The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements of the Corporation and the accompanying notes.
The Corporation is not aware of any market or institutional trends, events, or circumstances that will have or are likely to have a material effect on liquidity, capital resources, or results of operations except as discussed herein. Also, the Corporation is not aware of any current recommendations by regulatory authorities that will have such effect if implemented.
FORWARD-LOOKING STATEMENTS
In addition to historical information, the following discussion contains "forward-looking statements" that involve risks and uncertainties. All statements regarding the expected financial position, business and strategies are forward-looking statements and the Corporation intends for them to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The words "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends," and similar expressions, as they relate to the Corporation or management, are intended to identify forward-looking statements. The Corporation believes that the expectations reflected in these forward-looking statements are reasonable based on our current beliefs and assumptions; however, these expectations may prove to be incorrect.
Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, changes in the relative difference between short and long-term interest rates, general economic conditions, legislative/regulatory changes, 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 or investment portfolios, including levels of non-performing assets, demand for loan products, deposit flows, competition, demand for financial services in our market area, our operating costs and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.
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 FASB ASC 350-10-35-1 Intangibles-Goodwill and Other, 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.
In accordance with the Corporation's annual review policy, its annual goodwill impairment analysis is conducted in the fourth quarter. The financial services industry and securities markets continue to be adversely affected by declining values of nearly all asset classes. If current economic conditions continue to result in a prolonged period of economic weakness, the Corporation's business segments, including the Community Banking segment, may be adversely affected, which may result in impairment of goodwill and other intangibles in the future. Any resulting impairment loss could have a material adverse impact on the Corporation's financial condition and its results of operations.
Income Taxes - Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
FINANCIAL CONDITION
Assets
Total assets increased $15.5 million, or 5.3%, to $307.3 million at September 30, 2009 compared to $291.8 million at December 31, 2008. Management attributes this growth to a strategy for 2009 that emphasizes growth in our investment portfolio. The increase in assets is also a by-product of management's continued focus on the growth of core deposits which has generated increased cash balances.
Securities
Securities increased to $18.4 million at September 30, 2009 compared to $8.9 million at December 31, 2008. The increase was attributable to $11.6 million in securities being purchased primarily to offset costs associated with the Capital Purchase Program (CPP).Those costs include an annual dividend of 5% and amortization of the discount on the preferred stock of .16%. The tax equivalent cost of the capital is 8%. See Equity for further discussion on the Capital Purchase Program (CPP). The yield on investment securities has decreased to 3.46% during the nine month ended September 30, 2009 from 4.29% for the same period a year ago. Management has slowed further purchasing of securities due to the decline in the current market yield. With the increase in securities we have continued to maintain a diversified securities portfolio, which includes obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions and mortgage-backed securities. We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. Loans
The Bank's net loan portfolio decreased by $17.1 million, or 6.9%, from $247.5 million at December 31, 2008 to $230.5 million at September 30, 2009. 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, 2009           December 31, 2008
                                      Amount        Percent        Amount       Percent
                                                   (Dollars in thousands)
     Real Estate Loans:
     One-to-four family             $   111,102         46.9     $  124,855         49.8
     Multi-family                         5,455          2.3          5,728          2.2
     Commercial                          79,667         33.6         75,730         30.2
     Construction or development          8,421          3.6          9,499          3.8

     Total real estate loans            204,645         86.4        215,812         86.0
     Other loans:
     Consumer loans:
     Home equity                         18,717          7.9         20,677          8.2
     Other                                4,862          2.0          5,737          2.3

     Total consumer loans                23,579         10.0         26,414         10.5
     Commercial Business Loans            8,731          3.7          8,609          3.5

     Total other loans                   32,310         13.7         35,023         14.0

     Total Loans                        236,955        100.0 %      250,835        100.0 %


     Allowance for loan losses            5,986                       2,719

     Less: Net deferred loan fees           493                         574
     Total Loans, net               $   230,476                  $  247,542

One-to-four family loans decreased $13.8 million from year end 2008 as a result of the Bank's continued strategy to sell a large portion of new one to four family loan originations. Historically low rates on residential mortgages have provided us the opportunity to refinance loans and increase our gains on sale of mortgages substantially. Commercial real estate loans increased $4 million or 5.2%. The Bank expects future loan growth to come primarily from commercial lending with a focus on in-market lending. Given the difficult economic conditions that we are facing in our market we remain cautiously optimistic about the Bank's potential for loan growth during the remainder of the year. The allowance for loan losses was $6 million at September 30, 2009 compared to $2.7 million at December 31, 2008, an increase of $3.3 million. The increase was necessitated by the increases in net charge offs and nonperforming assets which are directly related to the continued overall weakness in the Michigan economy. Year to date 2009 net charge offs totaled $2.3 million compared to $1.2 million for the same period a year ago. Net charge offs year to date consisted of 64% one to four family residential mortgages, 18% commercial real estate, 13% consumer and the remaining 5% included construction, commercial and industrial and home equity lines of credit. See "Provision for Loan Losses" below for further explanation regarding charge-offs and non-performing loans. We continue to be diligent in review of our loan portfolios for problem loans and believe that early detection of troubled credits is critical. We maintain the allowance for loan losses at a level considered adequate to cover losses within the loan portfolio. The allowance balance is established after considering past loan loss experience, current economic conditions, composition of the loan portfolio, delinquencies, and other relevant factors. Deposits
Total deposits increased $23.5 million, or 12.3%, from $192.2 million at December 31, 2008 to $215.7million at September 30, 2009. The increase is attributed to an increase of $10.1 million in local certificates of deposit, an increase of $5.9 million in demand and Now accounts, an increase in money market accounts of $15.1 million and an increase of $400,000 in savings accounts. Brokered deposits decreased $8 million as management continues to try to reduce its reliance on wholesale funding. The increase in local certificates of deposits and money market accounts is largely due to management's efforts to remain competitive with interest rates in these categories of deposits. The increase in money market 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 $49.7 million as of September 30, 2009 from $60.2 at December 31, 2008. The decrease is attributable to the repayment of $10.5 million of FHLB advances during the nine months ended September 30, 2009. Management is attempting to reduce its reliance on borrowed funds through the growth of low cost core 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 $40.6 million at September 30, 2009 compared to $36.3 million at December 31, 2008. This represents 13.2% and 12.4% of total assets at September 30, 2009 and December 31, 2008, respectively. Increases in equity primarily resulted from the issuance of preferred stock in the amount of $6.8 million associated with the Capital Purchase Program. Decreases in equity for the nine months ended September 30, 2009 included a net loss of $2 million and $689,000 in dividend payments, which included dividends to common shareholders of $511,000 and $178,000 on the Preferred stock. The annual 5% dividend on the Preferred Stock together with the amortization of the discount will reduce net income (or increase the net loss) applicable to common stock by approximately $350,000 annually. Management intends to utilize funds provided by the issuance of the preferred stock to invest in securities and pursue lending opportunities. Management considers its equity position to be strong.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income before any provision for loan losses decreased $14,000 for the quarter ended September 30, 2009 compared to the same period in 2008. The Bank's net interest margin decreased to 3.16% for the quarter ended September 30, 2009 from 3.31% for the quarter ended September 30, 2008 as a result of the yield on earning assets declining faster than the cost of funds. This is attributable to the falling rate environment consistent through 2008 and 2009. Interest income from loans represented 95% of total interest income for the three months ended September 30, 2009 compared to 96.3% for the same period in 2008.
Net interest income before any provision for loan losses decreased $29,000 for the nine months ended September 30, 2009 compared to the same period in 2008. The Bank's net interest margin decreased to 3.10% for the nine months ended September 30, 2009 from 3.29% for the nine months ended September 30, 2008 as our loan yields decreased more than our deposit costs compared to the same period a year ago as a result of falling rate environment mentioned previously. 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 Bank continues to be challenged in its efforts to increase lower costing core deposits. Management continues to put its efforts towards meeting this challenge.
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,
                                                2009                                                  2008
                              Average            Interest                           Average            Interest
                            Outstanding           Earned/         Yield/          Outstanding           Earned/         Yield/
                              Balance              Paid            Rate             Balance              Paid            Rate
                                       (dollars in thousands)                                (dollars in thousands)
Fed Funds and
overnight deposits         $       9,805         $       4           0.05 %      $       8,905         $     100           1.50 %
Investment securities             16,485               426           3.46               10,373               334           4.29
Other securities                   4,174                53           1.70                4,174               150           4.79
Loans receivable                 244,355            11,598           6.35              236,314            12,283           6.92

Total earning assets       $     274,819         $  12,081           5.88        $     259,766         $  12,867           6.60


Demand and NOW
Accounts                   $      33,297         $      68           0.27        $      32,270         $      72           0.30
Money market accounts             44,999               610           1.81               34,175               774           3.02
Savings accounts                  19,011                53           0.37               19,267                61           0.42
Certificates of
deposit                          105,314             3,080           3.91              104,036             3,551           4.55
Fed Funds Purchased                    -                 -           0.00                    -                 -           0.00
Federal Home Loan
Bank Advances                     55,763             1,882           4.51               54,246             1,992           4.89

Total interest
bearing liabilities        $     258,384             5,693           2.95        $     243,994             6,450           3.52

Net interest income                              $   6,388                                             $   6,417

Net interest spread                                                  2.93 %                                                3.08 %

Net interest margin                                                  3.10 %                                                3.29 %

Provision for Loan Losses
The provision for loan losses was $1.3 million in the third quarter of 2009, compared to $731,000 in the third quarter of 2008 and $5.4 million for the nine month period ended September 30, 2009, compared to $1.5 million in the same period of 2008. Net charge-offs for the quarter ended September 30, 2009 totaled $814,000, compared to $442,000 for the quarter ended September 30 , 2008 and $2.1 million for the nine months ended September 30, 2009, compared to $1.0 million for the same period a year ago. The significant increase in the provision was primarily driven by the continued deteriorating economic conditions in Michigan and weaknesses in the local real estate markets which resulted in downgrades to the credit ratings of certain loans in the portfolio and a significant increase in the balances of nonperforming loans. Nonperforming assets including the amount of real estate in judgment and foreclosed and repossessed properties, increased from $4.6 million at the end of 2008 to $13.6 million as of September 30, 2009. This increase was largely due to an increase nonperforming loans, specifically in commercial real estate and one to four family residential mortgage loans. Management also classified a large commercial loan relationship in the amount of $4 million as non-performing during the second quarter.
The following table presents non-performing assets and certain asset quality ratios at September 30, 2009 and December 31, 2008.

                                                                   September 30, 2009          December 31, 2008
                                                                                  (In thousands)
Non-performing loans                                              $              9,445        $             2,571
Real estate in judgement                                                         2,571                      1,327
Foreclosed and repossessed assets                                                1,615                        749

Total non-performing assets                                       $             13,631        $             4,647


Non-performing loans to total loans                                               3.98 %                     1.04 %
Non-performing assets to total assets                                             4.44 %                     1.59 %
Allowance for loan losses to non-performing loans                                63.40 %                   105.76 %
Allowance for loan losses to net loans receivable                                 2.52 %                     1.10 %

The Bank had 43 non-performing loan relationships as of September 30, 2009 compared to 24 non-performing loan relationships as of December 31, 2008. Non-interest Income
Non-interest income for the quarter ended September 30, 2009 increased $194,000, or 21.6%, from $898,000 to $1.1 million compared to the same period a year ago. This increase is attributable to an increase in gain on sale of loans offset by a decrease in fees and services charges.

Net gain on sale loans increased $269,000 for the quarter ended September 30, 2009 from $101,000 to $370,000 compared to the same period a year ago. The increase is largely due to the falling rate environment which has generated a significant amount of one to four family residential mortgage refinancing. Management expects this trend to decline through the latter half of 2009. Fees and service charges decreased $19,000 for the quarter ended September 30, 2009 from $598,000 to $579,000 compared to the same period a year ago. This decrease was a result of a decrease in overdraft fees of $17,000 offset by an increase of $2,000 in all other fees and charges. Future increases in this source of income are dependent on the Bank increasing the number of checking account customers. Management does not expect significant increases in Bounce Protection income from its existing customer base.
Non-interest income for the nine months ended September 30, 2009 increased $1.1 million or 38.5%, from $2.8 million to $3.9 million for the same period in 2008. Net gain on sale loans increased $1.3 million for the nine months ended September 30, 2009 from $563,000 to $1.8 million compared to the same period a year ago. Fees and Service charges decreased $98,000 for the nine months ended September 30, 2009 from $1.7 million to $1.6 million compared to the same period a year ago. As mentioned previously the decrease in fees and service charges is primarily due to the decrease in overdraft fees of $91,000. Other income decreased $74,000 from $204,000 to $127,000. Non-interest Expense
Noninterest expense increased $227,000, or 10.1%, for the three months ended September 30, 2009 compared to the same period ending a year ago. Salaries and employee benefits increased $127,000 from $1.1 million to $1.2 million due normal increases in salaries and wages. Amortization of mortgage servicing rights increased $19,000 as a result of a continued increase in mortgage loan payoffs due to refinancing associated with the decrease of interest rates in the fourth quarter of 2008. Other general and administrative expenses increased $49,000, from $330,000 to $379,000; reflecting the increase in the quarterly FDIC assessment. Foreclosed property expense increased $60,000, from $84,000 to $144,000 due to increases in maintenance costs, loan collection costs, and losses and impairment charges associated with the disposition of other real estate. Professional services increased $44,000 from $108,000 to $152,000 primarily due to increases in legal fees associated with non-performing loans. Other operating expenses increased $20,000. Data processing decreased $92,000 from $185,000 to $93,000 due to a one time credit recognized with the renegotiation of our contract with the third party data processor Jack Henry and Associates.
Noninterest expense increased $672,000, or 9.7%, for the nine months ended September 30, 2009 compared to the same period ending a year ago. Salaries and employee benefits increased $138,000 from $3.3 million to $3.5 million due normal increases in salaries and wages. Other general and administrative expenses increased $288,000, from $1 million to $1.3 million; this is primarily due to the increase in FDIC insurance reflecting the increase of $136,000 one-time special assessment on all insured financial institutions equal to approximately 5 basis points of total assets, less tier one equity and the quarterly increases implemented earlier in the year.. Amortization of mortgage servicing rights increased $125,000, from $321,000 to $446,000, also for reasons mentioned previously. Professional services increased $103,000, from $301,000 to $404,000 primarily due to increases in legal fees associated with non-performing loans and legal fees associated with the issuance of preferred stock and common stock warrants as part of the Capital Purchase Program transaction. Other operating expenses increased $92,000. The increase in other operating expenses was due to increases in loan collection costs, and losses and impairment charges associated with the disposition of other real estate and additional costs associated with the reissuance of ATM/debit cards associated with a compromised card processing vendor. Data processing decreased $74,000 due to the reasons mentioned previously.
Federal Income Tax Expense
An income tax benefit totaling $121,000 was recorded in the third quarter of 2009, an effective rate of approximately 25% of the pretax loss. A significant component of income tax expense is made up of general tax credits generated each year. Due to the current year loss, these tax credits may not be fully utilized. Accordingly, in the second quarter of 2009, a valuation allowance of $300,000 was established on general business tax credit carry forward that are not expected to be utilized.
An income tax benefit totaling $669,000 was recorded for nine months ended September 30, 2009 compared to a provision for federal income tax of $232,000 for the same period a year ago. The effective tax rate for the nine months ended September 30, 2009 was 25.1% compared to 26.7% for the same period in 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 primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans, and funds provided from operations. While scheduled payments from the amortization of loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general . . .