This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the consolidated financial condition, results of operations and business of the Company and its subsidiaries, including the Bank, that are subject to various factors which could cause actual results to differ materially from these estimates, including those set forth in

Executive Overview

The purpose of this summary is to provide an overview of the items management focuses on when evaluating the condition of the Company and our success in implementing our business and shareholder value strategies. The Company's business strategy is to operate the Bank as a well-capitalized, profitable and independent community oriented savings bank. Our shareholder value strategy has three major themes: (1) enhancing our shareholders' value; (2) making our retail banking franchise more valuable; and (3) efficiently utilizing our capital.

Management believes the following were important factors in the Company's performance during the quarter ended September 30, 2008:

• The Company held Freddie Mac and Fannie Mae perpetual preferred stock at June 30, 2008 with a carrying cost of approximately $4.2 million. On September 7, 2008, the Federal Housing Finance Agency placed both Freddie Mac and Fannie Mae under conservatorship. This action did not eliminate the equity in Freddie Mac and Fannie Mae represented by the perpetual preferred stock but did negatively impact its value. As a result, a non-cash other-than-temporary impairment ("OTTI") charge of $3.85 million pre tax was recorded by the Company in the quarter ended September 30, 2008. The estimated fair value of these securities at September 30, 2008 was $300,000.

• On October 3, 2008 the Emergency Economic Stabilization Act of 2008 ( "EESA") was adopted. Among other things, EESA provides tax relief to banking organizations that have suffered losses on preferred holdings of Freddie Mac and Fannie Mae by changing the characterization of these losses from capital to ordinary for Federal income tax purposes. As a result, the Company will recognize a tax benefit of approximately $2.1 million, or $1.56 per diluted share, on the $6.19 million cumulative Freddie Mac and Fannie Mae impairment charges, during the fourth quarter of 2008. This tax benefit was realized in the third quarter of 2008 for purposes of regulatory capital ratios. The Bank's required, actual and excess capital levels as of September 30, 2008 are shown in a table on page 12 of this report.

• Earnings before the provision for impairment on investments (a non-GAAP measure) remains strong, evidenced by the chart below.

                                      Three Months Ended             Nine Months Ended
                                      September 30, 2008             September 30, 2008
                                                 Diluted per                    Diluted per
(dollars in thousands, except
per share data)                    Amount           share          Amount          share
Reported net loss                $    (2,750 )          (2.04 ) $     (2,903 )         (2.17 )
Provision for impairment (net)         3,851             2.86          5,777            4.30
Net earnings before the
provision for impairment         $     1,101             0.82   $      2,874            2.13

• Consistent with the Company's focus on attracting and retaining talented employees, and at the same time reducing costs, the Board of Directors has approved changes in the Company's employee benefits programs including a freeze to the defined benefit pension plan effective July 1, 2008 and enhancements to the 401(k) plan.

• Although the level of nonperforming assets to total assets increased to 1.15% as of September 30, 2008 from 0.97% as of December 31, 2007 the Company continues to be pro-active in its approach to addressing and minimizing the financial impact of these assets.

• Purchases and originations of out of state real estate loans remain an integral part of the Company's business plan. The Company has purchased and originated out of state real estate loans to supplement local mortgage loan originations and to geographically diversify its mortgage loan portfolio.

• The Company continues its focus on earnings through management of net interest margin, successfully increasing the margin to 2.79% for the nine months ended September 30, 2008 from 2.65% for the twelve months ended December 31, 2007.

The general economy is slowing. Based upon increasing numbers of foreclosures and slower sales of one- to four-family residences, it is generally agreed that the real estate market is in a slowdown. The Federal Reserve reduced the targeted fed funds rate and the discount rate by 425 basis points between September 2007 and October 2008, indicating its concern about the slowing economy. It is uncertain when this slowdown will turn around and the ripple effect it could have on other parts of the economy. The duration and magnitude of any near-term economic difficulties are not known.

CRITICAL ACCOUNTING POLICIES

This "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the disclosures included elsewhere in this report, are based on the Company's consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on approximate measures of the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

The Company's accounting policies are described in the "Notes to Consolidated Financial Statements" of the Company's 2007 Annual Report on Form 10-K. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be that related to the allowance for loan losses and asset impairment judgments, including the recoverability of goodwill.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of those economic conditions. To the extent that actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less than future charge-offs.

Asset impairment judgments include evaluating the decline in fair value of available-for-sale securities below their cost. Declines in fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired in a purchase acquisition. Goodwill is tested for impairment at least annually.

FINANCIAL CONDITION

Total assets decreased $35.1 million, or 6.9%, to $475.1 million at September 30, 2008, from $510.2 million at December 31, 2007. The decrease in assets was primarily due to a decrease in net loans receivable, offset in part by increases in securities available-for-sale.

Net loans receivable decreased by $34.6 million, or 7.7%, to $412.3 million at September 30, 2008, from $446.9 million at December 31, 2007, primarily due to payments and prepayments of $101.5 million and loan sales of $34.1 million during the nine months ended September 30, 2008. These payments, prepayments, and loan sales were offset in part by the origination of $46.7 million of first mortgage loans primarily secured by one-to four-family residences and commercial real estate; the purchase of $18.5 million of first mortgage loans secured by commercial real estate and multifamily residential real estate; and the origination of $25.1 million of second mortgage loans during the nine months ended September 30, 2008. The Company sells substantially all fixed-rate residential loans originated with maturities of 15 years or more in the secondary mortgage market in order to reduced interest rate risk

Deposits decreased $20.7 million, or 5.7%, to $345.2 million at September 30, 2008, from $365.9 million at December 31, 2007. This decrease is a result of a few specific items. First, deposit pricing, particularly CD pricing, in certain markets the Company operates has been impacted by other financial institutions with above market specials. Second, a decrease in brokered deposits of $8.8 million which the Company has chosen not to replace due to pricing and liquidity needs. Lastly, deposits have fluctuated due to seasonality. Borrowings, primarily FHLB advances, decreased $10.0 million, or 10.3%, to $87.4 million at September 30, 2008, from $97.4 million at December 31, 2007. This decrease is due to the normal repayment of borrowings due to calls or maturities.

Total stockholders' equity was at $38.3 million at September 30, 2008 compared to $41.0 million at December 31, 2007.

The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum tangible, leverage (core) and risk-based capital requirements. As of September 30, 2008, the Bank exceeded all of its regulatory capital requirements. The Bank's required, actual and excess capital levels as of September 30, 2008 are set forth below. In accordance with EESA, the actual capital levels set forth below include the realization of a tax benefit of approximately $2.1 million, or $1.56 per diluted share, on the cumulative $6.19 million Freddie Mac and Fannie Mae impairment charges. The Company will recognize this tax benefit in its financial statements for the fourth quarter of 2008.

                                     Amount       Percentage of Assets
                                          (Dollars in thousands)
              Tangible capital:
              Capital level         $ 34,716 (1)                   7.34 %
              Less Requirement         7,094                       1.50 %
              Excess                $ 27,622                       5.84 %

              Core capital:
              Capital level         $ 34,716 (1)                   7.34 %
              Less Requirement        18,918                       4.00 %
              Excess                $ 15,798                       3.34 %

              Risk-based capital:
              Capital level         $ 38,063 (1)                  11.14 %
              Less Requirement        27,329                       8.00 %
              Excess                $ 10,734                       3.14 %

(1) Includes the tax benefit related to the cumulative impairment losses on Freddie Mac and Fannie Mae as previously discussed.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds are deposits, amortization and prepayment of loans, borrowings such as FHLB advances, brokered certificates of deposit, maturities of securities and other investments, and earnings and funds provided from operations. During the first nine months of 2008 and 2007, principal payments, prepayments, and proceeds from the sale of loans totaled $135.6 million and $113.6 million, respectively. Deposits decreased by $20.7 million during the first nine months of 2008 compared to an increase in deposits of $8.9 million during the first nine months of 2007. The proceeds from borrowed funds during the nine months ended September 30, 2008 and 2007 totaled $11.5 million and $17.0 million. During the first nine months of 2008 and 2007, the proceeds from the maturities, calls and sales of securities totaled $2.0 million and $1.8 million, respectively. Cash provided from operating activities during the first nine months of 2008 and 2007 totaled $5.1 million and $4.4 million, respectively. The Company's primary use of funds is to originate and purchase loans, purchase securities available-for-sale, repay borrowed funds and other financing activities. During the first nine months of 2008 and 2007, the Company's gross purchases and origination of loans totaled $102.8 million and $128.0 million, respectively. The purchase of securities available-for-sale for the nine months ended September 30, 2008 and 2007 totaled $11.0 million and $0.6 million, respectively. The repayment of borrowed funds during the first nine months of 2008 and 2007 totaled $21.5 million and $20.5 million, respectively. OTS regulations require the Company to maintain sufficient liquidity to ensure its safe and sound operation. For additional information about cash flows from the Company's operating, financing and investing activities, see the Consolidated Condensed Statements of Cash Flows in the Company's financial statements included in Item 1 of this report.

The Company has a line of credit agreement in the amount of $3.0 million with an unaffiliated bank. As of September 30, 2008, there were no borrowings outstanding on this line of credit. This annual line matured in October 2008 and the Company continues to analyze whether to renew due to the increased restrictions being place on all borrowers of this unaffiliated financial institution. If the Company renews the line of credit, it may use borrowings to fund stock repurchases in the future and for general corporate purposes.

On October 6, 2008, the Company paid a quarterly cash dividend of $0.01 per share of common stock to its shareholders as of the close of business on September 15, 2008. This dividend payment totaled $13,000. See SEC Form 8-K filed on August 29, 2008 for additional information regarding the dividend reduction. On May 30, 2008, the Company declared a quarterly cash dividend of $0.35 per share, payable on July 3, 2008 to shareholders of record as of the close on June 13, 2008. This dividend payment totaled $470,000.

RECENT REGULATORY ACTIONS

In response to the recent crises affecting the financial markets, the federal government has taken unprecedented steps in an attempt to stabilize and provide liquidity to the U.S. financial markets. Under the Emergency Economic Stabilization Act of 2008 ("EESA") and the Troubled Asset Relief Program Capital Purchase Program ("CPP"), the U.S. Treasury will make $250 billion of capital available to U.S. financial institutions and potentially other financial and commercial firms by purchasing preferred stock in these institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Total Risk-Weighted Assets, with a maximum investment equal to the lesser of 3% of Total Risk-Weighted Assets or $25 billion. In conjunction with the purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock having an aggregate market price equal to 15% of the preferred stock purchased. Participation in the program is not automatic and is subject to approval by the Treasury. We are evaluating whether to apply for participation in the CPP.

In addition, the Federal Deposit Insurance Corporation ("FDIC") announced the creation of the Temporary Liquidity Guarantee Program ("TLGP") as part of a larger government effort to strengthen confidence and encourage liquidity in the nation's banking system. All eligible institutions are automatically enrolled in the TLGP for the first 30 days at no cost. Organizations that do not wish to participate in the TLGP must opt out by December 5, 2008. After that time, participating entities will be charged fees. The TLGP has two components. The FDIC will provide a complete guarantee of newly issued senior unsecured debt of the participating organizations, within a certain limit, issued between October 14, 2008 and June 30, 2009. For such debts maturing beyond June 30, 2009, the guarantee will remain in effect until June 30, 2012. An annualized fee of 75 basis points multiplied by the amount of debt issued from October 14, 2008 (and still outstanding on December 6, 2008), through June 30, 2009 will be charged. The other component provides full FDIC insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount until December 31, 2009. An annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to insured depository institutions that have not opted out of the TLGP. We are evaluating whether to continue to participate in the TLGP.

It is not clear at this time whether our decision to participate or not to participate in either the CPP or the TLGP will have an effect on our business. In addition, there is no assurance that these government actions will achieve their purpose. The failure of the financial markets to stabilize, or a continuation or worsening of the current financial market conditions, could have a material adverse affect on our business, our financial condition, the financial condition of our customers, our common stock trading price, as well as our ability to access credit. It could also result in declines in our investment portfolio which could be "other-than-temporary impairments."

RESULTS OF OPERATIONS

Net Income (Loss). Net income (loss) decreased by $3.76 million to a net loss of $2.75 million for the quarter ended September 30, 2008, compared to net income of $1.01 million for the quarter ended September 30, 2007. The decrease in earnings was primarily due to a non-cash provision for impairment on investments and an increase in other expenses including write downs of value on foreclosed real estate.

Net income (loss) decreased by $5.98 million to a net loss of $2.90 million for the nine months ended September 30, 2008, compared to net income of $3.08 million for the nine months ended September 30, 2007. The decrease in earnings was primarily due to a non-cash provision for impairment on investments and an increase in other expenses including write downs of value on foreclosed real estate, offset in part by a decrease in income tax expense.

Net Interest Income. Net interest income before provision for loan losses increased by $16,000 to $3.29 million for the quarter ended September 30, 2008, from $3.27 million for the quarter ended September 30, 2007. The increase is due to an increase in the interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) and a decrease in the average balance of interest-bearing liabilities, offset in part by a decrease in the average balance of interest-earning assets. The interest rate spread increased to 2.70% for the quarter ended September 30, 2008, from 2.37% for the quarter ended September 30, 2007. The increase in interest rate spread primarily reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.

Net interest income before provision for loan losses decreased by $129,000 to $9.75 million for the nine months ended September 30, 2008, from $9.87 million for the nine months ended September 30, 2007. The decrease is due to a decrease in the average balance of interest-earning assets, offset in part by an increase in the interest rate spread and a decrease in the average balance of interest-bearing liabilities. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) increased to 2.58% for the nine months ended September 30, 2008, from 2.41% for the nine months ended September 30, 2007. The increase in interest rate spread primarily reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.

Interest Income. Interest income decreased by $1.02 million to $6.97 million for the quarter ended September 30, 2008, compared to $7.99 million for the quarter ended September 30, 2007. The decrease in interest income was due to a decrease in the average balance of interest-earning assets and a decrease in the yield on interest-earnings assets. The average balance of interest-earning assets decreased $43.7 million to $453.6 million for the quarter ended September 30, 2008, from $497.3 million for the quarter ended September 30, 2007. The average yield on interest-earning assets decreased to 6.12% for the quarter ended September 30, 2008, from 6.40% for the quarter ended September 30, 2007, primarily due to a decrease in market interest rates on first mortgage loans secured by on-to four-family real estate, commercial real estate, and multifamily residences. The decrease in the average balance of interest-earning assets primarily reflects decreases in the average balances of first mortgage loans and interest-bearing cash, offset in part by an increase in the average balance of consumer loans and securities available-for sale. The decrease in the average balance of first mortgage loans was derived from payments, prepayments, and sales of loans, offset in part by the origination and purchases of first mortgage loans secured by one-to four-family real estate, commercial real estate, and multifamily residences during the three months ended September 30, 2008. The increase in the average balance of securities available-for-sale was derived from purchases of mortgage-backed securities, offset in part by payments, maturities, and write downs due to the other-than-temporary impairment of investments during the quarter ended September 30, 2008.

Interest income decreased by $1.81 million to $21.61 million for the nine months ended September 30, 2008, compared to $23.42 million for the nine months ended September 30, 2007. The decrease in interest income was due to a decrease in the average balance of interest-earning assets and a decrease in the yield on interest-earnings assets. The average balance of interest-earning assets decreased $26.7 million to $464.3 million for the nine months ended September 30, 2008, from $491.0 million for 2007. The average yield on interest-earning assets decreased to 6.19% for the nine months ended September 30, 2008, from 6.36% for the nine months ended September 30, 2007, primarily due to a decrease in market interest rates on first mortgage loans secured by on-to four-family real estate, commercial real estate, and multifamily residences. The decrease in the average balance of interest-earning assets primarily reflects decreases in the average balances of first mortgage loans and interest-bearing cash, offset in part by an increase in the average balance of consumer loans and securities available-for sale. The decrease in the average balance of first mortgage loans was derived from payments, prepayments, and sales of loans, offset in part by the origination and purchases of first mortgage loans secured by one-to four-family real estate, commercial real estate, and multifamily residences during the nine months ended September 30, 2008. The increase in the average balance of securities available-for-sale was derived from purchases of mortgage-backed securities, offset in part by payments, maturities, and write downs due to other-than-temporary impairment of investments during the nine months ended September 30, 2008.

Interest Expense. Interest expense decreased by $1.04 million to $3.68 million for the quarter ended September 30, 2008, compared to $4.72 million for the quarter ended September 30, 2007. The average balance of interest-bearing liabilities decreased $37.1 million to $426.6 million for the quarter ended September 30, 2008, from $463.7 million for the quarter ended September 30, 2007. The decrease in the average balance of interest-bearing liabilities primarily reflects a decrease in borrowed funds, certificates of deposit, and savings account balances, offset in part by an increase in NOW and money market account balances. The decrease in the average balance of borrowed funds was primarily due to normal repayments of borrowings due to maturities. The average cost of funds was 3.42% for the quarter ended September 30, 2008 and 4.03% for the quarter ended September 30, 2007, respectively.

Interest expense decreased by $1.69 million to $11.86 million for the nine months ended September 30, 2008, compared to $13.55 million for the nine months ended September 30, 2008. The average balance of interest-bearing liabilities decreased $21.2 million to $437.4 million for the nine months ended September 30, 2008, from $458.6 million for the nine months ended September 30, 2007. The decrease in the average balance of interest-bearing liabilities primarily reflects a decrease in borrowed funds and certificates of deposit, offset in part by an increase in NOW, money market and savings account balances. The decrease in the average balance of borrowed funds was primarily due to normal repayments of borrowings due to maturities. The average cost of funds was 3.61% for the nine months ended September 30, 2008 and 3.95% for nine months ended September 30, 2007, respectively.

The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the three and nine months ended September 30, 2008 and 2007, respectively.

                                               For the Three Months Ended September 30,
                                             2008                                    2007
                              Average                   Average       Average                   Average
. . .