Overview and Recent Developments

The Company's results of operations depend primarily on its net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of savings accounts, checking accounts, time deposits and FHLB advances. The Company's results of operations also are affected by its provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charge income, earnings on bank-owned life insurance, gains and losses on the sale of securities and miscellaneous other income. Non-interest expense currently consists primarily of salaries and employee benefits, real estate or investment securities impairment charges, occupancy, data processing, professional fees, and other operating expenses. The Company's results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Throughout 2008 and continuing into 2009, there have been severe disruptions in the mortgage, credit and housing markets, both locally and nationally. These disruptions have had a significant negative impact on real estate and related industries, which has led to decreases in commercial and residential real estate sales, construction and property values. While these disruptions have not yet had a significant negative impact on the Bank's loan portfolio, we have experienced a reduction in demand for new loans, with a consequential reduction in the size of our loan portfolio, and an increase in the amount of nonperforming loans compared to year end 2007. At December 31, 2008, nonperforming loans represented 0.55% of gross loans, compared to 0.13% at December 31, 2007. Also, the decreased demand for new residential mortgage loans and the increase in nonperforming loans has resulted in a contraction of our net interest rate spread and net interest margin and the need to increase the provision for loan losses compared to 2007. Should the housing market and economic conditions in the Chicago-area stagnate or continue to deteriorate, it could have a material negative effect on the Company's business and results of operation.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company and its wholly owned subsidiaries include, but are not limited to, changes

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in: interest rates; the economic health of the local real estate market; general economic conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; and accounting principles, policies, and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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Average Statement of Financial Condition

The following table sets forth certain information relating to the Company's Average Statement of Financial Condition and reflects the average yield on assets and average cost of liabilities for the years ended December 31, 2008, 2007, and 2006. The yields and costs are derived by dividing interest income or expense by the average balance of assets or liabilities, respectively, for the years shown. Average balances are derived from average month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. Average balances of loans receivable include loans on which the Bank has discontinued accruing interest. Loan yields include fees which are considered adjustments to yields.

                                                                                   Year Ended December 31,
                                                   2008                                     2007                                     2006
                                                                Average                                  Average                                  Average
                                     Average                    Yield/        Average                    Yield/        Average                    Yield/
                                     Balance       Interest      Cost         Balance       Interest      Cost         Balance       Interest      Cost
Assets
Interest-earnings asset
Securities, net(1)                  $  36,059      $   1,636       4.54 %       28,472          1,309       4.60 %    $  31,036      $   1,306       4.21 %
Loans receivable(2)                   142,233          9,128       6.42        144,276          9,556       6.62        153,680          9,769       6.36
Mortgage-backed securities,
net(1)                                 12,321            496       4.03         17,382            690       3.97         22,766            906       3.98
Interest-earning deposits and
other investments                       8,093            192       2.37          8,823            435       4.93          6,087            317       5.21

Total interest-earning assets         198,706         11,452       5.76        198,953         11,990       6.03        213,569         12,298       5.76

Non-interest-earning assets            24,818                                   21,277                                   19,148


Total assets                        $ 223,524                                $ 220,230                                $ 232,717


Liabilities and stockholders'
equity
Interest-bearing liabilities
Passbook accounts                   $  28,909            183       0.63         29,552            226       0.76      $  31,859            244       0.77
Money market savings accounts           8,556            191       2.23          8,133            316       3.89          7,600            193       2.54
NOW accounts                            8,894             50       0.56         15,950             48       0.30         16,546             63       0.38
Certificate accounts                   86,816          3,598       4.14         84,480          3,886       4.60         90,092          3,738       4.15

Total deposits                        133,175          4,022                   138,115          4,476                   146,097          4,238
FHLB advances and other
borrowings                             51,376          2,017       3.93         47,370          1,981       4.18         53,312          2,198       4.12

Total interest-bearing
liabilities                           184,551          6,039       3.27        185,485          6,457       3.48        199,409          6,436       3.23

Non-interest-bearing liabilities        9,937                                    4,083                                    3,747

Total liabilities                     194,488                                  189,568                                  203,156
Stockholders' equity                   29,036                                   30,662                                   29,561


Total liabilities and
stockholders' equity                $ 223,524                                $ 220,230                                $ 232,717

Net interest income                                $   5,413                                $   5,533                                $   5,862

Net interest rate spread(3)                                        2.49 %                                   2.55 %                                   2.53 %
Net interest margin(4)                                             2.72 %                                   2.78 %                                   2.74 %
Ratio of average
interest-earning assets to
average interest-bearing
liability                              107.67 %                                 107.26 %                                 107.10 %

(1) Includes unamortized discounts and premiums.

(2) Amount is net of deferred loan origination fees, undisbursed loan funds, unamortized discounts, and allowance for loan losses and includes non-performing loans.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the average cost of interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

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Rate/Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the years indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                                         2008 Compared to 2007                    2007 Compared to 2006
                                                      Increase (Decrease) Due to                Increase (Decrease) Due to
                                                    Volume           Rate       Net         Volume             Rate        Net
Interest earned on
Securities, net                                   $       349       $  (22 )   $  327     $      (105 )      $    108     $    3
Loans receivable, net                                    (138 )       (290 )     (428 )          (571 )           358       (213 )
Mortgage-backed securities, net                          (201 )          7       (194 )          (214 )            (2 )     (216 )
Interest-earning deposits and other investments           (36 )       (207 )     (243 )           143             (25 )      118

Total interest-earning assets                             (26 )       (512 )     (538 )          (747 )           439       (308 )


Interest expense on
Passbook savings accounts                                  (5 )        (38 )      (43 )           (15 )            (3 )      (18 )
Money market savings accounts                              16         (141 )     (125 )            14             109        123
NOW accounts                                              (22 )         24          2              (2 )           (13 )      (15 )
Certificate accounts                                      106         (394 )     (288 )          (234 )           382        148
FHLB advances and other borrowings                        155         (119 )       36            (246 )            29       (217 )

Total interest-bearing liabilities                        250         (668 )     (418 )          (483 )           504         21


Change in net interest income                     $      (276 )     $  156     $ (120 )   $      (264 )      $    (65 )   $ (329 )

Comparison of Financial Condition at December 31, 2008 and December 31, 2007

Total assets at December 31, 2008 were $219.6 million compared to $220.1 million at December 31, 2007, a decrease of $500,000. Securities available for sale increased $9.8 million to $43.6 million at December 31, 2008 from $33.8 million at December 31, 2007. The increase in securities available for sale was due to increased liquidity during 2008 as a result of greater than anticipated loan repayments during the year. During 2008, loans decreased $7.4 million to $138.6 million from $146.0 million in 2007 primarily due to a lower volume of loan originations and larger than anticipated loan repayments during 2008. These decreases were partially offset by an increase of $2.6 million in premises and equipment, the result of the Bank's new branch location on 47th Street in Chicago, Illinois which opened in June, 2008.

Total liabilities at December 31, 2008 were $192.7 million compared to $189.8 million at December 31, 2007. Deposits remained stable with an increase of $600,000 to $137.6 million at December 31, 2008 from $137.0 million at December 31, 2007. Advances from the Federal Home Loan Bank increased $2.8 million to $48.9 million at December 31, 2008 from $46.1 million at December 31, 2007.

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Stockholders' equity at December 31, 2008 decreased $3.4 million to $26.9 million compared to $30.3 million at December 31, 2007. Book value at December 31, 2008 was $22.79 per share. The decrease in stockholders' equity from December 31, 2007 was primarily attributable to the repurchase of 21,805 shares at an average price of $22.15 or $483,000, dividends paid of $468,000, a net loss of $2.4 million, and a change in the fair value of securities available for sale, net of tax, of $278,000.

Comparison of Operating Results for the Years Ended December 31, 2008 and 2007

General

Net loss was $2.4 million for the year ended December 31, 2008, compared to a $117,000 net loss for the same period in 2007. The change is primarily due to an increase in noninterest expense of $2.6 million, which was the result of a $1.7 million loss on security impairment and a $1.0 million impairment on the carrying value of other real estate owned properties.

Net Interest Income

Interest income in 2008 was $11.5 million, compared to $12.0 million in 2007. Average yield on interest-earning assets decreased to 5.76% in 2008, compared to 6.03% in 2007, while average interest-earning assets decreased $247,000 during 2008 from 2007. The decreases were due to a declining interest rate environment in 2008 that led to increased loan repayments during that period.

Interest expense in 2008 was $6.0 million compared to $6.5 million in 2007. The change in interest expense is due to a 21 basis point decrease in the average cost of interest-bearing liabilities and a decrease of $934,000 in average interest-bearing liabilities from 2007.

Net interest income in 2008 was $5.4 million compared to $5.5 million in 2007. The net interest rate spread and net interest margin was 2.49% and 2.72% in 2008 compared to 2.55% and 2.78% in 2007, respectively.

Provision for Loan Losses

Management establishes provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, peer group information, and prevailing economic conditions. Management increased the factor relating to economic conditions due to the weakening economy throughout the year and the increased unemployment level in the latter half of 2008. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available or as future events change. The provision for loan losses was $184,000 and $75,000 in 2008 and 2007, respectively.

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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 economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of December 31, 2008 is maintained at a level that represents management's best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable.

Noninterest Income

Noninterest income in 2008 was $563,000 compared to $793,000 in 2007. The change was primarily due to a $74,000 gain on the sales of securities and a gain on the sale of real estate owned of $162,000 realized in 2007 with no similar gains occurring in 2008. The Company does not expect significant gains on the sales of securities or sales of real estate owned in 2009, as significant securities sales are not a planned strategy of the Company, and real estate owned is carried at the estimated market value as of December 31, 2008.

Noninterest Expense

Noninterest expense in 2008 was $9.2 million, an increase of $2.6 million from 2007. The change was primarily due to a loss on security impairment of $1.7 million and a writedown on the carrying value of other real estate owned of $1.0 million during 2008. The Company recognized a $1.5 million other-than-temporary impairment loss on its mutual fund investment and a $211,000 other-than-temporary impairment loss on its equity securities portfolio in 2008. Management believed it could no longer forecast a recovery within a reasonable holding period for these investments, and according to accounting literature in FASB Staff Position 115, the losses were recognized through earnings. Advertising expense increased $121,000 for the year ended December 31, 2008 from the same period in 2007 due to the opening of the branch location on 47th Street in Chicago. Professional fees were $439,000 for the year ended 2008 compared to $302,000 in 2007. This increase was due to additional legal and accounting fees related to the Company's supervisory agreement with the OTS and the replacement of the Company's Chief Financial Officer.

The mutual fund investment and equity securities portfolio is carried at market value as of December 31, 2008. Subsequent to December 31, 2008, the market value of the investments has continued to deteriorate. If the market value declines are determined to be other-than-temporary, additional noninterest expense will be recognized in future periods. Similarly, real estate owned is carried at the estimated market value as of December 31, 2008. If the estimated value of real estate continues to decline, additional noninterest expense will be recognized in future periods. Management monitors the market value of the mutual fund investment by periodically reviewing the published net asset value of the mutual fund. Management monitors the estimated value of the Company's real estate owned by periodically reviewing comparable property sales, and obtaining updated real estate appraisals.

Income Taxes

An income tax benefit of $1.0 million was recognized in 2008 compared to the income tax benefit of $234,000 recognized in 2007. The increase in income tax benefit was due to a larger pre-tax loss in 2008 compared to 2007, partially offset by a deferred tax asset valuation allowance of $339,000 recorded in 2008. The Company recognized a deferred tax asset valuation allowance in 2008 due to uncertainty that deferred tax assets may not be fully realized. Factors that the Company considered when recording the valuation allowance included that the Company reported a net loss in the previous two years, FDIC assessments are expected to increase noninterest expense in future periods, and the uncertainty regarding further other-than-temporary impairment as a result of further declines in the fair value of securities available for sale. If the Company determines that the deferred tax assets will more likely than not be realized in future periods, the Company will make an adjustment to the valuation allowance by reducing the provision for income taxes.

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from maturities and calls of securities, FHLB advances, and securities sold under repurchase agreements. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank maintains a liquidity ratio substantially above the regulatory requirement. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio is currently 4.0%. The Bank's average regulatory liquidity ratios were 28.99%, 22.37%, and 21.82% for the years ended December 31, 2008, 2007, and 2006, respectively.

The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash from operating activities were $(1.2) million, $1.3 million, and $(423,000) in 2008, 2007, and 2006, respectively. Net cash from investing activities consisted primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from maturing securities and paydowns on mortgage-backed securities. Net cash from investing activities were $(8.1) million, $6.6 million, and $23.6 million in 2008, 2007 and 2006, respectively. Net cash used in financing activities consisted primarily of the activity in deposit accounts, FHLB borrowings, and securities sold under repurchase agreements in addition to the purchase of treasury stock. The net cash used in financing activities was $2.7 million, $(7.7) million, and $(13.1) million, in 2008, 2007, and 2006, respectively.

At December 31, 2008, the Bank exceeded all of its regulatory capital requirements with a Tier 1 (core) capital level of $25.6 million, or 11.7% of adjusted total assets, which is above the required level of $8.8 million, or 4.0%; and total risk-based capital of $26.3 million, or 19.6% of risk-weighted assets, which is above the required level of $10.8 million, or 8.0%.

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The Bank's most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Bank's operating, financing, lending, and investing activities during any given period. At December 31, 2008, cash and short-term investments totaled $8.9 million. The Bank has other sources of liquidity if a need for additional funds arises, including the repayment of loans and mortgage-backed securities. The Bank may also utilize FHLB advances or the sale of securities available for sale as a source of funds. At December 31, 2008 the Bank had outstanding FHLB advances of $48.9 million and had the capacity available to borrow an additional $16.6 million if needed.

Critical Accounting Policies

Allowance for Loan Losses: The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, both of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors affecting the allowance for loan losses; some quantitative, while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for credit losses could be required that could adversely affect earnings or financial position in future periods. Management is monitoring credit risk trends and the impact on the allowance for loan losses analysis.

Securities Available For Sale: Securities available are carried at the estimated fair value. Unrealized gains and losses on securities available for sale are included as a separate component of stockholders' equity, net of deferred income taxes. The fair value of certain securities is less than amortized cost. When management believes the decline in fair values below the cost represents an other-than-temporary impairment, the loss is recognized on the income statement. The estimated fair value of investment securities are declining in the current market, and management is monitoring the values of its securities available for sale.

The fair value of certain securities was less than amortized cost at December 31, 2008. Management believes the decline in market value below cost does not represent an other-than-temporary impairment, and thus no loss was recognized on the income statement.

Real Estate Owned: Real estate acquired through foreclosure and similar proceedings is carried at cost (fair value at the date of foreclosure) or at fair value less estimated costs to sell. Losses on disposition, including expenses incurred in connection with the disposition, are charged to operations. Operating costs after acquisition are expensed. Real estate values are declining in the Company's market and management is monitoring the values of its real estate owned properties.

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