Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Malvern Federal Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: "believe", "expect", "anticipate", "intend", "plan", "estimate", or words of similar meaning, or future or conditional terms such as "will", "would", "should", "could", "may", "likely", "probably", or "possibly." Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumption, many of which are difficult to predict and generally are beyond the control of Malvern Federal Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Malvern Federal Bancorp, Inc. is or will be doing business, being less favorable than expected; (6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Malvern Federal Bancorp, Inc. is engaged. Malvern Federal Bancorp, Inc. undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

As used in this report, unless the context otherwise requires, the terms "we," "our," "us," or the "Company" refer to Malvern Federal Bancorp, Inc., a Federal corporation, and the term the "Bank" refers to Malvern Federal Savings Bank, a federally chartered savings bank and wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

General

On May 19, 2008, Malvern Federal Savings Bank ("Malvern Federal Savings" or the "Bank") completed its reorganization to the mutual holding company form of organization and formed Malvern Federal Bancorp, Inc. (the "Company") to serve as the stock holding company for the Bank. In connection with the reorganization, the Company sold 2,645,575 shares of its common stock to certain members of the Bank and the public at a purchase price of $10.00 per share. In addition, the Company issued 3,383,875 shares, or 55% of the outstanding shares, of its common stock to Malvern Federal Mutual Holding Company, a federally chartered mutual holding company (the "Mutual Holding Company"), and contributed 123,050 shares (with a value of $1.2 million), or 2.0% of the outstanding shares, to the Malvern Federal Charitable Foundation, a newly created Delaware charitable foundation.

The Company is a federally chartered corporation which owns all of the issued and outstanding shares of the Bank's common stock, the only shares of equity securities which the Bank has issued. While the Company is authorized to pursue all activities permitted by applicable laws and regulations for savings and loan holding companies, the Company's only business activity to date has been holding all of the outstanding common stock of Malvern Federal Savings. Malvern Federal Bancorp does not own or lease any property, but instead uses the premises, equipment and furniture of the Bank. At the present time, the Company employs only persons who are officers of Malvern Federal Savings to serve as officers of the Company. The Company also may use the Bank's support staff from time to time. These persons are not separately compensated by Malvern Federal Bancorp. Malvern Federal Savings is a federally chartered community-oriented savings bank which was originally organized in 1887 and is headquartered in Paoli, Pennsylvania. The Bank currently conducts its business from its headquarters and seven additional financial centers.

The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and investment securities. The Bank's principal sources of funds are deposits, repayments of loans and investment securities, maturities of investments and interest-bearing deposits, other funds provided from operations and wholesale funds borrowed from outside sources such as the FHLB. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, commercial real estate mortgage loans, construction and development loans, home equity loans and lines of credit and other consumer loans. The Bank derives its income principally from interest earned on loans, investment securities and, to a lesser extent, from fees received in connection with the origination of loans and for other services. Malvern Federal Savings' primary expenses are interest expense on deposits and borrowings and general operating expenses. Funds for activities are provided primarily by deposits, amortization of loans, loan prepayments and the maturity of loans, securities and other investments and other funds from operations.

In reviewing and understanding financial information for the Malvern Federal Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 2 of the notes to our unaudited consolidated financial statements included elsewhere herein. The accounting and financial reporting policies of Malvern Federal Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our loan portfolio and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management's initial estimates. In addition, the Office of Thrift Supervision, as an integral part of its examination processes, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Income Taxes. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Other-Than-Temporary Impairment of Securities - Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Comparison of Financial Condition at March 31, 2009 and September 30, 2008

The Company's total assets amounted to $681.5 million at March 31, 2009 compared to $639.5 million at September 30, 2008. The primary reason for the increase in assets during the first six months of fiscal 2009 was an increase in net loans receivable of $23.4 million, or 4.1%. Cash and cash equivalents increased by $8.6 million at March 31, 2009 compared to September 30, 2008 due to an increase of $48.1 million in deposits partially offset by funds used in lending and reductions in borrowings. Total deposits increased $48.1 million, or 10.6%, at March 31, 2009 compared to September 30, 2008.

At March 31, 2009, we had $4.8 million of real estate owned compared to $230,000 at September 30, 2008. During the first quarter fiscal 2009, we foreclosed upon a mixed-use building located in Philadelphia which had secured a $3.5 million commercial real estate loan which had been classified as impaired beginning in fiscal 2007. In addition, during the March 31, 2009 quarter, there was an aggregate of $1.3 million of real estate owned added which consisted of one single-family residence in Bucks County, Pennsylvania and one commercial real estate property located in Chester County, Pennsylvania.

Our total liabilities at March 31, 2009, amounted to $611.9 million compared to $570.7 million at September 30, 2008. The primary reason for the $41.2 million, or 7.2% increase in total liabilities was a $48.1 million increase in our deposits, which was partially offset by an $8.5 million decrease in the outstanding balance on our FHLB line of credit. Subsequent to the reorganization, we moderately increased our use of leverage in the form of FHLB advances as an additional source of funds.

Shareholders' equity increased by $755,000 to $69.6 million at March 31, 2009 compared to $68.8 million at September 30, 2008 primarily due to net income of $887,000 during the first six months of fiscal 2009. Retained earnings increased by $666,000 to $46.3 million as a result of net income for the first six months of the 2009 fiscal year less declared cash dividends of $221,000 in the aggregate.

The table below sets forth the amounts and categories of non-performing assets in our loan portfolio. Loans are generally placed on non-accrual status when they are 90 days or more past due as to principal or interest or when the collection of principal and/or interest becomes doubtful. Our non-performing assets include troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates). Foreclosed assets include real estate owned and other assets acquired in settlement of loans.

                                                        March 31,       September 30,
                                                          2009              2008
                                                           (Dollars in Thousands)

  Non-accruing loans:
  One-to four-family                                   $     3,372     $         1,402
   Multi-family                                                  -                   -
   Commercial real estate                                    4,900               4,050
   Construction or development                                 115               1,695
   Land loans                                                    -                   -
   Commercial                                                   35                 561
   Home equity lines of credit                                 269                 205
   Second mortgages                                          1,129                 672
   Other                                                         2                   -
  Total non-accruing                                         9,822               8,585
  Troubled debt restructurings                                  92                 103
   Total non-performing loans                                9,914               8,688
  Real estate owned and other foreclosed assets:
   One-to four-family                                        1,636                 230
   Commercial real estate                                    3,123                   -
   Commercial                                                   20                   -
   Total                                                     4,829                 230
  Total non-performing assets                          $    14,743     $         8,918
  Ratios:
  Non-performing loans as a percent of gross loans            1.66 %              1.52 %
  Non-performing assets as a percent of total assets          2.16 %              1.39 %

The Company's total non-performing assets amounted to $14.7 million at March 31, 2009, a $5.8 million increase compared to total non-performing assets at September 30, 2008. At March 31, 2009, the Company had $3.4 million of non-accruing single-family mortgage loans, comprised of eight loans, compared to four non-accruing single-family mortgage loans, with an aggregate carrying value of $1.4 million at September 30, 2008. At March 31, 2009, the Company had $4.9 million of non-accruing commercial real estate loans compared to $4.1 million of non-accruing commercial real estate loans at September 30, 2008. The Company's non-accruing commercial real estate loans at March 31, 2009 were comprised of an aggregate of six loans secured by properties located in Chester County, Pennsylvania and surrounding areas. All of the Company's non-accruing commercial real estate loans at September 30, 2008 were transferred to real estate owned during the first six months of fiscal 2009. The Company's real estate owned amounted to $4.9 million at March 31, 2009 compared to $230,000 at September 30, 2008. The Company's largest parcel of real estate owned at March 31, 2009 consisted of a $2.3 million (written down from the previous value of $3.5 million at September 30, 2008) mixed-use (medical offices and residential) building located in Philadelphia, Pennsylvania. The Company has entered into a contract to sell this property and expects the sale to be consummated during the quarter ending June 30, 2009. The Company's second largest real estate owned relationship at March 31, 2009 is a group of eight single-family rental properties located in Norristown, Pennsylvania with an aggregate carrying value of $985,000. Previously, the Company had recorded a $230,000 real estate owned balance at September 30, 2008 with respect to this relationship. During the first quarter of fiscal 2009, the Company paid off an existing $785,000 first lien on the properties held by another lender in order to gain control of the properties (originally, the Company had only a second mortgage on these properties). The Company currently is marketing the properties for sale. The Company's real estate owned at March 31, 2009 also includes a restaurant and related property located in Malvern, Pennsylvania with a carrying value of $806,000 (reduced from $1.1 million at September 30, 2008). The Company obtained these properties, which previously secured a commercial real estate loan and two commercial loans that were on non-accrual status at September 30, 2008, in foreclosure during the quarter ended March 31, 2009. The remainder of the Company's real estate owned at March 31, 2009 consists of two single-family homes with an aggregate carrying value of $701,000 located in the Company's market area.

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

General. Our net income was $371,000 for the three months ended March 31, 2009 and 2008. While net income for the quarters ended March 31, 2009 and 2008 was substantially unchanged, in the 2009 period compared to the 2008 period net interest income increased by $460,000 and other income increased by $129,000, which was offset by a $127,000 increase in provision for loan losses and a $498,000 increase in other expenses. Since January 1, 2007, our deposit insurance assessment has been substantially reduced by a $303,000 special one time credit. There was no remaining credit as of March 31, 2009. Effective January 1, 2009, annual assessment rates were increased uniformly by five basis points across the range of risk weightings of depository institutions. We expect our deposit insurance premiums to be significantly higher in the third quarter of fiscal year 2009 due to a special assessment by the FDIC on all insured institutions. The assessment is expected to be 10 to 20 basis points of our balance of deposits at June 30, 2009 which, based on March 31, 2009 deposits, would be $502,000 to $1.0 million. Our interest rate spread of 2.09% and net interest margin of 2.39% for the three months ended March 31, 2009 decreased when compared to a net interest spread of 2.12% and a net interest margin of 2.51% for the three months ended March 31, 2008.

Our net income was $887,000 for the six months ended March 31, 2009 compared to net income of $937,000 for the six months ended March 31, 2008. The primary reasons for the decline in net income during the first six months of fiscal 2009 compared to the first six months of fiscal 2008 was due to a $444,000 increase in the provision for loan losses and a $1.1 million increase in other expenses which was partially offset by a $1.3 million increase in net interest income, a $138,000 increase in other income and a $87,000 decrease in income tax expense.

Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following tables show for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

                                                       Three Months Ended March 31,
                                           2009                                            2008
                         Average                         Average         Average                         Average
                         Balance        Interest       Yield/Rate        Balance        Interest       Yield/Rate
                                                          (Dollars in Thousands)
Interest Earning
Assets:
Loans receivable (1)    $ 596,559      $    8,243             5.53 %    $ 502,113      $    7,890             6.29 %
 Investment
securities                 25,482             227             3.56         19,664             218             4.43
 FHLB stock                 6,567               -             0.00          4,681              53             4.53
 Deposits in other
banks                       8,540              20             0.92          6,102              43             2.82
 Total
interest-earning
assets                    637,148           8,490             5.32 %      532,560           8,204             6.16 %
Non-interest-earning
assets                     34,701                                          18,980
 Total assets           $ 671,849                                       $ 551,540

Interest Bearing
Liabilities:
 Demand and NOW
accounts                $  63,295             229             1.45      $  33,940              56             0.66
 Money market
accounts                   58,278             259             1.77         70,207             618             3.52
 Savings accounts          38,438              29             0.30         38,951              81             0.83
 Time deposits            311,649           2,881             3.70        264,385           3,067             4.64
 Total deposits           471,660           3,398             2.88        407,483           3,822             3.75
FHLB borrowings           107,510           1,288             4.79         74,221           1,038             5.59
 Total
interest-bearing
liabilities               579,170           4,686             3.24        481,704           4,860             4.04
Non-interest-bearing
liabilities                24,684                                          25,697
 Total liabilities        603,854                                         507,401
Shareholders' Equity       67,994                                          44,139
 Total liabilities
and shareholders'
equity                  $ 671,849                                       $ 551,540
Net interest-earning
assets                  $  57,978                                       $  50,856
Net interest income;
average interest
rate spread                            $    3,804             2.09 %                   $    3,344             2.12 %
Net interest margin
(2)                                                           2.39 %                                          2.51 %
Average
interest-earning
assets to average
interest-bearing
liabilities                110.01 %                                        110.56 %

                                                       Six Months Ended March 31,
                                          2009                                            2008
                         Average                        Average         Average                         Average
                         Balance       Interest       Yield/Rate        Balance        Interest       Yield/Rate
                                                         (Dollars in Thousands)
Interest Earning
Assets:
 Loans receivable
(1)                     $ 594,035      $  16,922             5.70 %    $  492,163      $  15,670             6.37 %
 Investment
securities                 25,916            458             3.53          23,648            526             4.44
 FHLB stock                 6,459              -             0.00           4,562            118             5.17
 Deposits in other
banks                       7,193             25             0.70           6,573            114             3.47
 Total
interest-earning
assets                    633,603         17,405             5.49 %       526,946         16,428             6.24 %
Non-interest-earning
assets                     28,649                                         18,566
 Total assets           $ 662,252                                       $ 45,512

Interest Bearing
Liabilities:
 Demand and NOW
accounts                $  59,633            439             1.47      $   34,417            123             0.71
 Money market
accounts                   58,835            602             2.05          68,378          1,258             3.68
. . .