Critical Accounting Policies

The consolidated condensed financial statements as of June 30, 2009 and December 31, 2008, and for the three-month and six month periods ended June 30, 2009 and June 30, 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 June 30, 2009 and December 31, 2008

Total assets increased by $34.2 million, from $967.6 million at December 31, 2008 to $1.0 billion at June 30, 2009. Securities available for sale increased from $247.0 million at December 31, 2008 to $290.1 million at June 30, 2009. The Company sold fed funds balances of $2.3 million at June 30, 2009 as compared to $16.1 million at December 31, 2008. 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 June 30, 2009. Total FHLB borrowings declined approximately $900,000, from $130.0 million at December 31, 2008 to $129.1 million at June 30, 2009. Total repurchase balances increased from $28.7 million at December 31, 2008 to $31.4 million at June 30, 2009.

At June 30, 2009 and December 31, 2008, investments classified as "held to maturity" were carried at an amortized cost of $413,000 and $454,000, respectively and had an estimated fair market value of $421,000 and $455,000, respectively. At June 30, 2009 and December 31, 2008, securities classified as "available for sale" had an amortized book value of $287.4 million and $244.2 million, respectively.

The loan portfolio increased $8.7 million during the six-months ended June 30, 2009. Net loans totaled $637.1 million and $628.4 million at June 30, 2009 and December 31, 2008, respectively. For the three-month periods ended June 30, 2009 and June 30, 2008, the average tax equivalent yield on loans was 6.20% and 7.04%, respectively. For the six-month periods ended June 30, 2009 and June 30, 2008 and the year ended December 31, 2008, the average tax equivalent yield on loans was 6.22%, 7.22% and 6.93% respectively. Set forth below is selected data relating to the composition of the loan portfolio by type of loan at June 30, 2009 and 2008. At June 30, 2009 and 2008, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

                                                                 Quarter Ended
                                           06/30/09        6/30/2009       6/30/2008        6/30/2008
                                            Amount          Percent          Amount          Percent
                                                             (Dollars in Thousands)
Real estate loans:
One-to-four family (closed end) first
mortgages                                  $ 192,383            29.9 %     $  178,898            29.8 %
Second mortgages (closed end)                  7,198             1.1 %          8,429             1.4 %
Home equity lines of credit                   37,206             5.8 %         33,562             5.6 %
Multi-family                                  47,682             7.4 %         29,732             4.9 %
Construction                                  31,436             4.9 %         55,434             9.2 %
Commercial real estate                       253,335            39.3 %        212,162            35.3 %

Total mortgage loans                         569,240            88.4 %        518,217            86.2 %

Loans secured by deposits                      4,394             0.7 %          3,200             0.5 %
Other consumer loans                          16,838             2.6 %         20,803             3.5 %
Commercial loans                              53,792             8.3 %         58,502             9.8 %

Total loans, gross                           644,264           100.0 %        600,722           100.0 %


Deferred loan cost, net of income                274                              288

Less allowance for loan losses                (7,427 )                         (5,118 )


Total loans                                $ 637,111                       $  595,892

The allowance for loan losses totaled $7.4 million at June 30, 2009, $6.1 million at December 31, 2008 and $5.1 million at June 30, 2008. The ratio of the allowance for loan losses to total loans was 1.15% at June 30, 2009, 0.97% at December 31, 2008 and 0.85% at June 30, 2008. Also at June 30, 2009, non-performing loans were $8.2 million, or 1.26% of total loans, compared to $598,000, or 0.10% of total loans, at June 30, 2008 and $7.3 million, or 1.16% at December 31, 2008. The increase in non-performing loans in June 2009 as compared to June 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 $6.1 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 $9.1 million or 0.91% of total assets at June 30, 2009, compared to $1.0 million, or 0.12% of assets, at June 30, 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. 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 and six-month periods ended June 30, 2009 and June 30, 2008 and the year ended December 31, 2008 was 0.21%. The ratios of allowance for loan losses to non-performing loans at June 30, 2009, June 30, 2008 and December 31, 2008 were 91.1%, 855.9% and 83.0%, respectively. The following table sets forth an analysis of the Bank's allowance for loan losses for the six-month periods ended:

                                                             06/30/09         06/30/08
Beginning balance, allowance for loan loss                   $   6,133        $   4,842

Loans charged off:
Commercial loans                                                  (291 )           (231 )
Consumer loans and overdrafts                                     (310 )           (308 )
Residential loans                                                 (290 )           (213 )

Total charge offs                                                 (891 )           (752 )


Recoveries
Commercial loans                                                    34               -
Consumer loans and overdrafts                                      156              120
Residential loans                                                   59               31

Total recoveries                                                   249              151


Net charge offs                                                   (642 )           (601 )


Provision for loan loss                                          1,936              877


Ending balance                                               $   7,427        $   5,118


Average loan balance, gross                                    622,881          585,083


Ratio of net charge offs to average outstanding loans
during the period                                                 0.21 %           0.21 %

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 June 30, 2009 and December 31, 2008, the Company's impaired loans totaled $24.9 million and $11.3 million, respectively. At June 30, 2009 and December 31, 2008, the Company's reserve for impaired loans totaled $1.3 million and $731,000, respectively.

At June 30, 2009, deposits increased to $743.6 million from $713.0 million at December 31, 2008. The balances of brokered deposits decreased from $67.9 million at December 31, 2008 to $63.0 million at June 30, 2009. The average cost of all deposits during the three-month periods ended June 30, 2009, June 30, 2008, and the year ended December 31, 2008 was 2.85%, 3.34%, and 3.26%, respectively. The average cost of all deposits during the six-month periods ended June 30, 2009 and June 30, 2008 was 2.92% and 3.39%, 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 Six Months Ended June 30, 2009 and 2008

Net Income. Net income available for common shareholders for the six months ended June 30, 2009 was $1,866,000 compared to $2,753,000 for the six months ended June 30, 2008. The decline in the Company's net income available for common shareholders for the six- month period ended June 30, 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 as well as a FDIC special assessment equal to 5% of assets. In the six months ended June 30, 2009, the Company incurred $456,000 in expenses related to the payment of a 5% preferred dividend and $55,000 related to the accretion on the value of the stock warrants issued.

Net income was also hampered by a FDIC special assessment of approximately $460,000 as well as an increase in quarterly FDIC fees. Net income for the period was further influenced by higher levels of operating expenses and a 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 six month period ended June 30, 2009 was $13.0 million, compared to $11.4 million for the six month period June 30, 2008. The increase in net interest income was largely due to an increase in the average balance of interest earning assets. The average balance of interest earnings assets for the six months ended June 30, 2009 was $912.2 million, an increase of $163.3 million over the six months ended June 30, 2008. The growth in interest earning assets offset a 0.79% decline in the yield on interest earning assets during the same period.

For the six month period ended June 30, 2009, income on tax exempt securities increased to $662,000 from $324,000 for the six month period ended June 30, 2008. For the six month period ended June 30, 2009, income on taxable securities classified as available for same increased to $6.5 million as compared to $3.3 million for the six month period ended June 30, 2008. The increase in investment income is the result in both a growth in the yield and average balances of the securities portfolio. The average tax equivalent yield on taxable securities and tax exempt securities have increased by 0.30% and 1.01%, respectively for the six month period ended June 30, 2009 as compared to the six month period ended June 30, 2008.

For the six month period ended June 30, 2009, the Company's interest income from loans receivable declined by approximately $1.6 million as compared to the six month period ended June 30, 2008. For the six-months ended June 30, 2009 and June 30, 2008, the tax equivalent yield on loans declined to 6.22% from 7.22% over the same period in 2008. The decline in interest income on loans occurred despite an increase of $37.8 million in the average balance of loans receivable to $622.9 million at June 30, 2009 from $585.1 million at June 30, 2008.

For the six-month periods ended June 30, 2009 and June 30, 2008, the Company's cost of interest bearing liabilities was 3.20% and 3.81%, 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.

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 six-month periods ended June 30, 2009 and June 30, 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 six-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 $297 for June 30, 2009, and $139 for June 30, 2008, for a tax equivalent rate using a cost of funds rate of 3.00% for June 30, 2009 and 3.50% for June 30, 2008. The table adjusts tax-free loan income by $27 for June 30, 2009 and $136 for June 30, 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
                                     6/30/2009     6/30/2009        6/30/2009      6/30/2008     6/30/2008        6/30/2008
                                                        (Table Amounts in Thousands, Except Percentages)
Loans                                $  622,881   $     19,367           6.22 %    $  585,083   $     21,114           7.22 %
Investments AFS taxable                 253,455          6,481           5.11 %       132,851          3,193           4.81 %
Investment AFS tax free                  30,510            959           6.29 %        17,524            463           5.28 %
Investment held to maturity                 434             10           4.61 %         5,680            125           4.40 %
Federal funds                             4,935              8           0.32 %         7,786             95           2.44 %


Total interest earning assets           912,215         26,825           5.88 %       748,924         24,990           6.67 %


Other assets                             79,132                                        65,093


Total assets                         $  991,347                                    $  814,017


Interest bearing deposits            $  680,596         10,800           3.17 %    $  557,128         10,364           3.72 %
Subordinated debentures                  10,310            278           5.39 %        10,310            284           5.51 %
Repurchase agreements                    31,389            390           2.48 %        35,859            600           3.35 %
FHLB borrowings                         123,622          2,076           3.36 %        94,094          2,033           4.32 %


Total interest bearing liabilities      845,917         13,544           3.20 %       697,391         13,281           3.81 %


Non-interest bearing deposits            60,377                                        54,162
Other liabilities                         4,874                                         5,191

Shareholders equity                      80,179                                        57,273

Total liabilities and shareholder
equity                               $  991,347                                    $  814,017


Net change in interest bearing
assets and liabilities                            $     13,281           2.68 %                 $     11,709           2.86 %


Net yield on interest earning
assets                                                    2.91 %                                        3.13 %

Interest Income. For the six-months ended June 30, 2009, the Company's total interest income was $26.5 million as compared to $24.7 million for the six months ended June 30, 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 ratio of average interest-earning assets to average interest-bearing liabilities increased from 107.39% for the six-months ended June 30, 2008 to 107.84% for the six-months ended June 30, 2009.

Interest Expense. Interest expense increased approximately $263,000 for the six-months ended June 30, 2009 as compared to the same period in 2008. The increase in interest expense was attributable to a $148.5 million increase in interest bearing liabilities from June 30, 2009 as compared to June 30, 2008. Over the same period, the average balance of interest bearing deposits increased $123.5 million, from $557.1 million at June 30, 2008 to $680.6 million at June 30, 2009 and the average balance of funds borrowed from the Federal Home Loan Bank of Cincinnati (FHLB) increased $29.5 million, from $94.1 million at June 30, 2008 to $123.6 million at June 30, 2009.

The average cost of average interest-bearing deposits declined from 3.72% at June 30, 2008 to 3.17% at June 30, 2009. The average cost of average borrowed funds from the FHLB decreased from 4.32% at June 30, 2008 to 3.36% at June 30, 2009. The average cost of all deposits declined from 3.39% at June 30, 2008 to 2.92% at June 30, 2009. The average balance of repurchase agreements declined from $35.9 million at June 30, 2008 to $31.4 million at June 30, 2009. The average cost of repurchase agreements declined from 3.35% at June 30, 2008 to 2.48% at June 30, 2009. The reduction in the cost of repurchase agreements is limited due to two long term agreements with third parties that are fixed. These 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, the Company's 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 $1.9 million of provision for loan loss was required for the six-months ended June 30, 2009 compared to $877,000 in provision for loan loss expense for the six months ended June 30, 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 as well as an increase in loans classified as impaired.

Non-Interest Income. There was a $599,000 increase in non-interest income in the six-months ended June 30, 2009 as compared to the same period in 2008. For the six-month period ended June 30, 2009, service charge income was $2.0 million, a decrease of $148,000 over the same period in 2008. For the six months ended June 30, 2009, income from financial services was $476,000, compared to $519,000 for the same period in 2008. For the six month period ended June 30, 2009, the Company realized gains on the sale of investments totaling $1.5 million as compared to $702,000 for the six-months ended June 30, 2008. In 2009, the Company took advantage of narrowing agency and mortgage backed bond spreads to selectively sell securities.

Non-Interest Expenses. There was a $1.6 million increase in total non-interest expenses in the six-month period ended June 30, 2009 as compared the same period in 2008. For the six-month period ended June 30, 2009, compensation expense increased to $6.2 million compared to $5.8 million for the six-months ended June 30, 2008. For the six month period ended June 30, 2009, the Company's expenses related to FDIC and OTS regulatory fees increased to $885,000 as compared to $175,000 for the six month period ended June 30, 2008. The increase in fees included a special assessment by the FDIC of 5% of bank assets less total risk based capital. This assessment was approximately $460,000. The Company anticipates that higher FDIC fees will continue for some time in the future. Other operating expense that increased by more than $100,000 included data processing expenses and other operating expenses.

Income Taxes. The effective tax rate for the six months ended June 30, 2009 was 29.6%, compared to 30.8% for the same period in 2008. The decline in the effective tax rate is the result of a larger average balance of municipal bonds in the Company's investment portfolio and relatively lower taxable net income.

Comparison of Operating Results for the Three Months Ended June 30, 2009 and 2008

Net Income. Net income available for common shareholders for the three months ended June 30, 2009 was $854,000, compared to net income of $1,261,000 for the three months ended June 30, 2008. The decline in the Company's net income available for common shareholders for the three month period ended June 30, 2009 is largely the result of the Company's dividend accrual and accretion of warrant cost associated with the Company's preferred stock. In the three months ended June 30, 2009, the Company accrued $229,000 related to the payment of a 5% preferred dividend and $28,000 related to the accretion on the value of the stock warrants issued. Lower net income production was also influenced by higher fees charged by the FDIC previously discussed.

Net Interest Income. Net interest income for the three month period ended June 30, 2009 was $6.6 million, compared to $5.9 million for the three month period ended June 30, 2008. The increase in net interest income for the three months ended June 30, 2009 as compared to June 30, 2008 was largely due to a $172.1 million increase in the average balance of interest earning assets. For the three month period ended June 30, 2009, the average balance for loans was $627.0 million compared to $589.4 million for the same period in 2008. The average balance of investments classified as available for sale increased to $292.6 million as compared to $148.8 million for the same period in 2008.

For the three-months ended June 30, 2009 and June 30, 2008, the tax equivalent yield on total interest earning assets declined to 5.86% from 6.57%. The decline in net yields is the result of the reduction in yields on variable rate loans. 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 June 30, 2009 and June 30, 2008, the Company's cost of interest bearing liabilities was 3.17% and 3.61%, 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.

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 June 30, 2009 and June 30, 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 $175 for June 30, 2009, and $70 for June 30, 2008, for a tax equivalent rate using a cost of funds rate of 3.00% for June 30, 2009 and 3.50% for June 30, 2008. The table adjusts tax-free loan income by $8 for June 30, 2009 and $72 for June 30, 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
                                      6/30/2009     6/30/2009        6/30/2009      6/30/2008     6/30/2008        6/30/2008
                                                         (Table Amounts in Thousands, Except Percentages)
Loans                                 $  627,045   $      9,720           6.20 %    $  589,409   $     10,372           7.04 %
. . .