and size of the allowance relative to that of peer institutions, and other adequacy tests. Such regulatory agencies could require an adjustment to our allowance based on information available to them at the time of their examination.

Valuation of mortgage servicing rights. We capitalize the fair value of mortgage servicing rights upon the sale of loans. We determine the fair value by allocating the previous carrying amount of the sold loans based on the relative fair values of the servicing rights retained and the loans that are sold to a third party. The estimated value takes into consideration contractually known amounts, such as loan balance, term, contract rate and whether the customer escrows funds with the Bank for the payment of

taxes and insurance. The estimated value is also affected by additional assumptions relating to loan prepayment speeds, earnings on escrow funds, as well as the discount rate used to present value the estimated future cash flow stream. Subsequent to the establishment of this asset, management reviews the fair value of mortgage servicing rights on a quarterly basis using current estimates of prepayment speeds, cash flow and discount rate assumptions. Changes in these estimates impact fair value, and could require us to record a valuation allowance or recovery. There was no valuation reserve at December 31, 2006 or 2005. Net recoveries of $171,000 were recorded in 2005 due to lower prepayment estimates reflective of a rising rate environment. Should estimates assumed by management regarding future prepayment speeds on the underlying loans supporting the mortgage servicing rights prove to be incorrect, additional valuation allowances could occur, or conversely, valuation allowances could be recovered if changing estimates increase the fair value of mortgage servicing rights.

Valuation of goodwill and intangible assets. In accounting for acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets, such as core deposit intangibles. The amounts we record are based on our estimates of the fair value of assets and liabilities acquired. The valuation techniques we use to determine the carrying value of tangible and intangible assets and liabilities acquired in acquisitions and the estimated lives of the identifiable intangible assets involve a number of subjective judgments such as estimates for discount rates, projected future cash flows and time period of useful lives, all of which are susceptible to change based on changes in economic conditions and other factors. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds the remaining value we are reasonably likely to realize. Similarly, on an annual basis we evaluate whether the carrying value of our goodwill has become impaired, in which case we reduce its carrying value through a charge to our earnings. Goodwill is evaluated for impairment at the segment reporting level, and all of our goodwill is recorded in our banking segment. Based on our evaluations, we recorded no goodwill impairment in the years ended December 31, 2006, 2005 and 2004.

While we believe the valuation assumptions and estimates we used are reasonable, using different assumptions or estimates would have resulted in our recording different amounts of goodwill and core deposit intangibles and could have impacted our amortization expense. For example, if we had assumed faster prepayment speeds of mortgage loans we acquired in our acquisitions, the value of the mortgage loans we acquired would have been less and the goodwill we recorded would have been greater. Similarly, if we had assumed greater deposit run-off rates, we may have recorded lower core deposit intangibles, but might have shortened our estimate of the average life of this intangible asset, and the combination of these changes may have increased or decreased our amortization expense in 2006. Any changes in the assumptions and estimates which we use in future periods to determine the carrying value of our goodwill and identifiable intangible assets which adversely affect their value or shortens estimated lives would adversely affect our results of operations.

Real estate held for development. Income from real estate operations in the Company’s real estate developments are based on cash received less the cost of sales per lot, including capitalized interest and an estimate of future costs to be incurred. This is especially true at the outset of a project, where few actual costs have been incurred in the project as a whole. The estimate of total project costs is reviewed on a quarterly basis by management. Estimates are subject to change for various reasons, including the duration of the project, changes in rules or requirements of the communities where the projects reside, soil and weather conditions, increased project budgets, as well as the general level of inflation. If these estimates are incorrect and either the expenses are greater than anticipated or the sales do not close as expected, we may have to expend additional funds or obtain borrowings to cover current improvement costs.

Any change in income from real estate operations from past sales that results from changes in future estimated costs are recognized in the period of change as either a charge or an addition to income from real estate operations. Additionally, we periodically evaluate the net realizable value from each project by considering other factors, such as pace of lot absorption, sources of funding and timing of disbursements. A charge to current earnings would occur if this evaluation indicated a project’s net realizable value did not exceed its recorded cost. Currently, the estimated net realizable value of Springbank, our only project currently under development, exceeds the recorded cost of the project.

Income Taxes. The determination of income tax expense and the amounts of current and deferred income tax assets and liabilities is based on complex analyses of many factors, including

interpretation of Federal and state income tax laws, current financial accounting standards, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), assessments of the likelihood that the reversals of deferred deductible temporary differences will yield tax benefits and estimates of reserves required for tax uncertainties.

We periodically undergo examination by various governmental taxing authorities. Such agencies may require that changes in the amount of tax expense be recognized when their interpretations of tax law differ from those of management, based on their judgments about information available to them at the time of their examinations. There can be no assurance that future events, such as court decisions, new interpretations of existing law or positions by federal or state taxing authorities, will not result in tax liability amounts that differ from management’s current assessment of such amounts, the impact of which could be significant to future results.

Temporary differences may give rise to deffered tax assets, which are recorded on our balance sheet as deferred tax assets. We assess the likelihood that deferred tax assets will be realized in future periods and establish a valuation allowance for those assets for which recovery is unlikely. In making this assessment, we must make judgments and estimates regarding the ability to realize these assets through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Although the Company has established valuation allowances relating to certain deferred tax assets, there is no guarantee that the tax benefits associated with other deferred tax assets for which no valuation allowance has been established, will be fully realized.

In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws for which the outcome of such positions may not be certain. Management periodically reviews and evaluates the status of uncertain tax positions and may establish tax reserves for estimates of amounts that may ultimately be due or owed (including interest). These estimates may change from time to time based on management’s evaluation of developments subsequent to the filing of the income tax return, such as tax authority audits, court decisions or other tax law interpretations. There can be no assurance that any tax reserves will be sufficient to cover tax liabilities that may ultimately be determined to be owed. FASB Interpretation No. 48 provides new accounting for uncertain income tax positions and is effective for 2007. See “Recent Accounting Standards.”

For additional discussion of income taxes, see “Management's Discussion and Anaylsis of Financial Condition and Results of Operations - Results of Operations- Income Tax Expense” and Notes 1 and 14 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Results of Operations

	Year Ended December 31,
	2006			2005		2004
	(Dollars in thousands, except per share data)
Net income	$	84,583			103,353		101,522
Net income as adjusted for balance sheet
restructuring and certain tax charges		100,651			103,353		101,522
Diluted earnings per share		2.51			3.13		3.01
Diluted earnings per share as adjusted for
balance sheet restructuring and
certain tax charges		2.99			3.13		3.01
Return on average assets		.75	%		1.03		1.10
Return on average assets, exclusive of
balance sheet restructuring and certain tax
charges ⁽¹⁾		.89			1.03		1.10
Return on average equity		8.04			10.75		10.98
Return on average equity, exclusive of
balance sheet restructuring and certain tax
charges ⁽¹⁾		9.57			10.75		10.98

Return on average tangible equity⁽²⁾		12.99			16.03		15.81
Return on average tangible equity, exclusive of
balance sheet restructuring and certain tax
charges⁽¹⁾⁽²⁾		15.46			16.03		15.81
Average diluted shares outstanding		33,765,012			32,983,962		33,706,569

⁽¹⁾	These ratios are calculated exclusive of balance sheet restructuring and certain tax charges. See “Item 6. Non-GAAP Financial Information”

⁽²⁾	Return on average tangible equity is calculated by dividing net income by the difference of average shareholder equity less average goodwill and core deposit intangibles.

Balance Sheet Restructuring

During the fourth quarter of 2006, we undertook a balance sheet restructuring plan seeking to better position the Bank for current difficult and uncertain interest rate environment. The restructuring has allowed us to reduce pressure on our net interest margin as we reduced the size of our investment portfolio and repaid certain wholesale borrowings, and has enable us to improve future operating results without increasing interest rate risk. The restructuring plan had a negative impact on 2006 pre-tax earnings of $19.9 million, or $.36 per diluted share on an after-tax basis. We estimate that the restructuring will benefit 2007 pre-tax earnings by approximately $9.8 million, or approximately $.18 per diluted share on an after-tax basis, and that we will have recouped the 2006 restructuring costs through increased net interest income in approximately 2.1 years without considering any potential redeployment of capital in longer-term opportunities.

The table below summarizes the results of the various components of the restructuring:

	Balance				Pre-tax Impact on 2006 Results
*Interest-earning assets sold:*
Loans receivable	$	219,579	4	.21%	$	(4,156	)
Investment Securities		229,650	3	.71		(3,618	)
Mortgage-backed securities		301,722	4	.10		(9,316	)

	$	750,951	4	.01%		(17,090	)

FHLBC advances prepaid	$	501,513	5	.28%		(2,813	)

Total restructuring charges					$	(19,903	)

We identified for sale $219.6 million of one- to four-family loans held in our portfolio, primarily seasoned 5/1 hybrid ARMs with approximately two years remaining to their first repricing, which carried a weighted average yield of 4.21%. A lower-of-cost-or-market adjustment was recorded in December 2006, when we reclassified the loans into the loans held for sale category. We also identified for sale investments and mortgage-backed securities with; a cost basis of $531.4 million, an average duration of approximately 2.17 years, and an average yield of 3.93%. We recorded an other-than-temporary impairment on these securities as of December 31, 2006. Much of this write-down was previously recognized as a reduction to stockholders’ equity through other comprehensive income adjustments in accordance with SFAS No. 115. We repaid $501.5 million of FHLBC advances with a duration of approximately 2.07 years and included advances with unexercised put options. We repaid the borrowings in late December 2006, and recorded $2.8 million of expense associated with prepayment of these borrowings. We initially funded the repayment with cash on hand and a $400 million short-term borrowing until the asset sales were consummated and settled in early 2007. Consequently, at December 31, 2006, our balance sheet has yet to reflect the deleverage aspect of the transaction. The short-term borrowing was repaid on January 9, 2007. The approximately $230.0 million of liquidity available for immediate reinvestment has been used to purchase securities which meet the Bank’s duration target contemplated in the transaction, at a current yield of approximately 5.69%, well above the yields on assets sold.

Net interest income

Net interest income is our principal source of earnings, and consists primarily of interest income on loans receivable and mortgage-backed and investment securities, offset by interest expense on deposits, borrowed funds, and junior subordinated debentures. Net interest income fluctuates due to a variety of reasons, most notably due to the size of our balance sheet, changes in interest rates, the shape of the U.S. Treasury yield curve, competitive market pressures on the pricing of our products, the extent of our investment in non-interest earning assets and the level of interest-rate and credit risk we are willing to accept. Our net interest margin has contracted over the last several years largely due to the concentration of one- to four-family mortgages in our portfolio.

Traditionally, we have been able to increase net interest income at a faster pace when intermediate to long-term U.S. Treasury rates are greater than short-term interest rates, as our funding costs tend to be tied to shorter-term rates, while pricing on our fixed-rate and ARM loan products tend to

be tied to intermediate to longer-term interest rates. In periods of greater slope in the yield curve, we have leveraged our capital to increase loans and other earning assets and this strategy has successfully increased past profits. As the market differential between short- and long-term interest rates has shrunk since late 2004, marginal incremental business added to our balance sheet carries smaller net interest margin income, and ultimately decreases our net interest margin percentage. We have attempted to limit the adverse impact of the flatter and inverted yield curve environment by limiting asset growth in lower yielding asset categories, by selling a higher percentage of our one- to four-family ARM mortgage loan production.

Over the past five years, we have successfully transitioned a greater percentage of our balance sheet into higher-yielding, adjustable-rate loans related to our business banking and home equity line of credit loan portfolios as another way of combating a flatter, or inverted yield curve environment. These products tend to be tied to the Prime rate (or to a lesser extent three-month LIBOR) and adjust to increased short-term interest rates more rapidly than other assets in our portfolio. Because of this, we can more effectively match fund these assets with similar duration liabilities, exclusive of the shape of the yield curve.

Core deposits, which tend to provide lower-cost funding, also help us mitigate the impact of a flatter yield curve. Impacting our net interest income recently has been the shifting of our low-cost core deposits into higher-yielding certificate accounts and money market accounts due to rapid increases in short-term interest rates since 2005. As rates rose in the first half of 2006, our pricing strategy was designed to migrate interest-sensitive depositors to more rate-sensitive certificates of deposit. In the fourth quarter of 2006, when rates appeared to have peaked, we changed our pricing strategy with a goal of moving these funds back into shorter term products such as money market accounts. Our mix of core deposits to total deposits has declined slightly from 53.4% at December 31, 2005, to 49.4% at December 31, 2006, and the cost of core deposits has also risen, both due to higher short-term market rates and competitive pricing for deposits. These factors have added pressure to our net interest margin.

Average Balance Sheets.The following table reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields or costs are derived by dividing income or expense by the average balance of assets or liabilities, excluding any tax equivalent adjustments for municipal security income, the impact of which is not significant. Average balances are derived from average daily balances, and include non-accrual loans and investments. The yield/cost at December 31, 2006 includes fees that are considered adjustments to yield.

	Year Ended December 31,
	2006								2005								2004								At December 31, 2006
	Average Balance		Interest			Average Yield/ Cost			Average Balance		Interest			Average Yield/ Cost			Average Balance		Interest			Average Yield/ Cost			Balance			Yield/ Cost
	(Dollars in thousands)
Assets:
Loans receivable	$	8,007,644		488,639			6.10	%	$	7,051,371	$	383,879			5	.44%	$	6,721,514	$	343,011			5	.10%	$	7,780,552			6	.36%
Mortgage-backed
securities		1,475,936		67,649			4.58			1,411,558		59,664			4	.23		1,008,800		38,802			3	.85		1,407,796			4	.69
Stock in FHLB of
Chicago		166,343		5,276			3.17			208,734		12,346			5	.91		356,435		23,092			6	.46		146,407			3	.10
Investment securities		521,807		24,060			4.61			438,074		18,077			4	.13		358,022		13,233			3	.70		529,998			4	.73
Interest-bearing deposits
and federal funds sold⁽¹⁾		146,264		9,576			6.55			83,955		4,690			5	.59		106,580		3,035			2	.85		132,827			5	.88

Total interest-earning
assets		10,317,994		595,200			5.77			9,193,692		478,656			5	.21		8,551,351		421,173			4	.92		9,997,580			5	.98
Non-interest earning
assets		982,407								800,980								707,928								1,122,919

Total assets	$	11,300,401							$	9,994,672							$	9,259,279							$	11,120,499

Liabilities and
stockholders' equity:
Deposits	$	6,226,306		185,705			2.98		$	5,575,696		108,374			1	.94	$	5,226,301		73,872			1	.41		6,413,906			3	.47
Borrowed funds		3,194,054		145,359			4.55			2,747,379		103,531			3	.77		2,487,727		86,013			3	.46		2,773,192			4	.71
Junior subordinated
debentures		67,011		4,507			6.73			36,944		1,992			5	.39		—		—				—		67,011			6	.95

Total interest-bearing
liabilities		9,487,371		335,571			3.54			8,360,019		213,897			2	.56		7,714,028		159,885			2	.07		9,254,109			3	.87
Non-interest
bearing deposits		580,982								494,239								462,961								604,104
Other liabilities		180,064								178,876								157,828								190,141

Total liabilities		10,248,417								9,033,134								8,334,817								10,048,354
Stockholders' equity		1,051,984								961,538								924,462								1,072,145

Liabilities and
stockholders' equity	$	11,300,401							$	9,994,672							$	9,259,279							$	11,120,499

Net interest income/
interest rate spread				259,629			2.23	%				264,759			2	.65%				261,288			2	.85%					2	.11%

Net earning assets/net
yield on average
interest-earning assets	$	830,623					2.52	%	$	833,673					2	.88%	$	837,323					3	.06%	$	743,471

Ratio of interest-earning
assets to interest-
bearing liabilities				108.76	%							109.97	%							110.85	%					108.03	%

⁽¹⁾	Includes pro-rata share of interest income received on outstanding drafts payable.

Rate/Volume Analysis. The table below shows the impact of changes in interest-earning assets and interest-bearing liabilities and changes in interest rates on our interest income and interest expense during the periods indicated. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Year Ended December 31, 2006 vs. 2005									Year Ended December 31, 2005 vs. 2004
	Total Change			Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate
	(Dollars in thousands)
Change in:
Interest-income:
Loans receivable	$	104,760			55,387			49,373		$	40,868			17,309			23,559
Mortagage-backed securities		7,985			2,802			5,183			20,862			16,719			4,143
Investment securities		5,983			3,706			2,277			4,844			3,185			1,659
Stock in FHLB of Chicago		(7,070	)		(2,153	)		(4,917	)		(10,746	)		(8,925	)		(1,821	)
Interest-bearing deposits and
federal funds sold		4,886			3,967			919			1,655			(756	)		2,411

Total interest income		116,544			63,709			52,835			57,483			27,532			29,951

Interest-expense:
Deposits		77,331			13,857			63,474			34,502			5,175			29,327
Borrowed funds		41,828			18,368			23,460			17,518			9,411			8,107
Junior subordinated
debentures		2,515			1,621			894			1,992			1,992			—

Total interest expense		121,674			33,846			87,828			54,012			16,578			37,434

Net change in interest
income	$	(5,130	)		29,863			(34,993	)	$	3,471			10,954			(7,483	)

2006 versus 2005. Net interest income decreased to $259.6 million in 2006, compared to $264.8 million in 2005. While we grew average earning assets by $1.12 billion, primarily due to the acquisition of EFC, our net interest margin declined 36 basis points, to 2.52% from 2.88%. With higher funding costs, our one- to four-family mortgage portfolio, made up primarily of hybrid ARMs originated within the last one to three years, is negatively impacting our margin. More than $1.5 billion of these loans are scheduled to reprice over the next eight quarters, which should help our net interest margin beginning in late 2007.

The overall yield on interest-earning assets improved 56 basis points to 5.77% in 2006, reflecting higher market rates of interest as well as the strategic shift in our mix of loans. Organic growth in interest-earning assets was minimal in 2006 due to our strategy to limit balance sheet growth in lower-yielding asset categories.

We experienced 35 and 48 basis point improvements in the average yields on our mortgage-backed and investment securities portfolio, respectively, during 2006 due to maturities and amortization of lower-yielding securities redeployed at higher current yields. Due to our balance sheet restructuring, the yields on these portfolios should improve further in 2007, while average balances are expected to decrease.

We reduced our investment in FHLBC stock in 2006 to the extent of permitted redemptions, but continued to hold excess investment in what is now an underperforming investment. The dividend yield declined to 3.17% in 2006 from 5.91% in 2005 due to continued regulatory restrictions and weaker earnings at the FHLBC. We anticipate further reducing our excess investment in 2007, subject to FHLBC constraints.

The cost of our interest-bearing liabilities increased 98 basis points to 3.54% in 2006, as deposit costs increased by 104 basis points due to upward repricing of maturing certificates of deposit, slow checking account growth and a decline in the balance of passbook accounts. Money market deposit costs increased due to our strategy of offering a higher rate money market product as an alternative to higher cost CDs. The increase in the prime rate due to Federal Reserve Board tightened monetary policy (as well as 3-month LIBOR) led to an increase in the cost of variable rate borrowings and our junior subordinated debentures.

In addition, during 2006 we repurchased 1.9 million shares of stock using borrowed funds, which improved earnings per share results but had the effect of reducing the net interest margin. We also increased our investments in bank-owned life insurance (earnings from which are classified as non-

interest income) by another $35 million during 2006 after having added $35 million in the second quarter of 2005, and our investment in real estate held for development. Investments in non-interest earning assets negatively impact the net interest margin.

2005 versus 2004. Net interest income increased to $264.8 million in 2005, compared to $261.3 million in 2004, due to an increase in average interest-earning assets of $642.3 million, or 7.5%, to $9.19 billion. Our net interest margin contracted 18 basis points from the previous year to 2.88% in 2005, due to the faster upward repricing of our deposits and borrowed funds compared to our interest->earning assets, in response to the rise in short-term market interest rates and our issuance during 2005 of junior subordinated debentures, which are higher cost than the average rate on our other borrowings. We used the majority of this amount to fund stock repurchases during the year.

Our overall yield on interest-earning assets increased 29 basis points to 5.21% in 2005. We achieved a 34 basis point increase in the yield on our loan portfolio, to 5.44%, as our portfolios of equity lines of credit and commercial business loans adjusted upward in response to the rise in the Prime rate of interest. Similarly, a 38 basis point increase in the average yield on our mortgage-backed and investment securities portfolio due to new assets purchased at higher rates helped improve our asset yields. Due to limited growth in our loan portfolio, attributable to slower mortgage production and increased prepayments on mortgage loans and equity lines, we grew our average mortgage-backed securities portfolio by $402.8 million, while maintaining our interest rate risk objectives. Our overall average asset yield in 2005 was negatively impacted by the yield reduction on our FHLBC stock investment, as well as the $147.7 million reduction in the average balance of this investment. We redeemed FHLBC stock periodically throughout the year during 2005 to address the concentration in our investment portfolio resulting from prior acquisitions.

Our overall cost of interest-bearing liabilities increased 49 basis points to 2.56% in 2006, driven by a 53 basis point increase in our cost of deposits, to 1.94%. Deposits accounted for 66.5% of our funding in 2005. Our deposit costs were impacted by a variety of factors, including the sharp upward repricing of maturing certificate of deposit accounts and money market deposits, slower growth of checking deposits, and a decline in the balance of passbook accounts, which led to a reduction in the percentage of our core deposits to total deposits to 53.4% in 2005, compared to 59.6% in 2004. Similarly, our costs of borrowed funds increased 31 basis points to 3.77% in 2005. In response to our increase in shorter-term interest-earning assets, we have increased our exposure to Prime and LIBOR-indexed borrowed funds, which have repriced upward in response to rising short-term interest rates.

Provision for Loan Losses

We recorded a provision for loan losses and experienced net charge-offs as follows for the three years ended December 31, 2006 as shown below:

	Year Ended December 31,
	2006			2005		2004
	(Dollars in thousands)
Provision for loan losses	$	3,900			1,980		1,215
Net charge-offs		4,758			1,740		812
Net charge-offs to average loans		.06	%		.02		.01

The provision for loan losses increased in 2006 due to higher incurred and expected losses on the residential loan portfolio, particularly in the high loan-to-value equity lines of credit category, where we earn a higher rate of interest to compensate for the greater credit risk associated with these loans. Higher interest rates and weakness in residential real estate prices have contributed to higher levels of delinquencies, non-accrual loans and chargeoffs on these loans although our overall credit quality experience as measured by net-charge-offs to average loans has remained strong.

In evaluating the adequacy of the allowance for loan losses and determining, if any, the related provision for loan losses shown in the table above, management considers: (1) historical loss experience and change in the size and mix of the overall portfolio composition, (2) specific allocations based upon probable losses identified during the review of the portfolio, (3) delinquency trends in the portfolio and the composition of non-performing loans, including the percent of non-performing loans with supplemental mortgage insurance, and (4) subjective factors, including local and general economic business factors and trends, industry and interest rate trends, new lending products and changes in underwriting criteria and portfolio concentrations. The table below shows the total allowance for loan losses and selected percentages for the periods indicated:

	Year Ended December 31,
	2006			2005		2004
	(Dollars in thousands)
Allowance for loan losses	$	39,931			36,495		36,255
Allowance for loan losses as a percentage of non-performing
loans		60.06	%		117.12		115.18
Allowance for loan losses as a percentage of loans receivable,
exclusive of loans held for sale		.54			.51		.53

Non-interest income

2006 versus 2005. Non-interest income is another significant source of revenue for us. It consists primarily of fees earned on deposit and loan products and services and gains and losses from asset sale activity. Non-interest income decreased $5.3 million or 6.5% for the year ended December 31, 2006 compared to the year ended December 31, 2005. Exclusive of balance sheet restructuring charges, however, non-interest income grew by $11.8 million, or 15% in 2006.

The table below shows the composition of non-interest income for the periods indicated.

	Year Ended December 31,								Percentage Increase (Decrease)
	2006			2005		2004			2006			2005
	(Dollars in thousands)
Net gain (loss) on sale and write-down
of assets:
Loans receivable	$	8,793			10,675		9,294			(17	.6)%		14	.9
Mortgage-backed securities		(9,316	)		—		500			N	M		N	M
Investment securities		(3,614	)		727		822			(597	.1)		(11	.6)
Premises and equipment		795			164		(9	)		384	.8		(1,922	.2)
Foreclosed real estate		(322	)		221		506			(245	.7)		(56	.3)
Mortgage loan servicing rights		3,600			2,400		—			50	.0		N	M
Deposit account service charges		41,837			35,193		34,112			18	.9		3	.2
Other loan fees		6,821			6,303		5,775			8	.2		9	.1
Bank-owned life insurance		7,303			5,576		3,410			31	.0		63	.5
Brokerage and insurance commissions		6,281			4,891		4,608			28	.4		6	.1
Loan servicing fee income		3,409			2,261		1,231			50	.8		83	.7
Valuation recovery (allowance) on
mortgage servicing rights		—			171		2,072			N	M		(91	.7)
Income from real estate operations		785			2,928		6,657			(73	.2)		(56	.0)
Other income:
Safe deposit box fees		972			899		820			8	.1		9	.6
Title agency fees		286			386		524			(25	.9)		(26	.3)
Assumed premium income		2,491			2,346		1,938			6	.2		21	.1
Real estate held for investment
income⁽¹⁾		3,842			4,150		3,951			(7	.4)		5	.0
Other		1,955			1,885		1,843			3	.7		2	.3

Total other income		9,546			9,666		9,076			(1	.2)		6	.5

Total non-interest income	$	75,918			81,176		78,054			(6	.5)%		4	.0

⁽¹⁾	Income from investments in affordable housing properties in Wisconsin.

Exclusive of the $4.2 million lower-of-cost or market adjustment related to our balance sheet restructuring, our gain on sale of loans in 2006 increased to $13.0 million on $1.28 billion of loan sales compared to $10.7 million on $825.8 million of loan sales in 2005. Also contributing to 2006 non-interest income was a $3.6 million gain on sale of $963 million of loan servicing rights compared to a $2.4 million gain on $751 million of loan servicing rights sold in 2005, continuing our strategy of selling primarily single-service loan servicing rights to take advantage of attractive market opportunity when we believe market pricing offers us a better return than our projected servicing cash flows.

Losses on investment and mortgage-backed securities in 2006 resulted from $12.9 million of other-than-temporary impairment writedowns on $531 million of securities identified for sale as part of the balance sheet restructuring. Subsequent to year end, these securities have all been sold. Investment

gains in 2005 related primarily to consideration received in the dissolution of a regional ATM network in which we held shares.

Losses of $322,000 in 2006 from the sale of foreclosed real estate is indicative of the slowdown in home sales in the U.S. and local economy.

Assumed premium income, which represents the portion we share of insurance premiums under reinsurance agreements with various private mortgage insurance (PMI) companies in return for our assuming part of the risk of loss on credits we originate, increased over 6% due to a higher volume of loans included in these programs.

Deposit account service charge income increased primarily due to higher fee rates for deposit service charges, as well as the addition of the EFC deposit base acquired in February 2006. The growth also reflects increases in debit card activity and higher consumer overdraft activity.

Income earned from bank-owned life insurance increased $1.7 million, or 31%, in 2006, as the result of $15 million of new investments during the year and additional BOLI investments acquired in the EFC acquisition.

Other loan fee income, which primarily includes late charges, commercial processing fees, equity lines of credit fees, income from our origination and sale of subprime product offerings and letter of credit fees, was $6.8 million in 2006, an increase of $518,000 over 2005. The increase is due primarily to higher fee income from subprime lending activities where we originate loans as a broker or correspondent for third party subprime lenders.

Brokerage and insurance commissions improved 28.4% to $6.3 million due to the improved equity markets, additional sales personnel, as well as the acquisition of EFC. We currently employ 28 licensed investment professionals throughout our network selling investment products to our customers.

Loan servicing fee income improved in 2006 as a result of slower prepayment speeds experienced in the current year that resulted from higher interest rates and slower home sales. The improvement supports the higher value of servicing rights in the market, and why we have sold mortgage servicing rights in the past two years.

Income from real estate operations for the last three years is detailed below by project:

	Year Ended December 31,
	2006					2005				2004
	Lots Closed		Income (Loss)			Lots Closed		Income (Loss)		Lots Closed		Income (Loss)
	(Dollars in thousands)
Springbank of Plainfield		83	$	726			123	$	2,335		—	$	—
Shenandoah		—		(5	)		4		561		126		5,022
Tallgrass of Naperville:
Single-family		3		360			—		32		13		1,175
Multi-family and commercial		—		—			—		—		1		460
Other		—	$	(296	)		—		—		—		—

		86	$	785			127	$	2,928		140	$	6,657

During 2006, we sold the final lots in Tallgrass of Naperville. Lot sales in the Springbank development in 2006 decreased due to the weaker housing market that has significantly reduced new and existing home sales nationwide and in our markets. Higher estimated costs to completion in the project, largely due to earlier project delays, have contributed to lower lot sale profit margins. While we now have product to sell to our builder group, most of the builders have been reluctant to add to their existing lot inventories due to the slow home sales market. The $296,000 other loss in 2006 resulted from the Company’s decision not to exercise an expiring option to purchase a parcel of real estate in Plainfield, IL , which resulted in a write-off of an earnest money deposit and other costs. The slow real estate sales market and the considerable investment the Company has in the Springbank development in Plainfield led to this decision. To accelerate revenue in the Springbank project, we are considering potential bulk lot sales, and the sale of unimproved land and the commercial and townhome sites in the subdivision.

2005 versus 2004. Loan sale volume dropped to $825.8 million in 2005 compared to $914.1 million in 2004, but our gain on sale of loans increased nearly 15% due to higher loan sale margins, primarily on our equity line of credit sales. During the year we also completed a sale of mortgage servicing rights, representing 21% of our serviced for others portfolio, at a pre-tax gain of $2.4 million.

Gain on investment securities in 2005 resulted primarily from the dissolution of a regional ATM network and the sale of two investments in other equity securities. The gain in 2004 resulted from the sale of certain corporate debt securities that had incurred other-than-temporary impairment write-downs in previous periods at a net gain of $2.7 million that was offset by a $2.0 million other-than-temporary impairment write-down on $8.8 million of Freddie Mac floating-rate preferred stock securities.

Assumed premium income increased over 20% due to an increase in the volume of loans originated with PMI that we included in these programs.

Income earned from bank-owned life insurance increased $2.2 million, or 64%, in 2005, as the result of $35 million of new investments during the year and the receipt of $664,000 of death benefit proceeds.

Other loan fee income was $6.3 million in 2005, an increase of $528,000 over 2004. The increase was due primarily to a higher volume of late charges and commercial processing fees.

We closed on the first lots in the Springbank development in the fourth quarter of 2005. The 2005 income from Shenandoah included a $428,000 gain resulting from the closing out of the project.

Non-interest expense

The table below shows the composition of non-interest expense for the periods indicated.

	Year Ended December 31,							Percentage Increase (Decrease)
	2006			2005		2004		2006			2005
	(Dollars in thousands)
Compensation	$	80,031			74,613		74,295		7	.3%			.4
Employee benefits		25,764			25,375		23,975		1	.5		5	.8

Total compensation and benefits		105,795			99,988		98,270		5	.8		1	.7

Occupancy expense		23,468			21,145		19,717		11	.0		7	.2
Furniture, fixture and equipment expense		8,345			8,248		8,267		1	.2		(	.2)
Advertising and promotion		7,656			8,313		9,079		(7	.9)		(8	.4)
Data processing		9,695			8,144		8,012		19	.0		1	.6
Amortization of core deposit intangibles		4,309			2,902		3,002		48	.5		(3	.3)
Prepayment charges related to repayment of borrowings		2,813			—		—		N	M		N	M
Other expenses:
Professional fees		2,843			4,873		4,756		(41	.7)		2	.5
Stationery, brochures and supplies		3,036			2,811		3,210		8	.0		(12	.4)
Postage		2,556			2,649		2,810		(3	.5)		(5	.7)
Telephone		1,987			1,938		3,200		2	.5		(39	.4)
Transaction fraud losses, net		3,149			1,941		3,084		62	.2		(37	.1)
Correspondent banking services		1,607			1,586		1,596		1	.3		(	.6)
Title fees, recording fees and credit		2,092			2,317		1,937		(9	.7)		19	.6
report expense
Security expense		1,692			1,625		1,464		4	.1		11	.0
Insurance costs		1,963			1,829		1,635		7	.3		11	.9
FDIC premiums and OTS assessment		2,545			2,332		2,224		9	.1		4	.9
Real estate held for investment⁽¹⁾		3,886			3,966		4,215		(2	.0)		(5	.9)
Other		8,633			9,467		9,338		(8	.8)		1	.4

Total other expenses		35,989			37,334		39,469		(3	.6)		(5	.4)

Total non-interest expense	$	198,070			186,074		185,816		6	.5%		0	.1

Non-interest expense to average assets, exclusive of balance sheet restructuring charges		1.73	%		1.86		2.01
FTEs		2,152			2,075		2,088

⁽¹⁾	Expenses related to investments in affordable housing properties in Wisconsin.

2006 versus 2005. Non-interest expense increased 6.5%, or $12.0 million, in 2006 compared to 2005, including $2.8 million of prepayment charges related to the balance sheet restructuring and $1.0 million loss related to a standby letter of credit obligation. While we added seven branches from the acquisition of EFC and operated two de novo branches opened in December 2005 for the full year, we partially offset these costs through a number of cost curtailment strategies implemented during the year. The ratio of non-interest expense to average assets improved to 1.73% in 2006 from 1.86% in 2005. Efforts to carefully monitor and control non-interest expense levels will continue to be a focus in 2007.

Compensation and benefits increased by 5.8% during 2006, while occupancy and equipment costs increased by 8.2% over this same period. The increase in these categories is primarily due to the impact of the EFC transaction.

We experienced a 19.0% increase in data processing expense to $9.7 million in 2006 as the expansion of our retail network in the EFC acquisition necessitated additional resources allocated to network hardware support. Also contributing to the increase was the cost of additional security safeguards.

Amortization of core deposit intangibles increased as a result of the EFC acquisition.

Other expenses of $36.0 million were 3.6% lower than 2005 despite the $1.0 million write down. Professional expenses were substantially lower in 2006 compared to 2005 as certain expenses incurred in 2005 relating to anti-money laundering and Sarbanes-Oxley functions were not recurring in 2006.

2005 versus 2004. Our successful cost control efforts during the year held non-interest expenses flat to the prior year. The ratio of non-interest expense to average assets improved to 1.86% in 2005 compared to 2.01% in 2004. This was achieved while operations continued to expand through acquisition (Chesterfield Financial Corp. in October 2004) and three new branch openings in 2005.

Compensation and benefit costs increased only 1.7% in 2005, as our average full-time equivalent number of employees remained flat, and we reduced annual incentive compensation despite adding three new branches during the year.

Our advertising costs were reduced by 8.4% as we changed our marketing initiatives, spending less on new account premiums and channeling those savings into more targeted, rate-driven promotions.

Professional fees increased during 2005 compared to the prior year, reflecting higher costs related to consulting fees for various process improvement initiatives, including an automated work flow system for the mortgage loan division, and for enhancement of our ongoing Bank Secrecy Act/anti-money laundering compliance activities.

Telephone expense decreased year over year due to renegotiation and consolidation of our contract. Reductions in stationery and supplies expenses for 2005 reflect various efficiency and cost-reduction efforts.

Income Tax Expense

2006 versus 2005. Income tax expense decreased to $49.0 million for 2006, compared to $54.5 million for 2005 due to a decrease in pre-tax income, the effect of which was partially offset by an increase in the effective income tax rate. Our effective tax rate increased to 36.7% in 2006 compared to 34.5% for 2005. The increase in the effective tax rate compared to the prior year period was primarily attributable to adjustments to tax reserves for uncertainties.

During 2006, we recorded additional tax reserves of approximately $4.5 million relating to tax uncertainties (including interest) associated with income earned through the Bank’s REIT subsidiary that invests in real estate loans. Included in this total is $4.0 million of REIT-related reserves recorded in the fourth quarter as a result of state audit activity. As part of its audit of state income tax returns for 1999 to 2001, the Illinois Department of Revenue (“IDR”) issued a proposed adjustment in January 2007 that reflected the disallowance of the REIT dividends paid deduction for the years under examination. We disagree with the IDR proposed adjustment and intend to defend our tax filing positions.

Although we believe we have established adequate reserves for the state tax uncertainties associated with the REIT, if we are unsuccessful in defending our tax filing positions in these and subsequent years, we may incur increased tax expense in future periods.

2005 versus 2004. Income tax expense increased to $54.5 million for 2005, compared to $50.8 million for 2004, due to an increase in pre-tax income and to an increase in our effective tax rate to 34.5% in 2005 compared to 33.3% for 2004. The increase in the effective tax rate in 2005 was primarily due to the reversal of tax reserves for uncertainties in 2004 that related to certain prior years’ income tax matters.

A reconciliation of the statutory federal income tax rate to the effective tax rate is included in Note 14 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data.”

Liquidity and Capital Resources

Our holding company manages liquidity and capital resources to provide funds necessary for holding company debt service on borrowings, cash dividends to stockholders, funding our real estate operations, and planned repurchases of common stock. Our major sources of liquidity at our holding company are dividends from the Bank, which are subject to regulatory limitations. Additionally, we maintain a $60.0 million unsecured line of credit with a Chicago-based commercial bank. See “Business– Borrowed Funds and Junior Subordinated Debentures” on page 19 for more information relating to this bank line of credit.

At December 31, 2006 our capital structure at the holding company includes equity capital of $1.07 billion, coupled with $67.0 million of junior subordinated debentures and $147.5 million of unsecured term debt. The weighted-average cost of our junior subordinated debentures is equal to 3-month LIBOR plus 156 basis points, while our term debt floats at 3-month LIBOR plus 95 basis points. We have used a combination of these sources of funds over the past few years to fund acquisitions and to repurchase our common stock in the open market. In connection with our purchase of EFC, we issued $105.1 million worth of our common stock, and increased our unsecured term loan to $115 million from $63 million to help finance the cash portion of the transaction. We also increased our revolving line of credit during 2006 from $55.0 million to $60.0 million. In July, 2006, we increased the term loan by $40 million to $155 million in part to provide funding for our stock buyback program. A scheduled principal payment on the term loan of $7.5 million was paid on December 31, 2006 reducing the balance to $147.5 million. At December 31, 2006, there were no amounts outstanding under the $60 million line of credit.

During 2006, the Company received $95.0 million in dividends from the Bank. At December 31, 2006 under current OTS regulations, the Bank has $13.3 million of retained earnings available for dividend declarations. On January 1, 2007 the amount available for dividend declarations increased to $40.5 million.

We manage liquidity at the Bank to ensure that adequate funds are available to meet normal operating requirements, as well as unexpected loan demand or deposit withdrawals by our customers, and other contractual obligations or commitments, on a timely and cost-effective manner. Our primary sources of funds are deposits, wholesale borrowings, principal repayments on loans and mortgage-backed securities, as well as proceeds from the sale of loans and investment securities. We manage our liquidity through regular review of loan originations and payoffs, deposit flows, and anticipated movements in interest rates, efforts that are aimed at forecasting when liquidity needs may occur and satisfying these liquidity needs while attempting to minimize funding risk.

While our scheduled loan and mortgage-backed securities amortization and maturing certificates of deposit are a relatively predictable source of funds, core deposit flows, loan and mortgage-backed securities prepayments are greatly influenced by economic conditions, the general level of interest rates and competition. We utilize particular sources of funds based on comparative costs and availability. We expect to continue diversifying our funding sources in 2007 through increased use of other wholesale borrowing sources, including reverse repurchase agreements. We may pursue wholesale borrowings with optionality structures to provide lower effective borrowing costs.

At December 31, 2006, we have approximately $1.21 billion of potential additional borrowing capacity from the FHLBC and approximately $1.05 billion of available collateral capacity under our one- to four-family blanket pledge agreement. We also have the ability to pledge other mortgage-backed and investment securities, as well as certain multi-family mortgage loans. Additional borrowings from the

FHLBC are subject to the Bank’s compliance underwriting, collateral, capital stock and other policies set forth in the FHLBC credit guide at the time of the borrowing request. In addition, we have $80 million of various short-term lines of credit with two other commercial banks. We also have additional capacity to obtain other borrowings through the pledge of investment or mortgage-backed securities.

Contractual Obligations and Commitments and Contingencies

Through the normal course of business we enter into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits or borrowings. We generally renew a large percentage of our certificates of deposit, upon maturity, as certificates of deposit are primarily retail-oriented accounts rather than more rate-sensitive brokered certificates. As such, the scheduled $2.78 billion of maturing certificates of deposit in 2007 are not expected to put a burden on our cash needs. We have the ability to refinance any advance coming due with the FHLBC, which we will normally do in the normal course of business if our loan portfolio is growing and out-pacing deposit growth. If loan portfolio growth is slower, due to higher prepayments in the loan portfolio or increased loan sale activity, we may repay our maturing advances out of loan repayment proceeds.

Contractual Obligations. The following table shows our contractual obligations coming due in the periods indicated at December 31, 2006:

	Total
	(Dollars in thousands)
Certificates of deposit	$	3,554,035	2,783,973	713,036	47,125	9,901
FHLB of Chicago advances		2,155,000	1,495,000	600,000	60,000	—
Other borrowings		470,751	95,751	100,000	225,000	50,000
Unsecured term bank loan		147,500	12,500	28,000	33,000	74,000
Junior subordinated debentures		67,011	—	—	—	67,011
Purchase obligations		5,623	4,120	1,503	—	—
Real estate development contracts⁽¹⁾		11,898	7,294	4,604	—	—
Post retirement benefit plans		5,895	95	504	903	4,393
Operating leases		54,310	5,611	10,602	9,250	28,847

Total	$	6,472,023	4,404,344	1,458,249	375,278	234,152

⁽¹⁾	Reflects pending contractual commitments for improvements. These figures do not include estimated development costs not under contract, currently estimated at $67 million for existing real estate development projects, all of which relates to our Springbank of Plainfield development.

Purchase obligations reflect payment obligations under agreements to purchase goods or services in determinable amounts at fixed prices that are enforceable and legally binding on the Company.

Real estate development costs have been funded primarily out of proceeds from sales of previously developed lots, and when sales have not generated sufficient cash flow, funding is supported by additional capital investments from the holding company. It is currently anticipated that in 2007 we will be required to supplement the cash flow from lot sales with capital investments from the holding company.

Post retirement benefits include benefits for certain employees and/or directors under the Company’s Supplemental Executive Retirement Plan and Long-Term Medical Plan.

Commitments and Contingencies. The following table shows certain off-balance sheet commitments and contingencies of the Company and the Bank as of December 31, 2006:

	Total
	(Dollars in thousands)
One- to four-family mortgage
commitments	$	377,617	377,617	—	—	—
Equity line and equity loan
commitments		55,856	55,856	—	—	—
Unused portion of equity lines of
credit		1,166,102	1,166,102	—	—	—
Commitments to sell one- to
four-family mortgage and equity
loans		109,266	109,266	—	—	—
SBIC commitments		3,625	3,625

PART I

Item 1. Business

General

Lending Activities

Secondary Market and Loan Servicing Activities

Asset Quality and Allowance for Loan Losses

Investment Activities

Deposits

Real Estate Development

Regulation and Supervision

Federal Home Loan Bank System

Federal Reserve System

Executive Officers of the Registrant

Employees

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Item 1B. Unresolved Staff Comments

Available Information

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Performance Graph

Comparison of Cumulative Total Return Among MAF Bancorp,Peer Group Index and Nasdaq Market Index

Item 6. Selected Financial Data

Overview

Recent Acquisitions

Critical Accounting Policies and Estimates

Results of Operations

Income Tax Expense

Liquidity and Capital Resources

Comparison of Cumulative Total Return Among MAF Bancorp,
Peer Group Index and Nasdaq Market Index

MAF BANCORP INC 10-K