CRITICAL ACCOUNTING POLICIES
The nature of the financial services industry is such that, other than described below, the use of estimates and management judgment is not likely to present a material risk to the financial statements. In cases where estimates or management judgment are required, internal controls and processes are established to provide assurance that such estimates and management judgments are materially correct to the best of management's knowledge.
Allowance for Loan Losses. Accounting for loan classifications, accrual status, and determination of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is not limited to, generally accepted accounting principles, the uniform retail credit classification and account management policy issued by the Federal Financial Institutions Examination Council, the joint policy statement on the allowance for loan losses methodologies issued by the Federal Financial Institutions Examination Council and guidance issued by the Securities and Exchange Commission. Accordingly, the allowance for loan losses includes a reserve calculation based on an evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due, collateral values and cost of disposal and other subjective factors. Foreclosed Assets. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated selling expenses, which consist primarily of commissions that will be paid to an independent real estate agent upon sale of the property. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Under the provisions of SFAS 142, goodwill is no longer amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Impairment of goodwill is evaluated by reporting unit and is based on a comparison of the recorded balance of goodwill to the applicable market value or discounted cash flows. To the extent that impairment may exist, the current carrying amount is reduced by the estimated shortfall. Intangible assets which have finite lives are amortized over their estimated useful lives and are subject to impairment testing.
FINANCIAL CONDITION
Assets
Total assets increased $8.8 million, or 3.1%, to $288.0 million at September 30, 2008 compared to $279.2 million at December 31, 2007. Management attributes this growth to a strategy for 2008 that emphasizes growth in the commercial business and real estate loan portfolio.
Securities
Securities decreased to $8.9 million at September 30, 2008 compared to $11.1 million at December 31, 2007. The decrease was attributable to $2.3 million in securities being called due to decreasing market interest rates and $2.1 million in securities maturing. This decrease was offset by the purchase of $2.2 million in securities as a result of efforts to increase yield on investments.

Loans
The Bank's net loan portfolio increased by $16.8 million, or 7.5%, from
$224.8 million at December 31, 2007 to $241.6 million at September 30, 2008. The
following table presents information concerning the composition of our loan
portfolio in dollar amounts and in percentages as of the dates indicated:

                                      September 30, 2008              December 31, 2007
                                    Amount          Percent          Amount       Percent
                                                    (Dollars in thousands)
   Real Estate Loans:
   One-to-four family             $   123,936            50.7      $  126,780         55.8 %
   Multi-family                         5,759             2.4           5,594          2.5
   Commercial                          74,547            30.5          56,714         25.0
   Construction or development          5,598             2.2           6,409          2.8

   Total real estate loans            209,840            85.8         195,497         86.0
   Other loans:
   Consumer loans:
   Home equity                         20,666             8.5          20,430          9.0
   Other                                5,817             2.4           7,014          3.1

   Total consumer loans                26,483            10.8          27,444         12.1
   Commercial Business Loans            8,134             3.3           4,228          1.9

   Total other loans                   34,617            14.2          31,672         14.0

   Total Loans                        244,457           100.0 %       227,169        100.0 %


   Allowance for loan losses            2,296                           1,824
   Less: Net deferred loan fees           583                             548
   Loans in process                         -                               -

   Total Loans, net               $   241,578                      $  224,797

One-to-four family loans decreased as a result of a $7.5 million decrease in adjustable rate mortgages and a $1.3 million decrease in all other mortgages (including fixed rate mortgages), this decrease was offset by an increase in balloon loans of $4.9 million. Continuing with the strategy adopted in 2007, the Bank sold a large percentage of new one to four family loan originations. Commercial real estate loans increased $17.8 million and commercial business loans increased $3.9 million due to the continued focus on growth in commercial lending. The Bank has made inroads in the local market but also continues to originate large commercial real estate loans outside the market area. For the last several years the Bank has originated loans in areas outside the market area where the economy is perceived to be better than the local economy. The Bank also relies on good underwriting standards and maintaining current financial information to mitigate the risk associated with lending outside the market area. The Bank expects future loan growth to come primarily from commercial lending with a focus on in-market lending.
The allowance for loan losses was $2,296,000 at September 30, 2008 compared to $1,824,000 at December 31, 2007, an increase of $472,000. This increase was primarily due a provision for loan losses of $1,488,000, which was offset by net charge offs of $1,017,000 for the nine months ended September 2008, (see "Provision for Loan Losses" below). Charge-offs for the nine months ended September 30, 2008 included $500,000 of one-to-four family mortgage loans, $79,000 of home equity lines of credit, $119,000 of commercial loans collateralized by real estate, $67,000 commercial loans not secured by real estate and $406,000 of consumer loans (including overdrafts). Recoveries consisted of $152,000 in consumer loans (including overdrafts) and $2,000 in commercial loans collateralized by real estate. See "Provision for Loan Losses" below for further explanation regarding charge-offs. Deposits
Total deposits increased $13.3 million, or 7.5%, from $177.9 million at December 31, 2007 to $191.2 million at September 30, 2008. The increase can be attributed to a $13.5 million increase in money market accounts, $1.5 million increase in certificates of deposits, offset by a decrease of $1.7 million in interest bearing demand, NOW and savings accounts. The increase in money market accounts is largely due to management's efforts to remain competitive with interest rates in this category of deposits. The increase in money markets accounts has provided funding so it has not been necessary for management to borrow additional FHLB advances or increase brokered deposits. Brokered deposits have been managed to provide additional liquidity or reduce excess liquidity depending on current conditions. Management expects future deposit growth to come from increased sales and marketing efforts to attract lower cost savings and checking accounts as well as product enhancement.

Federal Home Loan Bank Advances
Total Federal Home Loan Bank (FHLB) advances decreased to $57.3 million as of September 30, 2008 from $59.3 at December 31, 2007. Total proceeds from and repayments of FHLB advances for the nine months ended September 30, 2008 total were $38.5 million and $40.5 million respectively. Management is attempting to reduce its reliance on borrowed funds through the growth of deposits, including brokered deposits. Should this strategy not succeed, management anticipates the need for future borrowings to fund loan growth. See "Net Interest Income" below, and also see "Liquidity" later in this report regarding available borrowings. Equity
Total equity was $36.8 million at September 30, 2008 compared to $39.1 million at December 31, 2007. This represents 12.8% and 14.0% of total assets at September 30, 2008 and December 31, 2007, respectively. Increases in equity primarily resulted from $637,000 in year-to-date net income. Decreases in equity for the nine months ended September 30, 2008 included $2,599,000 in stock repurchases and $587,000 in dividend payments. Management considers its equity position to be strong.
As of September 30, 2008, the previously disclosed stock repurchase program had resulted in 212,290 shares repurchased with 15,710 remaining shares to be repurchased. On October 24, 2008 the Company completed the repurchase of 228,000 shares in connection with the repurchase plan announced February 25, 2008. With the completion of this plan 259,733 shares have been repurchased in 2008.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income before any provision for loan losses increased $11,000 for the quarter ended September 30, 2008 compared to the same period in 2007. The Bank's net interest margin increased to 3.31% for the quarter ended September 30, 2008 from 3.26% for the quarter ended September 30, 2007 as a result of some success in increasing deposits and renewing borrowings at lower interest rates. The Bank continues to be challenged in its efforts to increase lower costing core deposits. Management continues to put its efforts towards meeting this challenge.
Net interest income before any provision for loan losses increased $182,000 for the nine months ended September 30, 2008 compared to the same period in 2007. The Bank's net interest margin increased to 3.29% for the nine months ended September 30, 2008 from 3.26% for the nine months ended September 30, 2007. Our net interest margin increased primarily due to the decrease in costs associated with our borrowings and increases in lower costing deposit balances as compared to the same period a year ago. Interest income from loans represented 96.3% of total interest income for the nine months ended September 30, 2008 compared to 93.7% for the same period in 2007. The Bank's ability to maintain its net interest margin is heavily dependent on future loan demand and its ability to attract core deposits to offset the effect of higher cost certificates of deposits and borrowings.
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made.

                                  Nine Months Ended September 30,                       Nine Months Ended September 30,
                                                2008                                                  2007
                              Average            Interest                           Average            Interest
                            Outstanding           Earned/         Yield/          Outstanding           Earned/         Yield/
                              Balance              Paid            Rate             Balance              Paid            Rate
                                                                  (dollars in thousands)
Fed Funds and
overnight deposits         $       8,905         $     100           1.50 %      $       9,387         $     344           4.90 %
Investment securities             10,373               334           4.29               13,465               464           4.61
Other securities                   4,174               150           4.79                4,174               141           4.52
Loans receivable                 236,314            12,283           6.92              228,099            12,251           7.18

Total earning assets       $     259,766         $  12,867           6.60        $     255,125         $  13,200           6.92


Demand and NOW
Accounts                   $      32,270         $      72           0.30        $      33,205         $      53           0.21
Money market accounts             34,175               774           3.02               24,897               666           3.58
Savings accounts                  19,267                61           0.42               21,621                69           0.43
Certificates of
deposit                          104,036             3,551           4.55              104,394             3,843           4.92
Fed Funds Purchased                   58                 -           0.00                    -                 -           0.00
Federal Home Loan
Bank Advances                     54,246             1,992           4.89               56,775             2,334           5.50

Total interest
bearing liabilities        $     244,052             6,450           3.52        $     240,892             6,965           3.87

Net interest income                              $   6,417                                             $   6,235

Net interest spread                                                  3.08 %                                                3.05 %

Net interest margin                                                  3.29 %                                                3.26 %

Provision for Loan Losses
The Bank recorded a provision for loan losses of $731,000 for the quarter ended September 30, 2008 compared to $219,000 for the quarter ended September 30, 2007. Net charge-offs for the quarter ended September 30, 2008 totaled $442,000 compared to $537,000 for the same period a year ago. While charge off activity continues to consist mostly of 1-4 family residential mortgage loans, there has been an increase in consumer and commercial real estate loans as well for the quarter ended September 2008.
The Bank recorded a $1,488,000 provision for loan losses for the nine months ended September 30, 2008 compared to $689,000 for the same period in 2007, an increase of $799,000. Management believes the increase in provision was necessary to maintain adequate reserves. The level of non-performing assets, net charge-offs, loan impairment, and loan growth were primary considerations in determining the need for the increased provision. Nonperforming assets including the amount of real estate in judgment and foreclosed and repossessed properties, increased from $2.8 million at the end of the last quarter to $3.6 million as of September 30, 2008. Management continues to be aggressive in valuing repossessed properties in efforts to sell quickly. This continues to be a challenge due to the current housing market and the weakened economy. Net charge-offs for the nine months ended September 30, 2008 totaled $1,017,000 compared to $849,000 for the nine months ended September 30, 2007. The net charge-offs consisted primarily of one to four family loans, consumer loans and commercial real estate loans. The Bank's loan growth is primarily attributable growth in the commercial loan portfolio which represents 39% of the loan portfolio as of September 30, 2008 compared to 32% as of December 31, 2007.
The following table presents non-performing assets and certain asset quality ratios at September 30, 2008 and December 31, 2007.

                                                                   September 30, 2008          December 31,2007
                                                                                  (In thousands)
Non-performing loans                                              $              1,853        $              865
Real estate in judgement                                                           932                       630
Foreclosed and repossessed assets                                                  799                       885

Total non-performing assets                                       $              3,584        $            2,380


Non-performing loans to total loans                                               0.76 %                    0.38 %
Non-performing assets to total assets                                             1.24 %                    0.85 %
Allowance for loan losses to non-performing loans                               120.60 %                  210.80 %
Allowance for loan losses to net loans receiveable                                0.91 %                    0.81 %

The Bank had 23 non-performing loan relationships as of September 30, 2008 compared to 13 non-performing loan relationships as of December 31, 2007.

Non-interest Income
Non-interest income for the quarter ended September 30, 2008 decreased $142,000, or 13.7%, from $1,040,000 to $898,000 compared to the same period a year ago. This decrease is attributable to decreases in fees and service charges, net gain on sale of loans, and net gain on sale of fixed assets. These decreases are offset by an increase in other income.
Fees and Service charges decreased $55,000 for the quarter ended September 30, 2008 from $653,000 to $598,000 compared to the same period a year ago. This decrease was a result of a decrease in brokered loan income of $33,000 and a decrease in overdraft fees of $31,000. These decreases were offset by increases in other loan fees including construction and consumer loan fees of $7,000. While there has been a slight improvement in brokered loan income in the third quarter, management does not expect the same level of income for 2008 or 2009 as achieved in 2007.
Net gain on sale of loans decreased $38,000 for the quarter ended September 30, 2008 from $139,000 to $101,000 compared to the same period a year. While there was an upsurge of mortgage loans originated for sale in the secondary market in the first two quarters of the year, the Bank has seen a decline in sales in the secondary market during the third quarter and expects the same level sales in the last quarter of 2008. The decrease in net gain on sale of fixed assets for the quarter ending September 30, 2008 of $71,000 compared to the same period a year ago is attributable to the sale of former branch building located at 30 West Chicago, Coldwater in the third quarter of 2007. Other income increased $20,000 for the quarter ended September 30, 2008 from $69,000 to $89,000 as a result of an increases in net gain on sale of foreclosed assets of $36,000. Decreases in all other income of $16,000 offset the increase in net gain of foreclosed assets.
Non-interest income for the nine months ended September 30, 2008 decreased $169,000, or 5.6%, from $3.0 million to $2.8 million for the same period in 2007. Fees and Service charges decreased $140,000 for the nine months ended September 30, 2008 from $1.9 million to $1.7 million compared to the same period a year ago. This decrease was a result of a decrease in brokered loan income of $129,000, decrease of overdraft fees of $45,000 and a decrease in other fees of $16,000, offsetting these decreases was a decrease in costs associated with our overdraft protection program of $51,000, and an increase in atm/debit card income of $23,000. Net gain on sale of fixed assets decreased by $71,000 was due to the sale of a building in 2007 as mentioned previously.
Other income decreased $73,000 for the nine months ended September 30, 2008 from $277,000 to $204,000 as a result of decreases in net gain on sale of foreclosed assets of $45,000, a decrease in rental income of $28,000 and a decrease in all other income of $2,000.
The decreases in fees and service charges and other income are offset by an increase in gain on sale of loans for the nine months ended September 30, 2008 of $93,000 from $470,000 to $563,000. A gain of $2,000 on the sale of securities for the nine months ended September 30, 2008 compared to a net loss of $19,000 for the same period in 2007 also offset the decreases in fees and service charges and other income.
Non-interest Expense
Noninterest expense remained relatively unchanged decreasing $8,000, or less than 1%, for the for the three months ended September 30, 2008 compared to the same period ending September 30, 2007. Occupancy and equipment expense increased by $12,000 for the three months ended September 30, 2008 compared to the same period a year ago due to the Bank completing a repaving project for several locations. Other general and administrative expenses increased $65,000 (from $266,000 to $331,000 for the quarter ended September 30, 2008 compared to the same period a year ago. These increases include an increase in advertising of $25,000, an increase in loan related fees of $17,000, and an increase in costs associated with FDIC insurance of $33,000. The increase in advertising reflects the Bank's efforts to utilize sources of media as a means of promoting products and services and participation in community activities. These increases were offset by decreases in professional services of $73,000 (from $180,000 to $108,000). This area of expense was higher in 2007 due to the Company's attempt to execute a going private transaction. Amortization of Core Deposit Intangible decreased $11,000 (from $54,000 to $43,000).
Noninterest expense increased $251,000, or 3.8%, to $6.9 million for the nine months ended September 30, 2008 compared to $6.6 million for the same period in 2007. This increase is mainly due to increases in compensation and benefits, repossessed property expenses, amortization of mortgage servicing rights and other general and administrative expenses. Salaries and employee benefits expense increased $125,000 due to normal increases in salaries and wages, and an increase in staffing and utilization of contracted personnel. The Bank has 84 full-time equivalent employees as of September 30, 2008 compared to 77 full-time equivalent employees as of September 30, 2007.

Other general and administrative expenses increased $146,000, from $862,000 to $1,008,000 for the nine months ended September 30, 2008 compared to the same period a year ago. These increases include an increase in advertising of $73,000, an increase in FDIC insurance of $62,000 and an increase in all other general and administrative expenses of $11,000.
Foreclosed property expense increased $44,000, from $125,000 to $169,000, resulting from write downs on properties held in real estate owned and additional expenses associated with preparing and maintaining properties for sale. Amortization of mortgage servicing rights increased $56,000 (from $265,000 to $321,000) as a result of an increase in mortgage loan payoffs due to refinancing associated with the decrease of interest rates in the first quarter. Data processing increased $29,000, from $546,000 to $575,000 due to implementation of network upgrades and costs associated with the installation of a new telephone system.
Professional services and amortization of core deposit intangible decreased offsetting the other noninterest expense items. Professional services decreased $129,000, from $430,000 to $301,000; this area of expense was higher in 2007 due reason mentioned in the preceding paragraph. Amortization of Core deposit intangible decreased $37,000, from $176,000 to $139,000, as amortization of this asset continues to slow from year to year. Federal Income Tax Expense
The Company's provision for federal income taxes decreased $121,000 for the quarter ended September 30, 2008 compared to the same period in 2007 as our net income before taxes decreased $535,000. The effective tax rate for the quarter ended September 30, 2008 was 38.7 % compared to 25% for the same period in 2007. The increase was a result of an over estimation of federal tax and will be reversed in the 4th quarter of 2008. The difference between the effective tax rates and the federal corporate income tax rate of 34% is attributable to the low income housing credits available to the Bank from the investment in the limited partnership as well as fluctuation of permanent book and tax differences such as non-taxable income and non-deductible expenses.
LIQUIDITY
The Bank's liquidity, represented by cash, overnight funds and investments, is a product of our operating, investing, and financing activities. The Bank's . . .