CRITICAL ACCOUNTING POLICIES

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, valuation of real estate owned and the methodology for the determination of our allowance for loan losses, due to the judgments, estimates and assumptions inherent in those policies, are critical to preparation of our financial statements. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management's Discussion and Analysis and in the notes to the unaudited financial statements included herein. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our financial condition or results of operations.

In estimating the amount of credit losses inherent in our loan portfolio, various judgments and assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan portfolio. If the current downturn in the economy is prolonged, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses. For impaired loans that are collateral-dependent and for real estate owned, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

CHANGES IN FINANCIAL CONDITION


Changes in financial condition between September 30, 2008 and December 31, 2007
are presented in the following table (dollars in thousands).  Material changes
between the periods are discussed in the sections which follow the table.



                                           September 30,      December 31,       Increase      Percentage
                                               2008               2007          (Decrease)       Change
ASSETS
Cash and cash equivalents                 $        14,484    $       27,387    $    (12,903 )       (47.1 )%
Investment securities held to maturity            131,437            95,590          35,847          37.5
Federal Home Loan Bank stock                        4,802             4,433             369           8.3
Loans receivable, net                             566,775           601,256         (34,481 )        (5.7 )
Accrued interest receivable                         7,303             9,042          (1,739 )       (19.2 )
Real estate owned, net                             17,402             8,120           9,282         114.3
Office properties and equipment, net               24,961            24,263             698           2.9
Prepaid expenses and other assets                  22,664            21,887             777           3.6

TOTAL                                     $       789,828    $      791,978    $     (2,150 )        (0.3 )%