The discussion and analysis that follows focuses on the factors affecting our consolidated financial condition at December 31, 2008 and 2007, and our consolidated results of operations for the years ended December 31, 2008, 2007 and 2006. The consolidated financial statements and related notes and the discussion of our critical accounting policies appearing elsewhere in this Annual Report should be read in conjunction with this discussion and analysis.

Overview

Loans. Net loans receivable increased $14.0 million, or 1.1%, to $1.268 billion at December 31, 2008, from $1.254 billion at December 31, 2007. The increase in net loans receivable was primarily due to planned growth in commercial leases, multi-family real estate loans and non-residential real estate loans, offset by planned reductions in construction and land loans and one- to four family residential mortgage loans. Commercial leases increased by $31.0 million, multi-family real estate loans increased by $13.9 million, and non-residential real estate loans increased by $16.4 million. Construction and land loans decreased by $15.0 million, and one- to four-family residential mortgage loans decreased by $21.5 million. Commercial loans decreased by $5.7 million primarily due to declines in healthcare loan exposures. Future loan growth could be adversely affected by our unwillingness to compete for loans by relaxing our historical underwriting standards.

Securities Available for Sale. Net securities available-for-sale increased $47.9 million, or 62.1%, to $124.9 million at December 31, 2008, from $77.0 million at December 31, 2007. The primary reason for the increase was our purchase of $103.0 million in securities available-for-sale, offset by $25.2 million of principal repayments and maturities on securities available-for-sale and a $35.9 million pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks after Freddie Mac was placed into conservatorship.

Deposits. Deposits decreased $3.8 million, or 0.4%, to $1.070 billion at December 31, 2008, from $1.074 billion at December 31, 2007, due in part to our decision to enhance the composition and reduce the cost of our deposits by diminishing our competitive position for deposits in excess of historical federal deposit insurance limits and reducing interest rates on our highest-balance checking and money market deposit accounts consistent with the overall declines in U.S. interest rates. Total core deposits (savings, money market, noninterest-bearing demand and NOW accounts) decreased as a percentage of total deposits, representing 65.0% of total deposits at December 31, 2008, compared to 71.3% of total deposits at December 31, 2007.

Borrowings. Borrowings increased $103.9 million, or 107.8%, to $200.4 million at December 31, 2008, from $96.4 million at December 31, 2007. The increase in borrowings was due in substantial part to an increase in wholesale borrowings to temporarily replace planned reductions in high-balance deposit accounts and to purchase securities.

Stockholders’ Equity. Total stockholders’ equity was $266.8 million at December 31, 2008, compared to $291.1 million at December 31, 2007. The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 549,700 shares of our common stock for a total cost of $7.7 million, the declaration and payment of cash dividends totaling $6.1 million, and the $19.4 million net loss that we recorded for 2008. These items were partially offset by a $3.5 million increase in accumulated other comprehensive income, and a $4.4 million increase in additional paid in capital resulting from the vesting of stock-based compensation and ESOP shares earned. The unallocated shares of common stock that our ESOP owns were reflected as a $16.1 million reduction to stockholders’ equity at December 31, 2008, compared to a $17.1 million reduction to stockholders’ equity at December 31, 2007.

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Net Income (Loss). We had a net loss of $19.4 million for the year ended December 31, 2008, compared to net income of $7.2 million and $10.0 million in 2007 and 2006, respectively. The net loss was due in substantial part to a $35.9 million pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks after Freddie Mac was placed into conservatorship. Our basic loss per common share was $0.98 for the year ended December 31, 2008, compared to basic earnings per common share of $0.35 and $0.45 for the years ended December 31, 2007 and 2006, respectively.

Net Interest Income. Net interest income decreased $1.4 million to $52.3 million for the year ended December 31, 2008, from $53.6 million for 2007. The decrease was due in substantial part to an $11.6 million decrease in interest earned on loans receivable resulting from a $55.8 million decline in the average loans receivable balance, a 64 basis point decrease in the average yield on loans receivable due to declining market interest rates, Freddie Mac’s suspension of dividends on its preferred stocks beginning the third quarter of 2008, and the FHLBC’s suspension of dividends on its common stock beginning the fourth quarter of 2007. These decreases were partially offset by an $11.4 million decrease in interest expense on deposits.

Provision for Loan Losses. We recorded a provision for loan losses of $5.1 million for the year ended December 31, 2008, compared to a provision for loan losses of $697,000 for 2007 and a credit for loan losses of $136,000 for 2006. The provision for loan losses reflects a $1.8 million increase in the general portion of the allowance for loan losses that we establish pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, due to deteriorating national and local economic conditions, a $1.9 million increase in the portion of the allowance for loan losses that we allocate to impaired loans pursuant to SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and $1.4 million in net charge offs.

Noninterest Income. Noninterest income totaled $10.0 million for the year ended December 31, 2008, compared to $9.6 million for 2007 and $10.5 million for 2006. Our noninterest income for 2008 included a $1.4 million pre-tax gain on the sale of shares of Visa, Inc. Class B common stock that we received in connection with Visa, Inc.’s initial public offering, and a $1.2 million pre-tax gain on additional shares of Visa. Inc. Class B common stock that were allocated to us in the initial public offering and are currently held in a litigation escrow under Visa Inc.’s retrospective responsibility plan. The gain that we recorded on the shares held in litigation escrow represents a reduction of our obligation to indemnify Visa USA under the retrospective responsibility plan.

Noninterest Expense. Noninterest expense for the year ended December 31, 2008 was $88.6 million, compared to $52.5 million for 2007 and $52.4 million for 2006. The increase was primarily due to a $35.9 million pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks after Freddie Mac was placed into conservatorship, and a $2.0 million pre-tax loss on the early extinguishment of borrowings that we recorded in connection with the prepayment of a $25 million FHLBC term advance. Results for 2007 included a $1.2 million pre-tax charge, which reflected the proportionate share of Visa USA’s estimated litigation obligations that was allocated to us under Visa Inc.’s retrospective responsibility plan.

Income Taxes. We recorded an income tax benefit of $12.0 million for the year ended December 31, 2008, compared to income tax expense of $3.0 million and $4.8 million for 2007 and 2006, respectively. The income tax benefit was due in substantial part to the impairment loss that we recorded on our holdings of Freddie Mac preferred stocks.

Key Strategic Initiatives And Events

Stock Repurchase Program. Our Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. The authorization permits shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization may be utilized at management’s discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of Directors. The repurchase authorization will expire on May 15, 2009, unless extended by the Board of Directors. As of December 31, 2008, the Company had repurchased 3,604,923 shares of its common stock out of the 5,047,423 shares that have been authorized for repurchase.

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Quarterly Cash Dividends. Our Board of Directors declared four quarterly cash dividends of $0.07 per share during 2008. Cash dividends totaling $6.1 million were paid in 2008. On January 28, 2009, the Board of Directors declared a quarterly cash dividend of $0.07 per share that is payable on March 6, 2009.

Equity Incentive Plan. On June 27, 2006, our stockholders approved the BankFinancial Corporation 2006 Equity Incentive Plan (the “2006 EIP”), which authorized the Human Resources Committee of the Board of Directors to grant a variety of cash-based and equity-based incentive awards, including stock options, stock appreciation rights, restricted stock, performance shares and other incentive awards, to employees and directors aggregating up to 3,425,275 shares of our common stock. The 2006 EIP was established by the Board of Directors to promote the long-term financial success of the Company, to attract, retain and reward persons who can and do contribute to such success, and to further align the participants’ interests with those of our stockholders. The Human Resources Committee has awarded stock options to purchase 2,358,604 shares of our common stock and 833,450 shares of restricted stock to certain employees and directors of the Company pursuant to the 2006 EIP.

Economic and Competitive Conditions

General financial and credit conditions exhibited significant uncertainty and distress as 2008 progressed. In general, however, pricing and underwriting terms and conditions for multifamily and commercial real estate loans and commercial leases became more favorable, especially in the latter half of the year. Pricing for residential and consumer loans improved as well, but market conditions and the Bank’s underwriting standards resulted in comparatively little demand for the Bank’s traditional adjustable-rate residential portfolio assets. Price competition for local deposits, whether low-balance core deposits, certificates of deposits or high-balance, high-yield transaction accounts, steadily increased during the year despite the dramatic changes in U.S. Federal Reserve monetary policy and the U.S. Treasury yield curve. Higher unemployment rates began to negatively affect consumer spending, and these factors could have adverse effects on apartment building and commercial real estate occupancy levels in 2009.

We experienced modest growth in our multifamily loan portfolio, in substantial part due to a careful expansion of our geographic market territory that we began several years ago. Our research and experience indicate that certain markets in the central United States exhibit more favorable pricing and underwriting conditions than those available in the Chicago metropolitan market; accordingly, we have gradually established relationships with market participants in selected metropolitan markets within reasonable travel distance from Chicago. We expect to continue this expansion within the existing markets and in new markets based on our ongoing internal and third-party due diligence results as long as the required pricing and underwriting conditions remain available.

We experienced modest growth in our commercial real estate portfolio, principally due to internal expansion by existing customers as well as a favorable impact from certain competitors’ inability to increase or renew commercial credit exposures. Given economic conditions, however, we do not expect material growth in this portfolio absent a significant favorable shift in competitor behavior in our local Chicago metropolitan market.

Our construction loan portfolio continued to decline due to project sales activity, though the pace of sales activity slowed meaningfully in the second half of 2008. We discouraged any new residential construction loans and we had limited interest in site acquisition loans for future construction. Demand for non-residential construction loans also diminished and we expect the balances in all construction loan categories to decline further in 2009.

We experienced reasonably strong growth in the commercial lease portfolio due principally to continuing demand for technology assets and the impact of credit market disruption on non-bank competitors. In addition, we experienced more limited growth in new commercial loans due to increased marketing and credit facility usage by existing customers, but this growth was offset by continuing declines in selected health-care credit exposures. We will continue to focus on expanding our commercial lending to our commercial lease customers and local businesses to the extent that economic and credit conditions are favorable.

Our overall loan portfolio quality was stable in 2008. The net increase in non-accrual loans and a related increase to loan loss reserves resulted primarily from the death of one residential construction loan borrower and the estate’s inability to maintain debt service on the completed residence, together with the widely-known distressed sale nature of the collateral disposition. In addition, acting on the premise that bankruptcy protection litigation may become necessary, we established a specific loan loss reserve and recorded a charge-off on two health care-related real estate

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loans due to ongoing cash flow issues and lien priority issues concerning future accounts receivables, as well as the borrower’s inability to consummate pending facility sales transactions. We are generally comfortable with the quality of our loan portfolio exposures for 2009 subject to the foregoing concerns on general economic conditions.

As we expected, pursuant to our model, our general loan loss reserves continued to increase materially due to the changes in national and local economic risk factors. We continue to believe that adherence to our historical loan underwriting standards remains appropriate, though our credit analyses incorporate somewhat more pessimistic assumptions given the negative trends in these risk factors.

Deposits declined slightly in 2008, as modest growth in our deposit balances under $250,000 (the new FDIC insurance limit) was offset by declines in high-yielding transaction accounts with balances in excess of $250,000. Our customer retention efforts for balances under $250,000 were successful, though the migration rate from lower-yielding accounts accelerated compared to 2007. Given the material uncertainties regarding institutional liquidity and funding pressures, we expect that price competition for deposits from all sources will exhibit considerable volatility in 2009.

Our net interest margin and net interest spread were relatively stable during the year. Nonetheless, we believe that such behavior may not necessarily continue because of further reductions in our construction and healthcare loan portfolios and continued deposit-pricing pressures. These factors could be offset by a favorable interest rate environment and continued favorable commercial credit spreads on multifamily real estate loans and commercial leases.

Non-interest income increased slightly in 2008 due to one-time gains on securities and VISA stock. Deposit fees continued a gradual decline as customers minimize their transaction costs. Wealth Management performed consistent with our original expectations for 2008 despite the adverse investment climate. We expect that income from gains on sales of fixed-rate loans and the related loan servicing rights could increase in 2009, but any increase will likely be at least partially offset by accelerated amortization of our portfolio of loan servicing rights. In general, we expect most categories of other recurring income will remain constant or experience only slight growth. Income from Bank Owned Life Insurance (“BOLI”) was stable in 2008, but we expect to take all necessary measures in 2009 to continue to preserve the original amount invested in BOLI and the downside protections afforded by the policy’s stable value contract, including a potential surrender of the BOLI policy, and will accept such volatility to BOLI earnings as may result from these actions.

Non-interest expense increased significantly due to a $36 million impairment loss on Freddie Mac preferred stocks and a $2 million expense relating to the prepayment of a $25 million Federal Home Loan Bank term advance. Excluding these items, non-interest expense remained well contained as we continued our focus on improving efficiency through operational reviews and technology deployments. We expect expenses related to multi-state loan and lease originations, deposit marketing and technology to increase, but we also expect significant partial expense offsets arising from the completion of our operational reviews in departments with recently completed technology deployments. We also expect a material increase in FDIC insurance assessments due to recent and anticipated significant increases in deposit insurance premium rates.

Critical Accounting Policies

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

Investment Securities. The classification and accounting for investment securities are discussed in detail in Note 1 of the Consolidated Financial Statements presented elsewhere herein. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , investment securities must be classified as held-to-maturity, available-for-sale, or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on

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securities. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment securities are generally determined by reference to quoted market prices and reliable independent sources. We evaluate marketable investment securities with significant declines in fair value as required to determine whether they should be considered other-than-temporarily impaired. Impairment losses must be recognized in current earnings rather than in other comprehensive income (loss). Investment securities are discussed in more detail in Note 4 to the Consolidated Financial Statements presented elsewhere herein.

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

Intangible Assets. Acquisitions accounted for under purchase accounting must follow SFAS No. 141, Business Combinations , and SFAS No. 142, Goodwill and Other Intangible Assets . SFAS No. 141 requires us to record as assets on our financial statements both goodwill, an intangible asset which is equal to the excess of the purchase price which we pay for another company over the estimated fair value of the net assets acquired, and identifiable intangible assets such as core deposit intangibles and non-compete agreements. Under SFAS No. 142, we evaluate goodwill at least annually, or when business conditions suggest an impairment may have occurred and we will reduce its carrying value through a charge to earnings if impairment exists. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used by us to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates that we used to determine the carrying value of our goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives could have a material adverse impact on our results of operations. As of December 31, 2008, our intangible assets consisted of goodwill of $22.6 million and core deposit intangibles of $6.0 million.

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

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Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We must assess the realization of the deferred tax asset and, to the extent that we believe that recovery is not likely, a valuation allowance is established. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. No valuation allowances were required at December 31, 2008. Although we have determined a valuation allowance is not required for any deferred tax assets at December 31, 2008, there is no guarantee that a valuation allowance will not be required in the future.

Comparison of Financial Condition at December 31, 2008 and December 31, 2007

Balance Sheet

Total assets increased $74.2 million, or 5.0%, to $1.555 billion at December 31, 2008, from $1.481 billion at December 31, 2007. The principal reasons for the increase in total assets were increases in securities available for sale and loans receivable.

Our loan portfolio consists primarily of investment and business loans (multi-family, nonresidential real estate, commercial, construction and land loans, and commercial leases), which together make up approximately 74.2% of gross loans. Net loans receivable increased $14.0 million, or 1.1%, to $1.268 billion at December 31, 2008, from $1.254 billion at December 31, 2007. The increase in net loans receivable was primarily due to planned growth in commercial leases, multi-family real estate loans and non-residential real estate loans, offset by planned reductions in construction and land loans and one- to four family residential mortgage loans. Commercial leases increased by $31.0 million, multi-family real estate loans increased by $13.9 million, and non-residential real estate loans increased by $16.4 million. Construction and land loans decreased by $15.0 million, and one- to four-family residential mortgage loans decreased by $21.5 million. Commercial loans decreased by $5.7 million primarily due to declines in healthcare loan exposures. Future loan growth could be adversely affected by our unwillingness to compete for loans by relaxing our historical underwriting standards.

Our allowance for loan losses increased by $3.7 million, from $11.1 million at December 31, 2007 to $14.7 million at December 31, 2008, due principally to a $1.9 million increase in the portion of the allowance for loan losses that we allocate to impaired loans pursuant to SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and a $1.8 million net increase in the general loan loss reserves that we establish pursuant to SFAS No. 5, Accounting for Contingencies , based on adverse changes to the national and local economic data that we use in our model for determining the proper level of general reserves. As of December 31, 2008, the specific reserves that we allocated to impaired loans pursuant to SFAS No. 114, totaled $2.7 million. The increase in the portion of the allowance for loan losses that we allocate to impaired loans resulted primarily from the death of one residential construction loan borrower, the estate’s inability to maintain debt service on the completed residence, and the widely known distressed sale nature of the collateral disposition. In addition, acting on the premise that the borrower may need to seek bankruptcy protection, we established a specific loan loss reserve and recorded a charge-off on two healthcare-related real estate loans to a healthcare provider and its affiliated entities due to ongoing cash flow and receivables lien priority issues, as well as the borrower’s inability to consummate pending facility sales transactions.

Net securities available-for-sale increased by $47.9 million, or 62.1%, to $124.9 million at December 31, 2008, from $77.0 million at December 31, 2007. The increase was primarily due to the purchase of $103.0 million in securities available-for-sale, offset by principal repayments on and maturities of $25.2 million in securities available-for-sale, and a $35.9 million pre-tax impairment loss that we recorded on our holdings of Freddie Mac preferred stocks following certain actions that were announced by the United States Department of the Treasury (“UST”) and the FHFA on September 7, 2008, including the placing of Freddie Mac into conservatorship, the issuance of new shares of Freddie Mac preferred stock to the UST that are senior to all previously issued shares, and the suspension of dividends on all previously issued shares.

Cash and cash equivalents increased by $381,000 to $29.3 million at December 31, 2008, compared to $28.9 million at December 31, 2007. Other assets increased by $12.7 million, or 95.8%, to $26.0 million at December 31, 2008, from $13.3 million at December 31, 2007, principally due to an increase in deferred tax assets relating to the impairment charge that we recorded on our Freddie Mac preferred stocks.

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Deposits decreased $3.8 million, or 0.4%, to $1.070 billion at December 31, 2008, from $1.074 billion at December 31, 2007, due in part to our decision to enhance the composition and reduce the cost of our deposits by diminishing our competitive position for deposits in excess of historical federal deposit insurance limits and reducing interest rates on our highest-balance checking and money market deposit accounts consistent with the overall declines in U.S. interest rates. Total core deposits (savings, money market, noninterest-bearing demand and NOW accounts) decreased as a percentage of total deposits, representing 65.0% of total deposits at December 31, 2008, compared to 71.3% of total deposits at December 31, 2007.

Borrowings increased $103.9 million, or 107.8%, to $200.4 million at December 31, 2008, from $96.4 million at December 31, 2007. The increase in borrowings was due in substantial part to an increase in wholesale borrowings to temporarily replace planned reductions in high-balance deposit accounts and to purchase securities. Additionally, fixed-rate advances due within one year increased by $85.0 million to $95.0 million at December 31, 2008.

Total stockholders’ equity was $266.8 million at December 31, 2008, compared to $291.1 million at December 31, 2007. The decrease in total stockholders’ equity was primarily due to the combined impact of our repurchase of 549,700 shares of our common stock for a total cost of $7.7 million, the declaration and payment of cash dividends totaling $6.1 million, and the $19.4 million net loss that we recorded for 2008. These items were partially offset by a $3.5 million increase in accumulated other comprehensive income, and a $4.4 million increase in additional paid in capital resulting from the vesting of stock-based compensation and ESOP shares earned. The unallocated shares of common stock that our ESOP owns were reflected as a $16.1 million reduction to stockholders’ equity at December 31, 2008, compared to a $17.1 million reduction to stockholders’ equity at December 31, 2007.

Loan Portfolio

We originate multi-family mortgage loans, nonresidential real estate loans, commercial loans, commercial leases, and construction and land loans. In addition, we originate one- to four-family residential mortgage loans and consumer loans, and purchase and sell loan participations from time to time. The following briefly describes our principal loan products.

Multi-family Mortgage Loans. Loans secured by multi-family mortgage loans totaled approximately $305.3 million, or 23.8%, of our total loan portfolio, at December 31, 2008. At December 31, 2008, $52.1 million of our multi-family loan portfolio was on loans outside of Illinois, this represents 17.0% of our multi-family portfolio and 4.1% of our total loan portfolio. Multi-family mortgage loans generally are secured by multi-family rental properties such as apartment buildings, including subsidized apartment units. The majority of our multi-family mortgage loans have adjustable interest rates following an initial fixed-rate period, typically between three and five years.

Nonresidential Real Estate Loans. Loans secured by nonresidential real estate totaled $342.3 million, or 26.7%, of our total loan portfolio, at December 31, 2008. We emphasize nonresidential real estate loans with initial principal balances between $1.0 million and $5.0 million. The nonresidential real estate properties securing these loans are predominantly office buildings, light industrial buildings, shopping centers and mixed-use developments, and to a lesser extent, more specialized properties such as nursing homes and other healthcare facilities. Substantially all of our nonresidential real estate loans are secured by properties located in our primary market area. Our nonresidential real estate loans are typically written as three- or five-year adjustable-rate mortgage loans or mortgage loans with balloon maturities of three or five years. Amortization of these loans is typically based on 20- to 25-year payout schedules. We also originate some 15-year fixed-rate, fully amortizing loans.

Commercial Loans. Commercial loans totaled $77.6 million, or 6.1%, of our total loan portfolio, at December 31, 2008. This total includes unsecured commercial loans with an aggregate outstanding balance of $9.4 million. We generally make commercial loans to customers in our primary market area to finance equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to five years. The loans either are negotiated on a fixed-rate basis, or carry adjustable interest rates indexed to a lending rate that is determined internally or based on a short-term market rate index.

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Commercial Leases. Commercial leases totaled $175.8 million, or 13.7%, of our total loan portfolio, at December 31, 2008. Our commercial leases are secured primarily by technology equipment, material handling equipment, and other capital equipment through an assignment of the lease and the grant of a security interest in the leased equipment. Leases generally are non-recourse to the leasing company. Consequently, we underwrite leases by examining the creditworthiness of the lessee rather than the lessor. The lessee generally agrees to send the lease payments directly to us. As of December 31, 2008, 60.8% of our commercial lease portfolio involved lessees with investment-grade rated public debt, 34.0% involved publicly-traded lessees with no public debt and thus no public debt rating, and 5.2% involved privately-held lessees or lessees with a below investment-grade public debt rating. Ratings are determined by Moody’s, Standard & Poors, Fitch, AM Best’s or an equivalent rating firm. Commercial leases typically have a maximum maturity of seven years and we limit our maximum outstanding credit exposure to $10.0 million to any single entity. Leases to companies with no public debt ratings generally involve companies with a net worth in excess of $25.0 million and typically have a maximum maturity of five years.

Construction and Land Loans. Construction and land loans totaled $49.5 million, or 3.9%, of our total loan portfolio at December 31, 2008. These loans generally consist of land acquisition loans to help finance the purchase of land intended for further development, including single-family homes, multi-family housing and commercial income property, development loans to builders in our market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder, often in conjunction with development loans. In general, the maximum loan-to-value ratio for raw land acquisition loan is 65% of the appraised value of the property, and the maximum term of these loans is two years. The maximum amount loaned on a development loan is generally limited to the cost of the land and public improvements, and advances are made in accordance with a schedule reflecting the cost of the improvements. Advances are generally limited to 90% of actual construction costs and, as required by applicable regulations, a 75% loan to completed appraised value ratio. We have discouraged new residential construction lending for the past several years and have had only limited interest in site acquisition loans for future construction.

One- to Four-Family Residential Mortgage Lending. Conforming and non-conforming fixed-rate and adjustable-rate residential mortgage loans totaled $323.7 million, or 25.3%, of our total loan portfolio at December 31, 2008, including home equity loans and lines of credit totaling $16.1 million, or 1.3%, of our total loan portfolio, and $78.0 million, or 6.1%, of our total loan portfolio, respectively. We generally originate both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which is currently $417,000 for single-family homes. Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 80%. At December 31, 2008, our adjustable-rate residential mortgage loan portfolio totaled $138.0 million, and included $48.1 million in loans that reprice once a year and $89.9 million in loans that reprice periodically after an initial fixed-rate period of three years or more. In addition to traditional one- to four-family residential mortgage loans, we offer home equity loans and home equity lines of credit that are secured by the borrower’s primary residence.

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

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

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Nonperforming Loans and Assets

We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we place loans on nonaccrual status when we believe that there is sufficient reason to question the borrower’s ability to continue to meet contractual principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting polices. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection or; (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At December 31, 2008, we had one loan in this category, compared to none in 2007. The loan is a $2.7 million multifamily loan secured by an apartment building located in a northern suburb of Chicago. The borrower made a payment in January 2009 that was scheduled for December 2008, and is currently expected to continue making scheduled payments. It is possible that this loan will placed on non-accrual status at a future date depending on the borrower’s responsiveness to our requirements and collection efforts. For comparative purposes, this loan was on non-accrual status at December 31, 2007.

At December 31, 2008, we had nonaccrual loans of $13.7 million, an increase of $1.6 million from December 31, 2007. Increases in nonaccrual loans occurred in construction loans ($4.2 million), non-residential real estate loans ($138,000), and one-to-four family loans ($9,000). Decreases in non-accrual loans occurred in multi-family loans ($2.1 million), commercial loans ($610,000) and commercial leases ($7,000). At December 31, 2008, no accrued interest on nonaccrual loans had been recognized.

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The increase in nonaccrual loans was primarily due to our placing on non-accrual status a total credit relationship of $3.7 million that is secured by a completed single-family residence and a parcel of vacant land zoned for commercial development, both of which are located in the northern suburbs of Chicago. We placed the loan on non-accrual status due to the death of the borrower and the inability of the borrower’s estate to continue debt service payments. The completed residence is currently under a contract for sale and the sale is scheduled to close by the end of first quarter of 2009; the proceeds of the sale are expected to substantially reduce the net credit exposure. However, there can be no assurance that the closing of the sale will in fact occur.

Real estate acquired through foreclosure or deed in lieu of foreclosure is classified as real estate owned (“REO”) until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At December 31, 2008, we had REO consisting of three one- to four- family residential properties with a fair value of $588,000, one multi-family property with a fair value of $133,000, and one land parcel with a fair value of $234,000. The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets at the dates indicated.

Risk Classification of Assets

Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in assets classified as substandard with the added characteristic that the weaknesses present also make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.

Based on a review of our assets at December 31, 2008, classified assets consisted of substandard assets of $27.0 million and doubtful assets of $1.5 million, and we had no loans classified as loss assets. Classified assets included $10.8 million of nonperforming loans, and substandard assets included $4.2 million of loans to healthcare providers. As of December 31, 2008, we recorded a charge-off of $605,000 and established a specific reserve of $714,000 on a total credit exposure of $4.2 million to a healthcare provider and its affiliated entities, acting on the premise that the

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borrower may need to seek bankruptcy protection due to ongoing cash flow issues and lien priority issues concerning future accounts receivables, as well as our concerns about the borrower’s ability to consummate a pending sale of the facilities. As of December 31, 2008, we had $30.9 million of assets designated as special mention, which included $9.8 million of loans to healthcare providers.

Allowance for Loan Losses

We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

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

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

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

We regularly review our loan portfolio to determine whether any loans require classification in accordance with applicable regulations. When we classify loans as either substandard or doubtful, we review the collateral and future cash flow projections to determine if a specific reserve is necessary. The allowance for loan losses represents amounts that have been established to recognize incurred losses in the loan portfolio that are both probable and reasonably estimable at the date of the financial statements. When we classify problem loans as loss, we charge-off such amount. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. Our determination as to the risk classification of our loans and the amount of our loss allowances are subject to review by our regulatory agencies, which can require that we establish additional loss allowances.

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