Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Total assets increased by $15.0 million or 2.7% to $578.5 million at June 30, 2008 from $563.5 million at December 31, 2007. The Bank continued to grow assets, funded primarily through cash flow provided by retail deposit growth, and repayments and prepayments of loans and mortgage backed securities. During the first half of 2008 the Company decreased its interest earning deposits to fund loan growth which in turn provided a higher yield to our interest earning assets as yields obtained through our loan originations were higher than money market instruments. Asset growth stabilized as management is concentrating on controlled growth and maintaining adequate liquidity in the anticipation of funding outstanding loan commitments. The composition of the Bank's assets has shifted more to loans reflecting management's desire to obtain higher yields from loan products than are obtainable from other types of investments. We intend to continue to grow at a measured pace consistent with our capital levels and as business opportunities permit.

Total cash and cash equivalents decreased by $2.0 million or 16.9% to $9.8 million at June 30, 2008 from $11.8 million at December 31, 2007. Investment securities classified as held-to-maturity decreased by $13.2 million or 8.0% to $151.8 million at June 30, 2008 from $165.0 million at December 31, 2007. This decrease was primarily attributable to call options exercised on $68.9 million of callable agency securities during the six months ended June 30, 2008, and $3.0 million of repayments and prepayments in the mortgage backed security portfolio, partially offset by the reinvestment of $58.6 million of proceeds back into the investment portfolio. The balance of the proceeds were used for the origination of loans.

Loans receivable increased by $27.9 million or 7.7% to $392.6 million at June 30, 2008 from $364.7 million at December 31, 2007. The increase resulted primarily from a $20.2 million increase in real estate mortgages comprising residential, commercial, construction and participation loans with other financial institutions, net of amortization, and an $8.2 million increase in commercial loans comprising business loans and commercial lines of credit, net of amortization, partially offset by a $133,000 decrease in consumer loans, net of amortization. The balance in the loan pipeline as of June 30, 2008 stood at $46.4 million. At June 30, 2008 the allowance for loan losses was $4.6 million or 280.39% of non-performing assets.

Deposits increased by $14.0 million or 3.5% to $412.8 million at June 30, 2008 from $398.8 million at December 31, 2007. The increase resulted primarily from an increase of $9.8 million in time deposit accounts, a $1.5 million increase in transaction accounts and a $2.6 million increase in savings and club accounts. During the six months ended June 30, 2008, the Federal Open Market Committee, (FOMC) has embarked on a philosophy

of decreasing short term interest rates at a rapid rate in an effort to lessen the impact of a possible recession in the American economy. This has resulted in a normalization of the yield curve helping decrease short term time deposit account yields.

The balance of borrowed money remained constant at $114.1 million during the six months ended June 30, 2008. The purpose of the borrowings reflects the use of long term Federal Home Loan Bank advances to augment deposits as the Bank's funding source for originating loans and investing in Government Sponsored Enterprise (GSE) investment securities.

Stockholders' equity increased by $1.1 million to $49.6 million at June 30, 2008 from $48.5 million at December 31, 2007. The increase in stockholders' equity is primarily attributable to net income of the Company for the six months ended June 30, 2008 of $2.6 million and $622,000 from 69,278 shares issued from stock option exercises, partially offset by $1.0 million paid to repurchase 67,431 shares of common stock, the payment of two quarterly cash dividends totaling $875,000 representing a $0.09/share payment during the quarter ended March 31, 2008, and a $0.10/share payment during the quarter ended June 30, 2008 and a $198,000 decrease in the market value of our available-for-sale securities portfolio, net of tax. At June 30, 2008 the Bank's Tier 1, Tier 1 Risk-Based and Total Risk Based Capital Ratios were 9.12%, 13.25% and 14.40% respectively.

Results of Operations
Three Months

Net income increased by $150,000 or 13.3% to $1.28 million for the three months ended June 30, 2008 from $1.13 million for the three months ended June 30, 2007. The increase in net income was due to an increase in net interest income, partially offset by increases in the provision for loan losses, non-interest expense and income taxes and a decrease in non-interest income. Net interest income increased by $684,000 or 16.3% to $4.9 million for the three months ended June 30, 2008 from $4.2 million for the three months ended June 30, 2007. This increase in net interest income resulted primarily from an increase of $55.5 million or 10.9% in the average balance of interest earning assets to $562.6 million for the three months ended June 30, 2008 from $507.1 million for the three months ended June 30, 2007, partially offset by a decrease in the average yield on interest earning assets to 6.41% for the three months ended June 30, 2008 from 6.52% for the three months ended June 30, 2007. The average balance of interest bearing liabilities increased by $55.7 million or 12.9% to $488.2 million for the three months ended June 30, 2008 from $432.5 million for the three months ended June 30, 2007 and the average cost of interest bearing liabilities decreased by thirty-eight basis points to 3.39% for the three months ended June 30, 2008 from 3.77% for the three months ended June 30, 2007. As a consequence, our net interest margin increased to 3.46% for the three months ended June 30, 2008 from 3.30% for the three months ended June 30, 2007.

Interest income on loans receivable increased by $747,000 or 12.7% to $6.6 million for the three months ended June 30, 2008 from $5.9 million for the three months ended June 30, 2007. The increase was primarily attributable to an increase in the balance of average

loans receivable of $59.0 million or 18.1% to $385.5 million for the three months ended June 30, 2008 from $326.5 million for the three months ended June 30, 2007, partially offset by a decrease in the average yield on loans receivable to 6.87% for the three months ended June 30, 2008 from 7.20% for the three months ended June 30, 2007. The increase in average loans reflects management's philosophy to deploy funds in higher yielding instruments, specifically commercial real estate loans, in an effort to achieve higher returns. The decrease in average yield reflects the competitive price environment prevalent in the Bank's primary market area on loan facilities as well as the repricing downward of certain rates on loan facilities tied to variable indices, consistent with the decrease in the prime lending rate through the reduction in rates forwarded by the FOMC's philosophy of easing market rates.

Interest income on securities increased by $218,000 or 10.6% to $2.3 million for the three months ended June 30, 2008 from $2.1 million for the three months ended June 30, 2007. This increase was primarily due to an increase in the average balance of securities held-to-maturity of $4.7 million or 3.1% to $157.9 million for the three months ended June 30, 2008 from $153.2 million for the three months ended June 30, 2007, and an increase in the average yield on securities held-to-maturity to 5.78% for the three months ended June 30, 2008 from 5.39% for the three months ended June 30, 2007. The increase in the average balance reflects management's philosophy to deploy funds in investments, absent an opportunity to originate higher yielding loans, in an effort to achieve higher returns.

Interest income on other interest-earning assets decreased by $212,000 or 66.3% to $108,000 for the three months ended June 30, 2008 from $320,000 for the three months ended June 30, 2007. This decrease was primarily due to a $8.0 million decrease in the average balance of other interest-earning assets to $19.3 million for the three months ended June 30, 2008 from $27.3 million for the three months ended June 30, 2007 and a decrease in the average yield on other interest-earning assets to 2.24% for the three months ended June 30, 2008 from 4.69% for the three months ended June 30, 2007. The decrease in the average yield reflects the lower short-term interest rate environment for overnight deposits during the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. The decrease in the average balance primarily reflects management's philosophy to deploy funds into loans in an effort to achieve higher returns.

Total interest expense increased by $69,000 or 1.7% to $4.14 million for the three months ended June 30, 2008 from $4.07 million for the three months ended June 30, 2007. The increase resulted primarily from an increase in the balance of average interest bearing liabilities of $55.7 million or 12.9% to $488.2 million for the three months ended June 30, 2008 from $432.5 million for the three months ended June 30, 2007, partially offset by a decrease in the average cost of interest bearing liabilities to 3.39% for the three months ended June 30, 2008 from 3.77% for the three months ended June 30, 2007. The decrease in the average cost reflects the Company's reaction to the lower short term interest rate environment brought on by the easing bias of the Federal Reserve's philosophy and our ability to reduce our pricing on a select number of retail deposit products.

The provision for loan losses totaled $300,000 for the three months ended June 30, 2008. The Company did not record a loan loss provision for the three months ended June 30, 2007. The provision for loan losses is established based upon management's review of the Bank's loans and consideration of a variety of factors including, but not limited to, (1) the risk characteristics of the loan portfolio, (2) current economic conditions, (3) actual losses previously experienced, (4) significant level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. During the three months ended June 30, 2008, the Bank experienced $4,000 in net recoveries, (consisting of $7,000 in recoveries and $3,000 in charge-offs). During the three months ended June 30, 2007, the Bank experienced $217,000 in net charge-offs (consisting of $220,000 in charge-offs and $3,000 in recoveries), primarily as a result of the repossession of a loan to facilitate the construction of approximately ten residential units done in participation with another financial institution. The Bank had non-performing loans totaling $282,000 or 0.07% of gross loans at June 30, 2008, $1.7 million or 0.45% of gross loans at March 31, 2008 and $2.0 million or 0.59% of gross loans at June 30, 2007. The allowance for loan losses was $4.6 million or 1.15% of gross loans at June 30, 2008, $4.3 million or 1.12% of gross loans at March 31, 2008 and $3.5 million or 1.05% of gross loans at June 30, 2007. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in the aforementioned criteria. In addition various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additional provisions based on their judgment of information available to them at the time of their examination. Management believes that the allowance for loan losses was adequate at June 30, 2008, March 31, 2008 and June 30, 2007.

Total non-interest income decreased by $114,000 or 39.7% to $173,000 for the three months ended June 30, 2008 from $287,000 for the three months ended June 30, 2007. The decrease in non-interest income resulted primarily from a $109,000 decrease in gain on sales of loans originated for sale to $20,000 for the three months ended June 30, 2008 from $129,000 for the three months ended June 30, 2007, and a $5,000 decrease in general fees and service charges to $153,000 for the three months ended June 30, 2008 from $158,000 for the three months ended June 30, 2007. The decrease in gain on sale of loans originated for sale reflects the softening one- to four-family residential real estate market during the three months ended June 30, 2008. During the three months ended June 30, 2008, the Company made a decision to eliminate our Retail Mortgage Division as a separate division, due to a weakening in the one- to four-family residential real estate market, it was decided that this division's operation, on an on-going basis, were determined to be cost prohibitive.

Total non-interest expense increased by $16,000 or 1.0% to $2.74 million for the three months ended June 30, 2008 from $2.72 million for the three months ended June 30,

2007. Salaries and employee benefits expense decreased by $89,000 or 6.1% to $1.38 million for the three months ended June 30, 2008 from $1.47 million for the three months ended June 30, 2007. This decrease was primarily attributable to a decrease in the number of full time equivalent employees to 84 for the three months ended June 30, 2008 from 101 for the three months ended June 30, 2007, partially offset by salary increases in conjunction with annual reviews. Equipment expense remained relatively unchanged at $504,000 for the three months ended June 30, 2008 from $505,000 for the three months ended June 30, 2007. The primary component of this expense item is data service provider expense. Occupancy expense, advertising and other non-interest expense increased by an aggregate of $106,000 or 14.1% to $857,000 for the three months ended June 30, 2008 from $751,000 for the three months ended June 30, 2007. The increase in occupancy, advertising and other non-interest expense is primarily attributable to increases in expenses commensurate with a growing franchise. Other non-interest expense is comprised of directors' fees, stationary, forms and printing, professional fees, legal fees, check printing, correspondent bank fees, telephone and communication, shareholder relations and other fees and expenses.

Income tax expense increased $104,000 to $728,000 for the three months ended June 30, 2008 from $624,000 for the three months ended June 30, 2007 reflecting increased pre-tax income earned during the three month time period ended June 30, 2008. The consolidated effective income tax rate for the three months ended June 30, 2008 was 36.3% as compared to 35.7% for the three months ended June 30, 2007.

Six Months of Operations

Net income increased by $191,000 or 8.0% to $2.6 million for the six months ended June 30, 2008 from $2.4 million for the six months ended June 30, 2007. The increase in net income was due to an increase in net interest income, partially offset by increases in the provision for loan losses, non-interest expense and income taxes and a decrease in non-interest income. Net interest income increased by $1.17 million or 14.0% to $9.55 million for the six months ended June 30, 2008 from $8.38 million for the six months ended June 30, 2007. This increase in net interest income resulted primarily from an increase of $52.7 million or 10.5% in the average balance of interest earning assets to $556.3 million for the six months ended June 30, 2008 from $503.6 million for the six months ended June 30, 2007 while the average yield on interest earning assets increased slightly to 6.50% for the six months ended June 30, 2008, from 6.49% for the six months ended June 30, 2007. The average balance of interest bearing liabilities increased by $55.1 million or 12.9% to $482.7 million for the six months ended June 30, 2008 from $427.6 million for the six months ended June 30, 2007, while the average cost of interest bearing liabilities decreased to 3.53% for the six months ended June 30, 2008 from 3.73% for the six months ended June 30, 2007. As a consequence, our net interest margin increased to 3.43% for the six months ended June 30, 2008 from 3.33% for the six months ended June 30, 2007.

Interest income on loans receivable increased by $1.64 million or 14.1% to $13.27 million for the six months ended June 30, 2008 from $11.63 million for the six months

ended June 30, 2007. The increase was primarily attributable to an increase in the balance of average loans receivable of $55.9 million or 17.2% to $380.6 million for the six months ended June 30, 2008 from $324.7 million for the six months ended June 30, 2007, partially offset by a decrease in the average yield on loans receivable to 6.97% for the six months ended June 30, 2008 from 7.17% for the six months ended June 30, 2007. The increase in average loans reflects management's philosophy to deploy funds in higher yielding instruments, specifically commercial real estate loans, in an effort to achieve higher returns.

Interest income on securities increased by $513,000 or 12.5% to $4.6 million for the six months ended June 30, 2008 from $4.1 million for the six months ended June 30, 2007. The increase was primarily due to an increase in the average balance of securities of $7.8 million or 5.1% to $160.4 million for the six months ended June 30, 2008 from $152.6 million for the six months ended June 30, 2007 and an increase in the average yield on securities to 5.76% for the six months ended June 30, 2008 from 5.38% for the six months ended June 30, 2007. The increase in average balance reflects management's philosophy to deploy funds in investments absent the opportunity to invest in higher yielding loans in an effort to achieve higher returns. The increase in average yield reflects the higher long term interest rate environment during the six months ended June 30, 2008.

Interest income on other interest-earning assets decreased by $427,000 or 70.2% to $181,000 for the six months ended June 30, 2008 from $608,000 for the six months ended June 30, 2007. This decrease was primarily due to a decrease of $11.0 million or 41.8% in the average balance of other interest-earning assets to $15.3 million for the six months ended June 30, 2008 from $26.3 million for the six months ended June 30, 2007 and a decrease in the average yield on other interest-earning assets to 2.36% for the six months ended June 30, 2008 from 4.62% for the six months ended June 30, 2007. The decrease in the average yield reflects the lower short-term interest rate environment for overnight deposits in 2008 as compared to 2007. The decrease in the average balance primarily reflects management's philosophy to deploy funds in higher yielding instruments, specifically commercial real estate loans, in an effort to achieve higher returns.

Total interest expense increased by $553,000 or 6.9% to $8.5 million for the six months ended June 30, 2008 from $8.0 million for the six months ended June 30, 2007. The increase resulted primarily from an increase in the balance of average interest bearing liabilities of $55.1 million or 12.9% to $482.7 million for the six months ended June 30, 2008 from $427.6 million for the six months ended June 30, 2007, partially offset by a decrease in the average cost of interest bearing liabilities to 3.53% for the six months ended June 30, 2008 from 3.73% for the six months ended June 30, 2007.

The provision for loan losses totaled $550,000 for the six months ended June 30, 2008. The Company did not record a loan loss provision for the six months ended June 30, 2007. The provision for loan losses is established based upon management's review of the Bank's loans and consideration of a variety of factors including, but not limited to, (1)

the risk characteristics of the loan portfolio, (2) current economic conditions,
(3) actual losses previously experienced, (4) significant level of loan growth and (5) the existing level of reserves for loan losses that are probable and estimable. During the six months ended June 30, 2008, the Bank experienced $53,000 in net charge-offs (consisting of $93,000 in charge-offs and $40,000 in recoveries). During the six months ended June 30, 2007, the Bank experienced $214,000 in net charge-offs (consisting of $222,000 in charge-offs and $8,000 in recoveries), primarily as a result of the repossession of a loan to facilitate the construction of approximately ten residential units done in participation with another financial institution. The Bank had non-performing loans totaling $282,000 or 0.07% of gross loans at June 30, 2008, $4.3 million or 1.16% of gross loans at December 31, 2007 and $2.0 million or 0.59% of gross loans at June 30, 2007. The allowance for loan losses was $4.6 million or 1.15% of gross loans at June 30, 2008, $4.1 million or 1.10% of gross loans at December 31, 2007 and $3.5 million or 1.06% of gross loans at June 30, 2007. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in the aforementioned criteria. In addition various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additional provisions based on their judgment of information available to them at the time of their examination. Management believes that the allowance for loan losses was adequate at June 30, 2008, December 31, 2007 and June 30, 2007.

Total non-interest income decreased by $136,000 or 24.4% to $421,000 for the six months ended June 30, 2008 from $557,000 for the six months ended June 30, 2007. The decrease in non-interest income resulted primarily from an $150,000 decrease in gain on sales of loans originated for sale to $100,000 for the six months ended June 30, 2008 from $250,000 for the six months ended June 30, 2007, partially offset by a $14,000 increase in general fees, service charges and other income to $321,000 for the six months ended June 30, 2008 from $307,000 for the six months ended June 30, 2007. The decrease in gain on sale of loans originated for sale reflects the softening one- to four-family residential real estate market during the six months ended June 30, 2008. During the six months ended June 30, 2008, the Company made a decision to eliminate our Retail Mortgage Division as a separate division, due to a weakening softening in the one- to four-family residential real estate market, it was decided that this division's operation, on an on-going basis, was determined to be cost prohibitive.

Total non-interest expense increased by $166,000 or 3.2% to $5.4 million for the six months ended June 30, 2008 from $5.2 million for the six months ended June 30, 2007. Salaries and employee benefits expense decreased by $48,000 or 1.7% to $2.75 million for the six months ended June 30, 2008 from $2.80 million for the six months ended June 30, 2007. This decrease was primarily attributable to a decrease in the number of full time equivalent employees to 84 for the six months ended June 30, 2008 from 101 for the six months ended June 30, 2007, partially offset by annual salary increases in conjunction

with annual reviews. Equipment expense increased by $64,000 or 6.8% to $1.0 million for the six months ended June 30, 2008 from $938,000 for the six months ended June 30, 2007. The primary component of this expense item is data service provider expense which increases with the growth of the Bank's assets. Occupancy expense increased by $45,000 or 9.4% to $525,000 for the six months ended June 30, 2008 from $480,000 for the six months ended June 30, 2007. Advertising expense decreased by $72,000 to $122,000 for the six months ended June 30, 2008 from $194,000 for the six months ended June 30, 2007. Other non-interest expense increased by $177,000 to $964,000 for the six months ended June 30, 2008 from $787,000 for the six months ended June 30, 2007. The increase in other non-interest expense is primarily attributable to increases in expenses commensurate with a growing franchise. Other non-interest expense is comprised of directors' fees, stationary, forms and printing, professional fees, legal fees, check printing, correspondent bank fees, telephone and communication, shareholder relations and other fees and expenses.

Income tax expense increased $126,000 or 9.4% to $1.47 million for the six months ended June 30, 2008 from $1.35 million for the six months ended June 30, 2007 reflecting increased pre-tax income earned during the six month time period ended June 30, 2008. The consolidated effective income tax rate for the six months ended June 30, 2008 was 36.3% as compared to 36.0% for the six months ended June 30, 2007.