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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2008

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number: 000-52946





VIRGINIA SAVINGS BANCORP, INC.

(Exact name of registrant as specified in its
Charter)







|                                                               |  |                                       
|-------------------------------------------------------------- |  | --------------------------------------
|VIRGINIA                                                       |  | 20-8947933                            
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I. R. S. Employer Identification No.)

600 Commerce Avenue, Front Royal, Virginia 22630

(Address of Principal Executive Offices) (Zip Code)

(540) 635-4137

Registrants telephone number, including area code





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).     ̈  Yes    x  No

As of June 30, 2008, there were issued and outstanding 1,899,984 shares of the registrants common stock.









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##### Table of Contents

VIRGINIA SAVINGS BANCORP, INC.

QUARTERLY REPORT ON FORM 10-Q

June 30, 2008

INDEX

PART I  FINANCIAL INFORMATION



|                                                                                                     |  |        
|---------------------------------------------------------------------------------------------------- |  | -------
|Item 1  Financial Statements                                                                        |  |        
|                                                                                                     | 
|Consolidated Statements of Financial Condition as of June 30, 2008 and December 31, 2007 (Unaudited) |  | Page 3 
|                                                                                                     | 
|Consolidated Statements of Operations, Six Months Ended June 30, 2008 and 2007 (Unaudited)           |  | Page 4 
|                                                                                                     | 
|Consolidated Statements of Operations, Three Months Ended June 30, 2008 and 2007 (Unaudited)         |  | Page 5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows, Six Months Ended June 30, 2008 and 2007 (Unaudited)           |  | Page 6 
|                                                                                                     | 
|Notes to Financial Statements                                                                        |  | Page 7 
|                                                                                                     | 
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations       |  | Page 13
|                                                                                                     | 
|Item 4  Controls and Procedures                                                                     |  | Page 29
|                                                                                                     | 
|PART II  OTHER INFORMATION                                                                          |  |        
|                                                                                                     | 
|Item 1  Legal Proceedings                                                                           |  | Page 29
|                                                                                                     | 
|Item 4  Submission of Matters to a Vote of Security Holders                                         |  | Page 30
|                                                                                                     | 
|Item 6  Exhibits                                                                                    |  | Page 30
|                                                                                                     | 
|Signatures                                                                                           |  | Page 31



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1  Financial Statements

VIRGINIA SAVINGS
BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

Unaudited



|                                                                                                                                               |  |               |             |                   |   |            
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ----------------- | - | -----------
|                                                                                                                                               |  | June 30, 2008 |             | December 31, 2007
|Assets                                                                                                                                         |  |               |             |                   |   |            
|Cash and due from banks                                                                                                                        |  | $             | 4,627,392   |                   | $ | 4,096,011  
|Interest bearing deposits                                                                                                                      |  |               | 1,268,890   |                   |   | 681,411    
|Federal funds sold                                                                                                                             |  |               | 312,000     |                   |   | 263,000    
|                                                                                                                                               |  |               |             |                   |   |            
|Total cash and cash equivalents                                                                                                                |  |               | 6,208,282   |                   |   | 5,040,422  
|                                                                                                                                               |  |              
|Investment securities held to maturity, with a fair value of $7,014,932 and $33,845,013; respectively, at
June 30, 2008, and December 31, 2007 |  |               | 7,009,860   |                   |   | 34,009,811 
|Investment securities available for sale                                                                                                       |  |               | 11,521,465  |                   |   |           
|Loans held for sale                                                                                                                            |  |               |            |                   |   | 532,927    
|Loans receivable, net of loan loss allowances of $1,241,600 and $702,200 at June 30, 2008 and December 31, 2007,
respectively                  |  |               | 109,348,012 |                   |   | 111,481,387
|Premises and equipment, net                                                                                                                    |  |               | 5,862,559   |                   |   | 4,714,399  
|Federal Home Loan Bank of Atlanta Stock, at cost                                                                                               |  |               | 322,300     |                   |   | 917,300    
|Investment in title company                                                                                                                    |  |               | 158,039     |                   |   | 158,039    
|Accrued interest receivable                                                                                                                    |  |               | 751,507     |                   |   | 930,792    
|Mortgage servicing rights                                                                                                                      |  |               | 222,884     |                   |   | 241,003    
|Foreclosed real estate                                                                                                                         |  |               | 2,732,568   |                   |   | 653,941    
|Prepaid and deferred income taxes                                                                                                              |  |               | 247,300     |                   |   |           
|Other assets                                                                                                                                   |  |               | 640,501     |                   |   | 175,874    
|                                                                                                                                               |  |               |             |                   |   |            
|Total Assets                                                                                                                                   |  | $             | 145,025,277 |                   | $ | 158,855,895
|                                                                                                                                               |  |               |             |                   |   |            
|Liabilities and Stockholders Equity                                                                                                           |  |               |             |                   |   |            
|Liabilities                                                                                                                                    |  |               |             |                   |   |            
|Deposits                                                                                                                                       |  | $             | 128,469,207 |                   | $ | 133,230,122
|Short-term borrowings                                                                                                                          |  |               | 2,929,000   |                   |   | 11,800,000 
|Advances from borrowers for taxes and insurance                                                                                                |  |               | 73,311      |                   |   | 30,646     
|Other liabilities                                                                                                                              |  |               | 439,638     |                   |   | 467,868    
|                                                                                                                                               |  |               |             |                   |   |            
|Total Liabilities                                                                                                                              |  |               | 131,911,156 |                   |   | 145,528,636
|                                                                                                                                               |  |               |             |                   |   |            
|Stockholders Equity                                                                                                                           |  |               |             |                   |   |            
|Preferred stock, $10.00 par (500,000 shares authorized and 100,000 shares issued and outstanding)                                              |  |               | 1,000,000   |                   |   | 1,000,000  
|Common stock, $1.00 par (5,000,000 shares authorized and 1,899,984 shares issued and outstanding)                                              |  |               | 1,899,984   |                   |   | 1,899,984  
|Additional paid-in capital                                                                                                                     |  |               | 1,266,014   |                   |   | 1,266,014  
|Retained earnings                                                                                                                              |  |               | 8,948,123   |                   |   | 9,161,261  
|                                                                                                                                               |  |               |             |                   |   |            
|Total stockholders equity                                                                                                                     |  |               | 13,114,121  |                   |   | 13,327,259 
|                                                                                                                                               |  |               |             |                   |   |            
|Total Liabilities and Stockholders Equity                                                                                                     |  | $             | 145,025,277 |                   | $ | 158,855,895
|                                                                                                                                               |  |               |             |                   |   |            

The accompanying notes are an integral part of these financial statements.



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VIRGINIA SAVINGS BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited



|                                                  |  |                           |           |   |      |   |           |  
|------------------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|                                                  |  | Six Months Ended June 30, |          
|                                                  |  | 2008                      |           |   | 2007 |  
|Interest Income                                   |  |                           |           |   |      |   |           |  
|Interest and fees on loans                        |  | $                         | 3,654,380 |   |      | $ | 4,722,937 |  
|Interest and dividends on investments             |  |                           | 373,012   |   |      |   | 627,214   |  
|Other interest income                             |  |                           | 66,627    |   |      |   | 72,823    |  
|                                                  |  |                           |           |   |      |   |           |  
|Total Interest Income                             |  |                           | 4,094,019 |   |      |   | 5,422,974 |  
|                                                  |  |                           |           |   |      |   |           |  
|Interest Expense                                  |  |                           |           |   |      |   |           |  
|Interest on deposits                              |  |                           | 1,958,285 |   |      |   | 2,016,758 |  
|Interest on short-term borrowings                 |  |                           | 129,148   |   |      |   | 583,728   |  
|                                                  |  |                           |           |   |      |   |           |  
|Total Interest Expense                            |  |                           | 2,087,433 |   |      |   | 2,600,486 |  
|                                                  |  |                           |           |   |      |   |           |  
|Net interest income                               |  |                           | 2,006,586 |   |      |   | 2,822,488 |  
|Provision (decrease in provision) for loan losses |  |                           | 953,388   |   |      |   | (12,015   | )
|                                                  |  |                           |           |   |      |   |           |  
|Net interest income after loan loss provision     |  |                           | 1,053,198 |   |      |   | 2,834,503 |  
|                                                  |  |                           |           |   |      |   |           |  
|Other Income                                      |  |                           |           |   |      |   |           |  
|Other loan fees and late charges                  |  |                           | 108,934   |   |      |   | 136,840   |  
|Income from mortgage banking activities           |  |                           | 59,643    |   |      |   | 118,735   |  
|Fees from transaction accounts                    |  |                           | 566,348   |   |      |   | 349,317   |  
|Income - Bankers Title Company                    |  |                           | 37,615    |   |      |   |          |  
|Net gain on real estate owned                     |  |                           | 831,458   |   |      |   |          |  
|All other income                                  |  |                           | 4,676     |   |      |   | (3,771    | )
|                                                  |  |                           |           |   |      |   |           |  
|Total Other Income                                |  |                           | 1,608,674 |   |      |   | 601,121   |  
|                                                  |  |                           |           |   |      |   |           |  
|Non-Interest Expenses                             |  |                           |           |   |      |   |           |  
|Salaries and employee benefits                    |  |                           | 1,384,964 |   |      |   | 1,355,319 |  
|Director compensation                             |  |                           | 127,140   |   |      |   | 115,263   |  
|Occupancy, furniture and equipment expenses       |  |                           | 174,232   |   |      |   | 175,159   |  
|Professional fees                                 |  |                           | 134,988   |   |      |   | 199,123   |  
|Data processing expenses                          |  |                           | 449,938   |   |      |   | 417,523   |  
|Marketing expenses                                |  |                           | 52,100    |   |      |   | 99,000    |  
|Foreclosure Expense                               |  |                           | 173,070   |   |      |   |          |  
|Other expenses                                    |  |                           | 292,079   |   |      |   | 301,932   |  
|                                                  |  |                           |           |   |      |   |           |  
|Total Non-Interest Expenses                       |  |                           | 2,788,511 |   |      |   | 2,663,319 |  
|                                                  |  |                           |           |   |      |   |           |  
|(Loss) income before income tax provision         |  |                           | (126,639  | ) |      |   | 772,305   |  
|Income tax (benefit) provision                    |  |                           | (65,000   | ) |      |   | 261,600   |  
|                                                  |  |                           |           |   |      |   |           |  
|Net (loss) income                                 |  | $                         | (61,639   | ) |      | $ | 510,705   |  
|                                                  |  |                           |           |   |      |   |           |  
|Basic and diluted (loss) earnings per share       |  | $                         | (0.03     | ) |      | $ | 0.25      |  
|Dividends declared per common share               |  | $                         | 0.06      |   |      | $ | 0.19      |  
|                                                  |  |                           |           |   |      |   |           |  

The accompanying notes are an integral part of these financial statements.



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VIRGINIA SAVINGS BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited



|                                                  |  |                             |           |   |      |   |           |  
|------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                                  |  | Three Months Ended June 30, |          
|                                                  |  | 2008                        |           |   | 2007 |  
|Interest Income                                   |  |                             |           |   |      |   |           |  
|Interest and fees on loans                        |  | $                           | 1,768,271 |   |      | $ | 2,319,809 |  
|Interest and dividends on investments             |  |                             | 107,737   |   |      |   | 316,518   |  
|Other interest income                             |  |                             | 44,176    |   |      |   | 36,692    |  
|                                                  |  |                             |           |   |      |   |           |  
|Total Interest Income                             |  |                             | 1,920,184 |   |      |   | 2,673,019 |  
|                                                  |  |                             |           |   |      |   |           |  
|Interest Expense                                  |  |                             |           |   |      |   |           |  
|Interest on deposits                              |  |                             | 904,315   |   |      |   | 1,017,151 |  
|Interest on short-term borrowings                 |  |                             | 13,350    |   |      |   | 271,359   |  
|                                                  |  |                             |           |   |      |   |           |  
|Total Interest Expense                            |  |                             | 917,665   |   |      |   | 1,288,510 |  
|                                                  |  |                             |           |   |      |   |           |  
|Net interest income                               |  |                             | 1,002,519 |   |      |   | 1,384,509 |  
|Provision (decrease in provision) for loan losses |  |                             | 878,172   |   |      |   | (5,988    | )
|                                                  |  |                             |           |   |      |   |           |  
|Net interest income after loan loss provision     |  |                             | 124,347   |   |      |   | 1,390,497 |  
|                                                  |  |                             |           |   |      |   |           |  
|Other Income                                      |  |                             |           |   |      |   |           |  
|Other loan fees and late charges                  |  |                             | 50,406    |   |      |   | 67,659    |  
|Income from mortgage banking activities           |  |                             | 26,986    |   |      |   | 62,201    |  
|Fees from transaction accounts                    |  |                             | 288,633   |   |      |   | 206,695   |  
|Income - Bankers Title Company                    |  |                             | 37,615    |   |      |   |          |  
|Net gain on real estate owned                     |  |                             | 831,458   |   |      |   |          |  
|All other income                                  |  |                             | 1,735     |   |      |   | (4,160    | )
|                                                  |  |                             |           |   |      |   |           |  
|Total Other Income                                |  |                             | 1,236,833 |   |      |   | 332,395   |  
|                                                  |  |                             |           |   |      |   |           |  
|Non-Interest Expenses                             |  |                             |           |   |      |   |           |  
|Salaries and employee benefits                    |  |                             | 679,971   |   |      |   | 685,690   |  
|Director compensation                             |  |                             | 63,911    |   |      |   | 54,902    |  
|Occupancy, furniture and equipment expenses       |  |                             | 88,377    |   |      |   | 88,294    |  
|Professional fees                                 |  |                             | 67,466    |   |      |   | 153,650   |  
|Data processing expenses                          |  |                             | 230,146   |   |      |   | 209,453   |  
|Marketing expenses                                |  |                             | 2,075     |   |      |   | 49,500    |  
|Foreclosure Expense                               |  |                             | 173,070   |   |      |   |          |  
|Other expenses                                    |  |                             | 144,253   |   |      |   | 154,416   |  
|                                                  |  |                             |           |   |      |   |           |  
|Total Non-Interest Expenses                       |  |                             | 1,449,269 |   |      |   | 1,395,905 |  
|                                                  |  |                             |           |   |      |   |           |  
|(Loss) income before income tax provision         |  |                             | (88,089   | ) |      |   | 326,987   |  
|Income tax (benefit) provision                    |  |                             | (38,600   | ) |      |   | 112,100   |  
|                                                  |  |                             |           |   |      |   |           |  
|Net (loss) income                                 |  | $                           | (49,489   | ) |      | $ | 214,887   |  
|                                                  |  |                             |           |   |      |   |           |  
|Basic and diluted (loss) earnings per share       |  | $                           | (0.03     | ) |      | $ | 0.10      |  
|Dividends declared per common share               |  | $                           | 0.06      |   |      | $ | 0.09      |  
|                                                  |  |                             |           |   |      |   |           |  

The accompanying notes are an integral part of these financial statements.



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VIRGINIA SAVINGS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



|                                                                                                   |  |                           |             |   |      |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                                   |  | Six Months Ended June 30, |            
|                                                                                                   |  | 2008                      |             |   | 2007 |  
|Cash Flows From Operating Activities:                                                              |  |                           |             |   |      |   |            |  
|Net (loss) Income                                                                                  |  | $                         | (61,639     | ) |      | $ | 510,705    |  
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |  |                           |             |   |      |   |            |  
|Provision (reduction in provision) for loan losses                                                 |  |                           | 953,388     |   |      |   | (12,015    | )
|Gains on foreclosed real estate                                                                    |  |                           | (831,458    | ) |      |   |           |  
|Loans originated for sale                                                                          |  |                           |            |   |      |   | (977,800   | )
|Proceeds from loans sold                                                                           |  |                           |            |   |      |   | 1,393,424  |  
|Gains on sale of mortgage loans                                                                    |  |                           |            |   |      |   | (25,346    | )
|Depreciation expense                                                                               |  |                           | 100,808     |   |      |   | 98,952     |  
|Amortization of mortgage servicing rights                                                          |  |                           | 18,119      |   |      |   | 27,470     |  
|Decrease in interest receivable                                                                    |  |                           | 179,285     |   |      |   | 68,898     |  
|Change in current and deferred income taxes                                                        |  |                           | (126,200    | ) |      |   | (10,200    | )
|(Decrease) increase in other assets and liabilities, net                                           |  |                           | (518,587    | ) |      |   | 91,434     |  
|                                                                                                   |  |                           |             |   |      |   |            |  
|Net cash (used in) provided by operating activities                                                |  |                           | (286,284    | ) |      |   | 1,165,522  |  
|                                                                                                   |  |                          
|Cash Flows from Investing Activities:                                                              |  |                           |             |   |      |   |            |  
|Net redemption of Federal Home Loan Bank Stock                                                     |  |                           | 595,000     |   |      |   | 76,700     |  
|Purchase of available for sale investment securities                                               |  |                           | (11,521,465 | ) |      |   |           |  
|Calls of held to maturity investment securities                                                    |  |                           | 27,000,000  |   |      |   |           |  
|Net (increase) decrease in loans receivable                                                        |  |                           | (373,363    | ) |      |   | 6,210,134  |  
|Proceeds from sale of foreclosed real estate                                                       |  |                           | 1,029,658   |   |      |   |           |  
|Improvements on foreclosed real estate                                                             |  |                           | (243,504    | ) |      |   |           |  
|Investment in title company                                                                        |  |                           |            |   |      |   | (158,039   | )
|Purchase of premises and equipment                                                                 |  |                           | (1,248,968  | ) |      |   | (1,002,064 | )
|                                                                                                   |  |                           |             |   |      |   |            |  
|Net cash provided by investing activities                                                          |  |                           | 15,237,358  |   |      |   | 5,126,731  |  
|                                                                                                   |  |                          
|Cash Flows from Financing Activities:                                                              |  |                           |             |   |      |   |            |  
|Net decrease in deposits                                                                           |  |                           | (4,760,915  | ) |      |   | (4,158,931 | )
|Net decrease in short-term borrowings                                                              |  |                           | (8,871,000  | ) |      |   | (2,200,000 | )
|Dividends declared                                                                                 |  |                           | (151,499    | ) |      |   | (393,752   | )
|                                                                                                   |  |                           |             |   |      |   |            |  
|Net cash used in financing activities                                                              |  |                           | (13,783,414 | ) |      |   | (6,752,683 | )
|                                                                                                   |  |                           |             |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                           | 1,167,660   |   |      |   | (460,430   | )
|Cash and cash equivalents at beginning of period                                                   |  |                           | 5,040,422   |   |      |   | 7,067,472  |  
|                                                                                                   |  |                           |             |   |      |   |            |  
|Cash and cash equivalents at end of period                                                         |  | $                         | 6,208,082   |   |      | $ | 6,607,042  |  
|                                                                                                   |  |                           |             |   |      |   |            |  
|Supplemental Disclosures of Cash Flow Information:                                                 |  |                           |             |   |      |   |            |  
|Cash paid during the period for:                                                                   |  |                           |             |   |      |   |            |  
|Interest                                                                                           |  | $                         | 2,142,930   |   |      | $ | 2,614,732  |  
|Income taxes                                                                                       |  |                           | 22,100      |   |      |   | 280,100    |  
|Non-cash Activity                                                                                  |  |                           |             |   |      |   |            |  
|Transfer of loans to foreclosed real estate                                                        |  | $                         | 2,338,623   |   |      | $ |           |  
|Transfer of loans held for sale to portfolio                                                       |  |                           | 532,927     |   |      |   |           |  

The accompanying notes are an integral part of these financial statements.



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VIRGINIA SAVINGS BANCORP, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1
 Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Virginia Savings Bancorp, Inc. (the
Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Item 310
of Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

In preparing the consolidated
financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Operating results for
the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2008. The unaudited consolidated financial statements and
related notes thereto presented herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Companys annual report on Form 10-KSB for the year ended December 31, 2007.

Note 2  Capital and Earnings Per Share

Basic net
(loss) income per share was computed on the weighted average number of shares outstanding. Diluted earnings per share are computed on a weighted average basis under the if converted method assuming conversion as of January 1, 2008
and 2007. Potential converted shares represent the conversion of the 100,000 shares of convertible preferred stock of the wholly owned subsidiary of the Company, Virginia Savings Bank, F.S.B. (the Bank), that is convertible in the ratio
of two shares of common stock to three shares of preferred stock. There was no dilutive impact as the Company reported a loss for the three and six months ended June 30, 2008 and the assumed conversion was anti-dilutive for 2007 periods. With
the exception of preferred stock dividends, there were no adjustments to net (loss) income in the computation of diluted earnings per share for any of the periods presented. The following table shows the computation of basic and diluted (loss)
earnings per share for the three and six months ended June 30, 2008 and 2007.



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|                                            |  |                             |           |   |      |   |           |  
|------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                            |  | Six Months Ended June 30,   |          
|                                            |  | 2008                        |           |   | 2007 |  
|Net (loss) Income                           |  | $                           | (61,639   | ) |      | $ | 510,705   |  
|Preferred Stock Dividends                   |  |                             | *         |   |      |   | (37,500   | )
|                                            |  |                             |           |   |      |   |           |  
|Net (loss) Income Available to Common Stock |  | $                           | (61,639   | ) |      | $ | 473,205   |  
|                                            |  |                            
|Weighted average shares outstanding         |  |                             | 1,899,984 |   |      |   | 1,899,984 |  
|Basic and Diluted(Loss) Earnings Per Share  |  | $                           | (0.03     | ) |      | $ | 0.25      |  
|                                            |  |                             |           |   |      |   |           |  
|                                            | 
|                                            |  | Three Months Ended June 30, |          
|                                            |  | 2008                        |           |   | 2007 |  
|Net (loss) Income                           |  | $                           | (49,489   | ) |      | $ | 214,887   |  
|Preferred Stock Dividends                   |  |                             | *         |   |      |   | (18,750   | )
|                                            |  |                             |           |   |      |   |           |  
|Net (loss) Income Available to Common Stock |  | $                           | (49,489   | ) |      | $ | 196,137   |  
|                                            |  |                            
|Weighted average shares outstanding         |  |                             | 1,899,984 |   |      |   | 1,899,984 |  
|Basic and Diluted(Loss) Earnings Per Share  |  | $                           | (0.03     | ) |      | $ | 0.10      |  
|                                            |  |                             |           |   |      |   |           |  



|* | Not applicable to the computation due to the loss incurred.
|- | -----------------------------------------------------------

Note 3
 Guarantees

The Bank issues stand-by letters of credit that are unconditional commitments guaranteeing performance by a customer to a third
party. These guarantees are issued primarily to support private borrowing arrangements, generally limited to real estate transactions. The credit risk involved in issuing these guarantees is essentially the same as that involved in extending loans
to customers. At June 30, 2008 and December 31, 2007, with consideration given to collateral and risk of default, management does not believe its exposure to these letters of credit is significant. These stand-by letters of credit were
approximately $330,800 and $268,900, respectively, with current expiration dates through September 10, 2009.

The Bank also issues standard
representations, warranties and indemnifications in the course of selling mortgage loans and other types of loans. The Bank has not been required to act on such guarantees in the past and does not believe that any payments pursuant to them would
materially change the financial condition or results of operations as presented herein.

Note 4  Fair Value of Financial Instruments

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other
accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years.



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The primary effect upon the Company following adoption of SFAS 157 was to expand the required disclosures regarding the
methods used to determine fair values. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:



|         |  |                                                                                                                                                                                
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.                                      
|         | 
|Level 2: |  | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.          
|         | 
|Level 3: |  | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market
activity).

An asset or liabilitys level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.

For assets that the Company measures at fair value, the fair value measurements by level within the fair value
hierarchy used at June 30, 2008 are as follows:



|                               |  |               |            |          |   |            |  |            |   |  |   |          
|------------------------------ |  | ------------- | ---------- | -------- | - | ---------- |  | ---------- | - |  | - | ---------
|                               |  | June 30, 2008 |            | Level 1* |   | Level 2**  |  | Level 3***
|Investments available for sale |  | $             | 11,521,465 |          | $ | 11,521,465 |  |            |   |  |   |          
|Impaired loans                 |  |               | 2,420,403  |          |   |            |  |            |   |  |   | 2,420,403
|Foreclosed real estate         |  |               | 2,732,568  |          |   |            |  |            |   |  |   | 2,732,568
|Mortgage servicing rights      |  |               | 222,884    |          |   |           |  |            |  |  |   | 222,884  
|                               |  |               |            |          |   |            |  |            |   |  |   |          
|Total                          |  | $             | 16,897,320 |          | $ | 11,521,465 |  | $          |  |  | $ | 5,375,855



|* | Quoted prices in active markets for identical assets
|- | ----------------------------------------------------

|** | Significant other observable inputs
|-- | -----------------------------------

|*** | Significant unobservable inputs
|--- | -------------------------------



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The following table presents a summary of activity in the level 3 items:

Activity in level 3 Items



|                                            |  |                         |            |   |                           |   |            |  
|------------------------------------------- |  | ----------------------- | ---------- | - | ------------------------- | - | ---------- | -
|                                            |  | Six MonthsEnded 6/30/08 |            |   | Three MonthsEnded 6/30/08 |  
|Impaired loansBeginning balance            |  | $                       | 5,130,556  |   |                           | $ | 5,053,497  |  
|Loan returned to accrual status             |  |                         | (207,456   | ) |                           |   |           |  
|Property repossessed or foreclosed upon     |  |                         | (2,338,623 | ) |                           |   | (2,338,623 | )
|Properties sold at foreclosure auction      |  |                         | (1,683,115 | ) |                           |   | (1,644,505 | )
|Account paid off                            |  |                         | (71,988    | ) |                           |   |           |  
|Accounts added                              |  |                         | 1,591,029  |   |                           |   | 1,350,034  |  
|                                            |  |                         |            |   |                           |   |            |  
|Ending balance                              |  | $                       | 2,420,403  |   |                           | $ | 2,420,403  |  
|                                            |  |                         |            |   |                           |   |            |  
|Foreclosed real estateBeginning balance    |  | $                       | 653,941    |   |                           | $ | 641,541    |  
|Transfer of loans from portfolio            |  |                         | 2,338,623  |   |                           |   | 2,338,623  |  
|Fair value adjustment at transfer           |  |                         | 581,500    |   |                           |   | 593,900    |  
|Sales of real estate owned                  |  |                         | (1,085,000 | ) |                           |   | (1,085,000 | )
|Disbursements on partially completed houses |  |                         | 243,504    |   |                           |   | 243,504    |  
|                                            |  |                         |            |   |                           |   |            |  
|Ending balance                              |  | $                       | 2,732,568  |   |                           | $ | 2,732,568  |  
|                                            |  |                         |            |   |                           |   |            |  
|Mortgage servicing rightsBeginning balance |  | $                       | 241,003    |   |                           | $ | 232,710    |  
|Amortization of servicing rights            |  |                         | 18,119     |   |                           |   | 9,826      |  
|                                            |  |                         |            |   |                           |   |            |  
|Ending balance                              |  | $                       | 222,884    |   |                           | $ | 222,884    |  
|                                            |  |                         |            |   |                           |   |            |  

The following valuation techniques were used to measure the fair value of assets in the table above.

Investment securities available for sale The Company accounts for investments securities available for sale at fair value with unrealized gains and
losses, which were not significant at June 30, 2008, reflected net of taxes in comprehensive income or loss. The Company obtains quoted market prices from the Federal Home Loan Bank of Atlanta, the Companys servicing agent for the
specific investment securities included in this category.

Loans Loans included in the above table are those which were accounted for under
SFAS 114, Accounting by Creditors for Impairment of a Loan, under which the Company has measured impairment generally based on the fair value of the loans collateral. Fair value is determined based upon independent third party
appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value
consists of the loan balances less their valuation allowances as determined under SFAS 114.

Foreclosed real estate  Fair values of foreclosed
real estate were based on independent third party appraisals of the properties or discounted cash flows based upon the expected sales proceeds upon disposition of the assets. These values were generally determined based on the sales prices of
similar properties in the proximate vicinity. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. See discussion of foreclosed real estate under Critical
Accounting Policies.

Mortgage servicing rights The Company accounts for mortgage servicing rights at the lower of their carrying
amount or fair value and has measured the fair value of the mortgage servicing rights based upon the discounted cash flows of the assets future income streams. The



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Company obtains published data from the Federal Home Loan Mortgage Corporation for similar conventional mortgage loans that match critical data elements used
in the determination of fair values of the loans serviced. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Note 5  New Accounting Pronouncements

SAB 109

Staff Accounting Bulletin No. 109 (SAB 109), Written Loan Commitments Recorded at Fair Value Through Earnings expresses the views of the
staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staffs views consistent with current authoritative accounting guidance, the SAB revises
and rescinds portions of SAB No. 105, Application of Accounting Principles to Loan Commitments. Specifically, the SAB revises the SEC staffs views on incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB retains the staffs views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a
written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The implementation
of SAB 109 did not have a material impact on the Companys financial statements.

FSP FAS 157-2

In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, that permits a one-year deferral in applying
the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entitys financial statements on a recurring basis (at
least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to
that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applied Statement 157 in interim or annual financial statements
prior to the issuance of FSP 157-2. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-2 will have on the Companys operating income or net earnings.

FSP FAS 140-3

In February 2008, the FASB issued a FASB Staff
Position (FSP) FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one
linked transaction. The FSP includes a rebuttable presumption that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years
beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be allowed. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated
financial statements.

FASB Statement No. 162

In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation
of financial statements. This Statement is effective 60



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##### Table of Contents

days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

Note 6 Reclassifications

Certain prior period amounts have
been reclassified to conform to the current periods method of presentation. These reclassifications had no effect upon previously reported results of operations or retained earnings.



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Item 2  Managements Discussion and Analysis of Financial Conditions and
Results of Operations

Forward-Looking Statements

This quarterly report of the Company contains forward-looking statements within the meaning of the Securities Exchange Act of 1934. The words will, believe, expect,
should, and anticipate and words of similar construction are intended in part to help identify forward-looking statements. All forward-looking statements involve risks and uncertainty and certain factors could cause actual
results to differ materially from the anticipated results or other expectations expressed in forward-looking statements. Risks and uncertainties that may affect future results include, but are not limited to, changes in the economy, interest rate
movements, timely developments of technology resources for customer services and operating systems, the impact of competitive services and pricing, Congressional legislation and similar matters. Management cautions readers not to place undue
reliance on forward-looking statements, which are subject to influence by the foregoing risk factors and unanticipated future events.

Critical Accounting Policies

The Companys accounting policies are in accordance with accounting principles generally accepted
in the United States and conform to practices generally followed in the banking industry. Certain of these policies involve a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain. Different
assumptions in the preparation of these estimates could result in material changes in the Companys financial position and results of operations. Our judgments and estimates are based upon historical experience and other factors management
believes to be reasonable within the context of the circumstances in which they are applied.

There are four areas of accounting policy and practice that
are particularly sensitive to managements judgment and in which significant estimates are used. These are allowances for losses on loans, allowances for losses on foreclosed real estate, allowances for losses on mortgage servicing rights, and
other than temporary impairment of investment securities. Other accounting policies also involve the use of judgment and significant estimates but the impact of these processes are not material to the Companys financial condition or results of
operations.

The Financial Accounting Standards Board (FASB) Statement Number 114, Accounting by Creditors for Impairment of a
Loan (FASB 114), provides guidelines for the valuation of impaired loans. More extensive guidelines have been published by bank regulatory bodies. The latter provide for the classification of problem loans as sub-standard,
doubtful and loss. There is also a regulatory special mention category for performing loans that are the subject of heightened management concern as potential problem loans.

It is the Banks general policy to place loans in a non-accrual status when they become 90 days delinquent. Loans may, however, be placed in a non-accrual status regardless of their term of delinquency if the
borrower exhibits signs of financial distress or if the collateral property decreases in value below the loan balance. Generally, if a borrower has multiple loans, all of his loans will be placed in a non-accrual status if there are indications that
the borrower is having serious financial difficulties. Once loans other than low balance consumer loans are placed in a non-accrual status, they will be evaluated for individual impairment. At June 30, 2008, the Bank had 12 loans in a
non-accrual status with regard to interest income. Of these 12 loans, 11 were evaluated for individual impairment. The remaining loan is a small balance consumer loan.



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The 11 loans evaluated for individual impairment were to four borrowers. These evaluations resulted in increases to
specific loan loss allowances of $18,500 during the quarter. No loss allowances were required on the remaining loans because they have collateral values that exceed the related loan balances.

Under FASB Statement Number 5, Accounting for Contingencies (FASB 5), loan loss allowances on large groups of homogeneous loans are
provided based upon the Banks historical loss experience for similar types of loans. As part of its loan loss analysis under FASB 5, management also considers concentrations of credit and current economic conditions as they may impact
borrowers ability to meet their financial obligations.

Management identified four classifications of loans that represent high concentrations of
credit. Each of these credit concentration areas fall in a range of 100% to 200% of shareholders equity. These loan products are home equity lines of credit, balloon loans, non-residential real estate loans and builder construction loans. Of
concern to management and the board of directors is the concentration of loans to builders for the speculative construction of homes, which at June 30, 2008 approximated $10.7 million. Home equity lines of credit and balloon lines are
collateralized by residential one-to-four family properties, and had balances of approximately $12.8 million and $30.1 million, respectively, at June 30, 2008. Non-residential real estate loans approximated $21.7 million at June 30, 2008.

Because of the ongoing softness of our local real estate market which is hampering reduction of builders inventories of unsold houses, the potential
decrease in collateral values on existing loans, market unease over the strength of the government sponsored enterprises and the ripple effect on housing values, and our experience in managing foreclosures occurring in the second quarter, management
increased the loss allowances on the credit concentration areas as follows:



|                           |  |          |   |  |         |   |  |            |        
|-------------------------- |  | -------- | - |  | ------- | - |  | ---------- | -------
|                           |  | Previous |   |  | Current |   |  | $ Increase
|Builder construction loans |  | 1.25     | % |  | 2.00    | % |  | $          | 77,500 
|HELOC loans                |  | 0.75     |   |  | 1.25    |   |  |            | 62,800 
|Balloon loans              |  | 0.45     |   |  | 1.25    |   |  |            | 237,300
|Other real estate*         |  | 0.50     |   |  | 0.75    |   |  |            | 68,500 
|                           |  |          |   |  |         |   |  |            |        
|Total                      |  |          |   |  |         |   |  | $          | 446,100



|* | This classification of loans includes non-residential real estate loans.
|- | ------------------------------------------------------------------------

In addition to the foregoing increases, management also made a $106,600 unallocated addition to the general loan loss allowance because of environmental factors bearing on the credit quality of the loan portfolio.

Management believes that as of June 30, 2008 the loan loss allowances provided are adequate to absorb the losses inherent in the Banks loan portfolio. We,
however, caution that continued deterioration of real estate values and general economic conditions may result in the need for further additions to loan loss allowances if collateral values fall below loan balances on non-performing loans, and home
builders and other large borrowers who depend upon sales of real estate properties for repayment of their loans do not realize sufficient cash flows to repay their loans in full when they become due.



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While management segments the loan portfolio into several categories for purposes of evaluating the adequacy of loan loss
allowances and makes tentative allocations of these allowances to specific loan products, all general loss reserves are available to absorb losses from any sector of the loan portfolio.

The Bank evaluates the fair value of foreclosed real estate. Such evaluations are based upon observable market values of comparable properties obtained through appraisals when available. In the absence of adequate
appraisal values, the properties are valued using the discounted present value of the anticipated future cash flows. In addition to the appraisal values, the Bank considers costs which may be necessary to make the property salable, and selling costs
to dispose of the property. The net realizable values derived through this process are measured against the recorded book value of the loan. The Bank records foreclosed real estate at fair value at the foreclosure date through a credit to other
income or recovery to allowance if positive or a charge to expense if negative. Foreclosed real estate properties are evaluated for impairment not less frequently than quarterly after the initial evaluation is performed at the time of acquisition,
as post acquisition, such properties are recorded at the lower of cost or fair value. Any increase to the allowance for losses on foreclosed real estate made after the initial valuation is recorded as an expense.

During the quarter ended June 30, 2008, foreclosed real estate increased $2,091,000. This increase reflects $2,338,600 of loan balances transferred into foreclosed
real estate from loans receivable, $243,500 of disbursements on two partially completed houses acquired, a net increase of $593,900 resulting from fair market evaluations of acquired properties, less $1,085,000 of sales of acquired properties.

The increase resulting from fair value evaluations occurred on two separate properties. One of the properties had a loan balance of $782,400. At the
foreclosure auction, part of the collateral for the loan was sold for $650,000 leaving a balance of $132,400. The remaining collateral, a historical home has a realizable value of $375,000 based on an independent appraisal, and had an excess over
the recorded cost of $242,600. The second property, consisting of eleven 3 to 5 acre developed lots and eighty-nine acres of raw land, had a net realizable value based on two independent appraisals of $644,200 over the recorded cost of the property.

Offsetting these positive adjustments to fair value, were valuations of two construction loans on partially completed houses. After consideration of cost
to complete the houses, selling costs and the appraised values of the houses after completion, reductions of recorded costs down to the realizable value of the completed houses resulted in write-downs to fair value totaling $292,900 on these
properties.

These initial valuations of foreclosed real estate in the amount of $886,800 were recorded as a gain on foreclosed real estate in the
Companys statement of operations, and $292,900 was charged to the loan loss allowance.

FASB Statement Number 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities, requires that mortgage servicing rights be evaluated for impairment on a periodic basis. It has been the Banks policy to make such evaluations on a quarterly basis
prior to the publication of public and regulatory financial reports. Impairment evaluation of



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##### Table of Contents

mortgage servicing rights is a complex process involving several key assumptions. Among the factors considered are: the original contract term of the
underlying mortgages, the contractual interest rates, the remaining term of the mortgages, current interest rates and managements original and current assumptions as to the anticipated life of the mortgages.

The anticipated life of the mortgages is greatly impacted by pre-payment speed which is the most critical assumption made by management both in the original recording of
the mortgage servicing rights and in subsequent impairment evaluations. The longer the mortgage life, the higher the value of the mortgage servicing rights will be because the servicing rights will continue to generate income into the future in the
form of loan servicing fees. The Bank obtains published pre-payment speeds for similar conventional mortgage loans that match the Banks contract interest rates, year originated, and the original terms of the loans serviced. Such data was used
by management in its June 30, 2008 measurement of impairment of its mortgage servicing rights. At that date, the Banks mortgage servicing rights were not impaired and no valuation allowance was recorded on the Banks books.

The Company reviews its investment securities portfolio on a quarterly basis to identify and evaluate investments that have indications of possible other
than temporary impairment. Such securities are written down to their net realizable value when there is impairment in value that is other than temporary. The determination of whether or not other than temporary impairment exists is a matter of
judgment. At June 30, 2008, the Companys held to maturity and available for sale investment portfolios had immaterial amounts of market values in excess of their book values. No individual securities had a material unrealized losses.
Factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been less than the cost basis, the financial condition and credit quality of the security issuer, and the Banks
ability to hold the investment securities for a period of time sufficient to allow for any anticipated recovery in market value.

Financial Condition

At June 30, 2008, the total assets of the Company were $145.0 million, a decrease of $13.8 million since
December 31, 2007. During the first half of 2008, loans receivable decreased $2.1 million from the December 31, 2007 yearend balance. The Banks loan disbursements to customers were $19.2 million during the first half of 2008 compared
to $25.5 million in the same period in 2007. Loan principal reductions were $21.3 million for the six months year-to-date (YTD) in 2008 versus $30.8 million during the six months YTD in 2007. The foregoing loan disbursement and loan
principal reduction amounts include activity in the Banks revolving lines of credit. Principal reductions for the first half of 2008 include approximately $3.9 million of loans foreclosed upon in the second quarter of this year.

Investment securities decreased $15.5 million for the six months YTD in 2008. Investment securities totaling $27.0 million have been called by the issuing agencies.
Proceeds from these calls have been used to reduce short-term borrowings, to purchase $11.5 million of new securities, and to fund deposit withdrawals.

Deposits decreased $4.8 million during the six months YTD in 2008. Core deposit accounts, primarily checking and passbook savings accounts, increased $4.7 million since the beginning of the year. Certificate of deposit accounts decreased
$9.1 million during the same time period. At June 30, 2008, short-term borrowings were $2.9 million. Short-term borrowings decreased $8.9 million since the beginning of the year.



16



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##### Table of Contents

Asset Quality

Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual loan payments will result in charge-offs of loan balances. Asset quality is generally a
function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures. At June 30, 2008, the Bank had problem assets of approximately $9.8 million or 6.8% of total assets, that were
classified sub-standard. At December 31, 2007, similarly classified assets were $7.9 million and equaled 5.0% of assets. Non-accrual loans, for which only cash income is recognized, were $2.4 million and are decreased from $5.1 million at
March 31, 2008 and at December 31, 2007. See Critical Accounting Policies for a discussion of the Banks policy and procedure for developing loan loss allowances and valuing foreclosed real estate.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

The Company experienced a $61,600 loss for the six months YTD June 30, 2008, a decrease of $572,300 from the $510,700 of net income for the same period in 2007. Net
interest income decreased $815,900, a 28.9% decrease from the same period last year. Other income increased $1,007,600. Non-interest expense increased $125,200, or 4.7%, and pre-tax income decreased by $898,900.

Net interest margin, the difference between interest income and interest expense, is the primary source of operating revenues for the Company. Table 1 below presents,
for the six months ended June 30, 2008 and 2007, the average balances, related interest income and expense amounts, and average yields and costs which influence the Banks net interest margin. Table 2 reflects the changes in interest
income and interest expense between the periods which resulted from changes in average volumes and average rates.



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##### Table of Contents

|                      |  |  |  |         |  |  |  |  |  |  |  | 
|--------------------- |  |  |  | ------- |  |  |  |  |  |  |  | 
|Average Balance Sheet |  |  |  | Table 1
|Dollars in thousands  |  |  |  |        

|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|---------------------------------- |  | --------------------------------- | ------- | -------------- | ---- | ---------- |  | ---- | ------------- |  | -------------- | ------- | ---------- | - | ----- |  | ---- | -
|                                   | 
|                                   |  | For The Six Months Ended June 30, |        
|                                   |  | 2008                              |         |                | 2007 |           
|                                   |  | AverageVolume                     |         | Income/Expense |      | Yield/Rate |  |      | AverageVolume |  | Income/Expense |         | Yield/Rate |  
|Assets                             |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Interest Earning Assets            |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Loans receivable (1)               |  | $                                 | 111,865 |                | $    | 3,654      |  | 6.53 | %             |  | $              | 125,002 |            | $ | 4,723 |  | 7.56 | %
|Investment securities              |  |                                   | 21,413  |                |      | 356        |  | 3.33 | %             |  |                | 34,010  |            |   | 588   |  | 3.46 | %
|FHLB Stock                         |  |                                   | 576     |                |      | 17         |  | 5.90 | %             |  |                | 1,326   |            |   | 39    |  | 5.88 | %
|Other interest earning assets (2)  |  |                                   | 3,697   |                |      | 67         |  | 3.62 | %             |  |                | 1,833   |            |   | 73    |  | 7.97 | %
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Interest Earning Assets      |  | $                                 | 137,551 |                | $    | 4,094      |  | 5.95 | %             |  | $              | 162,171 |            | $ | 5,423 |  | 6.69 | %
|                                   |  |                                   |         |                |      |           
|Other Assets                       |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Cash and due from banks            |  |                                   | 5,579   |                |      |            |  |      |               |  |                | 4,631   |            |   |       |  |      |  
|Premises and equipment, net        |  |                                   | 5,171   |                |      |            |  |      |               |  |                | 3,687   |            |   |       |  |      |  
|Accrued interest receivable        |  |                                   | 710     |                |      |            |  |      |               |  |                | 984     |            |   |       |  |      |  
|Mortgage servicing rights          |  |                                   | 233     |                |      |            |  |      |               |  |                | 276     |            |   |       |  |      |  
|Other assets                       |  |                                   | 1,112   |                |      |            |  |      |               |  |                | 648     |            |   |       |  |      |  
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Other Assets                 |  |                                   | 12,805  |                |      |            |  |      |               |  |                | 10,226  |            |   |       |  |      |  
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Assets                       |  | $                                 | 150,356 |                |      |            |  |      |               |  | $              | 172,397 |            |   |       |  |      |  
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Interest-Bearing Liabilities       |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Checking accounts                  |  | $                                 | 20,511  |                | $    | 66         |  | 0.64 | %             |  | $              | 19,880  |            | $ | 17    |  | 0.17 | %
|Money market accounts              |  |                                   | 2,072   |                |      | 8          |  | 0.77 | %             |  |                | 3,069   |            |   | 11    |  | 0.72 | %
|Passbook savings                   |  |                                   | 18,111  |                |      | 134        |  | 1.48 | %             |  |                | 18,936  |            |   | 107   |  | 1.13 | %
|Certificates of deposit            |  |                                   | 82,742  |                |      | 1,750      |  | 4.23 | %             |  |                | 84,250  |            |   | 1,881 |  | 4.47 | %
|Short-term borrowings              |  |                                   | 5,606   |                |      | 129        |  | 4.60 | %             |  |                | 21,497  |            |   | 584   |  | 5.43 | %
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Interest-Bearing Liabilities |  | $                                 | 129,042 |                | $    | 2,087      |  | 3.23 | %             |  | $              | 147,632 |            | $ | 2,600 |  | 3.52 | %
|                                   |  |                                   |         |                |      |           
|Non-interest bearing deposits      |  |                                   | 7,503   |                |      |            |  |      |               |  |                | 9,727   |            |   |       |  |      |  
|Other Liabilities                  |  |                                   | 596     |                |      |            |  |      |               |  |                | 996     |            |   |       |  |      |  
|Stockholders equity (3)           |  |                                   | 13,215  |                |      |            |  |      |               |  |                | 14,042  |            |   |       |  |      |  
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Liabilities and Equity       |  | $                                 | 150,356 |                |      |            |  |      |               |  | $              | 172,397 |            |   |       |  |      |  
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Net Interest Income/Margin         |  |                                   |         |                | $    | 2,007      |  | 2.72 | %             |  |                |         |            | $ | 2,823 |  | 3.17 | %
|                                   |  |                                   |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  



|(1) | Includes loans held for sale and non-accrual loans.
|--- | ---------------------------------------------------

|(2) | The yield on other interest earning assets is computed using average daily general ledger balances. Due to the Banks issuance of large dollar amounts of cashier checks in 2007
and 2008, this balance is significantly less than the interest earning balances at our correspondent bank because of float.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Average balances are based on average daily balances except for stockholders equity which is computed on month end balances.
|--- | -----------------------------------------------------------------------------------------------------------------------------



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|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|----------------------------------------- |  | -------------------------------------- | ---- | - | ----- | - | ---- | -------- |  | - | --- | - |  | - | ------- | -
|Analysis of Change in Net Interest Income |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   | Table 2 |  
|Dollars in thousands                      |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|                                          |  | Six Months Ended June 30, 2008 vs 2007 |     
|                                          |  | Increase (Decrease) Due to             |      |   | Total |  
|                                          |  | Volume                                 |      |   | Rate  |   |      | Vol/Rate |  |  
|Interest Income on:                       |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Loans Receivable (1)                      |  | $                                      | (496 | ) |       | $ | (640 | )        |  | $ | 67  |   |  | $ | (1,069  | )
|                                          |  |                                        |      |  
|Investment Securities                     |  |                                        | (218 | ) |       |   | (22  | )        |  |   | 8   |   |  |   | (232    | )
|FHLB Stock                                |  |                                        | (22  | ) |       |   |     |          |  |   |    |   |  |   | (22     | )
|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Interest & Dividends on Investments       |  |                                        | (240 | ) |       |   | (22  | )        |  |   | 8   |   |  |   | (254    | )
|                                          |  |                                        |      |  
|Other Interest Earning Investments        |  |                                        | 74   |   |       |   | (40  | )        |  |   | (40 | ) |  |   | (6      | )
|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Total Interest on Earning Assets          |  |                                        | (662 | ) |       |   | (702 | )        |  |   | 35  |   |  |   | (1,329  | )
|                                          |  |                                        |      |  
|Interest Expense on:                      |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Checking Accounts                         |  |                                        | (1   | ) |       |   | 53   |          |  |   | (3  | ) |  |   | 49      |  
|Money Market                              |  |                                        | (4   | ) |       |   | 1    |          |  |   |    |   |  |   | (3      | )
|Passbook                                  |  |                                        | (5   | ) |       |   | 33   |          |  |   | (1  | ) |  |   | 27      |  
|Certificates of Deposit                   |  |                                        | (34  | ) |       |   | (99  | )        |  |   | 2   |   |  |   | (131    | )
|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Interest on Deposits                      |  |                                        | (44  | ) |       |   | (12  | )        |  |   | (2  | ) |  |   | (58     | )
|                                          |  |                                        |      |  
|Short-term Borrowings                     |  |                                        | (430 | ) |       |   | (90  | )        |  |   | 65  |   |  |   | (455    | )
|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Total Interest on Liabilities             |  |                                        | (474 | ) |       |   | (102 | )        |  |   | 63  |   |  |   | (513    | )
|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  
|Net Interest Income                       |  | $                                      | (188 | ) |       | $ | (600 | )        |  | $ | (28 | ) |  | $ | (816    | )
|                                          |  |                                        |      |   |       |   |      |          |  |   |     |   |  |   |         |  



|(1) | Includes loans held for sale.
|--- | -----------------------------

Net interest income decreased $816,000
from first half 2007 to the first half 2008. This is the net of a $1,329,000 decrease in interest income and a decrease of $513,000 in interest expense.

Interest on loans receivable decreased $1,068,000 in 2008 from 2007. Table 2 above indicates that the decrease in interest income from loans was due to a decrease in the average volume of loans outstanding and a decrease in income caused by
lower interest rates in the current period. The average balance of loans outstanding, as reported in Table 1, decreased by $13.1 million from 2007 to 2008, while the average yield on loans receivable decreased by 103 basis points. In 2008, loans
receivable had an average yield of 6.53%, which is down from 7.56% in 2007. The data in Table 2 indicates that the lower volume of loans outstanding in 2008 decreased interest income by $496,000, and that lower interest rates decreased income by
$640,000. The Bank had an average balance of $4.5 million of non-performing loans during the six months YTD in 2008. The average contractual interest rate on these loans was 8.08%. The amount of non-accrual interest on these loans was approximately
$182,000 for the YTD. The effect of this decrease in interest on loans receivable was a decrease in average yield of 33 basis points.

Other interest and
dividend income decreased by a total amount of $260,000. Interest income on investment securities decreased by $232,000 in 2008 from 2007 due to a lower average balance outstanding in 2008 and a lower average interest rate. The remaining sources of
dividend and interest income decreased $28,000. The Banks overall yield on interest earning assets was 5.95% in 2008, a 74 basis point decrease from the 6.69% achieved in 2007.



19



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##### Table of Contents

Interest expense decreased $513,000. Interest on deposits decreased by a net amount of $58,000. Interest on certificates
of deposit increased $131,000, of which $34,000 was primarily due to a lower volume of certificates of deposit outstanding and $99,000 was due to lower interest rates on certificates of deposit. Interest on short-term borrowings decreased $455,000.
The average balance of borrowings decreased $15.9 million and caused interest expense to decrease $430,000. Lower interest rates in 2008 caused interest expense to decrease $90,000. Because of a lack of growth in loans receivable in 2008, the Bank
used a portion of the proceeds from investment security calls to reduced its use of short-term borrowings.

The Banks overall cost of interest
bearing liabilities was flat, with a decrease of only 7 basis points, in 2008 versus 2007.

The Bank made a $953,400 provision for loan losses in the first
half of 2008 as compared to a $12,000 reduction in its provision for loan losses in first half 2007. The Bank accounts for the credit risk associated with its lending activities through its provision for loan losses. The provision is the expense
recognized in the statement of operations to adjust the loan loss allowance to an appropriate balance as determined by the Banks credit risk analysis procedures. See Critical Accounting Policies for a discussion of
the Banks methodology for determining loan loss allowances.

The $953,400 provision for loan losses is in recognition of concentrations of credit
risk in the Banks loan portfolio, the Banks recent experiences in management of foreclosed real estate, environmental concerns over both the local and national real estate markets, and other economic uncertainties potentially affecting
the performance of the loan portfolio.

Total other income increased $1,007,600 from the six months ended June 30, 2007 to 2008.

Loan fees and late charges decreased $27,900, or 20.4% from 2007. This decrease was due to a $15,600 decrease in late charges on delinquent loans, a $6.700 decrease in
credit card fees following the sale of the Banks credit card portfolio late in 2007, and a $5,600 decrease in fees for short-term loan extensions.

Income from mortgage banking activities decreased $59,100, or 49.8%. The Bank had no sales of loans to its primary correspondent in 2008 compared to 2007 during which it recorded gains on such sales of $25,300. Fees for loans originated on
behalf of other correspondents decreased $35,800.

Fees from transaction accounts increased 62.1% or $217,000 due to a $192,000 increase in insufficient
fund fees. The Bank introduced an overdraft protection program for customers late in the second quarter of 2007 which contributed to the increase in insufficient fund fees. ATM fees increased $9,200 from last year. All other transaction account fees
increased a net amount of $15,800 in the current period over 2007.

The Bank recorded a net gain on foreclosed real estate of $831,500. There was no
comparable amounts in the six months ended June 30, 2007. This gain was the net of a $886,800 valuation adjustment on foreclosed real estate and $55,300 loss on the disposition of foreclosed real estate. See Critical Accounting
Policies for a discussion regarding evaluations of foreclosed real estate.



20



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##### Table of Contents

Non-interest expenses increased $125,200, or 4.7%, in the six months ended June 30, 2008 compared to 2007. Expenses
in both 2008 and 2007 include costs not typically incurred by the Company in its normal operations. Expenses related to the formation of a holding company totaled $99,400 in 2007. Foreclosure related expenses in 2008 total $173,100. After these
items are deducted from total non-interest expenses in the respective periods for analytical purposes, normal expenses related to on-going operations increased only 2.0% or $51,500.

Directors fees and expenses increased $11,900, or 10.3%, primarily due to higher costs of insurance benefits provided to directors.

Professional fees decreased $64,100, or 32.2%. Expenses related to the formation of a holding company totaling $99,400 in 2007 were of a onetime nature. Fees for accounting and other professional services increased
$33,300 in 2008. There was a net decrease of $2,000 for all other items.

Data processing expenses increased $32,400, or 7.8%, primarily due to an increase
in deposit account servicing costs.

Marketing expenses decreased $46,900, or 47.4%. As part of its cost reduction efforts, management reassessed its
marketing budget at mid-year and significantly reduced its advertising plans for the year and reduced its accrued marketing expenses accordingly

Foreclosure expenses related to 25 loans totaling $3.9 million of loans foreclosed upon in the first half of the year were $173,100. There was no foreclosure expense in 2007.

Income tax benefit for the first half of 2008 was $65,000, a decrease of $326,600 from prior year income tax expense. The effective tax rate for the six months ended June 30, 2008 was a negative 51.3% versus a
positive 33.9% in the same period in 2007. Interest on U.S. Government agency securities is exempt from state taxation. This exemption had a proportionately greater impact on the state income tax calculation in 2008 because of the decline from a
pre-tax income status in 2007 to a pre-tax loss status in 2008.

Three Months Ended June 30, 2008 Compared to Three Months Ended
June 30, 2007

The Company had a $49,500 loss in the second quarter of 2008 versus a $214,900 net income in the second quarter of 2007. The
second quarter net loss was $24,900 higher than the loss recorded in the first quarter of this year due to foreclosure related items. Core income, or income from ongoing operations, on a pre-tax basis improved from a negative $39,000 in the first
quarter to a positive $140,000 in the second quarter. These pre-tax numbers exclude losses on the sale of real estate owned, provision for losses on real estate owned and foreclosure expenses. Prior to the current years activity with
foreclosed real estate, the Bank has not had any foreclosure experience since fiscal year 2000.

Net interest margin, the difference between interest
income and interest expense, is the primary source of operating revenues for the Company. Table 3 below presents, for the quarters ended June 30, 2008



21



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##### Table of Contents

and 2007, the average balances, related interest income and expense amounts, and average yields and costs which influence the Banks net interest
margin. Table 4 reflects the changes in interest income and interest expense between the periods which resulted from changes in average volumes and average rates.



22



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##### Table of Contents

|                      |  |        
|--------------------- |  | -------
|Average Balance Sheet |  | Table 3

Dollars in thousands



|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|---------------------------------- |  | ----------------------------------- | ------- | -------------- | ---- | ---------- |  | ---- | ------------- |  | -------------- | ------- | ---------- | - | ----- |  | ---- | -
|                                   |  | For The Three Months Ended June 30, |        
|                                   |  | 2008                                |         |                | 2007 |           
|                                   |  | AverageVolume                       |         | Income/Expense |      | Yield/Rate |  |      | AverageVolume |  | Income/Expense |         | Yield/Rate |  
|Assets                             |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Interest Earning Assets            |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Loans receivable (1)               |  | $                                   | 111,359 |                | $    | 1,768      |  | 6.35 | %             |  | $              | 122,667 |            | $ | 2,320 |  | 7.57 | %
|Investment securities              |  |                                     | 12,015  |                |      | 103        |  | 3.43 | %             |  |                | 34,010  |            |   | 298   |  | 3.50 | %
|FHLB Stock                         |  |                                     | 353     |                |      | 5          |  | 5.67 | %             |  |                | 1,233   |            |   | 18    |  | 5.84 | %
|Other interest earning assets (2)  |  |                                     | 5,765   |                |      | 44         |  | 3.05 | %             |  |                | 1,798   |            |   | 37    |  | 8.23 | %
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Interest Earning Assets      |  | $                                   | 129,492 |                | $    | 1,920      |  | 5.93 | %             |  | $              | 159,708 |            | $ | 2,673 |  | 6.69 | %
|                                   |  |                                     |         |                |      |           
|Other Assets                       |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Cash and due from banks            |  |                                     | 7,207   |                |      |            |  |      |               |  |                | 4,724   |            |   |       |  |      |  
|Premises and equipment, net        |  |                                     | 5,466   |                |      |            |  |      |               |  |                | 3,849   |            |   |       |  |      |  
|Accrued interest receivable        |  |                                     | 647     |                |      |            |  |      |               |  |                | 1,039   |            |   |       |  |      |  
|Mortgage servicing rights          |  |                                     | 228     |                |      |            |  |      |               |  |                | 273     |            |   |       |  |      |  
|Other assets                       |  |                                     | 1,870   |                |      |            |  |      |               |  |                | 708     |            |   |       |  |      |  
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Other Assets                 |  |                                     | 15,418  |                |      |            |  |      |               |  |                | 10,593  |            |   |       |  |      |  
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Assets                       |  | $                                   | 144,910 |                |      |            |  |      |               |  | $              | 170,301 |            |   |       |  |      |  
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Interest-Bearing Liabilities       |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Checking accounts                  |  | $                                   | 21,977  |                | $    | 37         |  | 0.34 | %             |  | $              | 19,403  |            | $ | 8     |  | 0.08 | %
|Money market accounts              |  |                                     | 2,072   |                |      | 4          |  | 0.77 | %             |  |                | 3,101   |            |   | 6     |  | 0.77 | %
|Passbook savings                   |  |                                     | 18,535  |                |      | 70         |  | 1.51 | %             |  |                | 19,145  |            |   | 56    |  | 1.17 | %
|Certificates of deposit            |  |                                     | 80,101  |                |      | 793        |  | 3.96 | %             |  |                | 83,973  |            |   | 947   |  | 4.51 | %
|Short-term borrowings              |  |                                     | 1,083   |                |      | 13         |  | 4.80 | %             |  |                | 19,943  |            |   | 272   |  | 5.46 | %
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Interest-Bearing Liabilities |  | $                                   | 123,768 |                | $    | 917        |  | 2.96 | %             |  | $              | 145,565 |            | $ | 1,289 |  | 3.54 | %
|                                   |  |                                     |         |                |      |           
|Non-interest bearing deposits      |  |                                     | 7,647   |                |      |            |  |      |               |  |                | 9,615   |            |   |       |  |      |  
|Other Liabilities                  |  |                                     | 363     |                |      |            |  |      |               |  |                | 1,016   |            |   |       |  |      |  
|Stockholders equity (3)           |  |                                     | 13,132  |                |      |            |  |      |               |  |                | 14,105  |            |   |       |  |      |  
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Total Liabilities and Equity       |  | $                                   | 144,910 |                |      |            |  |      |               |  | $              | 170,301 |            |   |       |  |      |  
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  
|Net Interest Income/Margin         |  |                                     |         |                | $    | 1,003      |  | 2.96 | %             |  |                |         |            | $ | 1,384 |  | 3.14 | %
|                                   |  |                                     |         |                |      |            |  |      |               |  |                |         |            |   |       |  |      |  



|(1) | Includes loans held for sale and non-accrual loans.
|--- | ---------------------------------------------------

|(2) | The yield on other interest earning assets is computed using average daily general ledger balances. Due to the Banks issuance of large dollar amounts of cashier checks in 2007
and 2008, this balance is significantly less than the interest earning balances at our correspondent bank because of float.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Average balances are based on average daily balances except for stockholders equity which is computed on month end balances.
|--- | -----------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|----------------------------------------- |  | ---------------------------------------- | ---- | - | ----- | - | ---- | -------- |  | - | ------- | - |  | - | ---- | -
|Analysis of Change in Net Interest Income |  |                                          |      |   |       |   |      |          |  |   | Table 4 |   |  |   |      |  
|Dollars in thousands                      |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|                                          |  | Three Months Ended June 30, 2008 vs 2007 |     
|                                          |  | Increase (Decrease) Due to               |      |   | Total |  
|                                          |  | Volume                                   |      |   | Rate  |   |      | Vol/Rate |  |  
|Interest Income on:                       |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Loans Receivable (1)                      |  | $                                        | (214 | ) |       | $ | (372 | )        |  | $ | 34      |   |  | $ | (552 | )
|                                          |  |                                          |      |  
|Investment Securities                     |  |                                          | (193 | ) |       |   | (7   | )        |  |   | 5       |   |  |   | (195 | )
|FHLB Stock                                |  |                                          | (13  | ) |       |   | (1   | )        |  |   | 1       |   |  |   | (13  | )
|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Interest & Dividends on Investments       |  |                                          | (206 | ) |       |   | (8   | )        |  |   | 6       |   |  |   | (208 | )
|                                          |  |                                          |      |  
|Other Interest Earning Investments        |  |                                          | 81   |   |       |   | (23  | )        |  |   | (51     | ) |  |   | 7    |  
|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Total Interest on Earning Assets          |  |                                          | (339 | ) |       |   | (403 | )        |  |   | (11     | ) |  |   | (753 | )
|                                          |  |                                          |      |  
|Interest Expense on:                      |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Checking Accounts                         |  |                                          |     |   |       |   | 28   |          |  |   | 1       |   |  |   | 29   |  
|Money Market                              |  |                                          | (2   | ) |       |   |     |          |  |   |        |   |  |   | (2   | )
|Passbook                                  |  |                                          | (2   | ) |       |   | 16   |          |  |   | (1      | ) |  |   | 13   |  
|Certificates of Deposit                   |  |                                          | (43  | ) |       |   | (115 | )        |  |   | 5       |   |  |   | (153 | )
|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Interest on Deposits                      |  |                                          | (47  | ) |       |   | (71  | )        |  |   | 5       |   |  |   | (113 | )
|                                          |  |                                          |      |  
|Short-term Borrowings                     |  |                                          | (257 | ) |       |   | (25  | )        |  |   | 24      |   |  |   | (258 | )
|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Total Interest on Liabilities             |  |                                          | (304 | ) |       |   | (96  | )        |  |   | 29      |   |  |   | (371 | )
|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  
|Net Interest Income                       |  | $                                        | (35  | ) |       | $ | (307 | )        |  | $ | (40     | ) |  | $ | (382 | )
|                                          |  |                                          |      |   |       |   |      |          |  |   |         |   |  |   |      |  



|(1) | Includes loans held for sale.
|--- | -----------------------------

Net interest income decreased $382,000
from second quarter 2007 to the second quarter 2008. This is the net of a $753,000 decrease in interest income and a decrease of $371,000 in interest expense.

Interest on loans receivable decreased $552,000 in 2008 from 2007. Table 4 above indicates that the decrease in interest income from loans was due to a decrease in the average volume of loans outstanding and a decrease in income caused by
lower interest rates in the current period. The average balance of loans outstanding, as reported in Table 3, decreased by $11.3 million from 2007 to 2008, while the average yield on loans receivable decreased by 122 basis points. In 2008, loans
receivable had an average yield of 6.35%, which is down from 7.57% in 2007. The data in Table 4 indicates that the lower volume of loans outstanding in 2008 decreased interest income by $214,000, and that lower interest rates decreased income by
$372,000. The Bank had an average balance of $3.9 million of non-performing loans during the quarter just ended. The average contractual interest rate on these loans was 8.05%. The amount of non-accrual interest on these loans was approximately
$79,000 for the quarter. The effect of this decrease in interest on loans receivable was a decrease in average yield of 15 basis points.



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Interest and dividend income on investment securities decreased by $208,000. The average balance of investment securities
decreased by $22.0 million in 2008 from 2007 and the average interest rate decreased by 7 basis points. Interest income on other interest earning investments increased by $7,000 in 2008 from 2007.

The Companys average interest earning assets decreased by $30.2 million and the overall yield on interest earning assets was 5.93% in 2008, an 76 basis point
decrease from the 6.69% achieved in 2007.

Interest expense decreased $371,000. Interest on deposits decreased $113,000, of which $71,000 was due to lower
interest rates. Interest on certificates of deposit decreased $153,000 primarily from lower interest rates. The average interest rate paid on certificates of deposits decreased 55 basis points from 2007 to 2008. Interest on short-term borrowings
decreased $258,000. The average balance of borrowings decreased $18.9 million and caused interest expense to decrease $257,000. Lower interest rates in 2008 caused interest expense to decrease $25,000. Because of a lack of growth in loans receivable
in 2008, the Bank used a portion of the proceeds from investment security calls to reduced its use of short-term borrowings.

The Banks overall cost
of interest bearing liabilities decreased 36 basis points in 2008 versus 2007.

The Bank booked a $878,200 addition to its provision for loan losses in the
second quarter of 2008 as compared to a $6,000 reduction in its provision for loan losses in second quarter 2007. The Bank accounts for the credit risk associated with its lending activities through its provision for loan losses. The provision is
the expense recognized in the statement of operations to adjust the loan loss allowance to an appropriate balance as determined by the Banks credit risk analysis procedures. See Critical Accounting Policies for a
discussion of the Banks methodology for determining loan loss allowances. Also see the discussion of loan loss provision under Six Months Ended June 30, 2008 compared to Six Months ended June 30, 2007.

Total other income increased $904,400 from the three months ended June 30, 2007 to 2008.

Loan fees and late charges decreased $17,300, or 25.5% from 2007. This decrease was due to a $7,600 decrease in late charges on delinquent loans, a $4,500 decrease in
credit card fees following the sale of the Banks credit card portfolio late in 2007, and a $7,500 decrease for short-term renewals loan extensions .

Income from mortgage banking activities decreased $35,200, or 56.6%. The Company had a $37,300 decrease in fees on loans originated for correspondents in 2008 compared to 2007.

Fees from transaction accounts increased 39.6% or $81,900 due to a $70,300 increase in insufficient fund fees. The Bank introduced an overdraft protection program for customers late in the second quarter of 2007 which
contributed to the increase in insufficient fund fees. All other transaction account fees increased a net amount of $11,600 in the current period over 2007.

The Bank recorded a net gain on foreclosed real estate of $831,500 during the second quarter of 2008. There was no comparable amount in the three months ended June 30, 2007. This gain was the net of a $886,800 valuation adjustment on
foreclosed real estate and $55,300 loss on the disposition of foreclosed real estate. See Critical Accounting Policies for a discussion regarding evaluations of foreclosed real estate.



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Non-interest expenses increased $41,000, or 2.9%, in the three months ended June 30, 2008 compared to 2007.

Directors fees and expenses increased $9,000, or 16.4%, due to a $5,500 increase in the cost of insurance benefits provided to directors. All other
items increased a net amount of $3,500.

Professional fees decreased $86,200, or 56.1%. Expenses related to the formation of a holding company totaling
$99,400 in 2007 were of a onetime nature. Fees for accounting and other professional services increased $20,700. There was a net decrease of $7,500 for all other items, principally legal fees.

Data processing expenses increased $20,700 due to higher costs for processing deposit accounts and a higher volume of electronic banking transactions.

Marketing expenses decreased $47,400, or 95.8%. As part of its cost reduction efforts, management reassessed its marketing budget at mid-year and significantly reduced
its advertising plans for the year and reduced its accrued expenses accordingly at the end of the second quarter.

Foreclosure and other expenses related
to the 25 loans totaling $3.9 million of loans foreclosed upon in the second quarter of the year were $173,100. There was no foreclosure expense in 2007.

The Company recorded an income tax benefit of $38,600 in the second quarter of 2008 versus an income tax expense of $112,100 in the second quarter of 2007, a difference of $150,700. See the discussion of income tax expense under
Six Months Ended June 30, 2008 compared to Six Months ended June 30, 2007.

Liquidity and Capital Resources

At June 30, 2008, the Bank had approximately $6.2 million of liquid assets in the form of cash and cash equivalent investments. The Company
also has $11.5 million of investment securities that are classified as available for sale. As of June 30, 2008, the Bank has pledged $1.0 million of these bonds as collateral for public deposits of Virginia counties. The Bank has approximately
$33.0 million of pre-approved credit from the FHLB with funding available on a same day basis and did not have any borrowings outstanding against this line of credit at June 30, 2008. The Bank also has a $4.6 million line of credit availability
from the Community Bankers Bank of Richmond, Virginia for federal funds purchases and had $2.9 million outstanding against this credit line at June 30, 2008. This credit facility is subject to renewal at July 31, 2008.

The Companys current liquidity position is more than adequate to meet its lending needs and to fund potential customer withdrawals from deposit accounts.

At June 30, 2008, the Companys common stockholders equity was equal to 9.04% of total assets, as compared to 7.76% at December 31,
2007. Stockholders equity decreased by $213,100 during the first half of 2008. This is the sum of $61,600 in operating losses plus dividends paid or accrued in the amount of $151,500.



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The Office of Thrift Supervision (OTS) regulations require savings banks to maintain minimum capital
standards: a 4.0% of tangible assets Tier 1 (core) capital requirement, and an 8.0% risk based capital requirement. These capital requirements are applicable to the Companys wholly owned subsidiary, Virginia Savings Bank, F.S.B. The OTS does
not have specific capital requirements applicable to thrift holding companies.

The Bank is required to file a quarterly report on its financial condition,
results of operations and other financial information with the OTS. OTS financial reporting rules follow the same generally accepted accounting principles (GAAP) applicable to this Report on Form 10-Q except for certain specified areas
in which regulatory accounting principles (RAP) differ from GAAP. One of these areas is accounting for properties acquired through foreclosure. GAAP indicates that these properties should be accounted for at their fair value on the
foreclosure date and at the lower of cost or fair value thereafter. OTS RAP specifies that they be reported at the lower of their historical cost or their fair value. Application of RAP to the Banks accounting for real estate acquired through
foreclosure resulted in approximately $603,000 less in second quarter earnings and tangible capital, as reported to the OTS, than the amounts determined under GAAP and reported in this Report on Form 10-Q. This difference between GAAP and RAP will
continue to exist until the Bank disposes of the properties. Table 5 reflects the $603,000 lower amount of capital reported to OTS.

Actual and required
regulatory capital requirements at June 30, 2008 and 2007 follow:



|                 |  |                               |  |        
|---------------- |  | ----------------------------- |  | -------
|Capital Position |  | Virginia Savings Bank, F.S.B. |  | Table 5



|              |  |                 |            |            |                              |   |                |                                                                |            |  |      |                |  |            |            |  |       |  
|------------- |  | --------------- | ---------- | ---------- | ---------------------------- | - | -------------- | -------------------------------------------------------------- | ---------- |  | ---- | -------------- |  | ---------- | ---------- |  | ----- | -
|              |  | Capital Amounts |            |            | For CapitalAdequacy Purposes |   |                | To be Well CapitalizedUnder Prompt CorrectiveAction Provisions |           
|              |  | ActualAmount    |            | % ofAssets |                              |   | RequiredAmount |                                                                | % ofAssets |  |      | RequiredAmount |  | % ofAssets |           
|June 30, 2008 |  |                 |            |            |                              |   |                |                                                                |            |  |      |                |  |            |            |  |       |  
|Tangible (1)  |  | $               | 12,116,253 |            | 8.40                         | % |                | $                                                              | 2,164,747  |  | 1.50 | %              |  | $          | N/A        |  | N/A   |  
|Tier I (2)    |  |                 | 11,116,253 |            | 9.75                         | % |                |                                                                | N/A        |  | N/A  |                |  |            | 6,837,414  |  | 6.00  | %
|Core (1)      |  |                 | 11,116,253 |            | 7.70                         | % |                |                                                                | 5,772,658  |  | 4.00 | %              |  |            | 7,215,822  |  | 5.00  | %
|Total (2)     |  |                 | 13,229,853 |            | 11.66                        | % |                |                                                                | 9,116,552  |  | 8.00 | %              |  |            | 11,395,691 |  | 10.00 | %
|              |  |                 |            |            |                              |  
|June 30, 2007 |  |                 |            |            |                              |   |                |                                                                |            |  |      |                |  |            |            |  |       |  
|Tangible (1)  |  | $               | 13,864,150 |            | 8.12                         | % |                | $                                                              | 2,562,633  |  | 1.50 | %              |  | $          | N/A        |  | N/A   |  
|Tier I (2)    |  |                 | 12,864,150 |            | 10.92                        | % |                |                                                                | N/A        |  | N/A  |                |  |            | 7,066,325  |  | 6.00  | %
|Core (1)      |  |                 | 12,864,150 |            | 7.53                         | % |                |                                                                | 6,833,689  |  | 4.00 | %              |  |            | 8,542,112  |  | 5.00  | %
|Total (2)     |  |                 | 14,306,450 |            | 12.15                        | % |                |                                                                | 9,421,766  |  | 8.00 | %              |  |            | 11,777,208 |  | 10.00 | %



|(1) | To adjusted total assets.
|--- | -------------------------

|(2) | To risk-weighted assets.
|--- | ------------------------

To be considered a well-capitalized institution
under the Federal Deposit Insurance Corporation Improvement Act of 1991, the Bank must have a core capital ratio of at least 5.0%, a Tier I risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. The most
recent notification from the OTS categorized the Bank as well capitalized.



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Off-Balance Sheet Arrangements

The Bank routinely engages in off-balance sheet arrangements in the normal course of business to meet the financial needs of its customers. These arrangements consist of outstanding mortgage loan commitments, letters
of credit and lines of credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial condition. The contractual amounts of these instruments are an indication of the extent of
involvement the Bank has in each class of off-balance sheet financial instruments. The Banks exposure to credit loss from non-performance by the other party to the above-mentioned financial instruments is represented by the contractual amount
of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Bank had outstanding commitments to make mortgage loans secured by real property, exclusive of the undisbursed portion of loans in process, of approximately $2.8 million at June 30, 2008, all of which expire within one year. Loans
in process represent the undisbursed portion of construction loans already on the Banks books. Disbursements are made at each stage of the construction process after an inspection by a qualified real estate appraiser. At June 30, 2008,
the Bank had loans in process commitments of approximately $2.7 million that expire within nine months.

The Bank also issues stand-by letters of credit
that are unsecured conditional commitments issued by the Bank guaranteeing performance by a customer to a third party. These guarantees are issued primarily to support private borrowing arrangements. At June 30, 2008, the Bank had $330,700 of
stand-by letters of credit outstanding with expiration dates through September 10, 2009.

Lines of credit are loan commitments to individuals and
companies that have fixed expiration dates as long as there is no violation of any condition established in the contract. The Bank evaluates each customers credit worthiness on a case-by-case basis. The Bank, at June 30, 2008, had secured
lines of credit with available balances of $13.1 million and unsecured lines of credit with available balances of $2.0 million. Many of these commitments are expected to expire without being fully drawn down. The total commitment amounts do not
therefore necessarily represent future cash requirements.

The risks involved in these off-balance sheet arrangements are essentially the same as those
involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition as of June 30, 2008 as a liability for credit loss due to off-balance sheet arrangements. Management does not anticipate
any difficulties in funding these commitments.



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Item 4  Controls and Procedures

Managements Disclosure Controls

Management of the
Company is responsible for the preparation of the accompanying financial statements and for their integrity and objectivity. The financial statements have been prepared in conformity with accounting principles generally accepted in the United
States. Management also prepares the other information in this quarterly report and is responsible for its accuracy and consistency with the financial statements.

Management has implemented what it believes are appropriate disclosure controls and procedures. These controls and procedures are designed to insure that management receives all pertinent information that may be required to be disclosed in
its annual and quarterly reports. Such information is not limited to financial data but also includes non-financial information that should be considered for disclosure in the annual and quarterly reports.

Management believes that as of June 30, 2008 its structure of disclosure controls and procedures are effective in meeting their intended purposes. The most recent
review of these systems, conducted as of June 30 2008, did not reveal any material deficiencies that would adversely affect the Companys ability to properly and accurately record and report financial data. There were no significant
changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of these evaluations. While management has an effective structure of disclosure controls and procedures in
place, there were deficiencies in implementation of these controls and procedures due to a personnel shortage beginning in May, 2008 as describe below.

In
May, 2008, the Companys controller resigned. Management was not able to fill this position vacancy prior to preparation of this report. As a consequence, dual controls related to the preparation of significant accounting entries and the
financial reports and schedules contained herein were inoperative. Management expects to have the controller position filled in the near future.

PART IIOTHER INFORMATION

Item 1  Legal Proceedings

In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management
believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition or results of operations of the Company.

Item 4  Submission of Matters to a Vote of Security Holders



| | A. | An annual meeting of the shareholders of the Company, was held on May 22, 2008
| | -- | ------------------------------------------------------------------------------



| | B. | Votes cast for the election of directors were as follows:
| | -- | ---------------------------------------------------------



|                        |  |           |  |           |  |           |  |                
|----------------------- |  | --------- |  | --------- |  | --------- |  | ---------------
|                        |  | For:      |  | Withheld: |  | Total:    |  | BrokerNon-Votes
|Samuel J. Baggarly      |  | 1,255,119 |  | 640       |  | 1,255,759 |  | 82,387         
|Kent E. Coons           |  | 1,255,119 |  | 640       |  | 1,255,759 |  | 82,387         
|Arnold M. Williams, Sr. |  | 1,255,119 |  | 640       |  | 1,255,759 |  | 82,387         

The following directors term of office continued after the meeting: Webb R. Davis, W.
Michael Funk, Francis D. Hall, J. William Gilliam and David L. Wines



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Item 6  Exhibits



|              |  |                                           
|------------- |  | ------------------------------------------
|ExhibitNumber |  | Description                               
|31-1          |  | Rule 13a-14(a)/15d-14(a) CEO Certification
|              | 
|31-2          |  | Rule 13a-14(a)/15d-14(a) CFO Certification
|              | 
|32            |  | Section 1350 Certification                



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



|                |  |                                |  |                                                
|--------------- |  | ------------------------------ |  | -----------------------------------------------
|                |  | VIRGINIA SAVINGS BANCORP, INC.
|                |  | (Registrant)                  
|                |  |                               
|                |  | By:                            |  | /s/ W. Michael Funk                            
|August 14, 2008 |  |                                |  | W. Michael Funk                                
|Date            |  |                                |  | President & Chief Executive Officer            
|                |  |                               
|                |  | By:                            |  | /s/ Noel F. Pilon                              
|August 14, 2008 |  |                                |  | Noel F. Pilon                                  
|Date            |  |                                |  | Senior Vice President & Chief Financial Officer



31