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 its success in implementing its 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. The Company's shareholder value strategy has three major themes: (1) enhancing shareholders' value; (2) making its retail banking franchise more valuable; and (3) efficiently utilizing its capital.

Management believes the following were important factors in the Company's performance during the quarter ended June 30, 2009:

• The credit crisis affecting the financial markets and residential housing that began in 2007 turned out to be just the flashpoint for a severe and prolonged recession. While recently published economic data indicates that the current downturn may be easing, the recession continues to affect the Company, the Bank, and the financial industry generally, and it is not clear when or at what speed the recession will end.

• The Company has taken significant steps to reduce the risk of additional loan losses. During the quarter ended June 30, 2009 the Company increased its provision for loan losses to $610,000 compared to the $160,000 during the quarter ended June 30, 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 continuing challenging conditions.

• The Company continues its focus on earnings through management of net interest margin, successfully increasing the margin to 3.31% as of June 30, 2009 from 2.80% as of June 30, 2008.

• The Bank is required to pay significantly higher FDIC premiums during 2009 due to market developments that have depleted the Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The FDIC may impose an additional special assessment of up to five basis points later in 2009. Management believes this additional special assessment is probable, but the amount is uncertain.

• The volume of originations of residential mortgages in the second quarter of 2009 doubled compared to the second quarter of 2008. The successful growth of this line of business is due to the historically low interest rates which are allowing consumers to refinance existing mortgages in order to reduce their monthly costs.

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 off 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 Company's ability to hold and its intent not to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

FINANCIAL CONDITION

Total assets decreased $12.4 million, or 2.6%, to $460.9 million at June 30, 2009, from $473.3 million at December 31, 2008. The decrease in assets was primarily due to a decrease in cash and cash equivalents and net loans receivable, offset in part by an increase in securities available-for-sale. Cash and cash equivalents decreased $8.1 million, or 49.8%, to $8.2 million at June 30, 2009, compared to $16.3 million at December 31, 2008. The decrease in cash and cash equivalents was primarily due to a decrease in deposits and borrowed funds during the six months ended June 30, 2009. The increase in securities available-for-sale was primarily due to the purchase of $8.0 million of securities for the six months ended June 30, 2009, offset in part by payments, maturities and sale of securities.

Net loans receivable decreased by $8.7 million, or 2.2%, to $392.1 million at June 31, 2009, from $400.8 million at December 31, 2008, primarily due to payments and prepayments of $61.0 million and loan sales of $49.9 million during the six months ended June 30, 2009. These payments, prepayments, and loan sales were offset in part by the origination of $68.4 million of first mortgage loans primarily secured by one-to four-family residences and commercial real estate, the origination of $21.3 million of consumer loans, and the purchase of $14.4 million of multifamily and commercial real estate loans during the six months ended June 30, 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 decreased $19.0 million, or 5.4%, to $331.2 million at June 30, 2009, from $350.2 million at December 31, 2008, primarily reflecting decreases in certificates of deposits and brokered deposits of $16.0 million and $11.6 million, respectively, offset in part by increases in NOW, money market and savings account balances of $4.5 million, $1.1 million and $3.0 million, respectively. Borrowings, primarily FHLB advances, decreased $5.5 million, or 6.7%, to $76.8 million at June 30, 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 $11.8 million, or 33.5%, to $47.0 million at June 30, 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 for the six months ended June 30, 2009.

The Office of Thrift Supervision (the "OTS") requires the Bank to meet minimum tangible, leverage (core) and risk-based capital requirements. As of June 30, 2009, the Bank exceeded all of its regulatory capital requirements. The Bank's required and actual capital levels as of June 30, 2009 and December 31, 2008 were as follows:

                                                                                        To Be Well-Capitalized
                                                                                             Under Prompt
                                                            For Capital                       Corrective
                                Actual                   Adequacy Purposes                Action Provisions
                         Amount         Ratio         Amount           Ratio           Amount             Ratio
                           (000's )                      (000's )                          (000's )
As of June 30, 2009:
Total Capital (to
risk- weighted
assets)                 $  46,668          14.0 %   $    26,592             8.0 %   $      33,241             10.0 %
Tier I Capital (to
risk- weighted
assets)                    42,885          12.9          13,296             4.0            19,944              6.0
Tier I (Core) Capital
(to adjusted assets)       42,885           9.3          13,804             3.0            23,010              5.0
Tangible Capital (to
adjusted assets)           42,885           9.3           6,903             1.5                 -                -

As of December 31,
2008:
Total Capital (to
risk- weighted
assets)                 $  37,768          11.2 %   $    27,097             8.0 %   $      33,872             10.0 %
Tier I Capital (to
risk- weighted
assets)                    34,336          10.1          13,549             4.0            20,323              6.0
Tier I (Core) Capital
(to adjusted assets)       34,336           7.3          14,187             3.0            23,646              5.0
Tangible Capital (to
adjusted assets)           34,336           7.3           7,094             1.5                 -                -

RESULTS OF OPERATIONS

Net Income (Loss). Net income increased by $1.85 million to $894,000 for the quarter ended June 30, 2009, compared to a net loss of $(957,000) for the quarter ended June 30, 2008. The increase in net income was primarily due to a decrease in other-than-temporary impairment on the investment portfolio and an increase in net interest income, offset in part by increases in provision for loan losses and FDIC insurance expense.

Net income increased by $1.83 million to $1.68 million for the six months ended June 30, 2009, compared to a net loss of $(153,000) for the six months ended June 30, 2008. The increase in net income was primarily due to a decrease in other-than-temporary impairment on the investment portfolio and an increase in net interest income, offset in part by increases in provision for loan losses and FDIC insurance expense.

Net Interest Income. Net interest income before provision for loan losses increased by $351,000, or 11%, to $3.61 million for the quarter ended June 30, 2009, from $3.26 million for the quarter ended June 30, 2008. The increase was 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 3.07% for the quarter ended June 30, 2009, from 2.59% for the quarter ended June 30, 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.

Net interest income before provision for loan losses increased by $554,000 to $7.01 million for the six months ended June 30, 2009, from $6.45 million for the six months ended June 30, 2008. The increase is due to an increase in net interest rate spread 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 2.94% for the six months ended June 30, 2009, from 2.53% for the six months ended June 30, 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 $868,000, or 12%, to $6.29 million for the quarter ended June 30, 2009, compared to $7.15 million for the quarter ended June 30, 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 $29.0 million to $435.3 million for the quarter ended June 30, 2009, from $464.4 million for the quarter ended June 30, 2008. The average yield on interest-earning assets decreased to 5.78% for the quarter ended June 30, 2009, from 6.16% for the quarter ended June 30, 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 secured by one-to four-family real estate and commercial real estate, 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 June 30, 2009. The increase in the average balance of securities available-for-sale was primarily due to the purchases of securities available-for sale, offset in part by payments, maturities, and sale of securities.

Interest income decreased by $1.89 million, or 13%, to $12.75 million for the six months ended June 30, 2009, compared to $14.64 million for the six months ended June 30, 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 $29.2 million to $440.5 million for the six months ended June 30, 2009, from $469.7 million for the six months ended June 30, 2008. The average yield on interest-earning assets decreased to 5.80% for the six months ended June 30, 2009, from 6.24% for the six months ended June 30, 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 secured by one-to four-family real estate and commercial real estate, 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 six months ended June 30, 2009. The increase in the average balance of securities available-for-sale was primarily due to the purchases of securities available-for sale, offset in part by payments, maturities, and sale of securities.

Interest Expense. Interest expense decreased by $1.22 million, or 31%, to $2.68 million for the quarter ended June 30, 2009, compared to $3.89 million for the quarter ended June 30, 2008. The decrease in interest expense was due to a decrease in the average balance of interest-bearing liabilities and a decrease in the cost of funds on interest-bearing liabilities. The average balance of interest-bearing liabilities decreased $41.0 million to $396.7 million for the quarter ended June 30, 2009, from $437.7 million for the quarter ended June 30, 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 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 2.70% for the quarter ended June 30, 2009, compared to 3.57% for the quarter ended June 30, 2008.

Interest expense decreased by $2.45 million, or 30%, to $5.74 million for the six months ended June 30, 2009, compared to $8.19 million for the six months ended June 30, 2008. The decrease in interest expense was due to a decrease in the average balance of interest-bearing liabilities and a decrease in the cost of funds on interest-bearing liabilities. The average balance of interest-bearing liabilities decreased $38.7 million to $404.1 million for the six months ended June 30, 2009, from $442.8 million for the six months ended June 30, 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 2.87% for the six months ended June 30, 2009, compared to 3.71% for the six months ended June 30, 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 and six months ended June 30, 2009 and 2008, respectively.

                                                     For the Three Months Ended June 30,
                                             2009                                          2008
                            Average                       Average         Average                       Average
                            Balance       Interest       Yield/Cost       Balance       Interest       Yield/Cost
                                                           (Dollars in thousands)
Assets:
Interest-earning assets:
Loans                      $ 393,640     $    6,000             6.10 %   $ 437,069     $    6,880             6.30 %
Securities
available-for-sale            30,497            282             3.70        22,998            255             4.44
Interest-bearing cash         11,210              5             0.16         4,301             20             1.84
Total interest-earning
assets                       435,347     $    6,287             5.78 %     464,368     $    7,155             6.16 %
Noninterest-earning
assets                        30,126                                        36,186
Total assets               $ 465,473                                     $ 500,554

Liabilities and Equity:
Interest-bearing
liabilities:
NOW and money market
savings                    $  98,828     $      112             0.45 %   $  96,940     $      223             0.92 %
Savings                       28,891             12             0.17        26,173             17             0.27
Certificates of deposit      196,968          1,662             3.38       223,321          2,504             4.50
Borrowed funds                72,041            889             4.95        91,312          1,151             5.06
Total interest-bearing
liabilities                  396,728     $    2,675             2.70 %     437,746     $    3,895             3.57 %
Noninterest-bearing
liabilities                   21,924                                        21,291
Total liabilities            418,652                                       459,037
Equity                        46,821                                        41,517
Total liabilities and
equity                     $ 465,473                                     $ 500,554

Net interest income                      $    3,612                                    $    3,260
Net interest rate spread                                        3.07 %                                        2.59 %
Net interest margin                                             3.31 %                                        2.80 %
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                                                   109.73 %                                      106.08 %

                                                     For the Six Months Ended June 30,
                                            2009                                          2008
                           Average                       Average         Average                       Average
                           Balance       Interest       Yield/Cost       Balance       Interest       Yield/Cost
                                                          (Dollars in thousands)
Assets:
Interest-earning
assets:
Loans                     $ 398,807     $   12,185             6.13 %   $ 440,348     $   14,051             6.38 %
Securities
available-for-sale           29,062            556             3.83        20,544            483             4.70
Interest-bearing cash        12,587             11             0.18         8,815            109             2.48
Total interest-earning
assets                      440,456     $   12,752             5.80 %     469,707     $   14,643             6.24 %
Noninterest-earning
assets                       31,625                                        36,057
Total assets              $ 472,081                                     $ 505,764

Liabilities and Equity:
Interest-bearing
liabilities:
NOW and money market
savings                   $  96,192     $      249             0.52 %   $  94,220     $      497             1.06 %
Passbook savings             27,968             28             0.20        25,539             39             0.31
Certificates of deposit     203,391          3,579             3.55       229,725          5,299             4.63
Borrowed funds               76,546          1,887             4.97        93,322          2,353             5.06
Total interest-bearing
liabilities                 404,097     $    5,743             2.87 %     442,806     $    8,188             3.71 %
Noninterest-bearing
liabilities                  22,070                                        21,558
Total liabilities           426,167                                       464,364
Equity                       45,914                                        41,400
Total liabilities and
equity                    $ 472,081                                     $ 505,764

Net interest income                     $    7,009                                    $    6,455
Net interest rate
spread                                                         2.94 %                                        2.53 %
Net interest margin                                            3.18 %                                        2.74 %
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                                                  109.00 %                                      106.08 %

Provision for Loan Losses. The Company's provision for loan losses was $610,000 and $160,000 for the quarters ended June 30, 2009 and 2008, respectively, representing a 281% increase. The increase in provision for loan losses for the quarter ended June 30, 2009 compared to the same period in 2008 was higher as a result of continuing recessionary conditions negatively impacting the construction and real estate development, commercial real estate, and consumer sectors. 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 $31.0 million, or 7.2% from June 30, 2008 to June 30, 2009. This decrease primarily consisted of decreases in loans secured by one-to four-family residential real estate of $21.3 and commercial real estate of $10.6. Net charge-offs were $451,000 for the six months ended June 30, 2009, compared to $244,000 for the six months ended June 30, 2008.

The allowance for loan loss was $5.7 million at June 30, 2009, compared to $5.4 million at December 31, 2008. The allowance for loan losses at June 30, 2009 was 1.43% of loans and 52.84% of nonperforming loans, compared to 1.32% of loans and 134.34% of nonperforming loans at December 31, 2008, and 1.38% of loans and 56.58% of nonperforming loans at March 31, 2009. Additions to the allowance for loan loss were due to a deterioration of economic conditions, downgrades in internal risk ratings, reductions in appraised values, and higher levels of charge-offs. Nonperforming loans were $10.78 million or 2.65% of total loans at June 30, 2009, compared to $8.02 million or 2.00% of total loans at December 31, 2008, and $9.59 million or 2.43% of total loans at March 31, 2009. Foreclosed real estate decreased to $1.29 million at June 30, 2009 from $2.77 million at June 30, 2008.

The following table summarizes the activity in the allowance for loan losses for the three and six months ended June 30, 2009 and 2008, as well as common ratios related to the allowance for loan losses.

                             Three Months Ended June 30,                 Six Months Ended June 30,
                           2009          2008         Change         2009          2008         Change
Balance at beginning
of period               $    5,425     $   3,512     $   1,913     $   5,379     $   3,487     $   1,892
. . .