The following discussion compares the consolidated financial condition of the Company at June 30, 2008 and December 31, 2007, and the results of operations for the three- and six-month periods ended June 30, 2008 and 2007. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

For the quarter ended June 30, 2008, the Company reported a net loss of $251,000, or $0.09 per basic and diluted share, compared to a net loss of $236,000, or $0.08 per basic and diluted share, for the year earlier period, a decrease of $15,000.

The main issues impacting the quarter ended June 30, 2008 were the level of the Company's non-performing assets coupled with a provision for loan losses of $342,000 for the period.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2008 AND DECEMBER 31, 2007

ASSETS: Total assets decreased $2.7 million, or 1.0%, to $248.1 million at June 30, 2008 from $250.8 million at December 31, 2007. Investment securities available for sale increased $2.2 million, or 10.9% from December 31, 2007 to June 30, 2008. Net loans receivable decreased $6.2 million, or 3.1% to $195.1 million at June 30, 2008 from $201.3 million at December 31, 2007. The decrease in net loans was attributable primarily to shrinkage of the residential mortgage loan portfolio due to paydowns and payoffs.

LIABILITIES: Deposits increased $2.8 million, or 1.7%, to $167.2 million at June 30, 2008 from $164.5 million at December 31, 2007. While we experienced a $20.0 million shift from traditional certificate of deposit (CD) products into our liquid CD product, the increase in deposits was in our money market product as customers sought deposit accounts which did not tie up their funds for long periods of time due to uncertainty about the future of competitive deposit rates. Total FHLB advances decreased $4.7 million to $48.0 million at June 30, 2008 from December 31, 2007 as we paid down advances with funds from loan payments.

EQUITY: Stockholders' equity decreased to $32.0 million at June 30, 2008 from $32.5 million at December 31, 2007, a decline of $558,000. Dividends were $144,000 and $288,000 for the three and six months ended June 30, 2008, respectively. The unrealized loss on available for sale securities, net of tax, was $77,800 at June 30, 2008 as compared to a gain of $66,900 at December 31, 2007, a decline of $142,700. The cumulative loss in value on securities was due to changes in interest rates and was not considered by management to be other than temporary.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007

GENERAL: Net income decreased by $15,000 to a net loss of $251,000 for the three months ended June 30, 2008 from a net loss of $236,000 for the same period ended June 30, 2007.

INTEREST INCOME: Interest income decreased to $3.5 million for the three months ended June 30, 2008 from $4.1 million for the year earlier period, due to three factors: a decrease of $14.9 million in the average balance of interest-earning assets to $233.1 million for the three month period ended June 30, 2008 from $248.1 million for the three month period ended June 30, 2007; a decrease of 56 basis points in our yield on interest-earning assets period over period, and an increase in the level of our non-performing loans period over period.

INTEREST EXPENSE: Interest expense decreased to $1.8 million for the three months ended June 30, 2008 from $2.1 million for the three months ended June 30, 2007. The decrease in interest expense for the three month period was due primarily to a decrease in our cost of funds related to certificates of deposit and FHLB advances. The cost of funds for certificates of deposit decreased from 4.50% from the three months ended June 30, 2007 to 4.21% for the three months ended June 30, 2008 as higher costing deposits matured and were re-priced at a lower rate. In addition, the cost of our FHLB advances decreased 38 basis points from 4.89% for the three months ended June 30, 2007 to 4.51% for the three months ended June 30, 2008.

NET INTEREST INCOME: Net interest income decreased to $1.7 million for the three month period ended June 30, 2008 compared to $1.9 million for the same period in 2007. For the three months ended June 30, 2008, average interest-earning assets decreased $14.9 million, or 6.0%, when compared to the same period in 2007. Average interest-bearing liabilities decreased $15.4 million, or 7.0%, to $203.4 million for the quarter ended June 30, 2008 from $218.9 million for the quarter ended June 30, 2007. The yield on average interest-earning assets increased to 6.00% for the three month period ended June 30, 2008 from 6.56% for the same period ended in 2007 and the cost of average interest-bearing liabilities decreased to 3.51% from 3.86% for the three month periods ended June 30, 2008 and 2007, respectively. The net interest margin decreased to 2.93% for the three month period ended June 30, 2008 from 3.15% for same period in 2007.

PROVISION FOR LOAN LOSSES: The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The provision for loan losses amounted to $342,000 for the three month period ended June 30, 2008 and $113,000 for the comparable period in 2007. The Company does continue to experience a high level of classified assets due to the current somewhat weak economic conditions in the northern Michigan market as well as declining real estate values. Classified assets are monitored quarterly and the loan loss reserve is adjusted as needed to reflect any changes in the status of classified assets.

NON INTEREST INCOME: Non interest income decreased from $883,000 for the three months ended June 30, 2007 to $822,000 for the three months ended June 30, 2008, primarily due to decreases in insurance brokerage income due to the sale of the exclusive BCBS contract to Grotenhuis, as described above.

NON INTEREST EXPENSE: Non interest expense decreased from $3.1 million for the three months ended June 30, 2007 to $2.6 million for the three months ended June 30, 2008. The decrease period over period was mainly the result of prepayment penalties of $293,000 paid on FHLB advances during the three

months ended June 30, 2007, reduction in compensation and benefit expenses due to the closure last year of one of our under-performing branches and other cost-cutting measures, as well as a reduction in insurance brokerage commission expense due to the sale of the exclusive BCBS contract as described above.

INCOME TAXES: The Company had a federal income tax benefit of $126,000 for the three months ended June 30, 2008 due to a pre-tax loss, compared to federal income tax benefit of $155,000 for the same period in 2007.

SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007

GENERAL: Net income decreased by $68,000 to a net loss of $283,000 for the six months ended June 30, 2008 from a net loss of $215,000 for the same period ended June 30, 2007.

INTEREST INCOME: Interest income decreased by $1.1 million to $7.1 million for the six month period ended June 30, 2008 from $8.2 million for the same six month period in 2007. This decrease was primarily attributed to a decline in the average balance of interest earning assets of $21.2 million to $232.7 million for the six month period ended June 30, 2008 from $253.9 million for the six month period ended June 30, 2007. In addition, we experienced a decrease in the yield on those interest earning assets of 39 basis points to 6.10% six month period over six month period. Notably, the yield on non-mortgage loans decreased 115 basis points six month period over six month period to 6.47% over an average balance of $104.7 million due in part to declining interest rates and in part to an increase in the amount of non-performing loans period over period.

INTEREST EXPENSE: Interest expense for the six months ended June 30, 2008 decreased to $3.7 million from $4.3 million for the six months ended June 30, 2007. The decrease in interest expense for the six month period was due primarily to a decrease in the cost of our certificates of deposit and FHLB advances. The cost of our certificates of deposit decreased from 4.51% for the six months ended June 30, 2007 to 4.29% for the six months ended June 30, 2008, as higher costing deposits matured and were re-priced at lower rates. In addition, the cost of our FHLB advances decreased 35 basis points from 5.00% for the six months ended June 30, 2007 to 4.55% for the six months ended June 30, 2008.

NET INTEREST INCOME: Net interest income decreased by $416,000 for the six-month period ended June 30, 2008 compared to the same period in 2007. For the six months ended June 30, 2008, average interest-earning assets decreased $21.2 million, or 8.4%, when compared to the same period in 2007. Average interest-bearing liabilities decreased $20.7 million, or 9.2%, to $203.6 million for the six-month period ended June 30, 2008 from $224.3 million for the six-month period ended June 30, 2007. The yield on average interest-earning assets decreased to 6.10% for the six month period ended June 30, 2008 from 6.49% for the same period ended in 2007 while the cost of average interest-bearing liabilities decreased to 3.59% from 3.90% for the six-month periods ended June 30, 2008 and 2007, respectively. The net interest margin decreased to 2.96% for the six month period ended June 30, 2008 from 3.05% for same period in 2007.

DELINQUENT LOANS AND NONPERFORMING ASSETS. The following table sets forth information regarding loans delinquent 90 days or more and real estate owned/other repossessed assets of the Bank at the dates indicated. As of the dates indicated, the Bank did not have any material restructured loans within the meaning of SFAS 15.

                                                              JUNE 30,   DECEMBER 31,
                                                                2008          2007
                                                              --------   ------------
                                                               (Dollars in thousands)
                                                              -----------------------
Total non-accrual loans ...................................    $7,651      $ 8,459
                                                               ------      -------
Accrual loans delinquent 90 days or more:
   One- to four-family residential ........................       143          532
   Other real estate loans ................................        --           --
   Consumer/Commercial ....................................        61          145
                                                               ------      -------
      Total accrual loans delinquent 90 days or more ......    $  203      $   677
                                                               ------      -------
Total nonperforming loans (1) .. ..........................     7,854        9,136
Total real estate owned-residential mortgages (2) .........       994          872
Total real estate owned-Consumer and other (2) ............         4          408
                                                               ------      -------
Total nonperforming assets ................................    $8,852      $10,416
                                                               ======      =======
Total nonperforming loans to loans receivable .............      3.96%        4.54%
Total nonperforming assets to total assets ................      3.57%        4.15%

(1) All of the Bank's loans delinquent more than 90 days are classified as nonperforming.

(2) Represents the net book value of property acquired by the Bank through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is recorded at the lower of its fair market value or the principal balance of the related loan.

PROVISION FOR LOAN LOSSES: The provision for loan losses amounted to $367,000 for the six-month period ended June 30, 2008 and $199,000 for the comparable period in 2007. The ratio of nonperforming loans to total loans was 3.96% and 4.54% at June 30, 2008 and December 31, 2007, respectively. As a percent of total assets, nonperforming loans decreased to 3.57% at June 30, 2008 from 4.15% at December 31, 2007. Total nonperforming assets decreased to $8.9 million at June 30, 2008 from $10.4 million at December 31, 2007, due in large part to the partial charge-off of one large commercial real-estate loan.

NON INTEREST INCOME: Non interest income decreased from $1.9 million for the six months ended June 30, 2007 to $1.8 million for the six months ended June 30, 2008. The decrease was primarily attributed to a decrease in insurance brokerage commissions during the six months ended June 30, 2008 due to the sale in April 2008 of the exclusive BCBS contract, partially offset by increases in service charges & other fees income and mortgage banking activities income.

NON INTEREST EXPENSE: Non interest expense decreased from $5.9 million for the six months ended June 30, 2007 to $5.3 million for the six months ended June 30, 2008. The decrease period over period was mainly the result of prepayment penalties of $293,000 paid on FHLB advances during the six months ended June 30, 2008, offset by a reduction in compensation and benefit expenses due to the closure last year of one of our under-performing branches and other cost-cutting measures, as well as a reduction in insurance brokerage commission expense due to the sale in April 2008 of the exclusive BCBS contract.

INCOME TAXES: The Company had a federal income tax benefit of $142,000 for the six months ended June 30, 2008 due to pre-tax losses, compared to a federal income tax benefit of $168,000, also due to pre-tax losses, for the same period in 2007.

LIQUIDITY

The Company's current liquidity position is expected to be adequate to fund expected asset growth. The Company's primary sources of funds are deposits, FHLB advances, proceeds from principal and interest payments, prepayments on loans and mortgage-backed and investment securities and sale of long-term fixed-rate mortgages into the secondary market. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows, mortgage prepayments and sale of mortgage loans into the secondary market are greatly influenced by general interest rates, economic conditions and competition.

Liquidity represents the amount of an institution's assets that can be quickly and easily converted into cash without significant loss. The most liquid assets are cash, short-term U.S. Government securities, U.S. Government agency securities and certificates of deposit. The Company is required to maintain sufficient levels of liquidity as defined by OTS regulations. This requirement may be varied at the direction of the OTS. Regulations currently in effect require that the Bank must maintain sufficient liquidity to ensure its safe and sound operation. The Company's objective for liquidity is to be above 20%. Liquidity as of June 30, 2008 was $37.9 million, or 21.7% compared to $57.3 million, or 32.1% at December 31, 2007. The decrease in liquidity was due mainly to a change in the way the liquidity ratio was calculated period over period. The Company had previously included in the liquidity ratio calculation the amount of available FHLB borrowing capacity based on Board resolution, however, this amount should have been (and now is) limited to the amount of actual collateral available to pledge for borrowings, which is less than the amount indicated in the Board resolution. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. The liquidity calculated by the Company includes additional borrowing capacity available with the FHLB. This borrowing capacity is based on the FHLB stock owned by the Bank along with pledged collateral. As of June 30, 2008, the Bank had unused borrowing capacity totaling $36.2 million at the FHLB based on the FHLB stock ownership.

The Company intends to retain for its portfolio certain originated residential mortgage loans (primarily adjustable rate, balloon and shorter term fixed rate mortgage loans) and to generally sell the remainder in the secondary market. The Bank will from time to time participate in or originate commercial real estate loans, including real estate development loans. During the six month period ended June 30, 2008 the Company originated $15.4 million in residential mortgage loans, of which $8.3 million were retained in portfolio while the remainder were sold in the secondary market or are being held for sale. This compares to $12.1 million in originations during the first six months of 2008 of which $7.2 million were retained in portfolio. The Company also originated $17.1 million of commercial loans and $3.0 million of consumer loans in the first six months of 2008 compared to $14.9 million of commercial loans and $5.2 million of consumer loans for the same period in 2007. Of total loans receivable, excluding loans held for sale, mortgage loans comprised 47.2% and 49.5%, commercial loans 39.3% and 36.1% and consumer loans 13.5% and 14.4% at June 30, 2008 and June 30, 2007, respectively.

Deposits are a primary source of funds for use in lending and for other general business purposes. At June 30, 2008 deposits funded 67.4% of the Company's total assets compared to 65.6% at December 31, 2007. Certificates of deposit scheduled to mature in less than one year at June 30, 2008 totaled $80.3 million. Management believes that a significant portion of such deposits will remain with the Bank. The Bank monitors the deposit rates offered by competition in the area and sets rates that take into account the prevailing market conditions along with the Bank's liquidity position.

Borrowings may be used to compensate for seasonal or other reductions in normal sources of funds or for deposit outflows at more than projected levels. Borrowings may also be used on a longer-term basis to support increased lending or investment activities. At June 30, 2008 the Company had $47.2 million in FHLB advances. FHLB borrowings as a percentage of total assets were 19.0% at June 30, 2008 as compared to 20.6% at December 31, 2007. The Company has sufficient available collateral to obtain additional advances of $8.7 million. When this is combined with current FHLB stock ownership the Company could obtain up to an additional $36.2 million in advances from the FHLB.

CAPITAL RESOURCES

Stockholders' equity at June 30, 2008 was $32.0 million, or 12.9% of total assets, compared to $32.5 million, or 13.0% of total assets, at December 31, 2007 (See "Consolidated Statement of Changes in Stockholders' Equity"). The Bank is subject to certain capital-to-assets levels in accordance with OTS regulations. The Bank exceeded all regulatory capital requirements at June 30, 2008. The following table summarizes the Bank's actual capital with the regulatory capital requirements and with requirements to be "Well Capitalized" under prompt corrective action provisions, as of June 30, 2008:

                                                          Regulatory       Minimum to be
                                          Actual           Minimum       Well Capitalized
                                     ---------------   ---------------   ----------------
                                      Amount   Ratio    Amount   Ratio    Amount   Ratio
                                     -------   -----   -------   -----   -------   -----
                                                     Dollars in Thousands
Tangible Capital (to
   tangible assets)                  $27,575   11.26%  $ 3,673   1.50%   $ 4,898    2.00%
Tier 1 (Core) capital (to risk -
   weighted assets)                  $27,575   15.52%  $ 7,106   4.00%   $10,658    5.00%
Total risk-based capital (to risk-
   weighted assets)                  $29,814   16.78%  $14,211   8.00%   $17,764   10.00%
Tier 1 risk-based capital (to
   tangible assets)                  $27,575   11.26%  $ 9,796   4.00%   $12,245    6.00%