Critical Accounting Policies

The consolidated condensed financial statements as of March 31, 2009 and December 31, 2008, and for the three months ended March 31, 2009 and March 31, 2008 included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company's 2008 Annual Report to Stockholders on Form 10-K.

Certain of the Company's accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances, which could affect these material judgments, include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

Comparison of Financial Condition at March 31, 2009 and December 31, 2008

Total assets increased by $23.5 million, from $967.6 million at December 31, 2008 to $991.1 million at March 31, 2009. Securities available for sale increased from $247.0 million at December 31, 2008 to $295.2 million at March 31, 2009. The Company does not have any federal funds sold at March 31, 2009 as compared to $16.1 million at December 31, 2008. The Company has chosen to maintain additional cash balances in non-interest bearing demand deposit accounts due to both the very low earnings rate on overnight funds as well as the unlimited FDIC coverage available on non-interest demand deposit accounts. The Company's holdings of Federal Home Loan Bank (FHLB) stock, at cost, increased from $4.1 million at December 31, 2008 to $4.3 million at March 31, 2009. Total FHLB borrowings declined $7.0 million, from $130.0 million at December 31, 2008 to $123.0 million at March 31, 2009. Total repurchase balances increased from $28.7 million at December 31, 2008 to $31.8 million at March 31, 2009.

At March 31, 2009 and December 31, 2008, investments classified as "held to maturity" were carried at an amortized cost of $431,000 and $454,000, respectively and had an estimated fair market value of $437,000 and $455,000, respectively. At March 31, 2009 and December 31, 2008, securities classified as "available for sale" had an amortized book value of $290.7 million and $244.2 million, respectively.

The loan portfolio declined $7.5 million during the three months ended March 31, 2009. Net loans totaled $620.9 million and $628.4 million at March 31, 2009 and December 31, 2008, respectively. For the three month periods ended March 31, 2009 and March 31, 2008 and the year ended December 31, 2008, the average tax equivalent yield on loans was 6.25%, 7.41% and 6.93% respectively. Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2009 and 2008. At March 31, 2009 and 2008, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

                                                                 Quarter Ended
                                            03/31/09       3/31/2009      3/31/2008       3/31/2008
                                             Amount         Percent         Amount         Percent
                                                            (Dollars in Thousands)
Real estate loans:
One-to-four family (closed end) first
mortgages                                   $ 174,788           27.9 %    $  183,649           31.1 %
Second mortgages (closed end)                   7,682            1.2 %         7,427            1.3 %
Home equity lines of credit                    36,938            5.9 %        32,351            5.5 %
Multi-family                                   37,568            6.0 %        25,886            4.4 %
Construction                                   52,340            8.3 %        52,588            8.9 %
Commercial real estate                        228,431           36.4 %       204,735           34.7 %

Total mortgage loans                          537,747           85.7 %       506,636           85.8 %

Loans secured by deposits                       3,921            0.6 %         3,201            0.6 %
Other consumer loans                           21,592            3.4 %        20,821            3.5 %
Commercial loans                               64,049           10.2 %        59,653           10.1 %

Total loans, gross                            627,309          100.0 %       590,311          100.0 %


Deferred loan cost, net of income                 281                            244

Less allowance for loan losses                 (6,685 )                       (4,862 )


Total loans                                 $ 620,905                     $  585,693

The allowance for loan losses totaled $6.7 million at March 31, 2009, $6.1 million at December 31, 2008 and $4.9 million at March 31, 2008. The ratio of the allowance for loan losses to total loans was 1.07% at March 31, 2009, 0.97% at December 31, 2008 and 0.82% at March 31, 2008. Also at March 31, 2009, non-performing loans were $6.9 million, or 1.10% of total loans, compared to $1.2 million, or 0.21% of total loans, at March 31, 2008 and $7.3 million, or 1.16% at December 31, 2008. The increase in non-performing loans in March 2009 as compared to March 2008 is largely the result of one residential home loan builder who filed bankruptcy in the third quarter of 2008. This relationship, with a current balance of approximately $6 million, is well secured with any anticipated losses currently reserved for in the Company's allowance for loan loss account.

Non-performing assets, which include other real estate owned and other assets owned, were $7.9 million or 0.80% of total assets at March 31, 2009, compared to $1.7 million, or 0.20% of assets, at March 31, 2008 and $8.2 million, or 0.86% of assets at December 31, 2008.

The Company does not originate loans it considers sub-prime and is not aware of any exposure to the additional credit concerns associated with sub-prime lending in either the Company's loan or investment portfolios. The Company does have a significant amount of construction and land development loans. Management reports to the Company's Board of Directors on the status of the Company's specific construction and development loans as well as the market trends in those markets in which the Company actively participates.

The Company's annualized net charge off ratios for the three-month periods ended March 31, 2009 and March 31, 2008 and the year ended December 31, 2008 were 0.27%, 0.26% and 0.20%, respectively. The ratios of allowance for loan losses to non-performing loans at March 31, 2009, March 31, 2008 and December 31, 2008 were 97.2%, 400.5% and 83.0%, respectively. The following table sets forth an analysis of the Bank's allowance for loan losses for the three-month periods ended:

                                                              03/31/09          03/31/08
                                                               (Dollars in Thousands)
Beginning balance, allowance for loan loss                  $      6,133       $    4,842

Loans charged off:
Commercial loans                                                    (182 )           (164 )
Consumer loans and overdrafts                                       (182 )           (147 )
Residential loans                                                   (276 )           (152 )

Total charge offs                                                   (640 )           (463 )


Recoveries
Commercial loans                                                      15               -
Consumer loans and overdrafts                                        166               74
Residential loans                                                     37                8

Total recoveries                                                     218               82


Net charge offs                                                     (422 )           (381 )


Provision for loan loss                                              974              401


Ending balance                                              $      6,685       $    4,862


Ratio of net charge offs to average outstanding loans
during the period                                                   0.27 %           0.26 %

The determination of the allowance for loan losses is based on management's analysis, performed on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred.

A loan is considered to be impaired when management determines that it is possible that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments using the fair value of the collateral if the loan is collateral dependent. At March 31, 2009 and December 31, 2008, the Company's impaired loans totaled $19.6 million and $11.3 million, respectively. At March 31, 2009 and December 31, 2008, the Company's reserve for impaired loans totaled $1,029,000 and $731,000, respectively.

At March 31, 2009, the Company had allocated approximately $2.4 million of its allowance for loan loss account specifically for loans that are classified as watch or special mention. These loans are not considered impaired but are reserved for based on potential weaknesses or higher levels of perceived risk due to the various factors, including unpredictable cash flows, a business operating in a challenging industry, or a new and significant relationship.

At March 31, 2009, deposits increased to $738.7 million from $713.0 million at December 31, 2008. The brokered deposits increased from $67.9 million at December 31, 2008 to $68.0 million at March 31, 2009. The average cost of all deposits during the three-month periods ended March 31, 2009, March 31, 2008, and the year ended December 31, 2008 was 2.98%, 3.58%, and 3.26%, respectively. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area.

Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008

Net Income. Net income available for common shareholders for the three months ended March 31, 2009 was $1,012,000, compared to net income of $1,492,000 for the three months ended March 31, 2008. The decline in the Company's net income available for common shareholders for the three month period ended March 31, 2009 is largely the result of the Company's dividend accrual and accretion of warrant cost associated with the Company's sale of $18.4 million in preferred stock to the United States Treasury under the Treasury's Capital Purchase Plan. In the three months ended March 31, 2009, the Company paid $161,000 related to the payment of a 5% preferred dividend and $27,000 related to the accretion on the value of the stock warrants issued.

Lower net income production was further influenced by higher operating expenses and higher provision for loan loss expense, which were partially offset by a higher level of net interest income and gains on the sale of securities. The Company increased its provision for loan loss expense as a result of management concerns about the continued weakness in the national economy and its potential effect on our local economy.

Net Interest Income. Net interest income for the three month period ended March 31, 2009 was $6.4 million, compared to $5.6 million for the three month period ended March 31, 2008. The increase in net interest income for the three months ended March 31, 2009 as compared to March 31, 2008 was largely due to a $123.9 million increase in the average balance of available for sale investments. The growth of the investment portfolio is the result of a strategy to increase interest earning assets through a mixture of Federal Home Loan Bank borrowings and increased deposit activity. This strategy was implemented to partially leverage the Company's preferred stock issuance while providing additional income to offset the cost of the preferred stock and warrant issuance. As a result of this strategy, interest income on taxable investments increased by $1.6 million in the three month period ended March 31, 2009 as compared to the same period in 2008, an increase of 96%. For the three month period ended March 31, 2009, income on tax exempt securities increased to $272,000 from $164,000 for the three month period ended March 31, 2008. At the same time, the average yield on taxable securities and tax exempt securities have increased by 0.52% and 0.98%, respectively for the three month period ended March 31, 2009 as compared to the three month period ended March 31, 2008.

For the three month period ended March 31, 2009, the Company's interest income from loans receivable declined by approximately $1 million as compared to the three month period ended March 31, 2008. This decline is the result of lower market interest rates, offsetting $37.9 million of average loan growth over the same period. The Company maintains approximately $327.7 million in loans tied to prime rate, currently at 3.25%. While new prime rate based loans originated by the Company include a 5% interest rate floor, the majority of the Company's prime rate portfolio does not include interest rate floors. The Company's loan portfolio includes approximately $138.8 in variable rate loans and securities indexed to the One Year United States Treasury (currently 0.46%) plus 3.00%. Single family loans indexed to the One Year Treasury do not have floors but have a 1% annual adjustment cap.

For the three-months ended March 31, 2009 and March 31, 2008, the tax equivalent yield on total interest earning assets declined to 5.88% from 6.79%. The decline in net yields is the result of the reduction in yields on variable rate loans discussed above. This reduction in loan yields was partially offset by an increase in investment yields due to timely purchases in the fourth quarter of 2008 as credit markets seized, resulting in unique opportunities for those institutions with the liquidity and inclination to make investment purchases in a difficult market.

For the three-month periods ended March 31, 2009 and March 31, 2008, the Company's cost of interest bearing liabilities was 3.24% and 4.00%, respectively. The lower cost of interest bearing liabilities was the result of a lower short term interest rates as well as an increase in FHLB advances that were made at favorable rates.

In the three month period ended December 31, 2008, the Company's deposit balances increased by approximately $66.3 million as management priced time deposits aggressively in response to the industry wide liquidity crisis. The deposits are scheduled to re-price beginning in August of 2009 and the Company anticipates that these deposits can be retained at a lower cost, providing cost savings to the Company.

Average Balances, Yields and Interest Expenses. The table below summarizes the overall effect of changes to both interest rates and changes in the average balances of interest earning assets and liabilities for the three month periods ended March 31, 2009 and March 31, 2008. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three-month periods. Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $122,000 for March 31, 2009, and $70,000 for March 31, 2008, for a tax equivalent rate using a cost of funds rate of 3.24% for March 31, 2009 and 4.00% for March 31, 2008. The table adjusts tax-free loan income by $42,000 for March 31, 2009 and $80,000 for March 31, 2008 for a tax equivalent rate using the same cost of funds rate:

                                     Average     Income and      Average       Average     Income and      Average
                                     Balance      Expense         Rates        Balance      Expense         Rates
                                    3/31/2009    3/31/2009      3/31/2009     3/31/2008    3/31/2008      3/31/2008
                                                   (Table Amounts in Thousands, Except Percentages)
Loans                               $  618,670        9,670          6.25 %   $  580,757       10,759          7.41 %
Investments AFS taxable                249,910        3,281          5.25 %      133,537        1,580          4.73 %
Investment AFS tax free                 25,338          394          6.22 %       17,857          234          5.24 %
Investment Held to maturity                444            5          4.50 %        9,061           97          4.28 %
Federal funds                           13,895            8          0.23 %        8,128           58          2.85 %


Total interest earning assets          908,257       13,358          5.88 %      749,340       12,728          6.79 %


Other assets                            76,978                                    65,698


Total assets                        $  985,235                                $  815,038


Interest bearing deposits              674,785        5,466          3.24 %      557,747        5,463          3.92 %
FHLB borrowings                        124,081        1,037          3.34 %       96,585        1,068          4.42 %
Repurchase agreements                   31,487          194          2.46 %       36,756          329          3.58 %
Subordinated debentures                 10,310          102          3.96 %       10,310          161          6.25 %


Total interest bearing
liabilities                            840,663        6,799          3.24 %      701,398        7,021          4.00 %


Non-interest bearing deposits           58,403                                    51,853
Other liabilities                        6,163                                     4,900

Stockholders' equity                    80,006                                    56,887


Total liabilities and
stockholders' equity                $  985,235                                $  815,038


Net change in interest earning
assets and interest bearing
liabilities                                           6,559          2.64 %                     5,707          2.79 %


Net yield on interest earning
assets                                                 2.89 %                                    3.05 %

Interest Income. For the three months ended March 31, 2009, the Company's total interest income was $13.2 million as compared to $12.6 million for the three months ended March 31, 2008. This increase primarily resulted from growth in the investment portfolio and helped to offset a sharp decline in the yields on loans due to lower market rates. The average balance of loans receivable increased $37.9 million to $618.7 million at March 31, 2009 from $580.8 million at March 31, 2008. For the three month period ended March 31, 2009, the average tax equivalent yield on loans was 6.25% as compared to 7.41% for the three month period ended March 31, 2008. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 106.84% for the three months ended March 31, 2008 to 108.04% for the three months ended March 31, 2009.

Interest Expense. Interest expense declined approximately $220,000 for the three months ended March 31, 2009 as compared to the same period in 2008. The decline was attributable to lower market interest rates, offsetting a $139.3 million increase in the average balance of total interest bearing liabilities as compared to March 31, 2008. The average cost of average interest-bearing deposits declined from 3.92% at March 31, 2008 to 3.24% at March 31, 2009. Over the same period, the average balance of interest bearing deposits increased $117.1 million, from $557.7 million at March 31, 2008 to $674.8 million at March 31, 2008 and the average balance of funds borrowed from the Federal Home Loan Bank of Cincinnati (FHLB) increased $27.5 million, from $96.6 million at March 31, 2008 to $124.1 million at March 31, 2009. The average cost of average borrowed funds from the FHLB decreased from 4.42% at March 31, 2008 to 3.34% at March 31, 2009. The average cost of all deposits declined from 3.58% at March 31, 2008 to 2.98% at March 31, 2009. The average balance of repurchase agreements declined from $36.8 million at March 31, 2008 to $31.5 million at March 31, 2009. The average cost of repurchase agreements declined from 3.58% at March 31, 2008 to 2.46% at March 31, 2009. The reduction in the cost of repurchase agreements is limited due to two long term agreements with third parties that are fixed. There agreements, totaling $16 million, have a weighted average cost of 4.31%.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including, general economic conditions, loan portfolio composition, prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $974,000 provision for loan loss was required for the three months ended March 31, 2009 compared to a $401,000 provision for loan loss expense for the three months ended March 31, 2008. The increase in provision for loan loss expense is in response to management's concerns about the economy as both the local and national unemployment rates continue to increase.

Non-Interest Income. There was a $45,000 decline in non-interest income in the three months ended March 31, 2009 as compared to the same period in 2008. For the three-month period ended March 31, 2009, service charge income was $924,000, a decrease of $143,000 over the same period in 2008. For the three months ended March 31, 2009, income from financial services was $226,000, compared to $240,000 for the same period in 2008. For the three month period ended March 31, 2009, the Company realized gains on the sale of investments totaling $658,000 as compared to $534,000 for the three months ended March 31, 2008. In 2009, the Company took advantage of narrowing agency spreads to selectively sell longer term agency securities.

Non-Interest Expenses. There was a $548,000 increase in total non-interest expenses in the three months ended March 31, 2009 compared the same period in 2008. For the three months ended March 31, 2009, compensation expense increased to $3.0 million compared to $2.9 million for the three months ended March 31, 2008 largely due to annual pay raises given on January 1, 2009. The only other operating expense that increased by more than $100,000 was other operation expenses, which included fees charged by the FDIC for deposit insurance. The Company's expense for FDIC fees increased from $17,000 for the three months ended March 31, 2008 as compared to $115,000 for the three months ended March 31, 2009.

The Company anticipates that the FDIC will continue to increase its quarterly assessments for deposit insurance. In addition, the Company anticipates that the FDIC will require all depository institutions to pay a special assessment equal to 0.10% to 0.20% of deposits at June 30, 2009 to provide additional reserves to the Bank Insurance Fund. The special assessment will be due September 30, 2009. We anticipate that the special assessment will cost the Company between $700,000 and $1.4 million. The Company's cost associated with the FDIC's special assessment, if approved by the FDIC, would increase the Company's non-interest expense during the second and third quarter of 2009.

Income Taxes. The effective tax rate for the three months ended March 31, 2009 was 30.4%, compared to 30.5% for the same period in 2008.

Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company.

The Bank's principal sources of funds for operations are deposits from its primary market areas, principal and interest payments on loans, proceeds from maturing investment securities and the net conversion proceeds received by it. The Company estimates that its CMO and mortgage backed security portfolio will provide more than $30 million in cash flow over the remaining nine months of 2009. Additional cash flows from agency securities are highly dependent on market interest rates. However, management anticipates that approximately $15 million in agency securities will be called due to their one time call feature and relatively high coupon rate. This cash flow will be used to fund loan growth, reduce FHLB borrowings, and to replace more expensive deposits. The principal uses of funds by the Bank include the origination of mortgage and consumer loans and the purchase of investment securities.

The Bank must satisfy three capital standards: a ratio of core capital to adjusted total assets of 4.0%, a tangible capital standard expressed as 1.5% of total adjusted assets, and a combination of core and "supplementary" capital equal to 8.0% of risk-weighted assets. At March 31, 2009, the Bank exceeded all regulatory capital requirements.

The table below presents certain information relating to the Company's and Bank's capital compliance at March 31, 2009:

. . .