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

Financial Condition

Total assets increased by $19.0 million or 3.4% to $582.5 million at September 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, repayments and prepayments of loans and mortgage backed securities as well as the utilization of Federal Home Loan Bank advances. During the first nine months of 2008 the Company decreased its interest earning deposits to fund loan originations which provide higher yields than the money market instruments representing a high level of our interest earning deposits. 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, the current economic environment and as business opportunities permit.

Total cash and cash equivalents decreased by $4.1 million or 34.7% to $7.7 million at September 30, 2008 from $11.8 million at December 31, 2007. Investment securities classified as available-for-sale decreased by $1.04 million or 50.5% to $1.02 million at September 30, 2008 from $2.06 million at December 31, 2007. Additionally, investment securities classified as available-for-sale decreased by $2.71 million or 72.7% to $1.02 million at September 30, 2008 from $3.73 million at June 30, 2008. The Company recorded an other than temporary impairment (OTTI) charge of $2.8 million on its $3.0 million investment in two Federal National Mortgage Association, (FNMA) preferred stock issues during the current quarter. The OTTI charge resulted from a significant decline in the market value of these securities following the announcement by the Federal Housing Finance Agency (FHFA) that FNMA would be placed under conservatorship. Additionally, the FHFA eliminated the payment of dividends on common stock and preferred stock and assumed the powers of the Board and management of FNMA. Based on these factors, the Company evaluated the impairment as other than temporary. Given a lack of eligible capital gain for federal and state income tax purposes to offset capital losses at September 30, 2008, no tax benefit was recognized for the OTTI charge. A tax benefit of $1.1 million on the OTTI charge will be recognized in the fourth quarter of 2008 as a result of the Emergency Economic Stabilization Act of 2008 enacted in October 2008 which allows entities to treat losses on these securities as ordinary losses for tax purposes.

Investment securities classified as held-to-maturity decreased by $12.6 million or 7.6% to $152.4 million at September 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 nine months ended September 30, 2008, partially offset by

the reinvestment of $60.7 million into the investment portfolio and $4.4 million of repayments and prepayments in the mortgage backed securities portfolio. The balance of the proceeds was deployed to the loan portfolio in an effort to increase yield with higher yielding loan products.

Loans receivable increased by $35.5 million or 9.7% to $400.2 million at September 30, 2008 from $364.7 million at December 31, 2007. The increase resulted primarily from a $30.8 million increase in real estate mortgages comprising residential, commercial, construction and participation loans with other financial institutions, net of amortization, a $4.2 million increase in commercial loans comprising business loans and commercial lines of credit, net of amortization, and a $762,000 increase in consumer loans, net of amortization. The balance of loans in process as of September 30, 2008 was $20.0 million. At September 30, 2008 the allowance for loan losses was $4.9 million or 109.24% of non-performing assets.

Deposits increased by $4.7 million or 1.2% to $403.5 million at September 30, 2008 from $398.8 million at December 31, 2007. The increase resulted primarily from an increase of $3.7 million in time deposit accounts, and a $1.1 million increase in savings and club accounts, partially offset by a $114,000 decrease in transaction accounts. During the nine months ended September 30, 2008, the Federal Open Market Committee, (FOMC) decreased short term interest rates in an effort to lessen the impact of a possible recession. This has significantly resulted in an upward sloping normalization of the yield curve. As shorter term interest rates have decreased, our cost of short term time deposits have also decreased.

The balance of borrowed money increased by $14.5 million or 12.7% to $128.6 million at September 30, 2008 from $114.1 million at December 31, 2007. The purpose of the borrowings reflects the use of long term advances as well as an overnight line of credit from the Federal Home Loan Bank to augment deposits as the Bank's funding source for originating loans and investing in Government Sponsored Enterprise (GSE) investment securities.

Stockholders' equity decreased by $453,000 to $48.1 million at September 30, 2008 from $48.5 million at December 31, 2007. The decrease in stockholders' equity is primarily attributable to the payment of three quarterly cash dividends totaling $1.3 million as well as $1.0 million paid to repurchase 67,341 shares of common stock, partially offset by net income of the Company of $1.3 million for the nine months ended September 30, 2008 and $622,000 from 69,278 shares issued from stock option exercises. At September 30, 2008 the Bank's Tier 1, Tier 1 Risk-Based and Total Risk Based Capital Ratios were 9.02%, 13.16% and 14.38% respectively.

On October 14, 2008, the U.S. Treasury announced that it would purchase equity stakes in a number of banks and savings and loan associations. Under the Capital Purchase Program of the Troubled Assets Relief Program (TARP), $250 billion of the $700 billion authorized by the Emergency Economic Stabilization Act of 2008 will be made available by the U.S. Treasury to a variety of U.S. financial institutions in exchange for

preferred stock. In connection with its purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Financial institutions that take part in the TARP Capital Purchase Program will be required to adopt the U.S. Treasury's standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds equity issued under the TARP Capital Purchase Program. The U.S. Treasury also announced that nine major financial institutions had already agreed to participate in the TARP Capital Purchase Program, and numerous other financial institutions have subsequently agreed to take part.

On October 14, 2008, the FDIC announced the establishment of the Temporary Liquidity Guarantee Program, which was designed to strengthen confidence and encourage liquidity in the banking system by guaranteeing the (1) newly issued senior unsecured debt and (2) non-interest-bearing transaction accounts of participating institutions. All eligible entities will be covered under the program unless they opt out of one or both of these components by December 5, 2008 (an extension from the original opt-out date of November 12, 2008). Following that deadline, institutions that have opted out of either or both components cannot then opt in. Similarly, institutions that have opted in by the December 5th deadline may not then opt out. The Temporary Liquidity Guarantee Program will be in effect through December 31, 2009.

As of this date, we have not applied to the U.S. Treasury to receive equity capital through the TARP Capital Purchase Program nor have we applied to the FDIC to opt in or out of the Temporary Liquidity Guarantee Program. However, as the details and ramifications of these and any other plans that may be introduced, are clarified, we will continue to review them in order to determine whether or not we should participate in them.

Results of Operations
Three Months

Net income decreased by $2.28 million to a net loss of $1.25 million for the three months ended September 30, 2008 from net income of $1.03 million for the three months ended September 30, 2007. The decrease in net income was due to primarily to an OTTI charge, as previously discussed, on two securities in our securities available-for-sale portfolio, an increase in provision for loan losses, a decrease in non-interest income and an increase in income tax expense, partially offset by an increase in net interest income and a decrease in non-interest expense.

Net interest income increased by $855,000 or 19.6% to $5.2 million for the three months ended September 30, 2008 from $4.4 million for the three months ended September 30, 2007. This increase in net interest income resulted primarily from an increase of $23.6 million or 4.3% in the average balance of interest earning assets to $569.3 million for the three months ended September 30, 2008 from $545.7 million for the three months ended September 30, 2007, partially offset by a slight decrease in the average yield on interest earning assets to 6.54% for the three months ended September 30, 2008 from 6.56% for the three months ended September 30, 2007. The average balance of interest bearing

liabilities increased by $28.0 million or 6.0% to $495.7 million for the three months ended September 30, 2008 from $467.7 million for the three months ended September 30, 2007 and the average cost of interest bearing liabilities decreased by 62 basis points to 3.30% for the three months ended September 30, 2008 from 3.92% for the three months ended September 30, 2007. As a consequence, our net interest margin increased to 3.67% for the three months ended September 30, 2008 from 3.20% for the three months ended September 30, 2007.

Interest income on loans receivable increased by $678,000 or 10.8% to $6.95 million for the three months ended September 30, 2008 from $6.27 million for the three months ended September 30, 2007. The increase was primarily attributable to an increase in the balance of average loans receivable of $56.3 million or 16.4% to $400.0 million for the three months ended September 30, 2008 from $343.7 million for the three months ended September 30, 2007, partially offset by a decrease in the average yield on loans receivable to 6.93% for the three months ended September 30, 2008 from 7.26% for the three months ended September 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. The current economic environment may have an adverse impact on this business strategy as more conservative loan underwriting standards may preclude loan origination opportunities, thereby possibly limiting loan growth to an undetermined degree.

Interest income on securities decreased by $5,000 or 0.2% to $2.348 million for the three months ended September 30, 2008 from $2.353 million for the three months ended September 30, 2007. This decrease was primarily due to a decrease in the average balance of securities held-to-maturity of $8.9 million or 5.2% to $162.9 million for the three months ended September 30, 2008 from $171.8 million for the three months ended September 30, 2007, partially offset by an increase in the average yield on securities held-to-maturity to 5.77% for the three months ended September 30, 2008 from 5.48% for the three months ended September 30, 2007. The decrease in average balance 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 other interest-earning assets decreased by $316,000 to $7,000 for the three months ended September 30, 2008 from $323,000 for the three months ended September 30, 2007. This decrease was primarily due to a $23.2 million decrease in the average balance of other interest-earning assets to $5.1 million for the three months ended September 30, 2008 from $28.3 million for the three months ended September 30, 2007 and a decrease in the average yield on other interest-earning assets to 0.63% for the three months ended September 30, 2008 from 4.57% for the three months ended September 30, 2007. The decrease in the average yield reflects the lower short-term interest rate environment for overnight deposits during the three months ended September

30, 2008 as compared to the three months ended September 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 decreased by $498,000 or 10.8% to $4.1 million for the three months ended September 30, 2008 from $4.6 million for the three months ended September 30, 2007. The decrease resulted primarily from a decrease in the average cost of interest bearing liabilities to 3.30% for the three months ended September 30, 2008 from 3.92% for the three months ended September 30, 2007, partially offset by an increase in the balance of average interest bearing liabilities of $28.0 million or 6.0% to $495.7 million for the three months ended September 30, 2008 from $467.7 million for the three months ended September 30, 2007. The decrease in the average cost reflects the lower short term interest rate environment which occurred following the Federal Reserve's significant reduction of short-term interest rates.

The provision for loan losses totaled $300,000 and $200,000 for the three month periods ended September 30, 2008 and 2007, respectively. 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) the level of loan growth and (5) the existing level of reserves for loan losses that are possible and estimable. During the three months ended September 30, 2008, the Bank experienced $7,000 in net charge-offs, (consisting of $8,000 in charge-offs and $1,000 in recoveries). During the three months ended September 30, 2007, the Bank experienced $61,000 in net charge-offs (consisting of $61,000 in charge-offs and no recoveries). The Bank had non-performing loans totaling $3.0 million or 0.74% of gross loans at September 30, 2008, $282,000 or 0.07% of gross loans at June 30, 2008 and $1.7 million or 0.48% of gross loans at September 30, 2007. The allowance for loan losses was $4.9 million or 1.20% of gross loans at September 30, 2008, $4.6 million or 1.15% of gross loans at June 30, 2008 and $3.7 million or 1.04% of gross loans at September 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 September 30, 2008.

Total non-interest income decreased by $2.8 million to a loss of $2.6 million for the three months ended September 30, 2008 from income of $261,000 for the three months ended September 30, 2007. The decrease in non-interest income resulted primarily from an OTTI charge of $2.8 million on $3.0 million of FNMA preferred stock during the third quarter, as discussed previously. The Bank also recorded a decrease in gain on sale of

loans originated for sale of $93,000 or 86.1% to $15,000 for the three months ended September 30, 2008, from $108,000 for the three months ended September 30, 2007. The decrease in gain on sale of loans originated for sale reflects the softening one- to four-family residential real estate market. The Company recently made a strategic decision to eliminate our Retail Mortgage Division as a separate division. Due to a continuing 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. The aforementioned decreases in non-interest income were partially offset by an increase in general fees, service charges and other income of $19,000 or 12.4% to $172,000 for the three months ended September 30, 2008 from $153,000 for the three months ended September 30, 2007.

Total non-interest expense decreased by $70,000 or 2.5% to $2.7 million for the three months ended September 30, 2008 from $2.8 million for the three months ended September 30, 2007. Salaries and employee benefits expense decreased by $95,000 or 6.5% to $1.37 million for the three months ended September 30, 2008 from $1.46 million for the three months ended September 30, 2007. This decrease was primarily attributable to a decrease in the number of full time equivalent employees to 82 for the three months ended September 30, 2008 from 92 for the three months ended September 30, 2007, partially offset by salary increases in conjunction with annual reviews. Equipment expense increased by $24,000 or 4.9% to $511,000 for the three months ended September 30, 2008 from $487,000 for the three months ended September 30, 2007. The primary component of this expense item is data service provider expense. Occupancy expense, advertising and other non-interest expense increased by $1,000 or 0.1% to $828,000 for the three months ended September 30, 2008 from $827,000 for the three months ended September 30, 2007 as the Bank has endeavored to manage our non-interest expense category somewhat conservatively during this challenging economic environment. 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. During 2009 the Bank expects a significant increase in non-interest expenses as a result of higher FDIC deposit insurance assessment.

Income tax expense increased $274,000 or 44.5% to $890,000 for the three months ended September 30, 2008 from $616,000 for the three months ended September 30, 2007. The increase in income tax expense reflects the increase in net income exclusive of the OTTI charge of $2.8 million discussed earlier. Excluding the effect of the OTTI charge on income, the consolidated effective income tax rate for the three months ended September 30, 2008 was 37.1% as compared to 37.4% for the three months ended September 30, 2007.

Nine Months of Operations

Net income decreased by $2.1 million to $1.3 million for the nine months ended September 30, 2008 from $3.4 million for the nine months ended September 30, 2007. The decrease in net income was due to primarily to an OTTI charge, as previously

discussed, on two securities in our securities available-for-sale portfolio, an increase in provision for loan losses, a decrease in non-interest income, an increase in non-interest expense and an increase in income tax expense, partially offset by an increase in net interest income.

Net interest income increased by $2.02 million or 15.9% to $14.76 million for the nine months ended September 30, 2008 from $12.74 million for the nine months ended September 30, 2007. The increase in net interest income resulted primarily from an increase of $43.0 million or 8.3% in the average balance of interest earning assets to $560.7 million for the nine months ended September 30, 2008 from $517.7 million for the nine months ended September 30, 2007, while the average yield on interest earning assets remained static at 6.51% for the respective nine month time periods ended September 30, 2008 and 2007. The average balance of interest bearing liabilities increased by $45.9 million or 10.4% to $487.0 million for the nine months ended September 30, 2008 from $441.1 million for the nine months ended September 30, 2007, while the average cost of interest bearing liabilities decreased to 3.45% for the nine months ended September 30, 2008 from 3.79% for the nine months ended September 30, 2007. As a consequence, our net interest margin increased to 3.51% for the nine months ended September 30, 2008 from 3.28% for the nine months ended September 30, 2007.

Interest income on loans receivable increased by $2.3 million or 12.8% to $20.2 million for the nine months ended September 30, 2008 from $17.9 million for the nine months ended September 30, 2007. The increase was primarily attributable to an increase in the balance of average loans receivable of $56.5 million or 17.1% to $386.0 million for the nine months ended September 30, 2008 from $329.5 million for the nine months ended September 30, 2007, partially offset by a decrease in the average yield on loans receivable to 6.96% for the nine months ended September 30, 2008 from 7.20% for the nine months ended September 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 current economic environment may have an adverse impact on this business strategy as more conservative loan underwriting standards may preclude loan origination opportunities, thereby possibly limiting loan growth to an undetermined degree.

Interest income on securities increased by $509,000 or 7.8% to $7.0 million for the nine months ended September 30, 2008 from $6.5 million for the nine months ended September 30, 2007. The increase was primarily due to an increase in the average balance of securities of $2.1 million or 1.3% to $161.2 million for the nine months ended September 30, 2008 from $159.1 million for the nine months ended September 30, 2007 and an increase in the average yield on securities to 5.76% for the nine months ended September 30, 2008 from 5.41% for the nine months ended September 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 nine months ended September 30, 2008.

Interest income on other interest-earning assets decreased by $738,000 or 79.7% to $188,000 for the nine months ended September 30, 2008 from $926,000 for the nine months ended September 30, 2007. This decrease was primarily due to a decrease of $14.9 million or 55.6% in the average balance of other interest-earning assets to $11.9 million for the nine months ended September 30, 2008 from $26.8 million for the nine months ended September 30, 2007 and a decrease in the average yield on other interest-earning assets to 2.11% for the nine months ended September 30, 2008 from 4.60% for the nine months ended September 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 $61,000 or 0.5% to $12.61 million for the nine months ended September 30, 2008 from $12.55 million for the nine months ended September 30, 2007. The increase resulted primarily from an increase in the balance of average interest bearing liabilities of $45.9 million or 10.4% to $487.0 million for the nine months ended September 30, 2008 from $441.1 million for the nine months ended September 30, 2007, partially offset by a decrease in the average cost of interest bearing liabilities to 3.45% for the nine months ended September 30, 2008 from 3.79% for the nine months ended September 30, 2007.

The provision for loan losses totaled $850,000 and $200,000 for the nine-month periods ended September 30, 2008 and 2007, respectively. 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) the level of loan growth and (5) the existing level of reserves for loan losses that are possible and estimable. During the nine months ended September 30, 2008, the Bank experienced $60,000 in net charge-offs (consisting of $101,000 in charge-offs and $41,000 in recoveries). During the nine months ended September 30, 2007, the Bank experienced $275,000 in net charge-offs (consisting of $283,000 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 $3.0 million or 0.74% of gross loans at September 30, 2008, $4.6 million or 1.16% of gross loans at December 31, 2007 and $1.7 million or 0.48% of gross loans at September 30, 2007. The allowance for loan losses was $4.9 million or 1.20% of gross loans at September 30, 2008, $4.1 million or 1.10% of gross loans at December 31, 2007 and $3.7 million or 1.16% of gross loans at September 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 September 30, 2008.

Total non-interest income decreased by $2.96 million to a loss of $2.15 million for the nine months ended September 30, 2008 from income of $815,000 for the nine months ended September 30, 2007. The decrease in non-interest income resulted primarily from an OTTI charge of $2.8 million on $3.0 million of FNMA preferred stock during the third quarter, as discussed previously. The Bank also recorded a decrease in gain on sale of loans originated for sale of $243,000 or 67.9% to $115,000 for the nine months ended September 30, 2008, from $358,000 . . .