The following discussion compares the consolidated financial condition of the Company at September 30, 2008 and December 31, 2007, and the results of operations for the three- and nine-month periods ended September 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 September 30, 2008, the Company reported a net loss of $635,000 compared to a net loss of $25,000 for the year earlier period, a decrease in earnings of $610,000. For the nine months ended September 30, 2008, the net loss was $917,000 compared to a net loss of $239,000 for the nine months ended September 30, 2007.

Total assets increased by $3.4 million, or 1.4% from December 31, 2007 to September 30, 2008. Investment securities available for sale increased by $3.5 million from December 31, 2007 to September 30, 2008. Net loans receivable decreased $6.8 million or 3.4% during that same time period. Total deposits increased $11.9 million, or 7.2% from December 31, 2007 to September 30, 2008, while Federal Home Loan Bank advances decreased by $6.5 million from December 31, 2007 to September 30, 2008. Equity decreased by $1.2 million, or 3.6% during the nine-month period ended September 30, 2008.

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

ASSETS: Total assets increased $3.4 million, or 1.4%, to $254.2 million at September 30, 2008 from $250.8 million at December 31, 2007. Investment securities available for sale increased $3.5 million, or 17.1%, from December 31, 2007 to September 30, 2008. Net loans receivable decreased $6.8 million, or 3.4%, to $194.5 million at September 30, 2008 from $201.3 million at December 31, 2007. Total mortgage loans decreased by $4.8 million, consumer loans decreased by $2.6 million and total commercial loans decreased by $360,000 as loan originations declined due to weaker economic conditions in our primary lending markets.

LIABILITIES: Deposits increased $11.9 million, or 7.2%, to $176.3 million at September 30, 2008 from $164.5 million at December 31, 2007, a time period during which we were not a market-leader in deposit rates. Over $9 million of this increase in deposits came was experienced during the three months ended September 30, 2008. While we were a market leader in rates in some CD maturity categories during this time period, we attribute the increase, which was primarily in our money-market and CD products, to depositors seeking safety rather than rate, and we did not match the high "special rates" that many of our area competitors were offering. FHLB advances decreased $6.5 million, or 12.6%, to $45.2 million at September 30, 2008 from $51.7 million at December 31, 2007 due to the pay-down of advances from the maturity of AFS investment securities, and the influx of deposits.

EQUITY: Stockholders' equity decreased to $31.3 million at September 30, 2008 from $32.5 million at December 31, 2007, a decline of $1.2 million. The decrease in stockholders' equity was mainly attributable to our net loss for the period of $910,000 as well as to dividends paid during the period. Dividends were $433,000 for the nine months ended September 30, 2008, respectively. The unrealized gain on available for sale securities, net of tax, was $36,200 at September 30, 2008 as compared to a gain of $64,900 at December 31, 2007, a decline of $28,700.

RESULTS OF OPERATIONS

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

GENERAL: Net income decreased by $610,000 to a net loss of $635,000 for the three months ended September 30, 2008 from a net loss of $25,000 for the same period ended September 30, 2007. This decrease was attributable to three factors: an increase in provision for loan losses of $764,000 to $875,000 for the three months ended September 30, 2008 as compared to $111,000 for the same period in 2007; a decrease in net interest income period over period of $323,000 mainly due to a decrease in interest income and a decrease in our net interest margin; and a decrease in non-interest income of $370,000 period over period. These three factors were partially offset by a reduction in our non-interest expense of $576,000 period over period. These factors are all discussed in greater detail below.

INTEREST INCOME: Interest income was $3.5 million for the three months ended September 30, 2008, compared to $4.1 million for the comparable period in 2007. The decrease in interest income was due primarily to two factors: a decrease in the average balance of our interest-earning assets due to a reduction in the size of our loan portfolio and a decrease in the yield on interest-earning assets due in part to lower market interest rates. The average balances of AFS investment securities decreased $7.9 million as securities matured or were called and the proceeds were used to pay-down higher-cost FHLB advances, rather than reinvest in lower-yielding investment securities. The average balance of mortgage loans decreased $7.7 million period over period and the average balance of non-mortgage loans decreased $2.8 million quarter over quarter, as we continued to experience a decline in loan originations due to economic conditions in our market areas.

INTEREST EXPENSE: Interest expense was $1.8 million for the three month period ended September 30, 2008, compared to $2.1 million for the same period in 2007. The decrease in interest expense for the three-month period was due primarily to decreases in the average balance of and interest rates paid on our Federal Home Loan Bank Advances period over period. We experienced a $9.6 million decrease in the average balance of FHLB advances for the three months ended September 30, 2008 when compared to the same period in 2007 and the average rate on those advances decreased 45 basis point to 4.40% for the three-month period ended September 30, 2008 as compared to the year-earlier period. In addition, our cost of funds relating to our certificates of deposit decreased 36 basis points to 4.12% three-month period over three-month period, due mainly to higher-costing certificates which matured and re-priced lower in the lower market interest rate environment.

NET INTEREST INCOME: Net interest income decreased to $1.7 million for the three month period ended September 30, 2008 compared to $2.0 million for the same period in 2007. For the three months ended September 30, 2008, average interest-earning assets decreased $9.2 million, or 3.7%, to $237.4 million when compared to the same period in 2007. Average interest-bearing liabilities decreased $7.6 million, or 3.5%, to $209.0 million for the quarter ended September 30, 2008 from $216.6 million for the quarter ended September 30, 2007. The yield on average interest-earning assets decreased to 5.92% for the three month period ended September 30, 2008 from 6.69% for the same period ended in 2007 due mainly to decreases in the yields on our non-mortgage loans, increases in interest reversals on non-performing loans, and investment securities purchased with yields lower than the securities they replaced in our portfolio due to declines in market rates of interest. The cost of average interest-bearing liabilities decreased to 3.42% from 3.83% for the three month periods ended September 30, 2008 and September 30, 2007, respectively. The decrease in asset yields on interest earning assets, offset by the decrease in our cost of funds resulted a decrease in the net interest margin of 41 basis points to 2.91% for the three month period ended September 30, 2008 from 3.32% 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 $875,000 for the three month period ended September 30, 2008 and $111,000 for the comparable period in 2007. During the quarter ended September 30, 2008, the Company had increased its reserves on certain commercial and mortgage loans based on deterioration of those credits during the quarter, particularly one large commercial real-estate loan, which accounted for the higher provision in the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007.

NON INTEREST INCOME: Non interest income was $652,000 for the three month period ended September 30, 2008, a decrease of $370,000 or 36.2% from the same period in 2007. The primary reason for the decrease was insurance & brokerage commission income which was $403,000 lower in the quarter ended September 30, 2008 as compared to the same period a year earlier due to the sale of the exclusive BCBS contract to Grotenhuis in April 2008.

NON INTEREST EXPENSE: Non interest expense was $2.4 million for the three month period ended September 30, 2008, a $576,000 or 19.0%, decrease from the same period in 2007. The decrease was due to $171,000 in prepayment penalties associated with early pay-off of FHLB advances during the quarter ended September 30, 2007, and decreases of $245,000 in insurance and brokerage commission expense related to the sale of the exclusive BCBS contract to Grotenhuis, $149,000 in compensation and employee benefits, $28,000 in advertising expense, and $27,000 in occupancy expense.

INCOME TAXES: Federal income taxes decreased to a tax benefit of $320,000 for the three month period ended September 30, 2008 compared to tax benefit of $48,000 for the same period in 2007. The decrease for the three month period was attributable to a decrease in pre-tax income quarter over quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2007

GENERAL: Net income decreased $678,000 to a net loss of $917,000 for the nine months ended September 30, 2008 from net loss of $239,000 for the same period ended September 30, 2007. The decrease in earnings period over period was primarily attributable to the same three factors as were discussed for the three-month period comparison: an increase in provision for loan losses of $933,000 to $1,243,000 for the nine months ended September 30, 2008 as compared to $310,000 for the same period in 2007; a decrease in net interest income period over period of $739,000 mainly due to a decrease in interest income and a decrease in our net interest margin; and a decrease in non-interest income of $441,000 period over period. These three factors were partially offset by a reduction in our non-interest expense of $1,200,000 period over period. The income tax benefit for the nine months ended September 30, 2008 increased by $245,000 as compared to the same period in 2007 due to the decrease in pre-tax income period over period.

INTEREST INCOME: Interest income was $10.6 million for the nine months ended September 30, 2008, compared to $12.3 million for the comparable period in 2007. This decrease of $1.7 million, or 14.0%, in interest income was due in large part to a decrease of $17.6 million in average balances of AFS investment securities to $16.9 million for the nine-month period ended September 30, 2008 compared to $34.6 million for the period ended September 30, 2007. In addition, the yield on that portfolio decreased 34 basis points to 4.06% period over period. We also experienced a 125 basis point decrease to 6.42% period over period in the yield on our non-mortgage loan portfolio, which carried an average balance of $104.7 million for the nine month period ended September 30. 2008.

INTEREST EXPENSE: Interest expense was $5.5 million for the nine month period ended September 30, 2008 compared to $6.4 million for the same period in 2007. The decrease in interest expense was due primarily to decreases in the average balance of and interest rates on our Federal Home Loan Bank Advances period over period. We experienced an $11.5 million decrease in the average balance of FHLB advances for the nine months ended September 30, 2008 when compared to the same period in 2007 and the average rate on those advances decreased 44 basis points to 4.50% for the nine-month period ended September 30, 2008 as compared to the year-earlier period. In addition, our cost of funds relating to our certificates of deposit decreased 28 basis points to 4.23% nine-month period over nine-month period, due mainly to higher-costing certificates which matured and re-priced lower.

NET INTEREST INCOME: Net interest income decreased by $739,000 for the nine month period ended September 30, 2008 compared to the same period in 2007. For the nine months ended September 30, 2008, average interest-earning assets decreased $17.3 million, or 6.9%, when compared to the same period in 2007. Average interest-bearing liabilities decreased $16.2 million, or 7.3% for the same period. The yield on average interest-earning assets decreased to 6.03% for the nine month period ended September 30, 2008 from 6.55% for the same period ended in 2007. The cost of average interest-bearing liabilities decreased to 3.53% from 3.87% for the nine month periods ended September 30, 2008 and September 30, 2007, respectively. The net result of the 52 basis point decrease in asset yields and 34 basis point decrease in the cost of funds was a net interest rate margin decrease of 20 basis points to 2.94% for the nine month period ended September 30, 2008, from 3.14% for the 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 context of SFAS 15.

                                                       SEPTEMBER 30,   DECEMBER 31,
                                                            2008            2007
                                                       -------------   ------------
                                                          (Dollars in thousands)
Total non-accrual loans                                   $8,206         $ 8,459
                                                          ------         -------
Accrual loans delinquent 90 days or more:
   One- to four-family residential                            92             532
   Other real estate loans                                    --              --
   Consumer/Commercial                                        29             145
                                                          ------         -------
      Total accrual loans delinquent 90 days or more      $  121         $   677
Total nonperforming loans (1)                              8,327           9,136
Total real estate owned-residential mortgages (2)            333             872
Total real estate owned-Consumer and other (2)             1,204             408
Total nonperforming assets                                $9,864         $10,416
                                                          ======         =======
Total nonperforming loans to loans receivable               4.21%           4.54%
Total nonperforming assets to total assets                  3.88%           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 $1.2 million for the nine month period ended September 30, 2008 and $310,000 for the comparable period in 2007. The ratio of nonperforming loans to total loans was 4.21% at September 30, 2008 and 4.54% at December 31, 2007. As a percent of total assets, nonperforming loans decreased to 3.88% at September 30, 2008 from 4.15% at December 31, 2007. Total nonperforming assets decreased by $552,000 from December 31, 2007 to September 30, 2008.

NON INTEREST INCOME: Non interest income was $2.5 million for the nine month period ended September 30, 2008, a decrease of $441,000 or 15.2%, from the same period in 2007. The primary reason for the decrease was a decrease of $728,000 in insurance and brokerage commission income due to the sale of the exclusive BCBS contract to Grotenhuis in April 2008, partially offset by increases of $59,000 in service charge and other fee income and a swing of $112,000 in gain on sale of AFS securities period over period (a net loss of $97,000 for the nine months ended September 30, 2007 as compared to net gain of $16,000 for the same period in 2008).

NON INTEREST EXPENSE: Non interest expense was $7.7 million for the nine month period ended September 30, 2008 as compared to $8.9 million for the nine month period ended September 30, 2007. The main reasons for the decrease period over period was $464,000 in prepayment penalties on FHLB advances paid during the nine months ended September 30, 2007, a $410,000 reduction in insurance brokerage and commission expense in 2008 due to the sale of the BCBS contract as described above and a reduction of $330,000 in compensation and employee benefits period over period due to the closure of an under-performing branch as well as other cost-cutting measures.

INCOME TAXES: Federal income tax benefit increased to $245,000 to $462,000 for the nine months ended September 30, 2008 from a benefit of $217,000 for the same period in 2007. The decrease for the nine month period was attributable to a decrease in pre-tax income period over period.

LIQUIDITY

The Company's current liquidity position is more than 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 September 30, 2008 was $37.1 million, or 20.2%, compared to $57.3 million, or 32.1%, at December 31, 2007. 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 pledged collateral. As of September 30, 2008, the Bank had unused borrowing capacity totaling $7.7 million at the FHLB based on the pledged collateral.

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 nine month period ended September 30, 2008 the Company originated $24.3 million in residential mortgage loans, of which $15.4 million were retained in portfolio while the remainder were sold in the secondary market or are being held for sale. This compares to $24.8 million in originations during the first nine months of 2007 of which $12.9 million were retained in portfolio. The Company also originated $22.6 million of commercial loans and $4.7 million of consumer loans in the first nine months of 2007 compared to $19.7 million of commercial loans and $7.2 million of consumer loans for the same period in 2007. Of total loans receivable, excluding loans held for sale, mortgage loans comprised 47.7% and 48.5%, commercial loans 39.1% and 37.3% and consumer loans 13.2% and 14.2% at September 30, 2008 and December 31, 2007, respectively.

Deposits are a primary source of funds for use in lending and for other general business purposes. At September 30, 2008 deposits funded 69.4% 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 September 30, 2008 totaled $72.9 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. Moreover, management believes that the growth in assets is not expected to require significant in-flows of liquidity. As such, the Bank does not expect to be a significant market leader in rates paid for liabilities.

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 September 30, 2008 the Company had $45.2 million in FHLB advances. FHLB borrowings as a percentage of total assets were 17.8% at September 30, 2008 as compared to 20.6% at December 31, 2007. The Company has sufficient available collateral to obtain additional advances of $7.7 million.

CAPITAL RESOURCES

Stockholders' equity at September 30, 2008 was $31.3 million, or 12.3% 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 requirements in accordance with OTS regulations. The Bank exceeded all regulatory capital requirements at September 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 September 30, 2008:

                                                                                           Minimum to be
                                                                           Regulatory           Well
                                                           Actual           Minimum         Capitalized
                                                      ---------------   ---------------   ---------------
                                                       Amount   Ratio    Amount   Ratio    Amount   Ratio
                                                      -------   -----   -------   -----   -------   -----
                                                                      Dollars in Thousands
Tier 1 (Core) capital (to adjusted assets)            $27,072   10.79%  $10,039   4.00%   $12,549    5.00%
Total risk-based capital (to risk-weighted assets)    $29,241   16.86%  $13,877   8.00%   $17,346   10.00%
Tier 1 risk-based capital (to risk weighted assets)   $27,072   15.61%  $ 6,939   4.00%   $10,408    6.00%
Tangible Capital (to tangible assets)                 $27,072   10.79%  $ 3,765   1.50%   $ 5,019    2.00%