What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2009-09-24 compared with 2008-09-26 · 354 added, 430 removed, 481 unchanged (62% of the section changed)

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institution would be undercapitalized.

See Regulation and SupervisionRegulation of Federal Savings AssociationsLimitations on Capital Distribution.

See Regulation and SupervisionFederal Savings Institution RegulationLimitation on Capital Distributions.

As of June 30, 2009, BV Financial satisfied all prescribed capital requirements.

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profitability, approval by its Board of Directors and prevailing OTS regulations.

The Board of Directors of Bay-Vanguard, M.H.C.

determines whether Bay-Vanguard, M.H.C.

will waive or receive dividends declared by the Company each time the Company declares a dividend, which is expected to be on a quarterly basis.

Bay-Vanguard, M.H.C.

may elect to receive dividends and utilize

such funds to pay general corporate expenses.

The OTS has indicated that:

(1) Bay-Vanguard, M.H.C.

shall provide the OTS annually with written notice of its intent to waive its dividends before the proposed date of the dividend and the OTS

shall have the authority to approve or deny any dividend waiver request;

and (2) if a waiver is granted, dividends waived by Bay-Vanguard, M.H.C.

will be excluded from the Companys capital accounts for calculating dividend payments to

minority shareholders.

Through June 30, 2008, Bay-Vanguard, M.H.C.

waived the right to receive its portion of the cash dividends paid, which totaled $509,000 on a cumulative basis.

The following table provides certain information with regard to shares repurchased by the Company in the

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Financial is a smaller reporting company.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The objective of this section is to help potential investors understand our views on our results of operations and financial condition.

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expenses, telephone and postage expenses, advertising expenses, professional fees, equipment expenses and other miscellaneous expenses.

Compensation and related expenses consist primarily of the salaries and wages paid to our employees, payroll taxes and expenses for health insurance, retirement plans and other employee benefits, including the employee stock ownership plan.

employee stock ownership plan.

Expense for the employee stock ownership plan is based on the average market value of the shares committed to be released.

An equal number of shares will be released each year over the 15-year term of the loan.

Expense for shares of restricted stock

awards and stock options is based on the fair market value of the shares on the date of grant.

Compensation and related expenses is recognized on a straight-line basis over the vesting period.

Occupancy expenses, which are the fixed and variable costs of land and building, consist primarily of

lease payments, real estate taxes, depreciation charges, maintenance and costs of utilities.

Depreciation of premises is computed using the straight-line method based on the useful lives of the related assets, which range from 15 to 40 years.

equal number of shares will be released each year over the 15-year term of the loan.

Expense for shares of restricted stock awards and stock options is based on the fair market value of the shares on the date of grant.

Compensation and related

expenses is recognized on a straight-line basis over the vesting period.

Occupancy expenses, which are the fixed and variable costs of

land and building, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and costs of utilities.

Depreciation of premises is computed using the straight-line method based on the useful lives of the related assets,

which range from 15 to 40 years.

Leasehold improvements are amortized over the shorter of the useful life of the asset or term of the lease.

Data processing expenses

include fees paid for third-party data processing service.

Telephone and postage expenses include our communication lines between branch

offices, our Internet access and our mailing expenses, including certain deposit statements.

Advertising expenses include expenses for

print advertisements, promotions and premium items.

Professional fees primarily include fees paid to our independent registered public

accountants, as well as our attorneys, predominantly in relation to problem assets and due to the costs of operating a public company.

Data processing expenses include fees paid for third-party data processing service.

Telephone and postage expenses include our

communication lines between branch offices, our Internet access and our mailing expenses, including certain deposit statements.

Advertising expenses include expenses for print advertisements, promotions and premium items.

Professional fees primarily include

fees paid to our independent registered public accountants, as well as our attorneys, predominantly in relation to problem assets and due to the costs of operating a public company.

Equipment expense includes expenses and depreciation charges related to office and banking equipment.

Depreciation of equipment is computed using the straight-line method based on the useful lives of the related assets, which range from

three to ten years.

Other expenses include federal insurance deposit premiums, charitable contributions, regulatory assessments,

office supplies and other miscellaneous operating expenses.

Depreciation of equipment is computed using the

straight-line method based on the useful lives of the related assets, which range from three to ten years.

FDIC insurance premium expense

includes premiums paid for federal insurance on deposits.

Other expenses include amortization of intangible assets, charitable

contributions, regulatory assessments, office supplies and other miscellaneous operating expenses.

Critical Accounting Policies

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value of certain assets or on income to be critical accounting policies.

We consider the allowance for loan losses and the determination of other than temporary impairment to be critical accounting policies.

Allowance for Loan Losses .

The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent

in the loan portfolio at the balance sheet date.

The allowance is established through the provision for loan losses, which is charged to income.

We consider the allowance for loan losses, fair value measurement for financial assets, the determination of other than temporary impairment of investments, intangible asset

impairment and the deferred tax asset valuation allowance to be critical accounting policies.

Allowance for Loan

The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date.

The allowance is established through the provision for loan losses,

which is charged to income.

Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.

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loss exposure at default;

the amount and timing of future cash flows on impaired loans;

the amount and timing

of future cash flows on impaired loans;

the value of collateral;

and determination of loss factors to be applied to the various

elements of the portfolio.

and determination of loss factors to be applied to the various elements of the portfolio.

All of these estimates are susceptible to significant change.

However, historically, our estimates and assumptions have provided results that did not differ materially from actual results.

For example, we recorded a loss

of $21,000 and a loss of $13,000 in relation to repossessed assets in fiscal 2008 and 2007, respectively.

Additionally, we had net charge-offs to average loans of 0.02% for fiscal 2008 compared to net charge offs to average loans of 0.01% for fiscal

Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for loan losses

based on an evaluation of the portfolio, past loss experience, economic conditions and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio,

the duration of the current business cycle and other factors related to the collectibility of the loan portfolio.

Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the

allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation.

For example, a downturn in the local economy could cause increases in non-performing loans.

Additionally, a decline in real estate values could cause some of our loans to become inadequately collateralized.

We recorded charge-offs of

$581,000 and $21,000 in relation to foreclosed real estate and repossessed assets in fiscal 2009 and 2008, respectively.

Additionally, we had net charge-offs to average loans of 0.68% for fiscal 2009 compared to net charge offs to average loans of

0.02% for fiscal 2008.

Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for

loan losses based on an evaluation of the portfolio, past loss experience, economic conditions and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan

portfolio, the duration of the current business cycle and other factors related to the collectibility of the loan portfolio.

Although we believe that we use the best information available to establish the allowance for loan losses, future additions

to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation.

For example, a further downturn

in the local economy could cause increases in non-performing loans.

Additionally, a further decline in real estate values could cause some of our loans to

become inadequately collateralized.

In either case, this may require us to increase our provision for loan losses, which would negatively impact earnings.

Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses.

Such agency may require us to recognize adjustments to the allowance based on its judgments about information available

to it at the time of its examination.

An increase to the allowance required to be made by the Office of Thrift Supervision would negatively impact our earnings.

Additionally, a large loss could deplete the allowance and require increased

provisions to replenish the allowance, which would negatively affect earnings.

See note 1 to the notes to consolidated financial statements included in this

At each of June 30, 2008 and 2007, over 89.9% of the loan portfolio consisted of real estate loans.

However, over

19.2% of the real estate loans consisted of multi-family and commercial real estate and construction loans, which carry a higher risk of default than one-to four-family residential real estate loans.

The level of the allowance for loan losses has

changed primarily due to an increase in nonperforming loans due to the addition of a $1.2 million residential construction loan to non-accrual status, and, to a lesser extent, changes in the composition of the loan portfolio and the growth of the

loan portfolio, which has increased by 6.2% and 2.7% for fiscal 2008 and 2007, respectively.

Other-than-Temporary Impairment of

Investment Securities.

There are certain securities in an unrealized loss position that management believes at this time are temporarily impaired.

If the fair value of these securities does not recover in a reasonable period of time or

management can no longer demonstrate the ability and intend to hold them until recovery, a write-down through the consolidated statements of income would be necessary.

Further, the Office of Thrift Supervision, as an integral part of its examination process,

periodically reviews our allowance for loan losses.

Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.

An increase to the allowance required

to be made by the Office of Thrift Supervision would negatively impact our earnings.

Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

notes 1 and 3 to the notes to consolidated financial statements included in this Form 10-K.

At each of June 30, 2009 and 2008, over

89.2% of the loan portfolio consisted of real estate loans.

However, over 19.0% of the real estate loans consisted of multi-family and commercial real estate and construction loans, which carry a higher risk of default than one-to four-family

residential real estate loans.

The level of the allowance for loan losses has changed due to a provision for loan losses of $729,000 for fiscal 2008, offset by $583,000 in charge-offs.

The allowance for loan losses also reflects changes in the size

of loan portfolio, which decreased by 4.4% for fiscal 2009 and increased by 6.2% fiscal 2008, respectively.

Fair Value Measurement

for Financial Assets and Financial Liabilities.

SFAS 157 establishes a three level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

The hierarchy gives the highest priority to unadjusted

quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Management has presented certain financial instruments measured at fair value on either a recurring or nonrecurring basis by level within the hierarchy.

Management obtains fair values from various broker pricing

sources on a monthly basis, at a minimum, and reviews the fair values for reasonableness.

Although the Company believes that it uses the best information available to establish fair values for these certain financial instruments, future changes to

the fair value may be significant if certain future events occur that cause actual results to differ from the assumptions used in making determinations about fair value.

For example, market data used as inputs to calculate pricing for a particular

financial instrument may change dramatically.

Other-than-Temporary Impairment of Investment Securities.

There are certain

securities in the Companys portfolio in an unrealized loss position that management believes at this time are temporarily impaired.

If the fair value of these securities does not recover in a reasonable period of time or management can no

longer demonstrate the ability and intent to hold them until recovery, a write-down through the consolidated statements of income would be necessary.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Consideration is given to (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 or until maturity.

In analyzing the issuers financial

condition, management considers industry analysts reports, financial performance and project target prices of investment analysts.

During the quarter ended June 30, 2008, the Company identified the Shay AMF Ultra Short Mortgage Fund

equity securities it holds as being an other-than-temporary impaired asset and realized an impairment loss of $274,000 on these securities.

See note 1 to the notes to consolidated financial statements included in this Form 10-K.

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 Companys intent to not sell the security and hold the security until the

specified maturity or repricing date.

In analyzing the issuers financial condition, management considers industry analysts reports, financial performance and projected target prices of investment analysts.

Intangible Asset Impairment.

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The goodwill is

evaluated regularly for impairment while the core deposit intangible is being amortized over seven years.

Deferred Tax Asset

Valuation Allowance.

Management determined that no valuation allowance was warranted based on a history of taxable income, the expectation of taxable income going forward and the availability of tax planning strategies to generate future

income, including capital gains if necessary to offset capital losses on the impaired mutual fund security.

evaluated annually for impairment while the core deposit intangible is being amortized over seven years and also evaluated annually for impairment.

Goodwill impairment was tested at May 31, 2009.

A valuation analysis identified impairment, and

as a result, the Company recorded an impairment charge of $3.9 million, which eliminated all goodwill at the Company.

The goodwill impairment charge did not affect the Companys regulatory capital or cash flow.

Deferred Tax Asset Valuation Allowance.

We use the asset and liability method of accounting for income taxes as prescribed in Statement of

Financial Accounting Standards No.

109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are

expected to be recovered or settled.

exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets.

These judgments require us to

make projections of future taxable income.

The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.

Any reduction in

estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

Management determined during the fiscal year ended June 30, 2009 that a deferred tax asset valuation allowance was warranted for its

mutual fund security based on the Companys ability to generate future capital gains if necessary to offset capital losses.

In addition, management determined that no deferred tax asset valuation allowance was warranted for its goodwill

impairment write-down due to the expectation of taxable income going forward and the availability of tax planning strategies to generate future income to offset operating losses.

Operating Strategy

Our mission is to operate and grow a profitable community-oriented financial institution.

Our mission is to operate and grow a profitable community-oriented financial

We plan to achieve this by executing our strategy of:

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Aggressively attract core deposits

Core deposits (accounts other than certificates of deposit) comprised 55.5% of our total deposits at June 30, 2008.

We value core deposits because

they represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit.

We aggressively seek core deposits through competitive pricing and targeted advertising.

Continue to emphasize the origination of one- to four-family residential real estate loans

Core deposits (accounts other than certificates of deposit)

comprised 53.4% of our total deposits at June 30, 2009.

We value core deposits because they represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit.

We aggressively seek core deposits through

competitive pricing and targeted advertising.

Continue to emphasize the origination of one- to four-family residential real estate

Our primary lending activity is the origination of residential mortgage loans secured by homes in our market area.

We intend to continue emphasizing the

origination of residential mortgage loans going forward.

continue emphasizing the origination of residential mortgage loans going forward.

At June 30, 2009, 70.3% of our total loans were one- to four-family residential real estate loans.

We believe that our emphasis on residential lending, which carries a lower credit risk,

contributes to our high asset quality.

Pursue opportunities to increase multi-family and commercial real estate lending in our market

Multi-family and commercial real estate loans provide us with the opportunity to earn more income because they tend to have higher

interest rates than residential mortgage loans.

We believe that our emphasis on residential lending, which

carries a lower credit risk, contributes to our high asset quality.

Pursue opportunities to increase multi-family and commercial real

estate lending in our market area

Multi-family and commercial real estate loans provide us with the opportunity to earn more income

because they tend to have higher interest rates than residential mortgage loans.

Additionally, we offer adjustable-rate multi-family and commercial real estate loans.

Adjustable-rate loans, which reprice periodically, help to offset the adverse effects of an increase in interest

rates, which improves our interest rate risk management.

Adjustable-rate loans, which reprice periodically, help to offset the adverse

effects of an increase in interest rates, which improves our interest rate risk management.

Multi-family and commercial real estate loans increased $3.0 million for the year ended June 30, 2009 and comprised approximately 13.5% of total loans.

There are many multi-family and

commercial properties located in our market area, and we will continue to pursue these opportunities, while continuing to originate any such loans in accordance with what we believe are our conservative underwriting guidelines.

There are many multi-family and commercial properties located in our market area, and we will continue to pursue these opportunities, while continuing to originate any such loans in accordance with what we believe are our conservative underwriting

Continue to use conservative underwriting practices to maintain the high quality of our loan portfolio

We believe that high asset quality is a key to long-term financial success.

We have sought to maintain a high level of asset quality and moderate credit

risk by using underwriting standards which we believe are conservative.

While our non-performing loans (loans that are 90 or more days delinquent) at June 30, 2008 increased to 2.2% of our total loan portfolio and 1.6% of our total assets, the

increase was attributable to two residential construction loans totaling $2.2 million being placed on non-accrual status.

We intend to continue our efforts to originate multi-family and commercial real estate loans and our philosophy of managing

large loan exposures through our conservative approach to lending.

We have sought to maintain a high level of asset quality

and moderate credit risk by using underwriting standards which we believe are conservative.

While our non-performing loans (loans that are 90 or more days delinquent) at June 30, 2009 decreased to 0.8% of our total loan portfolio and 0.6% of

our total assets, the decrease was attributable to two residential construction loans totaling $2.2 million being removed from non-accrual status due to $1.8 million in payoffs and $426,000 in charge-offs.

We intend to continue our efforts to

originate multi-family and commercial real estate loans and our philosophy of managing large loan exposures through our conservative approach to lending.

Provide exceptional service to attract and retain customers

As a community-oriented financial institution, we emphasize providing exceptional customer service as a means to attract and retain

As a community-oriented financial

institution, we emphasize providing exceptional customer service as a means to attract and retain customers.

We deliver personalized service and respond with flexibility to customer needs.

We believe that our community orientation is attractive to our customers and distinguishes us from the large banks that operate in our market area.

also provided Internet banking since 1997.

Balance Sheet Analysis

We believe that our community orientation is attractive to

our customers and distinguishes us from the large banks that operate in our market area.

We have also provided Internet banking since 1997.

Sheet Analysis

Our primary lending activity is the origination of loans secured by real estate.

We originate real estate loans secured by one- to four-family residential real estate, and to a much lesser

extent, secured by multi-family and commercial real estate.

At June 30, 2008, real estate loans totaled $115.1 million, or 89.9% of total loans, compared to $108.6 million, or 90.1%, of total loans at June 30, 2007.

The largest segment of our real estate loans is one- to four-family residential real estate loans.

At June 30, 2008, one- to four-family residential

real estate loans totaled $90.5 million, which represented 78.6% of real estate loans and 70.7% of total loans compared to $86.5 million at June 30, 2007, which represented 79.6% of real estate loans and 71.8% of total loans.

four-family residential real estate loans increased $4.0 million, or 4.6%, in the year ended June 30, 2008 due to the continuing low interest rate environment, competitive pricing and increased marketing efforts.

Multi-family and commercial real estate loans totaled $13.6 million at June 30, 2008, which

represented 11.8% of real estate loans and 10.6% of total loans, compared to $11.4 million at June 30, 2007, which represented 10.5% of real estate loans and 9.5% of total loans.

Multi-family and commercial real estate loans increased $2.1

million, or 18.8%, for the year ended June 30, 2008 due to the continued emphasis of this type of lending.

We purchase and originate

loans secured by mobile homes.

Mobile home loans totaled $11.8 million at June 30, 2008, which represented 9.2% of total loans, compared to $11.0 million at June 30, 2007, which represented 9.1% of total loans.

To mitigate our exposure to

this type of lending, we have limited the amount of mobile home loans to 15% of our loan portfolio.

Mobile home loans increased in fiscal 2008 due to additional purchases from Forward National and Mainland Financial.

A further discussion of our

mobile home loans is contained in BusinessLending ActivitiesMobile Home Loans.

We also originate

construction loans secured by residential and multi-family and commercial real estate and loans to individuals to acquire land upon which they intend to build a residence.

This portfolio totaled $11.1 million at June 30, 2008, which represented

8.7% of total loans, compared to $10.7 million at June 30, 2007, which represented 9.0% of total loans.

Construction loans increased $396,000, or 3.7%, for the year ended June 30, 2008 primarily because of an increase in non-residential

and construction loans due to successful sales efforts.

We also originate a variety of consumer loans, including loans secured by passbook

or certificate accounts.

originate real estate loans secured by one- to four-family residential real estate, and to a much lesser extent, secured by multi-family and commercial real estate.

At June 30, 2009, real estate loans totaled $110.0 million, or 89.2% of total

loans, compared to $115.1 million, or 89.9%, of total loans at June 30, 2008.

The largest segment of our real estate loans is one- to

four-family residential real estate loans.

At June 30, 2009, one- to four-family residential real estate loans totaled $86.6 million, which represented 78.7% of real estate loans and 70.3% of total loans compared to $90.5 million at

June 30, 2008, which represented 78.6% of real estate loans and 70.7% of total loans.

One- to four-family residential real estate loans decreased $3.9 million, or 4.3%, for the year ended June 30, 2009 due to borrower payoffs from their

refinancing with a competitor offering a lower rate, loan roll-off and a reduced demand for these loans.

Multi-family and commercial real

estate loans totaled $16.6 million at June 30, 2009, which represented 15.1% of real estate loans and 13.5% of total loans, compared to $13.6 million at June 30, 2008, which represented 11.8% of real estate loans and 10.6% of total loans.

Multi-family and commercial real estate loans increased $3.0 million, or 22.4%, for the year ended June 30, 2009 due to the continued emphasis of this type of lending.

We purchase and originate loans secured by mobile homes.

Mobile home loans totaled $11.5 million at June 30, 2009, which represented 9.3% of total

loans, compared to $11.8 million at June 30, 2008, which represented 9.2% of total loans.

To mitigate our exposure to this type of lending, we have limited the amount of mobile home loans to 15% of our loan portfolio.

Mobile home loans

decreased in fiscal 2009 due to roll-off exceeding additional purchases from Forward National and Mainland Financial.

A further discussion of our mobile home loans is contained in BusinessLending ActivitiesMobile Home

We also originate construction loans secured by residential, multi-family and commercial real estate and loans to

individuals to acquire land upon which they intend to build a residence.

This portfolio totaled $6.8 million at June 30, 2009, which represented 5.5% of total loans, compared to $11.1 million at June 30, 2008, which represented 8.7% of

Construction loans decreased $4.3 million, or 38.9%, for the year ended June 30, 2009 primarily due to management reducing exposure in this area, the completion of the construction period for some loans and resulting conversion to

permanent loans, and the foreclosure of a $1.0 million construction loan resulting in a charge-off of $426,000.

We also originate a

variety of consumer loans, including loans secured by passbook or certificate accounts.

Consumer loans totaled $888,000 and represented 0.7% of total loans at June 30, 2009, compared to $824,000, or 0.7% of total loans, at June 30, 2008.

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Total amount due

The following table sets forth the dollar amount of all loans at June 30, 2008 that are due

after June 30, 2009 and have either fixed interest rates or floating or adjustable interest rates.

The following table sets forth the dollar amount of all loans at June 30, 2009 that are due after

June 30, 2010 and have either fixed interest rates or floating or adjustable interest rates.

Due After June 30, 2010

Adjustable-Rates

(In thousands)

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government agency securities, mortgage-backed securities and a mutual fund that invests in adjustable-rate loans.

Securities increased approximately $12.7 million, or 212.7%, in the year ended June 30, 2008 primarily due to the purchase of

$6.0 million in medium-term Federal Home Loan Bank notes, $10.2 million in mortgage-backed securities, and $1.0 million in Federal Farm Credit Bank notes.

All of our mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie Mac.

The following table sets forth the carrying amounts and fair values of our securities portfolio at the dates indicated.

Securities decreased approximately $4.8 million, or 26.0%, in the year ended June 30, 2009 primarily due to $9.0 million of

government agency securities being called or maturing and $2.5 million principal collected on mortgage-backed securities offset by $7.0 million of U.S.

government agency securities purchases.

All of our mortgage-backed securities were issued by

Ginnie Mae, Fannie Mae or Freddie Mac.

The following table sets forth the carrying amounts and fair values of our securities portfolio at the

dates indicated.

(In thousands)

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Total available-for-sale securities

Trading securities:

Marketable equity securities

Total trading securities

Total securities

At June 30, 2008, marketable equity securities consisted of an investment in a variable-rate

mortgage mutual fund offered by American Funds, with an amortized cost of $2.5 million and a fair value of $2.5 million.

We also had a Ginnie Mae mortgage-backed security with an amortized cost of $1.7 million and a fair value of $1.7 million.

had no other investments that had an aggregate book value in excess of 10% of our equity at June 30, 2008.

At June 30, 2009, we had no investments that had an aggregate book value in excess of 10% of

our equity at June 30, 2009.

Management analyzed its exposure to U.S.

federal agencies securities and mortgage-backed securities held and found no impairment at

June 30, 2008.

The above-mentioned mutual fund was written down by $274,000 in the 2008 fiscal year when it became evident that the impairment was not temporary.

federal agencies securities and mortgage-backed securities held and found no other-than-temporary impairment at June 30, 2009.

The following table sets forth the maturities and weighted average yields of securities at June 30,

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Five Years to

Fifteen Years

(Dollars in thousands)

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Obligations of the U.S.

Treasury and U.S.

Government agencies

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Available-for-sale securities:

Obligations of the U.S.

Treasury and U.S.

Government agencies

Marketable equity securities

Mortgage-backed securities

Total available-for-sale securities

Our primary source of funds is our deposit accounts, which are

comprised of demand deposits, savings accounts and time deposits.

Trading securities:

Marketable equity securities

Total trading securities

Our primary source of funds is our deposit accounts, which are comprised

of demand deposits, savings accounts and time deposits.

These deposits are provided primarily by individuals within our market area.

We do not use brokered deposits as a source of funding.

Deposits increased $38.5 million, or 39.1%, for

the year ended June 30, 2008.

The Bank acquired $51.5 million in deposits, comprised mostly of $27.5 million in certificates of deposit and $20.2 million in NOW and money market accounts, in connection with a branch office purchase in August

During the year ended June 30, 2008, certificates of deposit experienced a $9.5 million runoff.

The following table

sets forth the balances of our deposit products at the dates indicated.

Deposits increased $584,000, or 0.4%, for the year ended

June 30, 2009 primarily due to a $3.1 million increase in time deposits and a $150,000 increase in savings accounts, offset by a $2.6 million decrease in NOW and money market accounts.

The Bank aggressively marketed time deposits early in

fiscal year 2009 attracting new monies while also seeing movement from other deposit categories.

The following table sets forth the

balances of our deposit products at the dates indicated.

(In thousands)

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Maturity Period

(In thousands)

Three months or less

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Beginning balance

Decrease before branch acquisition

and interest credited

Decrease before branch acquisition and interest credited

Increase due to branch acquisition

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(Dollars in thousands)

Net (loss) income

Return on average assets

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Dividend payout ratio

Net income decreased $421,000, or 462.6%, for fiscal 2008 due primarily to an increase in the

provision for loan losses and an increase in non-interest expense due to an impairment charge of $274,000 on a mutual fund, offset by an increase in net interest income.

Net loss increased $2.4 million, or 723.3%, for fiscal 2009 due primarily to a $3.9 million

goodwill impairment write-down, a $401,000 increase in the provision for loan losses and a $471,000 loss in securities trading, offset by a $1.7 million increase in benefit for income taxes.

Net Interest Income.

Net interest income increased $420,000, or 11.3%, to $4.1 million for fiscal 2009.

The increase in net interest income for fiscal 2008 was primarily attributable to an

increase in the volume of interest-earning assets, offset by a higher volume of interest-bearing liabilities.

Our net interest margin decreased from 2.67% for fiscal 2007 to 2.48% for fiscal 2008 and our interest rate spread decreased from 2.16% for

fiscal 2007 to 2.13% for fiscal 2008.

Total interest income increased $1.2 million, or 15.8%, to $8.8 million for fiscal 2008,

resulting from an increase in the volume of interest-earning assets.

During fiscal 2008, average interest-earning assets increased by $23.8 million, or 19.0%, to $149.4 million, while the average yield decreased 16 basis points to 5.92%.

composition of interest-earning assets consists of loans, securities and interest-bearing deposits.

Interest on loans increased $469,000, or 6.6%, to $7.5 million for fiscal 2008 due to a $6.6 million, or 5.8%, increase in the average balance of

loans, plus an increase in the average yield from 6.21% to 6.26%.

During fiscal 2008, other interest income increased $599,000, or 608.7%, due to an increase in overnight federal funds interest earned.

Interest on securities increased 69.5% due to

an increase in the average balance of securities, offset by the decrease in the average yield from 5.12% to 5.03%.

Total interest expense

increased $852,000, or 19.9%, to $5.1 million for fiscal 2008 primarily due to increases in interest on deposits, offset by a decrease in the average balance of Federal Home Loan Bank advances with the funds obtained in the branch acquisition.

average interest rate paid on deposits decreased 13 basis points to 3.70%.

The average balance of Federal Home Loan Bank advances decreased from $14.3 million for fiscal 2007 to $9.6 million for fiscal 2008.

The increase in net

interest income for fiscal 2009 was primarily attributable to a decrease in interest expense to lower interest rates.

Our net interest margin increased from 2.48% for fiscal 2008 to 2.80% for fiscal 2009 and our interest rate spread increased from

2.13% for fiscal 2008 to 2.54% for fiscal 2009.

Total interest income decreased $355,000, or 4.0%, to $8.5 million for fiscal 2009,

resulting from lower average balances and interest rates earned.

During fiscal 2009, average interest-earning assets decreased by $2.3 million, or 1.6%, to $147.1 million, while the average yield decreased 15 basis points to 5.77%.

The composition

of interest-earning assets consists of loans, securities and interest-bearing deposits.

Interest on loans increased $286,000, or 3.8%, to $7.8 million for fiscal 2009 due to an increase in the average balance, offset by a decrease in the average

yield from 6.26% to 6.21%.

During fiscal 2009, other interest income decreased $677,000, or 97.1%, due to a decrease in the average balance on federal funds and a decrease in the average yield on overnight federal funds from 4.11% to 0.29%.

on securities increased 5.9% due to an increase in the average balance, offset by a decrease in the average yield from 5.03% to 4.29%.

Total interest expense decreased $775,000 or 15.1%, to $4.4 million for fiscal 2009 primarily due to decreases in interest paid on deposits, offset by an increase in interest paid on borrowings.

The average interest rate paid on deposits

decreased 75 basis points to 2.95%.

The interest paid on Federal Home Loan Bank advances increased due to an increase in the average rate paid from 4.86% to 7.00%, offset by a decrease in average balance of Federal Home Loan Bank advances from $9.6

million for fiscal 2008 to $9.1 million for fiscal 2009.

The increase in the average rate paid was due to prepayment penalties in connection with the prepayment of higher-interest rate advances.

Average Balances and Yields.

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The provision for loan losses increased $401,000, from $328,000 for fiscal 2008 to $729,000 for fiscal 2009.

This was a result of an increase in non-accrual

loans primarily due to the addition of $2.6 million in residential construction loans to non-accrual status and a related $284,000 provision for loan losses.

An analysis of the changes in the allowance for loan losses, non-performing loans and classified loans is presented under Risk ManagementAnalysis of Non-Performing and Classified Assets and

Risk ManagementAnalysis and Determination of the Allowance for Loan Losses.

This was a result of increased charge-offs

and classified loans.

An analysis of the changes in the allowance for loan losses, non-performing loans and classified loans is presented

under Risk ManagementAnalysis of Non-Performing and Classified Assets and Risk ManagementAnalysis and Determination of the Allowance for Loan Losses.

Non-Interest Income .

The following table shows the components of other income and the percentage changes from year to year.

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Income from investment in life insurance

Service fees on loans increased due to an increase in income from participation loans that we

Income from investment in life insurance policy decreased due to the lower performance of the life insurance policies because of the lower interest rate environment.

Other income increased $30,000 or 60.0% primarily due to a $15,000

increase in debit card income as the Bank went through its first full year with the debit card product, an $8,000 increase in ATM fees due to the addition of an ATM at the new branch and increased usage of the existing ATMs.

Loss on securities trading

Loss on sale of securities available for sale

Termination of split-dollar life insurance policy

Total non-interest income decreased $194,000 from $288,000 to $94,000 or 67.4% primarily due to a

$471,000 loss on securities trading associated with a decline in the AMF Short Mortgage Mutual Fund offset by $240,000 in income from the termination of a split-dollar life insurance policy.

Non-Interest Expenses.

The following table shows the components of non-interest expenses

and the percentage changes from year to year.

The following table shows the components of non-interest expenses and the percentage changes from year to year.

(Dollars in thousands)

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Data processing

Telephone and postage

Professional fees

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Net amortization of intangible assets

Loss on sale of securities available for sale

Goodwill impairment

Repossessed assets expense

FDIC Insurance Premiums

Efficiency ratio (1)

Computed as non-interest expenses divided by the sum of net interest income and other income.

Compensation and related expenses increased due to increased staff in connection with the branch acquisition and an increase in salaries and

medical benefit expense.

Occupancy expense increased primarily due to the rental expense related to the new branch.

Data processing costs increased due to additional charges related to the branch acquisition.

Advertising increased as we increased

the advertising of our loan products.

Equipment expense increased due to increased depreciation costs and building maintenance.

A non-cash charge to earnings of $274,000, as a result of an other-than-temporary impairment in the value of the AMF

Ultra Short Mortgage Fund held in our investment portfolio also contributed to an increase in the non-interest expenses for 2008.

Other expense increased due to the amortization of the core deposit premium that resulted from the branch acquisition,

offset by a decrease in debit card expense due to start up costs in 2007 and the settlement costs of a lawsuit in 2007.

Professional fees decreased due primarily to the legal fees in connection with the branch acquisition being expensed during

fiscal year 2007.

If goodwill impairment for 2009 and impairment write-down of investment securities for

2008 were excluded, the efficiency ratio would be 100.6% and 99.6% for 2009 and 2008, respectively.

Total non-interest

expenses increased $3.9 million from $4.3 million to $8.2 million or 92.7% primarily due to a $3.9 million goodwill impairment charge off recorded in connection with the acquisition of the Pasadena, Maryland branch office in August 2007.

increased non-interest expense also reflected increased FDIC insurance premiums due to the one-time special assessment and an increase in the overall assessment rate.

Other expenses decreased due to management controlling costs and reductions in

office supplies, check printing, bank charges and insurance expenses.

Income Taxes.

The provision for income taxes decreased $320,000, or 484.8%, from $66,000 for fiscal

year 2007 to a benefit of $254,000 for fiscal year 2008 due primarily to the decrease in pre-tax income.

The Companys effective tax rate was (43.49%) for fiscal year 2008 compared to 42.04% for fiscal year 2007.

The benefit for income taxes increased

$1.7 million, or 678.7%, from a benefit of $254,000 for fiscal year 2008 to $2.0 million for fiscal year 2009 due primarily to the decrease in pre-tax income.

The Companys effective tax rate was (42.1)% for fiscal year 2009 compared to

(43.5%) for fiscal year 2008.

Risk Management

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Our most prominent risk exposures are credit risk, interest rate risk and market risk.

Credit risk is the risk of not collecting the interest and/or the

principal balance of a loan or investment when it is due.

Credit risk is

the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due.

Interest rate risk is the potential reduction of interest income as a result of changes in interest rates.

Market risk arises from fluctuations in interest rates that may result in changes in

the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis.

Other risks that we encounter are operational risks, liquidity risks and reputation risk.

Operational risks include risks

related to fraud, regulatory compliance, processing errors, technology and disaster recovery.

Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers.

Reputation risk is the risk that negative publicity or

press, whether true or not, could cause a decline in our customer base or revenue.

Market risk arises from

fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis.

Other risks that we encounter are operational risks, liquidity

risks and reputation risk.

Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery.

Liquidity risk is the possible inability to fund obligations to depositors, lenders or

Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk Management .

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When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status.

We make initial contact with the borrower when the

loan becomes 15 days past due.

If payment is not received by the 35 th day of delinquency, a letter from our President and Chief Executive Officer is

We make initial contact with the borrower when the loan becomes 15 days past

If payment is not received by the 35 th day of delinquency, a letter from our

President and Chief Executive Officer is sent.

Typically, when the loan becomes 60 days past due, a letter is sent from our attorney notifying the borrower that we will commence foreclosure proceedings if the loan is not paid in full within 30 days.

Generally, loan workout arrangements are

made with the borrower at this time;

however, if an arrangement cannot be structured before the loan becomes 90 days past due, we will commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any

personal property that secures a consumer loan.

If a foreclosure action is instituted and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure.

Management informs the board of directors monthly of the amount of loans delinquent more than 30 days.

Generally, loan workout arrangements are made with the borrower at this time;

however, if an arrangement cannot be structured before the loan becomes 90 days past due, we will commence foreclosure proceedings against any real property that secures

the loan or attempt to repossess any personal property that secures a consumer loan.

If a foreclosure action is instituted and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the

loan generally is sold at foreclosure.

Management informs the board of directors monthly of the amount of loans delinquent more than 30

Analysis of Non-Performing and Classified Assets.

We consider repossessed assets and loans that are 90 days or more past due to be

non-performing assets.

When a loan becomes 90 days delinquent, the loan is placed on non-accrual status at which time the accrual of interest ceases and an allowance for any uncollectible accrued interest is established and charged against

We consider repossessed assets and loans that are 90 days or more

past due to be non-performing assets.

against operations.

Typically, payments received on a non-accrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold.

When property is acquired, it is recorded at fair value, net of estimated

selling costs, at the date of foreclosure.

property is acquired, it is recorded at fair value, net of estimated selling costs, at the date of foreclosure.

Holding costs and declines in fair value after acquisition of the property result in charges against income.

Non-performing assets totaled $2.7 million, or 1.7% of total assets, at June 30, 2008, which is an increase of $2.5 million, or 966.2%, from June 30, 2007.

The increase in non-performing assets was due

primarily to three residential construction loans totaling $2.6 million being placed on non-accrual status.

There is a specific allowance for loan loss valuation of $284,000 for these three loans.

Two loans were to be repaid by the sale of the properties securing the loan.

One of the two construction loans has been refinanced.

In refinancing the

loan, the Bank split the original loan amount between the two primary borrowers.

Two of the properties were only 85% complete.

The borrower who took this part of the refinancing provided additional properties for collateral so that there would be

enough equity to finish the last 15% of the project.

Once complete, the two units will be rented to improve cash flows for repayment.

The borrower who refinanced the other properties is repaying a term loan that is secured by the two completed

units, which are rented and producing income.

The borrower is adding personal cash to help make the payments.

The other impaired

construction loan is non-performing.

The borrowers have stipulated that they will deed the two properties securing this loan in lieu of foreclosure.

One of the two properties is complete, while the other unit is nearly complete.

Once deeded to the

Bank, the Bank will use the funds in escrow to finish the incomplete unit and either lease or sell the properties as market conditions dictate.

Non-accrual loans accounted for 96.9% of total non-performing assets at June 30, 2008.

Non-performing assets totaled $1.6 million, or 1.02% of total assets, at June 30, 2009, which was a decrease of $1.2 million, or 42.9%, from

June 30, 2008.

The decrease in non-performing assets was due primarily to a $2.6 million decrease in non-accruing construction loans offset by a $651,000 increase in non-accruing one- to four-family loans and a $500,000 increase in foreclosed

The decrease in non-accruing construction loans was due to $2.2 million in pay-offs, $426,000 in charge-offs and a $405,000 loan becoming current.

In August 2008, the Bank refinanced one of the non-accruing construction loans present at June 30, 2008 by splitting the original loan amount between the two primary borrowers and making two loans.

borrowers new loan was secured by two properties that were only 85% complete.

This borrower provided additional properties for collateral so that there would be enough equity to finish the remaining 15% of the project.

This project has been

completed and the two properties are being rented providing cash flows for repayment of this loan.

The other borrowers new loan was secured by two completed properties that are being rented providing cash flows for repayment of this loan.

borrower is adding personal cash to help make the loan payments.

Both of the refinanced loans were granted at the current market rates available and the same risk and compliance standards as other such loans available.

At June 30, 2009, these

loans were current and paying in accordance with the revised terms.

Non-accrual loans accounted for 41.2% of total non-performing assets

at June 30, 2009.

The following table provides information with respect to our non-performing assets at the dates

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Non-accruing loans:

One- to four-family

Other consumer

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Total classified assets

There were four loans at June 30, 2008 with an aggregate balance of $2.6 million that are classified

as substandard and are considered non-performing.

There was one residential loan at June 30, 2007 with a principal balance of $63,677 that was classified as substandard and was considered non-performing.

Total classified assets increased $2.0 million from $2.6 million to $4.6 million, or 76.9%,

primarily due to negative changes in customer payment histories and deterioration of customers personal credit histories.

There were ten loans at June 30, 2009 with an aggregate balance of $1.8 million that are classified as substandard and are considered non-performing.

There were four loans at June 30, 2008 with an aggregate balance of $2.6 million

that were classified as substandard and were considered non-performing.

Delinquencies.

The following table provides information about delinquencies in our loan portfolio at the dates indicated.

The following table

provides information about delinquencies in our loan portfolio at the dates indicated.

90 Days or More

1 unchanged sentence

(Dollars in thousands)

Multi-family and commercial real estate

One- to four-family residential

Other consumer

32 unchanged sentences

These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary

market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory

examination results.

The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews

our allowance for loan losses.

market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in

particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results.

The applied loss factors are

re-evaluated quarterly to ensure their relevance in the current real estate environment.

The Office of Thrift Supervision, as an integral

part of its examination process, periodically reviews our allowance for loan losses.

The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours.

At June 30, 2009, our allowance for loan losses represented 0.71% of total loans and 92.8% of non-performing loans.

The allowance for loan losses increased to $709,000 at June 30, 2008 from $402,000 at

June 30, 2007, due to a provision for loan losses of $328,000 and charge-offs of $21,000.

The provision reflects an increase in non-accrual loans as well as increasing levels of loan growth compared to 2007.

In the first quarter of fiscal 2008,

the Bank increased its allowance factor for mobile home loans as there is no additional dealer reserve account to assist in offsetting losses.

In addition, a higher general reserve was established for the few unsecured loans the Bank originated.

The allowance for loan losses

increased to $855,000 at June 30, 2009 from $709,000 at June 30, 2008, due to a provision for loan losses of $729,000 and charge-offs of $583,000.

The higher allowance reflects higher general loss factors being established in all loan

categories except construction.

A lower allowance for construction loans was required at June 30, 2009 due to $1.8 million in pay-offs of non-accruing construction loans and $426,000 in construction loan charge-offs during fiscal year 2009.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

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Provision for loan losses

Non-residential

Other consumer

6 unchanged sentences

Net charge-offs to average loans outstanding during the period

The difference between fiscal 2008 and 2007 amounts were due primarily to a change in non-performing loan balances.

Interest Rate Risk Management.

We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in

an effort to minimize the adverse effects of changes in the interest rate environment.

Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits.

sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings.

To reduce the potential volatility of our earnings, we have sought to improve the match between asset and

liability maturities and rates, while maintaining an acceptable interest rate spread.

We manage the interest rate sensitivity of our

interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.

Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans

because of the shorter maturities of deposits.

As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings.

To reduce the potential volatility of our

earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread.

Also, we attempt to manage our interest rate risk through:

the origination of adjustable-rate one- to four-family residential real estate loans;

an investment in a

mutual fund that invests in adjustable-rate mortgage loans;

an increased focus on multi-family and commercial real estate lending, which emphasizes the origination of shorter-term adjustable-rate loans;

and efforts to originate fixed-rate mortgage

loans with maturities of fifteen years or less.

We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

Our board of directors serves as our Asset/Liability Committee to communicate, coordinate and control all aspects involving asset/liability management.

the origination of adjustable-rate one-

to four-family residential real estate loans;

an investment in a mutual fund that invests in adjustable-rate mortgage loans;

an increased focus on multi-family and commercial real estate lending, which emphasizes the origination of shorter-term

adjustable-rate loans;

and efforts to originate fixed-rate mortgage loans with maturities of fifteen years or less.

We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet

derivative financial instruments.

Our board of directors serves as our Asset/Liability Committee to communicate, coordinate and control

all aspects involving asset/liability management.

The committee monitors the volume and mix of assets and funding sources with the objective of managing assets and funding sources.

Net Portfolio Value Simulation Analysis.

We use an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk.

This analysis measures interest rate risk by

computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates.

Net portfolio value represents the market value of portfolio equity

and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items.

This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained

100 to 300 basis point increase or 100 and 200 basis point decrease in market interest rates.

We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios.

The following table, which is based

on information that we provide to the Office of Thrift Supervision, presents the change in our net portfolio value at June 30, 2008 that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision

assumptions, with no effect given to any steps that we might take to counteract that change.

We use an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to

review our level of interest rate risk.

This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market

interest rates.

Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items.

This analysis assesses the risk

of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 50 basis point decrease in market interest rates.

We measure interest rate risk by modeling the changes in net portfolio value

over a variety of interest rate scenarios.

The following table, which is based on information that we provide to the Office of Thrift Supervision, presents the change in our net portfolio value at June 30, 2009 that would occur in the event of

an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change.

Net Portfolio Value

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Net Portfolio Value as % of

Portfolio Value of Assets

Value of Assets

Basis Point (bp) Change in Rates

19 unchanged sentences

The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.

June 30, 2008, cash and cash equivalents totaled $8.9 million, including interest-bearing deposits of $580,000.

Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $8.8 million at June 30,

June 30, 2009, cash and cash equivalents totaled $11.2 million.

Additionally, at June 30, 2009, the Company had interest-bearing deposits of $124,000.

Securities classified as available-for-sale, which provide additional sources of

liquidity, totaled $1.2 million at June 30, 2009.

In addition, at June 30, 2009, we had the ability to borrow an additional $40.0 million from the Federal Home Loan Bank of Atlanta.

On that date, we had $7.5 million outstanding.

At June 30, 2008, we had $2.8 million in loan commitments outstanding.

In addition to commitments to originate loans, we had $2.3 million in unused

lines of credit and $2.4 million in undisbursed construction loans in process.

On that date, we had no outstanding borrowings.

At June 30, 2009, we had $471,000 in loan commitments outstanding.

In addition to commitments to originate loans, we had $2.2 million

in unused lines of credit and $1.0 million in undisbursed construction loans in process.

Certificates of deposit due within one year of June 30, 2009 totaled $38.7 million, or 28.2% of total deposits.

If these deposits do not remain with us, we will be

required to seek other sources of funds, including other certificates of deposit and lines of credit.

If these deposits do not remain with us, we

will be required to seek other sources of funds, including other certificates of deposit and lines of credit.

Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the

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Loan originations

Loan participation purchases

Securities purchases

Loan and participation purchases

New securities (sales) purchases

Loan participation sales

11 unchanged sentences

capitalized under regulatory guidelines.

See Regulation and SupervisionRegulation of Federal Savings AssociationsCapital Requirements and Regulatory Capital Compliance and note 12 of the notes

to the consolidated financial statements.

See Regulation and SupervisionFederal Savings Institution RegulationCapital Requirements and note 12 of the notes to the consolidated financial statements.

We also will manage our capital for maximum shareholder benefit.

We may use capital management

tools such as cash dividends and share repurchases.

We may use capital management tools such as cash dividends and share

Off-Balance Sheet Arrangements .

In the normal course of

operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements.

These transactions involve, to varying degrees, elements of credit,

interest rate and liquidity risk.

Such transactions are used primarily to manage customers requests for funding and take the form of loan commitments and lines of credit.

A presentation of our outstanding loan commitments and unused lines of

credit at June 30, 2008 and their effect on our liquidity is presented at note 3 of the notes to the consolidated financial statements included in this Form 10-K and under Risk ManagementLiquidity Management.

For the year ended June 30, 2008, we did not engage in any off-balance-sheet transactions reasonably likely to have a material effect

on our financial condition, results of operations or cash flows.

In the normal course of operations, we engage in a variety of financial

transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements.

These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.

Such transactions are

used primarily to manage customers requests for funding and take the form of loan commitments and lines of credit.

A presentation of our outstanding loan commitments and unused lines of credit at June 30, 2009 and their effect on our

liquidity is presented at note 3 of the notes to the consolidated financial statements included in this Form 10-K and under Risk ManagementLiquidity Management.

For the year ended June 30, 2009, we did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on our

financial condition, results of operations or cash flows.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No.

48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement

109 (FIN 48), which clarifies the accounting for uncertainty in tax positions.

This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not

of being sustained on audit, based on the technical merits of the position.

The Company adopted the provisions of FIN 48 in the fiscal year ended June 30, 2008 and determined that upon adoption, it had no impact on its financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.

141 (R) Business

Combinations (SFAS No.

This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities

assumed, and any noncontrolling interests in the acquiree.

The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the

financial statements to evaluate the nature and financial effects of the business combination.

The guidance will become effective as of the beginning of a companys fiscal year beginning after December 15, 2008.

This new pronouncement will

impact the Companys accounting for business combinations completed beginning July 1, 2009.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.

Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No.

51 (SFAS No.

This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary

and for the deconsolidation of a subsidiary.

The guidance will become effective as of the beginning of a companys fiscal year beginning after December 15, 2008 and is not expected to have a significant impact on its financial statements.

Staff Accounting Bulletin No.

110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based

Payment, of the Staff Accounting Bulleting series.

Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the simplified method in developing an estimate of expected term of plain

vanilla share options and allows usage of the simplified method for share option grants prior to December 31, 2007.

SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable

estimate to continue use of the simplified method for estimating the expected term of plain vanilla share option grants after December 31, 2007.

SAB 110 was effective January 1, 2008 and did not have a significant

impact on the Companys financial statements.

In September 2006, the FASB issued FASB Statement No.

157, Fair Value

Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.

FASB Statement No.

157 applies to other accounting pronouncements that require or

permit fair value measurements.

The new guidance is effective beginning July 1, 2008 and did not have a significant impact on the Companys financial statements.

In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.

157, that permits a

one-year deferral in applying the measurement provisions of Statement No.

157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entitys financial

statements on a recurring basis (at least annually).

Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date

of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

The Company is currently evaluating the impact, if any, of the adoption of FSP 157-2 on

its financial statements.

In September 2006, the FASBs Emerging Issues Task Force (EITF) issued EITF Issue No.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements (EITF 06-4).

EITF 06-4 requires the recognition of a liability related to the postretirement

benefits covered by an endorsement split-dollar life insurance arrangement.

The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee.

As such, if the policyholder has

agreed to maintain the insurance policy in force for the employees benefit during his or her retirement, then the liability recognized during the employees active service period should be based on the future cost of insurance to be

incurred during the employees retirement.

Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS

106 or Accounting Principles Board (APB) Opinion No.

12, as appropriate.

For transition, an entity can choose to apply the guidance using either of the following approaches:

(a) a change in accounting principle through

retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption.

The Company adopted this EITF

effective July 1, 2007 and recorded a cumulative-effect adjustment of $(221,000).

In February 2007, the FASB issued SFAS

159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.

115. SFAS No.

159 permits entities to choose to measure many financial instruments and certain

other items at fair value.

Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date.

159 is effective for the Company July 1, 2008.

Company has elected to account for the Shay AMF Ultra Short Mortgage Fund mutual fund it holds at fair value and there was no impairment recognized with this adoption as the investment had been written down to fair value at June 30, 2008.

Future gains and losses will be reflected through earnings.

In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11).

EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares,

nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital.

The amount recognized in additional paid in capital should be included in the pool of excess tax benefits

available to absorb potential future tax deficiencies on share-based payment awards.

EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years

beginning after December 15, 2007.

Adoption is not expected to have a significant impact on the Companys financial statements.

In May 2008, the FASB issued SFAS No.

162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the

preparation of financial statements.

This Statement is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with

Generally Accepted Accounting Principles. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets. This

FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No.

142, Goodwill and Other Intangible Assets

(SFAS 142).

The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R,

and other GAAP.

This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.

Early adoption is prohibited.

The Company is currently evaluating the

potential impact the new pronouncement will have on its consolidated financial statements.

See Note 1 to the notes to consolidated financial statements included in this Form 10-K for a discussion of recent accounting pronouncements.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this annual report on Form 10-K have been prepared in accordance with generally accepted

accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The primary impact

of inflation on our operations is reflected in increased operating costs.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates generally have a more

significant impact on a financial institutions performance than do general levels of inflation.

financial statements and related financial data presented in this annual report on Form 10-K have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in

terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The primary impact of inflation on our operations is reflected in increased operating costs.

Unlike most industrial

companies, virtually all the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates generally have a more significant impact on a financial institutions performance than do general levels of

Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

3 unchanged sentences

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What changed 10-K

Item 5. Market for Registrant’s Common Equity