This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the consolidated financial condition, results of operations and business of the Company and its subsidiaries, including the Bank, that are subject to various factors which could cause actual results to differ materially from these estimates, including those set forth in

Executive Overview

The purpose of this summary is to provide an overview of the items management focuses on when evaluating the condition of the Company and our success in implementing our business and shareholder value strategies. The Company's business strategy is to operate the Bank as a well-capitalized, profitable and independent community oriented savings bank. Our shareholder value strategy has three major themes: (1) enhancing our shareholders' value; (2) making our retail banking franchise more valuable; and (3) efficiently utilizing our capital.

Management believes the following were important factors in the Company's performance during the quarter ended March 31, 2009:

• The credit crisis affecting the financial markets and residential housing that began in 2007 turned out to be just the flashpoint for what appears to be the worst economic downturn since the Great Depression.

• The Company has taken significant steps to reduce the risk of additional loan losses. During the quarter ended March 31, 2009 the Company increased its provision for loan losses to $160,000 compared to the $60,000 during the quarter ended March 31, 2008. The Company continues to monitor its loan portfolio with the objective of avoiding defaults or write-downs. Despite these actions, the possibility of additional losses can not be eliminated, but the Board of Directors and all employees continue to work hard to make the best of these currently challenging conditions.

• The Company continues its focus on earnings through management of net interest margin, successfully increasing the margin to 3.04% as of March 31, 2009 from 2.68% as of March 31, 2008.

• On January 9, 2009, the Company completed the sale of $10.2 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock") and a warrant to purchase 99,157 shares of our common stock at an exercise price of $15.43 per share (the "Warrant") to the United States Department of the Treasury (the "Treasury") through the Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP"). The Series A Preferred Stock bears an annualized dividend rate of 5 percent for the first five years it is outstanding, after which the dividend will increase to 9 percent. Although the Bank would have remained "well capitalized" without these funds, this new equity investment further increases the capacity to support economic activity and growth in each of the communities served by the Bank through responsible lending.

• Effective February 17, 2009, the American Recovery and Reinvestment Act of 2009 ("ARRA") eliminates the restrictions on the source of repayment and the waiting period formerly applicable to TARP-CPP participants. The ARRA provides the Company with the option to repay the funds received under the TARP-CPP without regard to whether the Company has replaced the funds from other sources or any waiting period, subject to consultation with the Federal Reserve and the FDIC.

• As a result of participating in the TARP-CPP, the Company is subject to limitations and restrictions on executive compensation and corporate governance included in the ARRA as long as any obligation arising from financial assistance provided under the statute remains outstanding. In addition, the terms of the TARP-CPP require the Series A Preferred Stock to be senior to any future new debt incurred by the Company. The Congress and Treasury may create additional provisions that could become retroactively applicable to the Series A Preferred Stock.

• The Bank may be required to pay significantly higher FDIC premiums in the future because market developments have significantly depleted the Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. On February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point emergency special assessment on insured institutions. The assessment will be based on deposits as of June 30, 2009 and collected on September 30, 2009. After June 30, 2009, the FDIC may impose an additional assessment of up to 10 basis points if the condition of the banking industry continues to decline.

• The volume of originations of residential mortgages in the first quarter of 2009 doubled compared to the first quarter of 2008. The growth of this line of business is expected to continue as historically low interest rates cause consumers to refinance existing mortgages in order to reduce their monthly costs. Despite the decline in volume of home sales, consumers are selectively purchasing real estate while locking in relatively low long-term mortgage interest rates.

CRITICAL ACCOUNTING POLICIES

This "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the disclosures included elsewhere in this report, are based on the Company's consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on approximate measures of the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

The Company's accounting policies are described in the "Notes to Consolidated Financial Statements" of the Company's 2008 Annual Report on Form 10-K. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the allowance for loan losses and asset impairment judgments.

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 collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of those economic conditions. To the extent that actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less than future charge-offs.

Asset impairment judgments include evaluating the decline in fair value of available-for-sale securities below their cost. Declines in fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

FINANCIAL CONDITION

Total assets increased $5.3 million, or 1.1%, to $478.6 million at March 31, 2009, from $473.3 million at December 31, 2008. The increase in assets was primarily due to an increase in cash and cash equivalents and securities available-for-sale. Cash and cash equivalents increased $9.9 million, or 60.6%, to $26.2 million at March 31, 2009, compared to $16.3 million at December 31, 2008. The increase in cash and cash equivalents was primarily due to the sale of the Series A Preferred Stock and Warrant to the Treasury through the TARP-CPP. The increase in securities available-for-sale was primarily due to the purchase of $3.8 million of mortgage backed securities during the quarter ended March 31, 2009.

Net loans receivable decreased by $6.5 million, or 1.6%, to $394.3 million at March 31, 2009, from $400.8 million at December 31, 2008, primarily due to payments and prepayments of $23.0 million and loan sales of $24.7 million during the three months ended March 31, 2009. These payments, prepayments, and loan sales were offset in part by the origination of $33.0 million of first mortgage loans primarily secured by one-to four-family residences and commercial real estate and the origination of $4.5 million of second mortgage loans during the three months ended March 31, 2009. The Company sells most fixed-rate residential loans originated with maturities of 15 years or more in the secondary mortgage market in order to reduce interest rate risk.

Deposits increased $300,000, or 0.09%, to $350.5 million at March 31, 2009, from $350.2 million at December 31, 2008, primarily reflecting increases in NOW, money market and savings account balances, offset in part by a decrease in certificates of deposit. When excluding brokered deposits, deposits increased $11.1 million, or 3.17% at March 31, 2009 compared to December 31, 2008. Borrowings, primarily FHLB advances, decreased $4.5 million, or 5.5%, to $77.8 million at March 31, 2009, from $82.3 million at December 31, 2008. This decrease is due to the normal repayment of borrowings due to calls or maturities.

Total stockholders' equity increased $11.1 million, or 31.5%, to $46.3 million at March 31, 2009, from $35.2 million at December 31, 2008, primarily due to the sale of the Series A Preferred Stock and the Warrant to the Treasury through the Capital Purchase Program in January and earnings in the first quarter of 2009.

The Office of Thrift Supervision (the "OTS") requires the Bank to meet minimum tangible, leverage (core) and risk-based capital requirements. As of March 31, 2009, the Bank exceeded all of its regulatory capital requirements. The Bank's required, actual and excess capital levels as of March 31, 2009 were as follows:

                       Amount       Percentage of Assets
                            (Dollars in thousands)
Tangible capital:
Capital level         $ 41,941                       8.78 %
Less Requirement         7,169                       1.50 %
Excess                $ 34,772                       7.28 %

Core capital:
Capital level         $ 41,941                       8.78 %
Less Requirement        19,116                       4.00 %
Excess                $ 22,825                       4.78 %

Risk-based capital:
Capital level         $ 45,391                      13.42 %
Less Requirement        27,056                       8.00 %
Excess                $ 18,335                       5.42 %

RESULTS OF OPERATIONS

Three months ended March 31, 2009 compared to the three months ended March 31, 2008

Net Income. Net income decreased by $22,000 to $782,000 for the quarter ended March 31, 2009, compared to $804,000 million for the quarter ended March 31, 2008. Net income is an aggregate of net interest income, noninterest income, noninterest expense and income tax expense. The decrease in earnings was primarily due to an increase in other expenses and provision for loan losses, offset in part by an increase in net interest income.

Net Interest Income. Net interest income before provision for loan losses increased by $203,000 to $3.40 million for the quarter ended March 31, 2009, from $3.19 million for the quarter ended March 31, 2008. The increase is due to an increase in net interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) and a decrease in the average balance of interest-bearing liabilities, offset in part by a decrease in the average balance of interest-earning assets. The interest rate spread increased to 2.81% for the quarter ended March 31, 2009, from 2.46% for the quarter ended March 31, 2008. The increase in interest rate spread reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.

Interest Income. Interest income decreased by $1.0 million to $6.47 million for the quarter ended March 31, 2009, compared to $7.49 million for the quarter ended March 31, 2008. The decrease in interest income was due to a decrease in the average balance of interest-earning assets and a decrease in the yield on interest-earning assets. The average balance of interest-earning assets decreased $29.4 million to $445.6 million for the quarter ended March 31, 2009, from $475.0 million for the quarter ended March 31, 2008. The average yield on interest-earning assets decreased to 5.83% for the quarter ended March 31, 2009, from 6.31% for the quarter ended March 31, 2008, primarily due to a decrease in market rates on first mortgage loans secured by one-to four-family real estate, commercial real estate, and multifamily residences and consumer loans. The decrease in the average balance of interest-earning assets primarily reflects decreases in the average balances of first mortgage loans, offset in part by an increase in the average balance of consumer loans, securities available-for-sale, and interest-bearing cash. The decrease in the average balance of first mortgage loans was derived from payments, prepayments, and sales of loans, offset in part by the origination and purchases of first mortgage loans secured by one-to four-family real estate and commercial real estate during the three months ended March 31, 2009. The increase in the average balance of securities available-for-sale was primarily due to the purchases of mortgage-backed securities, offset in part by payments, maturities, and sale of securities.

Interest Expense. Interest expense decreased by $1.2 million to $3.1 million for the quarter ended March 31, 2009, compared to $4.29 million for the quarter ended March 31, 2008. The average balance of interest-bearing liabilities decreased $36.4 million to $411.5 million for the quarter ended March 31, 2009, from $447.9 million for the quarter ended March 31, 2008. The decrease in the average balance of interest-bearing liabilities primarily reflects a decrease in borrowed funds and certificates of deposit, offset in part by an increase in NOW, money market, and savings account balances. The decrease in the average balance of borrowed funds was primarily due to normal repayments of borrowings due to maturities. The average cost of funds was 3.02% for the quarter ended March 31, 2009, compared to 3.85% for the quarter ended March 31, 2008.

The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the three months ended March 31, 2009 and 2008, respectively.

                                                    For the Three Months Ended March 31,
                                             2009                                          2008
                            Average                       Average         Average                       Average
                            Balance       Interest       Yield/Cost       Balance       Interest       Yield/Cost
                                                           (Dollars in thousands)
Assets:
Interest-earning assets:
 Loans                     $ 403,973     $    6,185             6.15 %   $ 443,627     $    7,171             6.47 %
 Securities
available-for-sale            27,627            274             3.97        18,090            228             5.03
 Interest-bearing cash        13,965              7             0.19        13,328             89             2.69
  Total interest-earning
assets                       445,565     $    6,466             5.83 %     475,045     $    7,488             6.31 %
Noninterest-earning
assets                        33,124                                        35,930
  Total assets             $ 478,689                                     $ 510,975

Liabilities and Equity:
Interest-bearing
liabilities:
 NOW and money market
savings                    $  93,556     $      137             0.59 %   $  91,499     $      274             1.20 %
 Savings                      27,046             16             0.24        24,905             22             0.35
 Certificates of deposit     209,813          1,917             3.70       236,129          2,795             4.75
 Borrowed funds               81,052            998             5.00        95,332          1,202             5.06
Total interest-bearing
liabilities                  411,467     $    3,068             3.02 %     447,865     $    4,293             3.85 %
Noninterest-bearing
liabilities                   22,216                                        21,826
  Total liabilities          433,683                                       469,691
Equity                        45,006                                        41,284
  Total liabilities and
equity                     $ 478,689                                     $ 510,975

Net interest income                      $    3,398                                    $    3,195
Net interest rate spread                                        2.81 %                                        2.46 %
Net interest margin                                             3.04 %                                        2.68 %
Ratio of average
interest-earning
assets  to average
interest-bearing
liabilities                                                   108.29 %                                      106.07 %

Provision for Loan Losses. The Company's provision for loan losses was $160,000 and $60,000 for the quarters ended March 31, 2009 and 2008, respectively. The increase in provision for loan losses for the quarter ended March 31, 2009 compared to the same period in 2008 was related to the increase in nonperforming loans outstanding. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, and other factors related to the collectibility of the Company's loan portfolio. The Company's total loan portfolio decreased $44.6 million, or 10.0% from March 31, 2008 to March 31, 2009. This decrease primarily consisted of decreases in one-to four-family residential loans. Net charge-offs were $114,000 for the three months ended March 31, 2009, compared to $35,000 for the three months ended March 31, 2008. The resulting allowance for loan loss was $5.4 million at March 31, 2009, compared to $3.5 million at March 31, 2008.

The allowance for loan losses as a percentage of total loans receivable increased to 1.36% at March 31, 2009 from 0.79% at March 31, 2008. The level of nonperforming loans increased to $9.59 million at March 31, 2009 from $1.69 million at March 31, 2008. This change, along with the increase in the allowance for loan loss as a percentage of total loans receivable is primarily a reflection of the deterioration in the economy since the first quarter of 2008. The nonperforming asset ratio increased to 2.23% of total assets as of March 31, 2009 from 0.91% of total assets at March 31, 2008. Foreclosed real estate decreased to $1.05 million at March 31, 2009 from $2.96 million at March 31, 2008. The level of special mention loans increased to $4.32 million at March 31, 2009 from $2.27 million at March 31, 2008. Total nonperforming assets increased 15.7% in the first quarter of 2009 with such increase consisting of one-to-four family residential loans and one-to-four construction loans, as these sectors of the economy continued to experience difficulties.

Management believes that the allowance for loan losses was adequate as of March 31, 2009. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management's control.

Noninterest Income. Total noninterest income increased by $141,000, or 8.3%, to $1.84 million for the quarter ended March 31, 2009, from $1.70 million for the quarter ended March 31, 2008. The increase in noninterest income was primarily due to increases in mortgage banking income and other income, offset in part by decreases in fees and service charges, abstract fees and loss on sale of investments. Mortgage banking income increased $154,000 for the quarter ended March 31, 2009 compared to the same period of 2008 due to an increase in loans originated for the secondary market. Other income, which primarily includes annuity, securities, insurance sales, and other real estate owned net earnings, increased $108,000 for the quarter ended March 31, 2009 compared to the same period of 2008 primarily due to an increase in income from the sale of annuities and a decrease in other real estate owned expenses. Fees and service charges decreased $71,000 for the quarter ended March 31, 2009 compared to the same period of 2008 primarily due to a decrease in fees associated with checking accounts, including overdraft fees. During the quarter ended March 31, 2009, the Company recorded $13,000 in loan prepayment fees, compared to $5,000 for the quarter ended March 31, 2008. Abstract fees decreased $48,000 for the quarter ended March 31, 2009 compared to the same period of 2008. Loss on sale of investments increased by $10,000 for the quarter ended March 31, 2009 compared to the same period of 2008 due to the partial sale of a mortgage bond mutual fund investment.

Noninterest Expense. Total noninterest expense increased by $203,000, or 5.4%, to $3.95 million for the quarter ended March 31, 2009, from $3.74 million for the quarter ended March 31, 2008. The increase in noninterest expense was primarily due to increases in premises and equipment and other expenses, offset in part by decreases in salaries and employee benefits and data processing. The increase in premises and equipment of $45,000 was primarily due to increases in information technology enhancements and property taxes. Other expenses increased $299,000 for the quarter ended March 31, 2009 compared to the same period of 2008 primarily due to an increase in legal fees, other professional fees, and FDIC insurance expense. The Company's efficiency ratio for the quarter ended March 31, 2009 and 2008 was 75.13% and 76.42%, respectively. The Company's ratio of noninterest expense to average assets for the quarters ended March 31, 2009 and 2008 was 3.30% and 2.93%, respectively.

Income Taxes. Provision for income taxes increased by $63,000 to $354,000 for the quarter ended March 31, 2009, compared to $292,000 for the quarter ended March 31, 2008. The increase in income taxes was primarily due to the increase in the income before income taxes and an increase in the Company's effective tax rate due to a decrease in tax exempt earnings.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds are deposits, amortization and prepayment of loans, borrowings such as FHLB advances, brokered certificates of deposit, maturities of securities and other investments, and earnings and funds provided from operations. During the first three months of 2009 and 2008, principal payments, prepayments, and proceeds from the sale of loans totaled $47.7 million and $46.1, respectively. The net increase in deposits during the first three months of 2009 and 2008 totaled $305,000 and $2.1 million, respectively. There was no change in net short term borrowings during the three months ended March 31, 2009 and an increase in net short term borrowings of $2.0 million during the three months ended March 31, 2008. During the first three months of 2009 and 2008, the proceeds from the maturities, calls and sales of securities totaled $1.6 million and $516,000, respectively. Cash provided from operating activities during the first three months of 2009 and 2008 totaled $899,000 and $1.6 million, respectively. The Company's primary use of funds is to originate and purchase loans, purchase securities available-for-sale, repay borrowed funds and other financing activities. During the first three months of 2009 and 2008, the Company's gross purchases and origination of loans totaled $41.0 million and $38.9 million, respectively. The purchase of securities available-for-sale for the three months ended March 31, 2009 totaled $3.8 million compared to $3.1 million for the three months ended March 31, 2008. The repayment of borrowed funds during the first three months of 2009 and 2008 totaled $4.5 million and $5.5 million, respectively. OTS regulations require the Company to maintain sufficient liquidity to ensure its safe and sound operation. For additional information about cash flows from the Company's operating, financing and investing activities, see the Consolidated Condensed Statements of Cash Flows in the Company's financial statements included in Part I, Item 1 of this report.

On January 9, 2009, we completed the issuance of $10.2 million of our Series A Preferred Stock and the Warrant under the TARP-CPP. Although the Bank would have remained "well capitalized" without these funds, this new equity investment further increases the capacity to support economic activity and growth in each of the communities served by the Bank through responsible lending.

On January 5, 2009, the Company paid a quarterly cash dividend of $0.01 per share of common stock to its shareholders as of the close of business on December 15, 2008. This dividend payment totaled $13,000. On February 15, 2009, the Company paid an aggregate cash dividend of $51,000 on the Series A Preferred Stock. On February 27, 2009, the Company declared a quarterly cash dividend of $0.01 per share, payable on April 3, 2009 to shareholders of record as of the close of business on March 13, 2009. This dividend payment totaled $13,000.

During the first quarter of 2009, macro-economic conditions and the ongoing recession continued to impact liquidity and credit quality across the financial markets. While the recession has impacted the local economies in which we operate and purchase out-of-state real estate loans, our liquidity position and . . .