UNITEDTable STATESof Contents

~~SECURITIES~~UNITED ~~AND~~STATES ~~EXCHANGE COMMISSION~~

~~WASHINGTON,~~SECURITIES DCAND ~~20549~~EXCHANGE COMMISSION

~~FORM~~Washington, ~~10-K~~DC 20549

~~FOR~~FORM ~~ANNUAL~~10-K ~~AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF~~

~~THE~~(Mark ~~SECURITIES~~One) ~~EXCHANGE ACT OF 1934~~

~~(Mark~~x ~~One~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

xFor ~~ANNUAL~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION~~September 30, 132006 ~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~OR ~~the fiscal year ended September 30, 2004~~

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨For ~~TRANSITION~~the ~~REPORT~~transition ~~PURSUANT~~period ~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~from to

~~For~~Commission ~~the~~File ~~transition~~Number: ~~period~~0-24589 ~~from to~~

~~Commission~~BCSB ~~File~~BANKCORP, NoINC. ~~0-24589~~

~~BCSB~~(Exact ~~BANKCORP,~~name ~~INC.~~of registrant as specified in its charter)

(Name of Registrant as Specified in its Charter)


United States		52-2108333
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4111 E. Joppa Road, Suite 300, Baltimore, Maryland		21236
(Address of principal executive offices)		(Zip Code)

United States		52-2108333
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

Issuer’s telephone number, including area code: (410) 256-5000

4111 E. Joppa Road, Suite 300, Baltimore, Maryland		21236
(Address of Principal Executive Offices)		(Zip Code)

Securities registered pursuant to Section 12(b) of the Act:

~~Issuer’s telephone~~Common ~~number~~stock, ~~including~~par value $.01 per share ~~area code: (410) 256-5000~~

~~Securities registered pursuant to Section 12~~(b)Title of ~~the~~Class) ~~Act:~~

~~None~~Nasdaq Global Market

~~Securities~~(Name ~~registered~~of ~~pursuant~~exchange toon ~~Section~~which ~~12(g~~registered) ~~of the Act:~~

~~Common~~Securities ~~stock,~~registered ~~par~~pursuant ~~value~~to Section 12(g) ~~$.01~~of ~~per~~the ~~share~~Act: None

~~(Title~~Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of ~~Class)~~the Securities Act.

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x ~~No ¨~~

Indicate by check mark if ~~there~~the isregistrant ~~no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K~~ is not ~~contained~~required into ~~this~~file ~~form,~~reports ~~and~~pursuant ~~no disclosure will be contained,~~ to ~~the~~Section 13 ~~best of registrant’s knowledge, in definitive proxy~~ or ~~information~~15(d) ~~statements incorporated by reference in Part III~~ of ~~this Form 10-K or any amendment to this Form 10-K~~the Act. x

~~Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)~~ Yes ¨ No x.

~~The~~Indicate ~~aggregate~~by ~~market~~check ~~value~~mark ofwhether ~~voting~~the ~~and~~registrant: ~~common~~(1) has ~~non-voting~~filed ~~common~~all ~~equity~~reports ~~held by~~required ~~non-affiliates~~to ~~was~~be ~~approximately~~filed ~~$24,118,575 computed~~ by ~~reference~~Section 13 toor 15(d) of the ~~closing~~Securities ~~sale~~Exchange ~~price~~Act ~~for~~of ~~the~~1934 ~~registrant’s~~during ~~common~~the ~~stock~~preceding on12 ~~November~~months ~~29,~~(or ~~2004~~for assuch ~~reported~~shorter onperiod ~~The~~that ~~Nasdaq~~the ~~National~~registrant ~~Market.~~was ~~For~~required ~~purposes~~to offile ~~this~~such ~~calculation~~reports), ~~it is assumed that directors, executive officers~~ and ~~beneficial~~(2) has ~~owners~~been ofsubject ~~more~~to ~~than~~such 5%filing ofrequirements for the ~~registrant’s~~past ~~outstanding~~90 ~~voting~~days. ~~stock~~Yes ~~are~~x No ~~affiliates.~~¨

~~Number~~Indicate ofby ~~shares~~check mark if disclosure of ~~Common~~delinquent ~~Stock~~filers ~~outstanding~~pursuant asto Item 405 of ~~December~~Regulation 1S-K is not contained herein, ~~2004:~~and 5will not be contained,~~899~~ to the best of registrant’s knowledge,~~173~~ in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

~~DOCUMENTS~~Indicate ~~INCORPORATED~~by BYcheck ~~REFERENCE~~mark whether the registrant is a large accelerated, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

~~The~~Large ~~following~~Accelerated ~~lists the documents incorporated by reference and the Part of the Form 10~~Filer ¨ Accelerated Filer ¨ Non-Kaccelerated ~~into~~Filer x ~~which the document is incorporated:~~

1.Indicate ~~Portions~~by ofcheck mark whether the registrant’s ~~Annual~~is ~~Report~~a toshell ~~Stockholders~~company ~~for~~(as ~~the~~defined ~~Fiscal~~in ~~Year~~Rule ~~ended~~12b-2 ~~September~~of ~~30,~~the ~~2004.~~Exchange ~~(Parts II and III~~Act).

2.Yes ~~Portions~~¨ No ofx ~~Proxy Statement for registrant’s 2005 Annual Meeting of Stockholders. (Part III)~~

~~PART~~The Iaggregate market value of voting and non-voting common equity held by non-affiliates was approximately $19,989,193 based on the closing sale price of the registrant’s Common Stock as listed on the Nasdaq Global Market as of September 30, 2006 ($12.795 per share). For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 5% of the registrant’s outstanding voting stock are affiliates.

~~Item~~Number of shares of Common Stock outstanding as of December 1., ~~Business~~2006: 5,913,743

~~General~~DOCUMENTS INCORPORATED BY REFERENCE

~~BCSB Bankcorp,~~The ~~Inc.~~following ~~BCSB~~lists ~~Bankcorp, Inc. (~~the ~~“Company”)~~documents ~~serves~~incorporated asby ~~the~~reference ~~holding company for its wholly owned subsidiaries, Baltimore County Savings Bank, F.S.B. (the “Bank”), BCSB Bankcorp Capital Trust I~~ and ~~BCSB Bankcorp Capital Trust II. Baltimore County Savings Bank, M.H.C. (~~the ~~“MHC”),~~Part ~~a federal mutual holding company, owns 63.7%~~ of the ~~Company’s~~Form ~~outstanding~~10-K ~~common~~into ~~stock.~~which ~~The Company’s assets consist of its investment in~~ the ~~Bank~~document ~~and its portfolio of investment securities. The Company~~ is ~~primarily~~incorporated: ~~engaged in the business of directing, planning and coordinating the business activities of the Bank.~~

~~The Company’s most significant asset is its investment in the Bank~~1. ~~Accordingly,~~Portions the information set forth in this report, including financial statements and related data, relates primarily to the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Currently, the Company does not maintain offices separate from those of the ~~Bank~~registrant’s orAnnual ~~employ~~Report ~~any~~to ~~persons~~Stockholders ~~other~~for ~~than officers of~~ the ~~Bank~~Fiscal ~~who~~Year ~~are~~ended ~~not separately compensated for such service. At~~ September 30, ~~2004, the Company had total assets of $773~~2006.6 ~~million,~~(Parts ~~total~~II ~~deposits of $580.6 million~~ and ~~stockholders’ equity of $44.1 million.~~ III)

~~The~~2. ~~Company’s~~Portions ~~and~~of ~~the~~Proxy ~~Bank~~Statement for registrant’s ~~executive~~2007 ~~offices~~Annual ~~are~~Meeting ~~located~~of ~~at 4111 E~~Stockholders. ~~Joppa Road, Suite 300, Baltimore, Maryland 21236, and its main telephone number is~~ (~~410)~~Part ~~256-5000.~~ III)

BaltimoreTable County Savings Bank, F.S.B. The Bank is a federally chartered stock savings bank operating through fifteen banking offices serving the Baltimore metropolitan area. The Bank was chartered by the State of Maryland in 1955 under the name Baltimore County Building and Loan Association. The Bank received federal insurance of its deposit accounts in 1985 and received a federal charter in 1987, at which time it adopted its present name of Baltimore County Savings Bank, F.S.B. Contents

~~The~~PART ~~Bank’s~~I principal business consists of attracting deposits from the general public and investing these funds in loans secured by first mortgages on owner-occupied, single-family residences in the Bank’s market area, and, to a lesser extent, other real estate loans, consisting of construction loans, single-family rental property loans and commercial real estate loans, and consumer loans, particularly automobile loans. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest earned on mortgage-backed securities and investment securities and fees and charges. Funds for these activities are provided principally by operating revenues, deposits and repayments of outstanding loans and investment securities and mortgage-backed securities.

~~Market~~Item ~~Area~~1. Business

~~The~~General ~~Bank’s market area consists of the Baltimore metropolitan area. At September 30, 2004, management estimates that more than 95% of deposits and 95% of all lending came from its market area.~~

~~The economy~~BCSB ~~of the Bank’s market area is diversified~~Bankcorp, ~~with~~Inc. aBCSB ~~mix of services~~Bankcorp, ~~manufacturing, wholesale/retail trade, and federal and local government~~Inc. ~~Once~~ (the ~~backbone~~“Company”) ofserves ~~the~~as ~~regional economy,~~ the ~~manufacturing~~holding ~~industry~~company isfor ~~relatively~~its ~~stable~~wholly ~~after almost~~owned ~~two~~subsidiaries, ~~decades of decline. The manufacturing section of~~ Baltimore County Savings ~~received a further boost with General Motors’ completion of its construction of a new Allison Transmission Plant in the White Marsh growth area~~Bank, ~~and pending Route 43 extension~~F.S.B. ~~The~~(the ~~Baltimore Metropolitan area~~“Bank”), ~~which~~BCSB ~~consists~~Bankcorp ofCapital ~~Baltimore~~Trust ~~City,~~I ~~Anne Arundel, Baltimore, Carroll, Harford~~ and ~~Howard~~BCSB ~~Counties~~Bankcorp ~~has~~Capital anTrust ~~estimated population, according to the 2000 census, of 2,512,943 which equals approximately 47% of Maryland’s total population~~II. Baltimore County ~~has~~Savings ~~the largest population at 754~~Bank,~~292~~ ~~followed~~M.H.C. by(the ~~Baltimore City at 651~~“MHC”),~~154,~~ ~~Anne~~a ~~Arundel~~federal ~~County~~mutual atholding ~~489~~company,~~000,~~ ~~Howard~~owns ~~County at 247,842 and Harford County at 218,000~~63.5% ~~Located~~of ~~adjacent~~the ~~to major~~Company’s ~~transportation~~outstanding ~~corridors~~common ~~and Washington, DC, the Baltimore metropolitan area provides a diversified broad economic base~~stock. ~~According~~The toCompany’s ~~Baltimore~~assets ~~County~~consist ~~Department~~ of ~~Economic~~its ~~Development~~investment ~~seventy-seven percent of Baltimore County’s employees work~~ in the ~~private~~Bank ~~sector~~and ~~with~~its ~~approximately~~portfolio 9%of ininvestment ~~manufacturing,~~securities. ~~20%~~The inCompany ~~trade,~~is ~~transportation~~primarily ~~and~~engaged ~~utilities, 13.8%~~ in ~~professional~~the business ~~services~~of directing, ~~13.8%~~planning ~~in education~~ and ~~health~~coordinating ~~services,~~the ~~and~~business 8%activities of the Bank.

2The Company’s most significant asset is its investment in the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Currently, the Company does not maintain offices separate from those of the Bank or employ any persons other than officers of the Bank who are not separately compensated for such service. At September 30, 2006, the Company had total assets of $785.9 million, total deposits of $604.8 million and stockholders’ equity of $33.4 million.

inThe ~~leisure~~Company’s and ~~hospitality.~~the ~~Government~~Bank’s ~~provides~~executive 17offices are located at 4111 E.5% ofJoppa Road, Suite 300, Baltimore, ~~County’s~~Maryland ~~jobs~~21236, ~~with~~and ~~self-employed~~its ~~providing~~main ~~the~~telephone ~~remaining~~number ~~employment~~is (410) 256-5000.

~~Harford~~Baltimore County ~~continues~~Savings toBank, ~~experience~~F.S.B. ~~strong~~The ~~economic~~Bank ~~growth~~is ~~while maintaining~~ a ~~strong~~federally ~~government~~chartered ~~presence~~stock ofsavings ~~approximately~~bank ~~11,484~~operating ~~employed~~through ineighteen banking offices serving the ~~Aberdeen~~Baltimore ~~Proving~~metropolitan ~~Grounds~~area. ~~both~~The inBank was chartered by the ~~military~~State ~~and~~of Maryland in ~~civilian~~1955 under ~~capacity.~~the ~~The~~name ~~Maryland~~Baltimore ~~Department~~County ofBuilding ~~Labor~~ and ~~Licensing~~Loan ~~Regulation~~Association. ~~estimates~~The ~~54,727~~Bank ~~work~~received federal insurance of its deposit accounts in ~~Harford County’s~~1985 ~~private~~and ~~sector~~received ~~with~~a ~~30%~~federal ~~working~~charter in ~~retail trade~~1987, ~~33%~~at inwhich ~~service~~time ~~and~~it ~~19%~~adopted inits ~~construction~~present ~~and~~name ~~manufacturing~~of Baltimore County Savings Bank, F.S.B.

~~Lending~~The ~~Activities~~Bank’s principal business consists of attracting deposits from the general public and investing these funds in loans secured by first mortgages on owner-occupied, single-family residences in the Bank’s market area, and, other real estate loans, consisting of construction loans, single-family rental property loans and commercial real estate loans, and consumer loans. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest earned on mortgage-backed securities and investment securities and fees and charges. Funds for these activities are provided principally by operating revenues, deposits and repayments of outstanding loans and investment securities and mortgage-backed securities.

General. The Bank’s gross loan portfolio totaled $411.8 million at September 30, 2004, representing 53.2% of total assets at that date. At September 30, 2004, $179.0 million, or 43.5% of the Bank’s gross loan portfolio, consisted of singleForward-~~family, residential mortgage loans. Other loans secured by real estate include construction loans, single-family rental property and commercial~~Looking ~~real~~Statements estate loans, which amounted to $23.2 million, $19.3 million and $64.6 million, respectively, or 5.6%, 4.7% and 15.7%, respectively, of the Bank’s gross loan portfolio at September 30, 2004. The Bank also originates consumer loans, consisting primarily of automobile loans and home equity lines of credit, which totaled $88.1 million and $15.6 million, respectively, or 21.4% and 3.8% respectively, of the Bank’s gross loan portfolio. Other lending activities include commercial lines of credit, which totaled $16.0 million, or 3.9% of the Bank’s gross loan portfolio.

3When used in this Annual Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

~~Loan~~1 Portfolio Composition. The following table sets forth selected data relating to the composition of the Bank’s loan portfolio by type of loan at the dates indicated. At September 30, 2004, the Bank had no concentrations of loans exceeding 10% of gross loans other than as disclosed below.

	At September 30,
	2004					2003				2002				2001				2000
	Amount			%		Amount		%		Amount		%		Amount		%		Amount		%
Real Estate Loans:
Single-family residential (1)	$	179,010		43.47	%	$	179,552	46.32	%	$	221,062	53.09	%	$	165,028	57.94	%	$	152,469	59.42	%
Single-family rental property loans		19,257		4.68			14,348	3.70			8,306	2.00			7,581	2.66			5,080	1.98
Commercial		64,615		15.69			53,675	13.85			57,356	13.77			15,068	5.29			13,649	5.32
Construction (2)		23,225		5.64			16,411	4.23			11,734	2.82			8,709	3.06			5,905	2.30
Commercial lines of credit		16,038		3.89			6,410	1.65			4,208	1.01			400	.14			44	.02
Commercial leases		1,300		.32			820	.21			1,170	.28			1,308	.46			—	—
Commercial loans secured		800		.20			133	.03			1,595	.38			2,588	.91			1,475	.57
Commercial loans unsecured		545		.13			678	.17			—	—			—	—			—	—
Consumer Loans:
Automobile		88,122		21.40			98,168	25.33			93,161	22.38			72,822	25.57			67,852	26.44
Home equity lines of credit		15,629		3.79			13,943	3.60			13,864	3.33			8,935	3.13			8,147	3.18
Other		3,265		.79			3,474	.90			3,897	.94			2,395	.84			1,976	.77
		411,806		100.00	%		387,612	100.00	%		416,353	100.00	%		284,834	100.00	%		256,597	100.00	%
Add:
Purchase accounting premium (net)		950					1,320				1,990				—				—
Less:
Undisbursed portion of loans in process		(13,764	)				7,753				4,902				4,434				3,850
Deferred loan origination fees		(267	)				429				661				143				214
Unearned interest		(10,002	)				12,750				13,964				10,684				9,610
Allowance for loan losses		(2,587	)				2,698				2,199				1,563				1,403
Total	$	386,136				$	365,302			$	396,617			$	268,010			$	241,520

~~(1)~~The ~~Includes~~Company ~~fixed~~does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-~~rate~~looking ~~second~~statements ~~mortgage~~to ~~loans~~reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

~~(2)~~Market ~~Includes~~Area ~~acquisition and development loans.~~

4The Bank’s market area consists of the Baltimore metropolitan area. At September 30, 2006, management estimates that more than 95% of deposits and 95% of all lending came from its market area.

~~Loan~~The ~~Maturity~~economy ~~Schedules.~~of ~~The~~the ~~following~~Bank’s ~~table~~market ~~sets~~area ~~forth~~is ~~certain~~a ~~information~~diverse atcross ~~September~~section 30of employment sectors, ~~2004~~with a mix of services, manufacturing, wholesale/retail ~~regarding~~trade, federal and local government, health care facilities and finance related employment This partially mitigates the ~~dollar~~risk ~~amount~~associated with a decline in any particular economic sector. Once the backbone of ~~loans~~the ~~maturing~~regional economy, the manufacturing industry is relatively stable following a long period of decline. Demographic and economic growth trends, measured by changes in population, number of household, age distribution and median household income, provide key insight into the health of the Bank’s ~~portfolio~~market ~~based~~area. onBaltimore ~~their~~County ~~contractual~~has ~~terms~~the tolargest ~~maturity,~~population ~~including~~at ~~scheduled~~768,000 ~~repayments~~followed ofby ~~principal.~~Baltimore ~~Demand~~City ~~loans~~at 633,000, ~~loans~~Anne ~~having~~Arundel noCounty ~~stated~~at ~~schedule~~512,000, ofHoward ~~repayments~~County at 270,200 and noHarford ~~stated~~County ~~maturity~~at 238,750. Located adjacent to major transportation corridors and ~~overdrafts~~Washington, ~~are~~DC, ~~reported~~the asBaltimore ~~due~~metropolitan inarea ~~one~~provides ~~year~~a ordiversified ~~less~~broad economic base. ~~The~~According ~~table~~to ~~does~~Baltimore ~~not~~County ~~include~~Department ~~any~~of ~~estimate~~Economic Development 78% of ~~prepayments~~Baltimore ~~which~~County’s ~~significantly~~employees ~~shorten~~work in the ~~average~~private sector ~~life~~with ofapproximately ~~mortgage~~7% ~~loans~~in manufacturing, 20% in trade, transportation and ~~may~~utilities, ~~cause~~12.0% ~~the~~in ~~Bank~~professional business services, 22.0% in education and health services, and 8% in leisure and hospitality. Government provides 17.5% of Baltimore County’s ~~repayment~~jobs, ~~experience~~with toself-employed ~~differ~~providing ~~from~~the ~~that shown~~remaining ~~below~~employment.

	Due during theyear endingSeptember 30,2005		Due 1 through5 years afterSeptember 30,2005		Due 5 yearsafterSeptember 30,2005		Total
Real Estate Loans
Single-family residential	$	678	$	15,293	$	163,039	$	179,010
Single-family rental property		—		281		18,976		19,257
Commercial		400		5,987		58,228		64,615
Construction		7,019		4,803		11,403		23,225
Commercial lines of credit		16,038		—		—		16,038
Commercial leases		89		1,211		—		1,300
Commercial loans secured		—		800		—		800
Commercial loans unsecured		—		—		545		545
Consumer:
Automobile		1,356		86,335		431		88,122
Home equity lines of credit		211		2,542		12,876		15,629
Other		621		998		1,646		3,265
Total	$	26,412	$	118,250	$	267,144	$	411,806

Harford County continues to experience strong economic growth while maintaining a strong government presence of approximately 12,486 employed in the Aberdeen Proving Grounds both in the military and in civilian capacity. The Maryland Department of Labor and Licensing Regulation estimates 61,323 work in Harford County’s private sector with 23% working in retail trade, transportation, and utilities, 12.7% in professional or business services, 10.59% in local government and 10.0% in education and health services. Going forward Harford county and the entire Baltimore metropolitan area will benefit from the proposed recommendations by the U.S. Army for the realignment and closure of military bases which could add approximately 20,000 jobs in both military and related private sector employment.

~~The~~Lending ~~following~~Activities table sets forth at September 30, 2004, the dollar amount of all loans due one year or more after September 30, 2004 which have predetermined interest rates and have floating or adjustable interest rates.

	PredeterminedRate		Floating orAdjustable Rates
	(In thousands)
Real Estate loans:
Single-family residential	$	172,821	$	6,189
Single-family rental property		6,468		12,789
Commercial		28,569		36,046
Construction		19,913		3,312
Commercial lines of credit		—		16,038
Commercial leases		1,300		—
Commercial loans secured		800		—
Commercial loans unsecured		545		—
Consumer:
Automobiles		88,122		—
Home equity lines of credit		—		15,629
Other		3,265		—
Total		321,803		90,003

General. The Bank’s gross loan portfolio totaled $482.5 million at September 30, 2006, representing 61.4% of total assets at that date. At September 30, 2006, $214.7 million, or 44.5% of the Bank’s gross loan portfolio, consisted of single-family, residential mortgage loans. Other loans secured by real estate include construction loans, single-family rental property and commercial real estate loans, which amounted to $39.0 million, $29.1 million and $110.2 million, respectively, or 8.1%, 6.0% and 22.8%, respectively, of the Bank’s gross loan portfolio at September 30, 2006. The Bank also originates consumer loans, consisting primarily of automobile loans and home equity lines of credit, which totaled $53.5 million and $17.9 million, respectively, or 11.1% and 3.7% respectively, of the Bank’s gross loan portfolio. Other lending activities include commercial lines of credit, which totaled $9.6 million, or 2.0% of the Bank’s gross loan portfolio.

~~Scheduled~~2 contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on

5Table of Contents

Loan Portfolio Composition. The following table sets forth selected data relating to the ~~existing~~composition ~~mortgage~~of ~~loans~~the ~~and,~~Bank’s ~~conversely,~~loan ~~decrease~~portfolio ~~when~~by ~~current~~type ~~mortgage~~of loan ~~market~~at ~~rates~~the ~~are~~dates ~~substantially~~indicated. ~~lower~~At ~~than~~September 30, ~~rates~~2006, onthe ~~existing~~Bank ~~mortgage~~had no concentrations of loans exceeding 10% of gross loans other than as disclosed below.

Originations, Purchases and Sales of Loans. The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank concentrates its lending activities in its market area.


	At September 30,
	2006				2005				2004				2003				2002
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Real Estate Loans:
Single-family residential (1)	$	214,724	44.50	%	$	195,203	40.44	%	$	179,010	43.47	%	$	179,552	46.32	%	$	221,062	53.09	%
Single-family rental property loans		29,131	6.04			26,914	5.58			19,257	4.68			14,348	3.70			8,306	2.00
Commercial		110,179	22.83			75,034	15.55			64,615	15.69			53,675	13.85			57,356	13.77
Construction (2)		39,021	8.09			53,755	11.14			23,225	5.64			16,411	4.23			11,734	2.82
Commercial lines of credit		9,606	2.00			16,463	3.41			16,038	3.89			6,410	1.65			4,208	1.01
Commercial leases		4,749	.98			3,300	.68			1,300	.32			820	.21			1,170	.28
Commercial loans secured		365	.08			1,869	.39			800	.20			133	.03			1,595	.38
Commercial loans unsecured		409	.08			538	.11			545	.13			678	.17			—	—
Consumer Loans:
Automobile		53,530	11.09			88,287	18.29			88,122	21.40			98,168	25.33			93,161	22.38
Home equity lines of credit		17,942	3.72			17,901	3.71			15,629	3.79			13,943	3.60			13,864	3.33
Other		2,849	.59			3,377	.70			3,265	.79			3,474	.90			3,897	.94

		482,505	100.00	%		482,641	100.00	%		411,806	100.00	%		387,612	100.00	%		416,353	100.00	%

Add:
Purchase accounting premium (net)		451				665				950				1,320				1,990
Less:
Undisbursed portion of loans in process		12,014				16,874				13,764				7,753				4,902
Deferred loan origination fees		355				272				267				429				661
Unearned interest		4,132				9,067				10,002				12,750				13,964
Allowance for loan losses		2,679				2,746				2,587				2,698				2,199

Total	$	463,776			$	454,347			$	386,136			$	365,302			$	396,617

~~The~~(1) ~~following~~Includes ~~table~~fixed-rate ~~sets~~second ~~forth~~mortgage ~~certain information with respect to the Bank’s loan origination, purchase and sale activity for the periods indicated~~loans.

	Year Ended September 30,
	2004		2003		2002
	(In thousands)
Loans originated:
Real Estate Loans
Single-family residential	$	41,406	$	55,896	$	39,589
Single-family rental property		7,739		7,021		2,686
Commercial		27,866		21,021		10,002
Construction		6,196		2,209		1,708
Commercial lines of credit		13,570		605		3,014
Commercial loans secured		1,195		994		2,584
Commercial leases		872		154		518
Consumer:
Automobile		40,154		60,789		62,456
Home equity lines of credit		8,669		9,269		5,102
Other		927		1,290		1,573
Total loans originated	$	148,594	$	159,248	$	129,232
Loans purchased:
Real estate loans	$	—	$	—	$	—
Total loans purchased	$	—	$	—	$	—
Loans sold:
Whole loans	$	3,449	$	11,995	$	10,183
Total loans sold	$	3,449	$	11,995	$	10,183

(2)	Includes acquisition and development loans.

~~The~~3 Bank’s loan originations are derived from a number of sources, including referrals by realtors or automobile dealers, depositors and borrowers and advertising, as well as walk-in customers. The Bank’s solicitation programs consist of advertisements in local media, in addition to occasional participation in various community organizations and events. Real estate loans are originated by the Bank’s loan personnel. Automobile loans may be originated on an indirect basis through a limited number of approved dealers, and loan applications are accepted at the Bank’s offices.

LoanTable Underwriting Policies. The Bank’s lending activities are subject to the Bank’s written, non-discriminatory underwriting standards and to loan origination procedures prescribed by the Bank’s Board of Directors and its management. Detailed loan applications are obtained to determine the borrower’s ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Real estate loans up to $500,000, as well as all requests for lines of credit up to $250,000, may be approved by the Bank’s Loan Committee, which consists of the Bank’s President, Senior Vice President of Lending and Treasurer and meets weekly. All loans in excess of these amounts must be approved by the full Board of Directors. Individual officers of the Bank have been granted authority by the Board of Directors to approve loans up to varying specified dollar amounts, depending upon the type of loan. Automobile loans are approved by the Bank’s car loan manager or assistant manager and reviewed by the Bank’s Sr. Vice President who supervises lending operations. Contents

6Loan Maturity Schedules. The following table sets forth certain information at September 30, 2006 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity, including scheduled repayments of principal. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The table does not include any estimate of prepayments which significantly shorten the average life of mortgage loans and may cause the Bank’s repayment experience to differ from that shown below.

Applications for single-family real estate loans generally are underwritten and closed in accordance with the standards of the Federal Home Loan Mortgage Corporation, (“FHLMC”) and the Federal National Mortgage Association, (“FNMA”). Upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant’s employment, income and credit standing. If a proposed loan is to be secured by a mortgage on real estate, an appraisal of the real estate is undertaken by an appraiser approved by the Bank and licensed by the State of Maryland. In the case of single-family residential mortgage loans, except when the Bank becomes aware of a particular risk of environmental contamination, the Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made. A formal environmental report may be required in connection with commercial real estate loans, and the Bank obtains a Phase I environmental study in connection with its underwriting of acquisition and development loans.


	Due during the year ending September 30, 2006		Due 1 through 5 years after September 30, 2006	Due 5 years after September 30, 2006	Total
	*(In thousands)*
Real Estate Loans
Single-family residential	$	241	16,488	197,995	214,724
Single-family rental property		—	1,020	28,111	29,131
Commercial		1,684	15,082	93,413	110,179
Construction		2,492	18,473	18,056	39,021
Commercial lines of credit		8,568	741	297	9,606
Commercial leases		—	4,499	250	4,749
Commercial loans secured		—	365	—	365
Commercial loans unsecured		409	—	—	409
Consumer:
Automobile		66	53,239	225	53,530
Home equity lines of credit		—	—	17,942	17,942
Other		214	1,352	1,283	2,849

Total	$	13,674	111,259	357,572	482,505

ItThe isfollowing ~~the~~table ~~Bank’s policy~~sets toforth ~~record~~at aSeptember 30, ~~lien~~2006, on the ~~real~~dollar ~~estate~~amount ~~securing a loan and to obtain title insurance or an attorney’s certification which ensures that the property is free~~ of ~~prior~~all ~~encumbrances~~loans ~~and other possible title defects. Borrowers must also obtain~~due ~~hazard~~within ~~insurance~~one ~~policies~~year ~~prior to closing~~ and, ~~when~~one ~~the~~year ~~property~~or ismore inafter aSeptember 30, ~~flood~~2006 ~~plain~~which ashave ~~designated~~predetermined byinterest ~~Federal~~rates ~~Emergency~~and ~~Management~~have ~~Agency,~~floating ~~pay~~or ~~flood~~adjustable ~~insurance~~interest ~~policy premiums~~rates.

With respect to single-family residential mortgage loans, the Bank makes a loan commitment of between 30 and 60 days for each loan approved. If the borrower desires a longer commitment, the commitment may be extended for good cause and upon written approval. No fees are charged in connection with the issuance of a commitment letter. The interest rate is guaranteed until closing.


	Predetermined Rate		Floating or Adjustable Rates
	*(In thousands)*
Real Estate loans:
Single-family residential	$	201,613	$	13,111
Single-family rental property		10,911		18,220
Commercial		24,767		85,412
Construction		17,257		21,764
Commercial lines of credit		—		9,606
Commercial leases		4,749		—
Commercial loans secured		365		—
Commercial loans unsecured		409		—
Consumer:
Automobiles		53,530		—
Home equity lines of credit		—		17,942
Other		2,849		—

Total	$	316,450	$	166,055

~~The~~Scheduled ~~Bank~~contractual isprincipal ~~permitted~~repayments ~~to lend up to 97%~~ of ~~the lesser~~loans ofdo ~~the~~not ~~appraised~~reflect ~~value or~~ the ~~purchase~~actual ~~price~~life of ~~the~~such ~~real property securing a mortgage loan~~assets. The ~~However,~~average iflife ~~the amount~~ of aloans ~~residential loan originated or refinanced exceeds 80% of the appraised value, the Bank’s policy~~ is tosubstantially ~~obtain~~less ~~private mortgage~~than ~~insurance~~their atcontractual ~~the~~terms ~~borrower’s~~because ~~expense on the principal amount~~ of ~~the loan~~prepayments. ~~The~~In ~~Bank~~addition, ~~does~~due-on-sale ~~provide~~clauses aon ~~first~~loans ~~time~~generally ~~home~~give ~~buyers loan program in conjunction with~~ the ~~Federal Home Loan~~ Bank ~~of Atlanta where 100% of~~ the ~~loan~~right ~~amount~~to ~~will~~declare ~~be funded for qualified buyers. The Bank will make~~ a ~~single-family residential mortgage~~ loan ~~with~~immediately updue toand apayable ~~97%~~in ~~loan-to-value ratio if~~ the ~~required~~event, ~~private~~among ~~mortgage~~other things, ~~insurance~~that isthe ~~obtained.~~borrower ~~The~~sells ~~Bank generally limits~~ the ~~loan-to-value ratio on commercial~~ real ~~estate~~ ~~mortgage~~property ~~loans~~subject to ~~80%,~~the ~~although~~mortgage and the loan~~-to-value~~ ~~ratio~~is onnot ~~commercial real estate loans in limited circumstances has been as high as 90%~~repaid. The ~~Bank~~average ~~limits~~life ~~the~~of ~~loan-to-value~~mortgage ~~ratio on single-family rental property~~ loans tends to ~~80%.~~increase ~~Home equity loans are made in amounts which,~~ when ~~added~~current tomortgage ~~any~~loan ~~senior~~market ~~indebtedness,~~rates doare ~~not exceed 90% of the value of the property.~~

~~Under~~4 applicable law, with certain limited exceptions, loans and extensions of credit by a savings institution to a person outstanding at one time shall not exceed 15% of the institution’s unimpaired capital and surplus. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. Under these limits, the Bank’s loans to one borrower were limited to $8.2 million at September 30, 2004. Applicable law additionally authorizes savings institutions to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the savings institution is and continues to be in compliance with its fully phased-in regulatory capital requirements; (iii) the loans comply with applicable loan-to-value requirements; (iv) the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus; and (v) the Director of OTS, by order, permits the savings institution to avail itself of this higher limit. At September 30, 2004, the Bank had no lending relationships in excess of the loans-to-one-borrower limit. At September 30, 2004, the Bank’s largest loan customer was a $6.9 million relationship consisting of a medical office building and other residential and commercial investment properties. At September 30, 2004, the loans were current and performing in accordance with their terms.

InterestTable rates charged by the Bank on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters. Contents

~~Single-Family~~ substantially ~~Residential~~higher ~~Real~~than ~~Estate~~rates ~~Lending.~~on ~~The~~existing ~~Bank~~mortgage ~~historically~~loans ~~has~~and, ~~been~~conversely, ~~and~~decrease ~~continues~~when tocurrent bemortgage anloan ~~originator~~market ofrates ~~single-family,~~are ~~residential~~substantially ~~real~~lower than ~~estate~~rates ~~loans~~on inexisting ~~its~~mortgage ~~market area~~loans. ~~At September 30, 2004, single-family,~~

7Originations, Purchases and Sales of Loans. The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank concentrates its lending activities in its market area.

~~residential~~The ~~mortgage~~following ~~loans,~~table ~~excluding~~sets ~~single-family~~forth ~~rental~~certain ~~property~~information ~~loans~~with ~~and~~respect ~~home~~to ~~equity~~the ~~loans,~~Bank’s ~~totaled~~loan ~~$179.0 million~~origination, orpurchase ~~43.47%~~and ofsale ~~the~~activity ~~Bank’s~~for ~~gross loan~~the ~~portfolio~~periods indicated.

The Bank originates fixed-rate mortgage loans at competitive interest rates. At September 30, 2004, the Bank had $172.8 million of fixed-rate single-family mortgage loans, which amounted to 96.5% of the Bank’s single-family mortgage loans. The Bank emphasizes the origination of fixed-rate single-family residential mortgage loans with maturities of 15 years or less by offering more competitive rates on these loans as compared to the rates it offers on fixed-rate mortgage loans with terms in excess of 15 years.


	Year Ended September 30,
	2006		2005		2004
	*(In thousands)*
Loans originated:
Real Estate Loans:
Single-family residential	$	50,160	$	53,800	$	41,406
Single-family rental property		5,779		10,599		7,739
Commercial		36,463		39,095		27,866
Construction		14,738		18,652		6,196
Commercial lines of credit		3,275		8,174		13,570
Commercial loans secured		107		2,866		1,195
Commercial leases		2,745		190		872
Consumer:
Automobile		6,884		47,659		40,154
Home equity lines of credit		8,435		11,803		8,669
Other		896		1,089		927

Total loans originated	$	129,482	$	193,927	$	148,594

Loans purchased:
Real estate loans	$	0	$	0	$	0

Total loans purchased	$	0	$	0	$	0

Loans sold:
Whole loans	$	0	$	0	$	3,449

Total loans sold	$	0	$	0	$	3,449

The Bank’s ~~also~~loan ~~offers~~originations ~~adjustable-rate,~~are ~~single-family~~derived ~~residential~~from ~~mortgage loans.~~a Asnumber of ~~September 30~~sources, ~~2004,~~including ~~$6.2~~referrals ~~million~~by realtors, ordepositors ~~3.5%~~and ofborrowers ~~the~~and ~~Bank’s~~advertising, ~~single-family~~as ~~mortgage~~well ~~loans~~as ~~carried~~walk-in ~~adjustable rates~~customers. ~~After~~The ~~the initial term, the rate adjustments on the~~ Bank’s ~~adjustable-rate~~solicitation ~~loans~~programs ~~are~~consist ~~indexed~~of toadvertisements ain ~~rate~~local ~~which adjusts~~media, ~~annually based upon changes~~ in anaddition ~~index based on the weekly average yield on U.S. Treasury securities adjusted~~ to aoccasional ~~constant~~participation ~~comparable~~in ~~maturity~~various ofcommunity ~~one~~organizations ~~year,~~and ~~as made available by the Federal Reserve Board~~events. ~~The interest rates on most of the~~ ~~Bank’s~~Real ~~adjustable-rate~~estate ~~mortgage~~ loans are ~~adjusted~~originated ~~once~~by ~~a year, and~~ the Bank’s ~~offers~~loan ~~loans that have an initial adjustment period of one, three or five years~~personnel. ~~The~~Automobile ~~maximum adjustment is 2% per adjustment period with a maximum aggregate adjustment of 6% over the life of the loan. The Bank offers adjustable-rate mortgage~~ loans ~~that~~are ~~provide~~originated ~~for~~by ~~initial rates of interest below~~ the ~~rates that would prevail when the index used for repricing is applied, i.e., “teaser” rates. All of the~~ Bank’s ~~adjustable-rate loans require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the~~ loan bypersonnel ~~the~~and ~~end of the~~ loan ~~term~~applications ~~and,~~are ~~thus,~~accepted doat ~~not permit any of~~ the ~~increased payment~~Bank’s ~~to be added to the principal amount of the loan, known as “negative amortization~~offices.”

~~The~~Loan ~~retention~~Underwriting ofPolicies. ~~adjustable-rate~~The ~~loans in the~~ Bank’s ~~portfolio~~lending ~~helps~~activities ~~reduce~~are subject to the Bank’s ~~exposure~~written, tonon-discriminatory ~~increases~~underwriting instandards and ~~prevailing~~to ~~market~~loan ~~interest rates.~~origination ~~However,~~procedures ~~there~~prescribed ~~are~~by ~~unquantifiable~~the ~~credit~~Bank’s ~~risks~~Board ~~resulting~~of ~~from~~Directors ~~potential~~and ~~increases~~its inmanagement. ~~costs~~Detailed toloan ~~borrowers~~applications inare ~~the~~obtained ~~event~~to ofdetermine ~~upward~~the ~~repricing~~borrower’s ofability ~~adjustable-rate~~to ~~loans.~~repay, Itand isthe ~~possible~~more ~~that~~significant ~~during~~items ~~periods~~on ofthese ~~rising~~applications are ~~interest~~verified ~~rates,~~through the ~~risk~~use of ~~default~~ oncredit ~~adjustable-rate~~reports, ~~loans~~financial ~~may~~statements ~~increase~~and ~~due~~confirmations. toReal ~~increases~~estate inloans ~~interest~~up ~~costs~~ to ~~borrowers.~~$1 ~~Further~~million, ~~although~~as ~~adjustable-rate~~well ~~loans~~as ~~allow~~all ~~the~~requests ~~Bank~~for tolines ~~increase~~of ~~the~~credit ~~sensitivity~~up ofto ~~its~~$500,000, ~~interest-earning~~may ~~assets~~be toapproved ~~changes~~by inthe ~~interest~~Bank’s ~~rates~~Loan Committee, ~~the~~which ~~extent~~consists of ~~this~~the ~~interest~~Bank’s ~~sensitivity~~President, isExecutive ~~limited~~Vice byPresident ~~the~~of ~~initial~~Lending ~~fixed-rate~~and ~~period~~Treasurer ~~before~~and ~~the~~meets ~~first~~weekly. ~~adjustment~~All ~~and~~loans ~~the~~in ~~lifetime~~excess ~~interest~~of ~~rate~~these ~~adjustment~~amounts ~~limitations.~~must ~~Accordingly,~~be ~~there~~approved ~~can~~by bethe noBoard ~~assurance~~of ~~that~~Directors. ~~yields~~Individual onofficers of the Bank’s ~~adjustable-rate~~have ~~loans~~been granted authority by the ~~will~~Board ~~fully~~of ~~adjust~~Directors to ~~compensate~~approve ~~for~~loans ~~increases~~up into ~~the~~varying ~~Bank’s~~specified ~~cost~~dollar amounts, depending upon the type of ~~funds~~loan. ~~Finally,~~Automobile ~~adjustable-rate~~ loans ~~increase~~are ~~the~~approved ~~Bank’s~~by ~~exposure~~the, toSenior ~~decreases~~Loan inOfficer ~~prevailing~~and ~~market~~consumer ~~interest~~loan ~~rates,~~underwriters ~~although~~and ~~decreases~~reviewed inby the Bank’s ~~cost~~Executive ~~of funds~~Vice ~~tend~~President towho ~~offset~~supervises ~~this~~lending ~~effect~~operations.

Single-family Rental Property Loans. The Bank also offers single-family residential mortgage loans secured by properties that are not owner-occupied. As of September 30, 2004, single-family rental property loans totaled $19.3 million, or 4.7%, of the Bank’s gross loan portfolio. Originations of single-family rental property loans were $7.7 million, $7.0 million and $2.7 million for the years ended September 30, 2004, 2003 and 2002, respectively. Single-family residential mortgage loans secured by nonowner-occupied properties are made on a fixed-rate or an adjustable-rate basis and carry interest rates generally from .5% ~~to 1.0% above the rates charged on comparable loans secured by owner-occupied properties. The maximum term on such loans is 30 years.~~

ConstructionTable Lending. A substantial portion of the Bank’s construction loans are originated for the construction of owner-occupied, single-family dwellings in the Bank’s primary market area. Residential construction loans are offered primarily to individuals building their primary or secondary residence, as well as to selected local developers to build single-family dwellings. Generally, loans to owner/occupants for the construction of owner-occupied, single-family residential properties are originated in connection with the permanent loan on the property and have a construction term of up to 12 months. Such loans are offered on a fixed-rate or adjustable-rate basis. Interest rates on residential construction loans made to the owner/occupant have interest rates during the construction period equal to the same rate on the permanent loan selected by the customer. Interest rates on residential construction loans to builders are set at the prime rate plus a margin of between .0% and 1.5%. Interest rates on commercial construction loans are based on the prime rate plus a negotiated margin of between .0% and 1.5% and adjust monthly, with construction terms generally not exceeding 18 months. Advances are made on a percentage of completion basis. At September 30, 2004, $23.2 million, or 5.6%, of the Bank’s gross loan portfolio consisted of commercial construction loans, acquisition and development loans, and construction loans on single family residences. Contents

8Applications for single-family real estate loans generally are underwritten and closed in accordance with the standards of the Federal Home Loan Mortgage Corporation, (“FHLMC”) and the Federal National Mortgage Association, (“FNMA”). Upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to verify specific information relating to the loan applicant’s employment, income and credit standing. If a proposed loan is to be secured by a deed of trust or a mortgage on real estate, an appraisal of the real estate is generally undertaken by an appraiser approved by the Bank and licensed by the State of Maryland. In the case of single-family residential mortgage loans, except when the Bank becomes aware of a particular risk of environmental contamination, the Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made. A formal environmental report may be required in connection with commercial real estate loans, and the Bank may obtain a Phase I environmental study in connection with its underwriting of acquisition and development loans.

~~Prior~~It is the Bank’s policy to ~~making~~record a lien ~~commitment~~on tothe ~~fund~~real estate securing a loan, ~~the~~and ~~Bank~~to ~~requires~~obtain ~~both~~title aninsurance ~~appraisal~~or ofan ~~the~~attorney’s ~~property~~certification ~~by appraisers~~which ~~approved~~ensures bythat the ~~Board~~property ofis ~~Directors~~free ~~and~~of aprior ~~study~~encumbrances ofand ~~projected~~other ~~construction~~possible ~~costs~~title defects. ~~The~~Borrowers ~~Bank~~must also ~~reviews~~obtain ~~and~~hazard ~~inspects~~insurance policies ~~each~~prior ~~project~~to atclosing and, when the ~~commencement~~property ofis ~~construction~~in ~~and~~a flood plain as ~~needed~~designated ~~prior~~by toFederal ~~disbursements~~Emergency ~~during~~Management ~~the~~Agency, ~~term~~pay offlood ~~the~~insurance ~~construction loan~~policy premiums.

~~Consolidation~~With inrespect ~~the building industry and the increasing presence in the Bank’s market of large builders that are not locally based have limited the Bank’s ability~~ to ~~compete~~single-family ~~for~~residential ~~some~~mortgage loans, ~~to builders because~~ the Bank’s ~~loans-to-one-borrower~~makes ~~limitation~~a ~~limits~~loan ~~its~~commitment ~~ability to meet the volume requirements~~ of ~~the~~between ~~large~~30 ~~builders.~~and ~~The~~60 ~~Bank’s~~days ~~construction~~for ~~loans~~each ~~totaled~~loan ~~$23~~approved.2 ~~million,~~If ~~$16.4~~the ~~million~~borrower ~~and~~desires ~~$11.7~~a ~~million~~longer ~~at September 30~~commitment, ~~2004,~~the ~~2003,~~commitment ~~2002,~~may ~~respectively,~~be ~~and construction loan originations were $6.2 million, $2.2~~extended ~~million~~for ~~and~~good ~~$1.7~~cause ~~million during the years ended September 30, 2004, 2003~~ and ~~2002,~~upon ~~respectively~~written approval.

OnThe ~~occasion, the~~ Bank ~~makes~~is ~~acquisition~~permitted ~~and development loans~~ to ~~local~~lend ~~developers~~up to ~~acquire~~97% ~~and~~of ~~develop~~the ~~land~~lesser ~~for~~of ~~sale~~the toappraised ~~builders~~value ~~who~~or ~~will~~the ~~construct~~purchase ~~single-family~~price ~~residences.~~of ~~Acquisition~~the ~~and~~real ~~development~~property ~~loans,~~securing ~~which~~a ~~are~~mortgage ~~considered~~loan. byHowever, if the ~~Bank~~amount toof bea ~~construction~~residential ~~loans,~~loan ~~are~~originated ~~made~~or atrefinanced aexceeds ~~rate~~90% ~~that~~of ~~adjusts monthly, based on~~ the ~~prime~~appraised ~~rate plus a negotiated margin~~value, ~~for~~the ~~terms~~Bank’s ofpolicy upis to ~~three~~obtain ~~years. Interest~~private ~~only~~mortgage isinsurance ~~paid~~at ~~during~~ the ~~term~~borrower’s expense ofon the ~~loan, and the~~ principal ~~balance~~amount of the loan. isThe ~~paid~~Bank ~~down~~does asprovide ~~developed~~a ~~lots~~first ~~are~~time ~~sold~~home tobuyers ~~builders.~~loan ~~Generally,~~program in ~~connection~~conjunction with ~~acquisition~~the ~~and~~Federal ~~development~~Home ~~loans,~~Loan ~~the~~ Bank ~~issues~~of aAtlanta ~~letter~~where 100% of ~~credit~~the ~~to secure~~loan ~~the~~amount ~~developer’s~~will ~~obligation~~be tofunded ~~local~~for ~~governments~~qualified tobuyers. ~~complete~~The ~~certain~~Bank ~~work.~~will Ifmake a ~~the~~single-family ~~developer~~residential ~~fails~~mortgage loan with up to ~~complete~~a 97% loan-to-value ratio if the required ~~work,~~private ~~the~~mortgage ~~Bank~~insurance ~~would~~is beobtained. ~~required~~The toBank ~~fund~~generally limits the ~~cost~~loan-to-value ofratio ~~completing~~on ~~the~~commercial ~~work~~real upestate tomortgage ~~the~~loans ~~amount~~to of80%, although the loan-to-value ~~letter~~ratio ofon ~~credit. Letters~~commercial ofreal ~~credit~~estate ~~generate~~loans ~~fee~~in ~~income~~limited ~~for~~circumstances ~~the~~has ~~Bank~~been ~~but~~as ~~create~~high ~~additional~~as ~~risk~~90%. AtThe ~~September~~Bank ~~30,~~limits ~~2004,~~ the ~~Bank~~loan-to-value ~~had~~ratio ~~eight~~on ~~such~~single-family ~~facilities~~rental ~~outstanding~~property ~~totaling~~loans ~~$634,000~~to 80%. ~~All~~Home ~~acquisition~~equity ~~and development~~ loans ~~were~~are ~~performing~~made in ~~accordance~~amounts ~~with~~which, ~~their~~when added to ~~terms~~any atsenior ~~such~~indebtedness, ~~date~~do not exceed 90% of the value of the property.

~~Construction~~Under ~~financing~~applicable ~~generally~~law, ~~is considered~~with tocertain ~~involve~~limited aexceptions, ~~higher~~loans ~~degree~~and extensions of ~~risk~~credit ofby ~~loss~~a ~~than~~savings ~~long-term~~institution ~~financing~~to ona ~~improved,~~person ~~occupied~~outstanding ~~real~~at ~~estate.~~one ~~Risk~~time ofshall ~~loss~~not onexceed a15% ~~construction~~of ~~loan~~the isinstitution’s ~~dependent~~unimpaired ~~largely~~capital ~~upon~~and ~~the~~surplus. ~~accuracy~~Loans ofand ~~the~~extensions ~~initial estimate~~ of ~~the~~credit ~~property’s~~fully ~~value~~secured ~~at completion~~by ofreadily ~~construction~~marketable orcollateral ~~development~~may comprise ~~and~~an ~~the~~additional ~~estimated~~10% ~~cost~~of ~~(including~~unimpaired ~~interest)~~capital ofand ~~construction~~surplus. ~~During~~Under these limits, the ~~construction~~Bank’s ~~phase,~~loans ato ~~number~~one ofborrower ~~factors~~were ~~could~~limited ~~result~~to in$7.3 ~~delays~~million ~~and~~at ~~cost~~September 30, ~~overruns~~2006. IfApplicable ~~the~~law ~~estimate~~additionally ofauthorizes ~~construction~~savings ~~costs~~institutions ~~proves~~ to bemake ~~inaccurate~~loans ~~and~~to ~~the~~one borrower, isfor ~~unable~~any topurpose, ~~meet~~in ~~the~~an ~~Bank’s~~amount ~~requirements~~not ofto ~~putting~~exceed up$500,000 ~~additional~~or ~~funds~~in toan ~~cover~~amount ~~extra~~not ~~costs~~to orexceed ~~change~~the ~~orders,~~lesser ~~then~~of ~~the~~$30,000,000 ~~Bank~~or ~~will~~30% ~~demand~~of ~~that~~unimpaired ~~the~~capital ~~loan~~and besurplus ~~paid~~to ~~off~~develop ~~and~~residential housing, ifprovided: ~~necessary,~~(i) the ~~institute~~purchase ~~foreclosure~~price of ~~proceedings,~~each orsingle-family ~~refinance~~dwelling in the ~~loan.~~development Ifdoes not exceed $500,000; (ii) the ~~estimate~~savings ofinstitution ~~value~~is ~~proves~~and continues to be ~~inaccurate,~~in ~~the~~compliance ~~Bank~~with ~~may~~its befully ~~confronted,~~phased-in atregulatory orcapital ~~prior~~requirements; to (iii) the ~~maturity~~loans ofcomply ~~the~~with applicable loan,-to-value ~~with~~requirements; ~~collateral~~(iv) the ~~having~~aggregate aamount ~~value~~of ~~which~~loans ismade ~~insufficient~~under tothis ~~assure~~authority ~~full~~does ~~repayment.~~not ~~The~~exceed ~~Bank~~150% ~~has sought~~of tounimpaired ~~minimize~~capital ~~this~~and ~~risk~~surplus; byand ~~limiting~~(v) the ~~construction~~Director ~~lending~~of toOTS, ~~qualified~~by ~~borrowers (i.e.~~order, ~~borrowers~~permits ~~who~~the ~~satisfy~~savings ~~all~~institution ~~credit~~to ~~requirements~~avail ~~and~~itself ~~whose~~of ~~loans~~this higher ~~satisfy~~limit. ~~all~~At ~~other~~September 30, ~~underwriting~~2006, ~~standards~~the ~~which~~Bank ~~would~~had ~~apply~~no tolending ~~the~~relationships ~~Bank’s~~in ~~permanent mortgage~~excess ~~loan~~of ~~financing~~the ~~for~~loans-to-one-borrower ~~the~~limit. ~~subject~~At ~~property)~~September 30, in2006, the Bank’s ~~market~~largest ~~area.~~loan Oncustomer ~~loans~~was toa ~~builders,~~$6.2 ~~the~~million ~~Bank~~relationship ~~works~~consisting ~~only~~of ~~with~~residential properties. ~~selected~~At ~~builders~~September 30, ~~with~~2006, ~~whom~~the itloans ~~has~~were ~~experience~~current and ~~carefully~~performing ~~monitors~~in ~~the~~accordance ~~creditworthiness~~with oftheir ~~the builders~~terms.

~~Commercial~~Interest ~~Real~~rates ~~Estate~~charged ~~Lending.~~by the ~~The~~ Bank’s ~~commercial~~on ~~real estate loan portfolio includes~~ loans toare ~~finance~~affected ~~the~~principally ~~acquisition~~by ofcompetitive ~~small office buildings~~factors, ~~churches,~~the ~~medical~~demand ~~condominiums,~~for ~~small~~such ~~shopping~~loans ~~centers~~ and ~~small commercial and industrial buildings. Such loans generally range in size from $100,000 to $5 million, with~~ the ~~largest~~supply ~~having~~of anfunds ~~outstanding~~available ~~principal~~for ~~balance~~lending ~~of $4~~purposes.0 ~~million~~These atfactors ~~September 30~~are, ~~2004.~~in ~~At September 30~~turn, ~~2004,~~affected ~~the~~by ~~Bank~~general ~~had~~economic ~~$64.6 million of commercial real estate loans~~conditions, ~~which~~monetary ~~amounted~~policies ~~to 15.7%~~ of the ~~Bank’s gross loan~~ ~~portfolio.~~federal ~~Commercial~~government, ~~real~~including ~~estate loans are originated on a fixed-rate or adjustable-rate basis with terms of up to 25 years at a rate that is at least 1% above~~ the ~~rate~~Federal ~~charged~~Reserve byBoard, ~~the~~legislative ~~Bank~~tax onpolicies ~~single-family residential mortgage loans having comparable terms~~ and ~~interest~~government ~~rate~~budgetary ~~adjustment periods~~matters.

~~Commercial real estate lending entails significant additional risks as compared with single~~Single-~~family~~Family Residential ~~residential~~Real ~~property~~Estate ~~lending~~Lending. ~~Commercial~~The ~~real~~Bank ~~estate~~historically ~~loans~~has ~~typically~~been ~~involve~~and ~~larger~~continues ~~loan balances~~ to ~~single~~be ~~borrowers~~an ororiginator ~~groups~~ of ~~related borrowers.~~single-family, ~~The~~residential ~~payment experience on such loans typically is dependent on the successful operation of the~~ real estate ~~project,~~loans ~~retail establishment or business. These risks can be significantly impacted by supply and demand conditions~~ in ~~the market for office and retail space and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to~~ its market area ~~or to borrowers with which it has prior experience or who are otherwise known to the Bank~~. ItAt ~~is the Bank’s policy generally to obtain annual financial statements of the business of the borrower or the project for which commercial real estate loans are made. In addition~~September 30, ~~in the case of commercial real estate loans made to a legal entity~~2006, ~~the Bank seeks~~single-family, ~~whenever possible, to obtain personal guarantees and annual financial statements of the principals of the legal entity.~~

CommercialTable Lines of Credit. The Bank provides commercial lines of credit to businesses within the Bank’s market area. These loans are secured by business assets, including real property, equipment, automobiles and consumer leases. Generally, all loans are further personally guaranteed by the owners of the business. The commercial lines have adjustable interest rates tied to the prime rate and are offered at rates from prime plus 0% to prime plus 3 1/2%. As of September 30, 2004, the Bank had $16.0 million of such loans outstanding. Contents

~~Consumer~~ residential ~~Lending.~~mortgage ~~The consumer~~ loans, ~~currently~~excluding insingle-family ~~the~~rental ~~Bank’s~~property ~~loan portfolio~~loans ~~consist~~and ofhome ~~automobile~~equity loans, ~~home~~totaled ~~equity~~$214.7 ~~lines~~million, ofor ~~credit~~44.5% ~~and~~of ~~loans~~the ~~secured~~Bank’s bygross loan ~~savings deposit~~portfolio.

~~Automobile~~The ~~loans~~Bank ~~totaled~~originates ~~$88.1~~fixed-rate ~~million,~~mortgage orloans ~~21.4%,~~at ofcompetitive ~~the~~interest ~~Bank’s~~rates. ~~gross~~At ~~loan portfolio, at~~ September 30, ~~2004. Automobile loans are secured by both new and used cars and~~2006, ~~depending on~~ the ~~creditworthiness~~Bank ~~of the borrower, may be made for up to 100% of the “sticker price” or purchase price, whichever is lower, or, with respect to used automobiles, the loan values as published by a~~had ~~wholesale value listing utilized by the automobile industry~~$201.6 ~~Automobile~~million ~~loans~~of ~~are~~fixed-rate ~~made directly to the borrower~~single-~~owner~~family ormortgage ~~indirectly~~loans, ~~where~~which ~~the~~amounted ~~financing~~to ~~is arranged by the car dealer~~93.9% ~~Management~~ of the Bank’s ~~estimates~~single-family ~~that~~mortgage ~~approximately 80% of automobile~~ loans ~~are originated on an indirect basis through various dealerships located in its market area~~. ~~Automobile~~The ~~loans~~Bank ~~originated~~emphasizes onthe anorigination ~~indirect~~of ~~basis~~fixed-rate ~~are~~single-family ~~considered~~residential tomortgage ~~entail greater credit risk than automobile~~ loans ~~originated~~with onmaturities aof ~~direct~~30 ~~basis. New and relatively new cars (less than two~~ years ~~old~~ or ~~20,000 miles or~~ less) ~~are~~by ~~financed~~offering ~~for~~competitive ~~a period generally of up to six years, while used cars are financed for a period generally of up to five years, or less, depending on the age of the car~~rates. ~~Collision insurance is required for all automobile loans. The Bank also maintains a blanket collision insurance policy that provides insurance for any borrower who allows his insurance to lapse.~~

The Bank ~~originates~~also ~~second~~offers adjustable-rate single-family residential mortgage loans. ~~and~~As ~~home~~of September 30, ~~equity~~2006, ~~lines~~$13.1 million, or 6.1% of ~~credit~~the Bank’s single-family mortgage loans carried adjustable rates. AsAfter the initial term, the rate adjustments on the Bank’s adjustable-rate loans are indexed to a rate which adjusts annually based upon changes in an index based on the weekly average yield on U.S. Treasury securities adjusted to a constant comparable maturity of ~~September~~one 30year, ~~2004,~~as ~~home~~made ~~equity~~available ~~lines~~by ofthe ~~credit~~Federal ~~totaled~~Reserve ~~$15~~Board.6 ~~million~~The interest rates on most of the Bank’s adjustable-rate mortgage loans are adjusted once a year, and the Bank offers loans that have an initial adjustment period of one, three or 3five years.8 The maximum adjustment is 2% per adjustment period with a maximum aggregate adjustment of 6% over the ~~Bank’s~~life ~~gross~~of ~~loan~~the ~~portfolio~~loan. ~~Second~~The Bank offers adjustable-rate mortgage loans ~~are~~that ~~made~~provide atfor ~~fixed~~initial rates ~~and~~of ~~for~~interest ~~terms~~below ofthe uprates tothat 15would ~~years~~prevail ~~and~~when ~~totaled~~the ~~$13.5~~index ~~million,~~used orfor 3repricing is applied, i.3%e., “teaser” rates. All of the Bank’s ~~gross~~adjustable-rate loans atrequire ~~September~~that 30any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the loan term and, ~~2004~~thus, do not permit any of the increased payment to be added to the principal amount of the loan, known as “negative amortization.”

The retention of adjustable-rate loans in the Bank’s ~~home~~ ~~equity~~portfolio ~~lines~~helps ofreduce ~~credit~~the ~~currently~~Bank’s ~~have~~exposure ~~adjustable~~to increases in prevailing market interest rates. ~~tied~~However, tothere ~~the~~are ~~prime~~unquantifiable ~~rate~~credit ~~and~~risks ~~can~~resulting befrom ~~offered~~potential ~~anywhere~~increases ~~from~~in ascosts ~~low~~to asborrowers in the event ~~prime~~of ~~rate~~upward ~~less~~repricing of adjustable-rate loans.~~25%~~ upIt tois ~~the~~possible ~~prime~~that ~~rate.~~during ~~The~~periods of rising interest rates, the risk of default on adjustable-rate loans may ~~not~~increase ~~adjust~~due to aincreases ~~rate~~in ~~higher~~interest ~~than~~costs ~~18%~~to borrowers. ~~The~~Further, although ~~home~~adjustable-rate ~~equity~~loans ~~lines~~allow ofthe ~~credit~~Bank ~~require~~to ~~monthly~~increase ~~payments~~the ~~until~~sensitivity ~~the~~of ~~loan~~its isinterest-earning ~~paid~~assets to changes in ~~full~~interest rates, ~~with~~the aextent ~~loan~~of ~~term~~this ~~not~~interest tosensitivity ~~exceed~~is 20limited ~~years.~~by ~~The~~the ~~minimum~~initial ~~monthly~~fixed-rate ~~payment~~period isbefore ~~1.5%~~the offirst adjustment and the lifetime ~~outstanding~~interest ~~principal~~rate ~~balance~~adjustment limitations. ~~Home~~Accordingly, ~~equity~~there ~~lines~~can ofbe ~~credit~~no ~~are~~assurance ~~secured~~that ~~by subordinate~~yields ~~liens~~on ~~against~~the ~~residential~~Bank’s ~~real~~adjustable-rate ~~property.~~loans ~~The~~will ~~Bank~~fully ~~requires~~adjust ~~that~~to ~~fire~~compensate ~~and~~for ~~extended~~increases ~~coverage~~in ~~casualty~~the ~~insurance~~Bank’s ~~(and,~~cost ifof ~~appropriate~~funds. Finally, ~~flood~~adjustable-rate ~~insurance)~~loans increase bethe ~~maintained~~Bank’s exposure to decreases in anprevailing ~~amount~~market atinterest ~~least~~rates, ~~sufficient~~although decreases in the Bank’s cost of funds tend to ~~cover~~offset ~~its~~this ~~loan~~effect.

Single-family Rental Property Loans. The Bank ~~makes~~also ~~savings~~offers ~~account~~single-family residential mortgage loans ~~for~~secured upby toproperties ~~90%~~that are not owner-occupied. As of ~~the~~September 30, ~~depositor’s savings~~2006, ~~account~~single-family ~~balance.~~rental ~~The~~property loans ~~interest~~totaled ~~rate~~$29.1 ismillion, ~~normally~~or 26.0%, ~~above~~of the ~~rate~~Bank’s ~~paid~~gross onloan ~~the~~portfolio. ~~related~~Originations ~~savings~~of ~~account~~single-family rental property loans were $5.8 million, $10.6 million and ~~the~~$7.7 ~~account~~million ~~must~~for bethe ~~pledged~~years asended ~~collateral~~September 30, to2006, ~~secure~~2005 ~~the~~and ~~loan~~2004, respectively. ~~Interest~~Single-family ~~generally~~residential ismortgage ~~billed~~loans secured by non-owner-occupied properties are made on a ~~quarterly~~fixed-rate or an adjustable-rate basis. Atand ~~September~~carry ~~30, 2004,~~interest ~~savings~~rates ~~account~~generally ~~loans~~from ~~accounts~~0.5% ~~totaled~~to $1.20% ~~million,~~above orthe rates charged on comparable loans secured by owner-occupied properties.~~29%,~~ ofThe ~~the~~maximum ~~Bank’s~~term ~~gross~~on ~~loan~~such ~~portfolio~~loans is 30 years.

AsConstruction ~~part~~Lending. ofA substantial portion of the Bank’s ~~loan~~construction ~~strategy~~loans are originated for the construction of owner-occupied, single-family dwellings in the Bank’s ~~has~~primary ~~diversified~~market ~~its~~area. ~~lending~~Residential ~~portfolio~~construction loans are offered primarily to ~~afford~~individuals ~~the~~building ~~Bank~~their ~~the~~primary ~~opportunity~~or secondary residence, as well as to ~~earn~~selected ~~higher~~local ~~yields~~developers ~~and~~to build single-family dwellings. Generally, loans to owner/occupants for the construction of owner-occupied, single-family residential properties are originated in connection with the ~~provide~~permanent loan on the property and have a ~~fuller~~construction ~~range~~term of ~~banking~~up ~~services~~to 12 months. ~~These~~Such ~~products~~loans are offered on a fixed-rate or adjustable-rate basis. Interest rates on residential construction loans made to the owner/occupant have ~~generally~~interest ~~been~~rates induring the construction period equal to the ~~consumer~~same ~~area~~rate ~~and~~on ~~include~~the ~~surgical~~permanent ~~loans,~~loan ~~boat~~selected by the customer. Interest rates on residential construction loans to builders are set at the prime rate plus a margin of between 0% and 1.5%. Interest rates on commercial construction loans ~~for~~are based on the ~~purchase~~prime rate plus a negotiated margin of ~~recreational~~between ~~vehicles~~0% and 1.5% ~~Such~~and ~~loans~~adjust ~~totaled~~monthly, with construction terms generally not exceeding 18 months. Advances are made on a percentage of completion basis. At September 30, 2006, $139.90 million, ator ~~September~~8.1%, 30of the Bank’s gross loan portfolio consisted of commercial construction loans, ~~2004~~acquisition and development loans, and construction loans on single family residences.

~~Consumer~~7 lending affords the Bank the opportunity to earn yields higher than those obtainable on single-family residential lending. However, consumer loans entail greater risk than do residential mortgage loans, particularly in the case of loans which are unsecured or secured by rapidly depreciable assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by events such as job loss, divorce, illness or personal bankruptcy.

LoanTable Fees andof Servicing. The Bank receives fees in connection with late payments and for miscellaneous services related to its loans. The Bank also charges fees in connection with loan originations typically from 0 to 3 Contents

10Prior to making a commitment to fund a loan, the Bank requires both an appraisal of the property by appraisers approved by the Board of Directors and a study of projected construction costs. The Bank also reviews and inspects each project at the commencement of construction and as needed prior to disbursements during the term of the construction loan.

Consolidation in the building industry and the increasing presence in the Bank’s market of large builders that are not locally ~~points~~based ~~(one~~have ~~point~~limited ~~being~~the ~~equal~~Bank’s ability to 1%compete offor some loans to builders because the ~~loan~~Bank’s ~~amount)~~loans-to-one-borrower onlimitation ~~residential~~limits ~~and~~its ~~commercial~~ability ~~loan~~to ~~originations~~meet the volume requirements of the large builders. The Bank’s ~~services~~construction loans totaled ~~sold~~$39.0 tomillion, ~~FHLMC~~$53.8 million and ~~FNMA~~$23.2 ~~The Bank~~million ~~also~~at ~~services~~September 30, ~~participation~~2006, ~~loans~~2005 ~~originated~~ and ~~sold~~2004, byrespectively, ~~the~~and ~~Bank~~construction ~~with~~loan ~~servicing~~originations ~~retained~~were $17.3 million, $12.4 million and ~~earns~~$6.2 ~~minimal~~million ~~income~~during ~~from~~the ~~this~~years ~~activity~~ended September 30, 2006, 2005 and 2004, respectively.

~~Nonperforming~~On ~~Loans~~occasion, ~~and~~the ~~Other~~Bank ~~Problem~~makes ~~Assets.~~acquisition Itand isdevelopment ~~management’s~~loans ~~policy~~ to ~~continually~~local ~~monitor~~developers ~~its loan portfolio~~ to ~~anticipate~~acquire and ~~address~~develop land ~~potential~~for ~~and~~sale ~~actual~~to ~~delinquencies.~~builders ~~When~~who awill ~~borrower~~construct ~~fails~~single-family toresidences. ~~make~~Acquisition aand ~~payment~~development onloans, awhich ~~loan,~~are considered by the Bank ~~takes~~to ~~immediate~~be ~~steps~~construction toloans, ~~have~~are ~~the~~made ~~delinquency~~at ~~cured~~a ~~and~~rate ~~the~~that ~~loan~~adjusts ~~restored~~monthly, tobased ~~current~~on ~~status.~~the ~~Loans~~prime ~~which~~rate ~~are~~plus ~~past~~a ~~due~~negotiated margin, 15for ~~days~~terms ~~incur~~of aup ~~late~~to ~~fee~~three ofyears. 5%Interest ~~of principal~~only ~~and~~is ~~interest~~paid ~~due.~~during Asthe aterm ~~matter~~ of ~~policy~~the loan, and the ~~Bank~~principal ~~will~~balance ~~send~~of athe ~~late~~loan ~~notice~~is topaid ~~the~~down ~~borrower~~as ~~after~~developed ~~the~~lots ~~loan~~are ~~has~~sold ~~been~~to ~~past~~builders. ~~due~~Generally, 15in ~~days~~connection with acquisition and ~~again~~development ~~after~~loans, the 30Bank ~~days.~~issues Ifa ~~payment~~letter isof ~~not~~credit ~~promptly~~to ~~received,~~secure the ~~borrower~~developer’s isobligation ~~contacted~~to ~~again,~~local ~~and~~governments ~~efforts are~~to ~~made~~complete tocertain ~~formulate~~work. anIf ~~affirmative~~the ~~plan~~developer fails to ~~cure~~complete the ~~delinquency.~~required ~~Generally~~work, ~~after~~the ~~any~~Bank ~~loan~~would isbe ~~delinquent~~required 90to ~~days~~fund orthe ~~more,~~cost ~~formal~~of ~~legal~~completing ~~proceedings~~the ~~are~~work ~~commenced~~ up to ~~collect~~the ~~amounts~~amount ~~owed.~~of In the ~~case~~letter of ~~automobile~~credit. ~~loans,~~Letters ~~late~~of ~~notices~~credit ~~are~~generate ~~sent~~fee ~~after loans~~income ~~are~~for ~~ten~~the ~~days~~Bank ~~delinquent~~but create additional risk. At September 30, ~~and~~2006, the ~~collateral~~Bank ishad ~~seized~~22 ~~after~~letters aof ~~loan~~credit isoutstanding ~~delinquent~~totaling ~~60 days~~$754,000. ~~Repossessed~~All ~~cars~~acquisition ~~subsequently~~and ~~are~~development ~~sold~~loans were performing in accordance with their terms at ~~auction~~such date.

~~Loans~~Construction financing generally ~~are~~is ~~placed~~considered to involve a higher degree of risk of loss than long-term financing on ~~nonaccrual~~improved, ~~status~~occupied ifreal ~~the~~estate. Risk of loss on a construction loan ~~becomes~~is ~~past~~dependent ~~due~~largely ~~more~~upon ~~than~~the 90accuracy ~~days,~~of ~~except~~the ininitial ~~instances~~estimate ~~where~~of inthe ~~management~~property’s ~~judgment~~value at completion of construction or development and ~~there~~the isestimated nocost ~~doubt~~(including asinterest) toof ~~full~~construction. ~~collectibility~~During the construction phase, a number of ~~principal~~factors could result in delays and ~~interest,~~cost overruns. If the estimate of construction costs proves to be inaccurate and the borrower is unable to meet the Bank’s requirements of putting up additional funds to cover extra costs or ~~management~~change ~~concludes~~orders, then the Bank will demand that ~~payment~~the inloan ~~full~~be ispaid ~~not~~off ~~likely~~and, if necessary, institute foreclosure proceedings, or refinance the loan. ~~Consumer~~If ~~loans~~the ~~are~~estimate ~~generally~~of value ~~charged~~proves ~~off~~to be inaccurate, the Bank may be confronted, at or ~~any~~prior ~~expected~~to ~~loss~~the ismaturity ~~reserved~~of ~~for~~the loan, ~~after~~with ~~they~~collateral ~~become~~having ~~more~~a ~~than~~value ~~120~~which ~~days~~is insufficient to assure full repayment. The Bank has sought to minimize this risk by limiting construction ~~past~~lending ~~due~~to qualified borrowers (i.e., ~~All~~borrowers ~~other~~who satisfy all credit requirements and whose loans ~~are~~satisfy ~~charged~~all ~~off~~other ~~when~~underwriting ~~management~~standards ~~concludes~~which ~~that~~would ~~they~~apply ~~are~~to ~~uncollectible.~~the ~~See~~Bank’s ~~Note~~permanent 3mortgage ofloan ~~Notes~~financing for the subject property) in the Bank’s market area. On loans to ~~Financial~~builders, ~~Statements~~the Bank works only with selected builders with whom it has experience and carefully monitors the creditworthiness of the builders.

Commercial Real ~~estate~~Estate ~~acquired~~Lending. byThe ~~the~~ Bank’s ascommercial ~~a result of foreclosure is classified as~~ real estate ~~acquired~~loan ~~through~~portfolio ~~foreclosure~~includes ~~until~~loans ~~such~~to ~~time~~finance asthe itacquisition isof ~~sold.~~small ~~When~~office ~~such~~buildings, ~~property~~churches, ismedical ~~acquired~~condominiums, itsmall isshopping ~~initially~~centers ~~recorded~~and atsmall ~~the~~commercial ~~lower of cost or estimated fair value~~ and ~~subsequently~~industrial atbuildings. ~~the~~Such ~~lower~~loans ofgenerally ~~book~~range ~~value~~in orsize ~~fair~~from ~~value~~$100,000 ~~less~~to ~~estimated~~$5 ~~costs~~million, towith ~~sell.~~the ~~Costs~~largest ~~relating~~having toan ~~holding~~outstanding ~~such~~principal ~~real~~balance ~~estate~~of ~~are~~$6.2 ~~charged against~~million ~~income~~at inSeptember 30, ~~the~~2006. ~~current~~At ~~period~~September 30, ~~while~~2006, ~~costs~~the ~~relating~~Bank tohad ~~improving~~$110.2 ~~such~~million of commercial real estate ~~are~~loans, ~~capitalized~~which ~~until~~amounted ato ~~saleable condition is reached~~22.8% ~~Any required write-down~~ of the ~~loan~~Bank’s togross ~~its~~loan ~~fair~~portfolio. ~~value~~Commercial ~~less~~real ~~estimated~~estate ~~selling~~loans ~~costs~~are ~~upon~~originated ~~foreclosure~~on isa ~~charged~~fixed-rate or ~~against~~adjustable-rate ~~the~~basis ~~allowance~~with ~~for~~terms ~~loan losses. See Note 1~~ of ~~Notes~~up to ~~Financial~~25 ~~Statements~~years.

11Commercial real estate lending entails significant additional risks as compared with single-family residential property lending. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for office and retail space and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It is the Bank’s policy generally to obtain annual financial statements of the business of the borrower or the project for which commercial real estate loans are made. In addition, in the case of commercial real estate loans made to a legal

~~The~~8 ~~following table sets forth information with respect to the Bank’s nonperforming assets at the dates indicated.~~

	At September 30,
	2004			2003			2002			2001			2000
	(In thousands)
Loans accounted for on a nonaccural basis: (1)
Real Estate:
Single-family residential	$	266		$	59		$	291		$	239		$	383
Single-family rental property		—			—			—			—			—
Commercial		606			166			—			—			—
Construction		—			—			—			—			—
Commercial lines of credit		—			—			—			—			—
Commercial loans secured		—			—			1,100			—			—
Consumer		—			75			—			—			—
Total	$	872		$	300		$	1,391		$	239		$	383
Accruing loans which are contractually past due 90 days or more:
Real Estate:
Single-family residential	$	—		$	—		$	—		$	—		$	—
Single-family rental property		—			—			—			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Commercial lines of credit		—			—			—			—			—
Commercial loans secured		—			—			—			—			—
Consumer		—			—			—			—			—
Total	$	—		$	—		$	—		$	—		$	—
Total non-performance loans	$	872		$	300		$	1,391		$	239		$	383
Percentage of gross loans		.21	%		.08	%		.33	%		.09	%		.15	%
Percentage of total assets		.11	%		.04	%		.24	%		.06	%		.12	%
Other non-performing assets (2)	$	33		$	283		$	229		$	134		$	126
Loans modified in troubled debt restructuring	$	—		$	—		$	—		$	—		$	—

~~(1) Non-accrual status denotes loans on which~~ entity, in the ~~opinion~~Bank ~~of management~~seeks, ~~the~~whenever ~~collection~~possible, ~~of additional interest is unlikely. Payments received on a non-accrual loan are either applied~~ to ~~the~~obtain ~~outstanding~~personal ~~principal~~guarantees ~~balance~~and orannual ~~recorded~~financial asstatements ~~interest income, depending on management’s assessment~~ of the ~~collectibility~~principals of the ~~loan~~legal entity.

~~(2)~~Commercial ~~Other~~Lines ~~nonperforming~~of ~~assets~~Credit. ~~include~~The Bank provides commercial lines of credit to businesses within the Bank’s ~~inventory~~market area. These loans are secured by business assets, including real property, equipment, automobiles and consumer leases. Generally, all loans are further personally guaranteed by the owners of ~~repossessed~~the ~~cars~~business. The commercial lines have adjustable interest rates tied to the prime rate and are offered at rates from prime plus 0% to prime plus 3 1/2%. As of September 30, 2006, the Bank had $9.6 million of such loans outstanding.

~~During~~Consumer ~~the~~Lending. ~~year~~The ~~ended~~consumer ~~September 30, 2004, gross interest income of $83,000, would have been recorded on~~ loans ~~accounted~~currently ~~for~~in ~~on a nonaccrual basis if~~ the ~~loans~~Bank’s ~~had~~loan ~~been~~portfolio ~~current~~consist ~~throughout~~of ~~the~~automobile ~~year. Interest on such~~ loans, ~~included~~home inequity ~~income~~lines ~~during~~of ~~the~~credit ~~year~~and ~~ended~~loans ~~September~~secured ~~30,~~by ~~2004~~savings ~~amounted to $28,000~~deposits.

AtAutomobile ~~September~~loans 30totaled $53.5 million, ~~2004~~or 11.1%, of the Bank’s ~~had~~gross noloan portfolio, at September 30, 2006. Automobile loans ~~which~~are secured by ~~were~~both ~~not~~new ~~classified~~and asused ~~non-accrual~~cars and, 90depending ~~days~~on ~~past~~the ~~due~~creditworthiness orof ~~restructured~~the ~~but~~borrower, ~~where~~may ~~known~~be ~~information~~made ~~about~~for ~~possible~~up ~~credit~~to ~~problems~~110% of ~~borrowers~~the ~~caused~~“invoice ~~management~~price” toor ~~have~~clean ~~serious~~“black ~~concerns~~book” asvalue, towhichever ~~the~~is ~~ability~~lower, ofor, ~~the~~with ~~borrowers~~respect to ~~comply~~used ~~with~~automobiles, ~~present~~the loan ~~repayment~~values ~~terms~~as published by a wholesale value listing utilized by the automobile industry. Automobile loans are made directly to the borrower-owner. New and ~~may~~relatively ~~result~~new incars ~~disclosure~~(less asthan ~~nonaccrual~~two years old or 20,000 90miles ~~days~~or ~~past~~less) ~~due~~are financed for a period generally of up to six years, while used cars are financed for a period generally of up to five years, or ~~restructured~~less, depending on the age of the car. Collision insurance is required for all automobile loans. The Bank also maintains a blanket collision insurance policy that provides insurance for any borrower who allows his insurance to lapse.

AtThe ~~September~~Bank originates second mortgage loans and home equity lines of credit. As of September 30, ~~2004~~2006, ~~nonaccrual~~home ~~loans~~equity ~~consisted~~lines of ~~five~~credit ~~single-family~~totaled ~~residential~~$17.9 million, or 3.7% of the Bank’s gross loan portfolio. Second mortgage loans ~~aggregating~~are made at fixed rates and for terms of up to 15 years and totaled $~~266~~23.1 million,~~000~~ or 4.8%, ~~and~~of ~~two~~the ~~commercial~~Bank’s gross loans ~~aggregating~~ ~~$606~~at September 30,~~000~~ 2006.

~~Real~~The ~~estate~~Bank’s ~~acquired~~home ~~through~~equity ~~foreclosure is~~lines ~~initially~~of ~~recorded~~credit atcurrently have ~~the~~adjustable ~~lower~~interest ofrates ~~cost~~tied orto ~~estimated~~the ~~fair~~prime ~~value~~rate and ~~subsequently~~can atbe ~~the~~offered ~~lower~~anywhere offrom ~~book~~as ~~value~~low oras ~~fair~~the ~~value~~prime rate less ~~estimated~~0.50% ~~costs~~up to ~~sell.~~the ~~Fair~~prime ~~value~~rate isplus ~~defined~~1.0%. asThe ~~the~~interest ~~amount~~rate inmay ~~cash~~not oradjust ~~cash-equivalent~~to ~~value~~a ofrate ~~other~~higher ~~consideration that~~than a18%. ~~real~~The ~~estate~~home ~~parcel~~equity ~~would~~lines ~~yield~~of incredit require amonthly ~~current~~payments ~~sale~~until ~~between~~the aloan ~~willing~~is ~~buyer~~paid ~~and~~in ~~a willing seller~~full, aswith ~~measured~~a byloan ~~market~~term ~~transactions.~~not Ifto aexceed ~~market~~30 ~~does~~years. ~~not~~The ~~exist,~~minimum ~~fair~~monthly ~~value~~payment ofis the ~~item~~outstanding isinterest. ~~estimated~~Home ~~based~~equity onlines ~~selling prices~~ of ~~similar~~credit ~~items in active markets or, if there~~ are nosecured ~~active~~by ~~markets~~subordinate ~~for~~liens ~~similar~~against ~~items,~~residential byreal property. ~~discounting~~The aBank ~~forecast~~requires ofthat ~~expected~~fire ~~cash~~and ~~flows~~extended atcoverage acasualty ~~rate~~insurance ~~commensurate~~(and, ~~with~~if ~~the~~appropriate, ~~risk~~flood ~~involved.~~insurance) ~~Fair~~be ~~value~~maintained isin ~~generally determined through~~ an ~~appraisal~~amount at ~~the~~least ~~time~~sufficient ofto ~~foreclosure. The~~cover ~~Bank~~its ~~records~~loan. ~~a valuation allowance for~~

12The Bank makes savings account loans for up to 90% of the depositor’s savings account balance. The interest rate is normally 2.0% above the rate paid on the related savings account, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. At September 30, 2006, savings account loans accounts totaled $1.3 million, or .27%, of the Bank’s gross loan portfolio.

~~estimated~~As ~~selling~~part ~~costs~~ of the ~~property~~Bank’s ~~immediately~~loan ~~after~~strategy, ~~foreclosure.~~the ~~Subsequent~~Bank tohas ~~foreclosure,~~diversified ~~real~~its ~~estate~~lending ~~acquired~~portfolio ~~through~~to ~~foreclosure~~afford the isBank ~~periodically evaluated~~the byopportunity ~~management~~to earn higher yields and anto ~~allowance~~provide ~~for~~a ~~loss~~fuller isrange ~~established~~of ifbanking ~~the~~services. ~~estimated~~These ~~fair~~products ~~value~~have ofgenerally ~~the~~been ~~property,~~in ~~less~~the ~~estimated~~consumer ~~costs~~area toand ~~sell~~include, ~~declines.~~boat Atloans ~~September~~and ~~30,~~loans ~~2004,~~for the ~~Bank~~purchase ~~had~~of norecreational ~~real estate owned~~vehicles. ~~The~~Such ~~Bank~~loans ~~had~~ totaled $~~33,000~~1.5 ofmillion ~~other nonperforming~~at ~~assets~~September 30, ~~which consisted of the Bank’s inventory of repossessed cars~~2006.

~~Federal~~Consumer ~~regulations~~lending ~~require~~usually ~~savings~~affords ~~institutions to classify their assets on~~ the ~~basis~~Bank ~~of quality on a regular basis. An asset meeting one of~~ the ~~classification~~ ~~definitions~~opportunity ~~set forth below may be classified and still be a performing loan. An asset is classified as substandard if it is determined~~ to beearn ~~inadequately~~yields ~~protected~~higher bythan ~~the current retained earnings and paying capacity of the obligor~~those orobtainable ofon ~~the~~single-family ~~collateral~~residential ~~pledged, if any~~lending. AnHowever, ~~asset~~consumer isloans ~~classified~~entail asgreater ~~doubtful~~risk ifthan ~~full~~do ~~collection~~residential ismortgage ~~highly questionable or improbable. An asset is classified as loss if it is considered uncollectible~~loans, ~~even~~particularly ~~if a partial recovery could be expected~~ in the ~~future.~~ ~~The~~case ~~regulations~~of ~~also~~loans ~~provide for a special mention designation, described as assets~~ which doare ~~not~~unsecured ~~currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies~~ or ~~potential weaknesses~~secured ~~deserving~~by ~~management’s~~rapidly ~~close~~depreciable ~~attention. Such~~ assets ~~designated as special mention may include nonperforming loans consistent with the above definition~~. ~~Assets~~Repossessed ~~classified~~collateral for ~~as substandard or doubtful require~~ a ~~savings~~defaulted ~~institution~~consumer ~~to establish general allowances for~~ loan ~~losses.~~may Ifnot provide an ~~asset~~adequate orsource ~~portion~~of ~~thereof~~repayment isof ~~classified~~the ~~loss,~~outstanding aloan ~~savings~~balance ~~institution~~as ~~must either establish~~ a ~~specific~~result ~~allowance for loss in the amount~~ of the ~~portion~~greater likelihood of ~~the~~damage, ~~asset classified~~ loss, or ~~charge off such amount~~depreciation. ~~Federal~~The ~~examiners~~remaining ~~may~~deficiency ~~disagree~~often ~~with a savings institution’s classifications. If a savings institution~~ does not ~~agree~~warrant ~~with~~further ansubstantial collection ~~examiner’s~~efforts ~~classification~~against ~~of an asset, it may appeal this determination to~~ the ~~OTS Regional Director~~borrower. ~~The Bank~~In ~~regularly~~addition, ~~reviews~~consumer ~~its~~loan ~~assets~~collections toare ~~determine~~dependent ~~whether~~on ~~any~~the ~~assets~~borrower’s ~~require~~continuing ~~classification~~financial ~~or re-classification. At September 30~~stability, ~~2004,~~and ~~the~~thus ~~Bank~~are ~~had~~more ~~$4.5~~likely ~~million~~to inbe ~~classified~~adversely ~~assets~~affected ~~consisting~~by ofevents ~~$3.0~~such ~~million in assets classified~~ as ~~special~~job ~~mention~~loss, ~~$1.0~~ ~~million in assets classified as substandard~~divorce, noillness ~~assets classified as doubtful and $541,000 assets classified as loss. Special mention assets consisted of $1.5 million single-family residential mortgage loans 60 to 89 days delinquent at~~or ~~September~~personal ~~30, 2004, and $968,000 consumer loans 60 to 89 days delinquent at September 30, 2004 and substandard assets consisted of the $1~~bankruptcy.0 ~~million in nonaccrual loans described above.~~

~~Allowance~~9 for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management’s policy to maintain an adequate allowance for loan losses based on, among other things, the Bank’s and the industry’s historical loan loss experience, evaluation of economic conditions, regular reviews of delinquencies and loan portfolio quality and evolving standards imposed by federal bank examiners. The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank’s income.

ManagementTable will continue to actively monitor the Bank’s asset quality and allowance for loan losses. Management will charge off loans and properties acquired in settlement of loans against the allowances for losses on such loans and such properties when appropriate and will provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses and believes such allowances are adequate, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. Contents

~~The~~Loan ~~Bank’s~~Fees ~~methodology~~and ~~for~~Servicing. ~~establishing~~The ~~the~~Bank ~~allowance~~receives ~~for~~fees ~~loan losses takes into consideration probable losses that have been identified~~ in connection with ~~specific~~late ~~assets~~payments ~~as well as losses that have not been identified but can be expected to occur. Management conducts regular reviews of the Bank’s assets~~ and ~~evaluates~~for miscellaneous ~~the~~services ~~need~~related to ~~establish~~its ~~allowances on the basis of this review~~loans. ~~Allowances~~ ~~are~~The ~~established~~Bank byalso ~~the~~charges ~~Board~~fees ofin ~~Directors~~connection onwith aloan ~~monthly~~originations ~~basis~~typically ~~based~~from on0 anto ~~assessment~~3 ofpoints ~~risk~~(one inpoint ~~the~~being ~~Bank’s~~equal ~~assets~~to ~~taking~~1% ~~into consideration the composition and quality~~ of the ~~portfolio,~~loan ~~delinquency~~amount) ~~trends,~~on ~~current~~residential ~~charge-off~~ and ~~loss experience,~~commercial loan ~~concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally~~originations. ~~Additional~~The ~~provisions~~Bank services ~~for losses on~~ loans ~~are~~sold ~~made in order~~ to ~~bring~~FHLMC the allowance to a level deemed adequate. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and ~~the fair value of the security~~FNMA. AtThe ~~the date of foreclosure or other repossession, the~~ Bank ~~would~~also ~~transfer~~services ~~the~~participation ~~property to real estate acquired in settlement of~~ loans ~~initially~~originated ~~at the lower of cost or estimated fair value~~ and ~~subsequently~~sold atby the ~~lower~~Bank ofwith ~~book value~~servicing orretained, ~~fair~~and ~~value~~earns ~~less~~minimal ~~estimated~~income ~~selling~~from ~~costs~~this activity. ~~Any portion of the outstanding loan balance in excess of fair value less estimated selling costs~~

13Nonperforming Loans and Other Problem Assets. It is management’s policy to continually monitor its loan portfolio to anticipate and address potential and actual delinquencies. When a borrower fails to make a payment on a loan, the Bank takes immediate steps to have the delinquency cured and the loan restored to current status. Loans which are past due 15 days incur a late fee of 5% of principal and interest due. As a matter of policy, the Bank will send a late notice to the borrower after the loan has been past due 15 days and again after 30 days. If payment is not promptly received, the borrower is contacted again, and efforts are made to formulate an affirmative plan to cure the delinquency. Generally, after any loan is delinquent 90 days or more, formal legal proceedings are commenced to collect amounts owed. In the case of automobile loans, late notices are sent after loans are ten days delinquent, and the collateral is seized after a loan is delinquent 60 days. Repossessed cars subsequently are sold at auction.

~~would~~Loans begenerally ~~charged~~are ~~off~~placed ~~against~~on ~~the~~non-accrual ~~allowance~~status ~~for~~if the loan ~~losses.~~becomes Ifpast due more than 90 days, ~~upon~~except ~~ultimate~~in ~~disposition~~instances where in management’s judgment there is no doubt as to full collectibility of ~~the~~principal ~~property~~and interest, ~~net~~or ~~sales~~management concludes ~~proceeds~~that ~~exceed~~payment ~~the~~in ~~net~~full ~~carrying~~is ~~value of~~not ~~the~~likely. ~~property~~Consumer loans are generally charged off, aor ~~gain~~any onexpected ~~sale~~loss ofis ~~real~~reserved ~~estate~~for, ~~would~~after bethey ~~recorded~~become more than 120 days past due. All other loans are charged off when management concludes that they are uncollectible. See Note 3 of Notes to Financial Statements.

~~The~~Real ~~following~~estate ~~table~~acquired ~~sets~~by ~~forth~~the anBank ~~analysis~~as a result of foreclosure is classified as real estate acquired through foreclosure until such time as it is sold. When such property is acquired, it is initially recorded at the ~~Bank’s~~lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated costs to sell. Costs relating to holding such real estate are charged against income in the current period, while costs relating to improving such real estate are capitalized until a saleable condition is reached. Any required write-down of the loan to its fair value less estimated selling costs upon foreclosure is charged against the allowance for loan losses. ~~for~~See ~~the~~Note ~~periods~~1 ~~indicated~~of Notes to Financial Statements.

	At September 30,
	2004			2003			2002			2001			2000
	(In thousands)
Balance at the beginning of the period	$	2,698		$	2,199		$	1,563		$	1,403		$	1,273
Loans charged-off:
Real estate mortgage
Single-family residential		—			—			—			20			7
Multi-family residential		—			—			—			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Commercial loans secured		—			—			159			—			—
Consumer		1,021			1,239			530			324			201
Total charge-off		1,021			1,239			689			344			208
Recoveries:
Real estate mortgage:
Single-family residential		—			—			—			—			—
Multi-family residential		—			—			—			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Commercial loans secured		—			—			—			—			—
Consumer		423			379			429			172			176
Total recoveries		423			379			429			172			176
Net loans charged off		(598	)		(860	)		(260	)		(172	)		(32	)
Provision for loan losses		487			1,359			509			332			162
Allowance assumed in the provision		—			—			387			—			—
Balance at the end of period	$	2,587		$	2,698		$	2,199		$	1,563		$	1,403
Ratio of net charge-offs to average loans outstanding during the period		.16	%		.22	%		.09	%		.07	%		.01	%

14Table of Contents

The following table ~~allocates~~sets ~~the~~forth ~~allowance~~information ~~for~~with ~~loan~~respect ~~losses~~to bythe ~~loan~~Bank’s ~~category~~nonperforming assets at the dates indicated. ~~The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.~~

	At September 30,
	2004						2003					2002						2001				2000
	2006				2005				2004			2003				2002
	Amount			Percent ofLoans inCategory toTotal Loans			Amount			Percent ofLoans inCategory toTotal Loans		Amount			Percent ofLoans inCategory toTotal Loans			Amount		Percent ofLoans inCategory toTotal Loans		Amount		Percent ofLoans inCategory toTotal Loans
	(Dollars in thousands)
	(Dollars in Thousands)
Loans accounted for on a non-accrual basis: (1)
Real Estate Loans:
Real Estate:
Single-family residential	$	~~578~~69		~~43.47~~	%$	647	$	~~539~~	$	~~46.32~~266	%	$	~~760~~59		~~53.09~~	%$	291	$	~~587~~	~~57.94~~	%	$	~~421~~	~~59.42~~	%
Single-family rental property		29—		~~4.68~~		—		22		~~3.70~~—			17—		~~2.00~~		—		15	~~2.66~~			10	~~1.98~~
Commercial		~~455~~2,381		~~15.69~~		91		~~396~~		~~13.85~~606			~~314~~166		~~13.77~~		—		~~151~~	~~5.29~~			~~136~~	~~5.32~~
Construction		16—		~~5.64~~		—		~~107~~		~~4.23~~—			70—		~~2.82~~		—		40	~~3.06~~			70	~~2.30~~
Commercial lines of credit		10—		~~3.89~~		—		16		~~1.65~~—			46—		~~1.01~~		—		—	~~.14~~			—	~~.02~~
Commercial leases		—		.32				—		—			—		.28				—	.46			—	—
Commercial loans secured		—				—				—			—				1,100
Commercial loans secured		52		.20				—		.21			—		.38				—	.91			—	.57
Consumer		42				—				—			75				—
Commercial loans unsecured		541		.13				569		.03			—		—				—	—			—	—
Total	$	2,492			$	738			$	872		$	300			$	1,391
Consumer		906		25.98				1,049		29.83			992		26.65				770	29.54			766	30.39
Accruing loans which are contractually past due 90 days or more:
Total allowance for loan losses	$	2,587		100.00	%		$	2,698		100.00	%	$	2,199		100.00	%		$	1,563	100.00	%	$	1,403	100.00	%
Real Estate:
Single-family residential	$	—			$	—			$	—		$	—			$	—
Single-family rental property		—				—				—			—				—
Commercial		—				—				—			—				—
Construction		—				—				—			—				—
Commercial lines of credit		—				—				—			—				—
Commercial loans secured		—				—				—			—				—
Consumer		—				—				—			—				—
Total	$	—			$	—			$	—		$	—			$	—
Total non-performing loans	$	2,492			$	738			$	872		$	300			$	1,391
Percentage of gross loans		.51	%			.15	%			.21	%		.08	%			.33	%
Percentage of total assets		.32	%			.09	%			.11	%		.04	%			.24	%
Other non-performing assets (2)	$	130			$	86			$	33		$	283			$	229
Loans modified in troubled debt restructuring	$	—			$	—			$	—		$	—			$	—

15(1) Non-accrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the collectibility of the loan.

~~Investment~~(2) ~~Activities~~Other nonperforming assets include the Bank’s inventory of repossessed cars.

~~General.~~During ~~The~~the ~~Bank~~year isended ~~permitted under federal law to make certain investments~~September 30, ~~including investments in securities issued by various federal agencies and state and municipal governments~~2006, ~~deposits~~gross atinterest ~~the~~income ~~FHLB~~ of ~~Atlanta~~$152, ~~certificates of deposit in federally insured institutions~~000, ~~certain~~would ~~bankers’~~have ~~acceptances~~been ~~and~~recorded ~~federal~~on ~~funds.~~loans Itaccounted ~~may~~for ~~also~~on ~~invest,~~a ~~subject~~non-accrual tobasis ~~certain~~if ~~limitations,~~the ~~in commercial~~loans ~~paper~~had ~~rated~~been incurrent ~~one~~throughout of the ~~two highest investment rating categories of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds~~year. ~~Federal~~Interest ~~regulations require the Bank to maintain an~~on ~~investment~~such inloans ~~FHLB~~included ~~stock and a minimum amount of liquid assets which may be invested~~ in ~~cash~~income ~~and~~during ~~specified~~the ~~securities.~~year ~~From~~ended ~~time to time~~September 30, ~~the~~2006 ~~OTS~~amounted ~~adjusts the percentage of liquid assets which savings banks are required~~ to ~~maintain~~$139,000. ~~See “ — Regulation — Depository Institution Regulation — Liquidity Requirements.”~~

~~The~~At ~~Bank makes investments in order to maintain the levels of liquid assets required by regulatory authorities and manage cash flow~~September 30, ~~diversify its assets~~2006, ~~obtain yield and to satisfy certain requirements for favorable tax treatment. The investment activities of~~ the Bank ~~consist~~had no ~~primarily~~loans ofwhich ~~investments~~were innot ~~mortgage-backed~~classified ~~securities~~as ~~and other investment securities~~non-accrual, ~~consisting~~90 ~~primarily~~days ofpast ~~securities~~due ~~issued~~ or ~~guaranteed~~restructured bybut ~~the~~where ~~U.S.~~known ~~government~~information orabout ~~agencies~~possible thereof. Typical investments include federally sponsored agency mortgage pass-through and federally sponsored agency and mortgage-related securities. Investment and aggregate investment limitations and credit ~~quality~~problems ~~parameters~~ of ~~each~~borrowers ~~class~~caused ofmanagement ~~investment are prescribed in the Bank’s investment policy. The Bank performs analyses on mortgage-related securities prior~~ to ~~purchase~~have ~~and~~serious onconcerns anas ~~ongoing basis~~ to ~~determine~~ the ~~impact~~ability onof ~~earnings~~the ~~and~~borrowers ~~market~~to ~~value~~comply ~~under various interest rate and prepayment~~with ~~conditions.~~present ~~Under~~loan ~~the~~repayment ~~Bank’s~~terms ~~current investment policy, securities purchases are made by the Bank’s President. The Bank’s President~~ and ~~Treasurer~~may ~~have~~result ~~authority~~in todisclosure ~~sell investment securities subject to the Bank’s designation~~ as ~~available~~ ~~for~~non-accrual, ~~sale~~90 ~~and~~days ~~purchase~~past ~~comparable~~due ~~investment~~or ~~securities with similar characteristics~~restructured. ~~The Board of Directors reviews all securities transactions on a monthly basis.~~

~~Securities~~At ~~designated as “held to maturity” are those assets which the Bank has the ability and intent to hold to maturity. Upon acquisition~~September 30, ~~securities are classified as to the Bank’s intent~~2006, ~~and a sale would only be effected due to deteriorating investment quality. The held to maturity investment portfolio is not used for speculative purposes and is~~ ~~carried~~non-accrual atloans ~~amortized~~consisted ~~cost.~~of In1 ~~the~~single-family ~~event~~residential ~~the~~mortgage ~~Bank~~loan ~~sells~~aggregating ~~securities from this portfolio for other than credit quality reasons~~$69,000, ~~all~~1 ~~securities~~commercial ~~within~~loan ~~the~~aggregating ~~investment portfolio with matching characteristics may be reclassified as assets available for sale~~$2.4 ~~Securities~~million ~~designated as “available for sale” are those assets which the Bank may not hold to maturity~~ and ~~thus~~2 ~~are~~consumer ~~carried~~loans ataggregating ~~market value with unrealized gains or losses~~$42, ~~net of tax effect, recognized in retained earnings~~000. ~~At September 30, 2004 the Bank’s securities portfolio consists of both available for sale and held to maturity securities.~~

~~Mortgage-Backed~~Real ~~and~~estate ~~Related~~acquired ~~Securities.~~through ~~Mortgage-backed~~foreclosure ~~securities~~is ~~represent~~initially arecorded ~~participation~~at ~~interest~~the inlower ~~a pool~~ of ~~single-family~~cost or ~~multi-family mortgages,~~estimated ~~the~~fair ~~principal~~value and ~~interest~~subsequently ~~payments~~at onthe ~~which~~lower ~~are~~of ~~passed~~book ~~from~~value or ~~the~~fair ~~mortgage~~value ~~originators~~less ~~through~~estimated ~~intermediaries~~costs ~~that~~to ~~pool~~sell. ~~and~~Fair ~~repackage~~value ~~the~~is ~~participation~~defined ~~interest~~as in the ~~form~~amount ofin ~~securities~~cash toor ~~investors~~cash-equivalent ~~such~~value asof ~~the~~other ~~Bank.~~consideration ~~Such~~that ~~intermediaries may~~a ~~include~~real ~~quasi-governmental~~estate ~~agencies~~parcel ~~such~~would asyield ~~FHLMC,~~in ~~FNMA~~a ~~and~~current ~~GNMA~~sale ~~which~~between ~~guarantee~~a ~~the~~willing ~~payment~~buyer ~~of principal~~ and ~~interest~~a towilling ~~investors.~~seller, ~~Mortgage-backed~~as ~~securities~~measured by ~~generally~~market ~~increase~~transactions. ~~the~~If ~~quality~~a ofmarket ~~the~~does ~~Bank’s~~not ~~assets~~exist, byfair ~~virtue~~value of the ~~guarantees that~~item ~~back~~is ~~them,~~estimated ~~are~~based ~~more~~on ~~liquid~~selling ~~than~~prices ~~individual~~of ~~mortgage~~similar ~~loans~~items ~~and~~in ~~may~~active bemarkets ~~used~~or, toif ~~collateralize~~there ~~borrowings~~are orno ~~other~~active ~~obligations~~markets offor ~~the Bank.~~

~~Mortgage-related~~11 securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages.

TheTable actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage-backed security. The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to Contents

16 similar items, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value is generally determined through an appraisal at the time of foreclosure. The Bank records a valuation allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to foreclosure, real estate acquired through foreclosure is periodically evaluated by management and an allowance for loss is established if the estimated fair value of the property, less estimated costs to sell, declines. At September 30, 2006, the Bank had real estate owned values at $94,000. The Bank had $36,000 of other nonperforming assets, which consisted of the Bank’s inventory of repossessed cars.

~~the~~Federal ~~mortgage-backed~~regulations ~~security.~~require ~~Premiums~~savings ~~and~~institutions to ~~discounts~~classify their assets on ~~mortgage-backed~~the ~~securities~~basis ~~are~~of ~~amortized~~quality oron ~~accredited~~a ~~over~~regular ~~the~~basis. ~~estimated~~An ~~term~~asset meeting one of the ~~securities using~~classification adefinitions ~~level~~set ~~yield~~forth ~~method~~below may be classified and still be a performing loan. ~~The~~An ~~prepayment~~asset ~~assumptions~~is ~~used~~classified as substandard if it is determined to ~~determine~~be ~~the~~inadequately ~~amortization~~protected ~~period~~by ~~for~~the ~~premiums~~current ~~and~~retained ~~discounts~~earnings ~~can~~and ~~significantly~~paying ~~affect~~capacity of the ~~yield~~obligor or of the ~~mortgage-backed~~collateral ~~security~~pledged, ~~and~~if ~~these~~any. ~~assumptions~~An ~~are~~asset ~~reviewed~~is ~~periodically~~classified toas doubtful if full collection is highly questionable or improbable. An asset is classified ~~reflect~~as ~~the~~loss ~~actual~~if ~~prepayment~~it is considered uncollectible, even if a partial recovery could be expected in the future. The ~~actual~~regulations ~~prepayments~~also provide for a special mention designation, described as assets which do not currently expose a savings institution to a sufficient degree of ~~the~~risk ~~underlying~~to ~~mortgages~~warrant ~~depend~~classification onbut ~~many~~do ~~factors,~~possess ~~including~~credit deficiencies or potential weaknesses deserving management’s close attention. Such assets designated as special mention may include nonperforming loans consistent with the above ~~type~~definition. ofAssets ~~mortgage~~classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish a specific allowance for loss in the ~~coupon~~amount ~~rate,~~of the ~~age~~portion of the ~~mortgages~~asset classified loss, ~~the~~or ~~geographical~~charge ~~location~~off ofsuch ~~the~~amount. ~~underlying~~Federal ~~real~~examiners ~~estate collateralizing~~may ~~the~~disagree ~~mortgages~~with ~~and~~a ~~general~~savings ~~levels~~institution’s classifications. If a savings institution does not agree with an examiner’s classification of ~~market~~an ~~interest~~asset, ~~rates~~it may appeal this determination to the OTS Regional Director. The ~~difference~~Bank ~~between~~regularly ~~the~~reviews ~~interest~~its ~~rates~~assets onto ~~the~~determine ~~underlying~~whether ~~mortgages~~any ~~and~~assets ~~the~~require ~~prevailing~~classification ~~mortgage~~or ~~interest~~re-classification. ~~rates~~At isSeptember 30, an2006, the ~~important~~Bank ~~determinant~~had $5.0 million in ~~the~~classified ~~rate~~assets consisting of ~~prepayments~~$2. ~~During~~0 ~~periods~~million ofin ~~falling~~assets ~~mortgage~~classified ~~interest~~as ~~rates~~special mention, ~~prepayments~~$2.6 ~~generally~~million ~~increase,~~in ~~and,~~assets ~~conversely~~classified as substandard, ~~during~~no ~~periods~~assets ofclassified ~~rising~~as ~~mortgage~~doubtful ~~interest~~and ~~rates,~~no ~~prepayments~~assets ~~generally~~classified ~~decrease~~as loss. IfSpecial ~~the~~mention assets ~~coupon~~consisted ~~rate~~ of ~~the~~$538,000 ~~underlying~~in single-family residential mortgage ~~significantly~~loans ~~exceeds the~~60 ~~prevailing~~to ~~market~~89 ~~interest~~days ~~rates~~delinquent ~~offered~~at ~~for~~September 30, ~~mortgage~~2006, ~~loans~~and $74,000 ~~refinancing~~in ~~generally~~consumer ~~increases~~loans ~~and~~60 ~~accelerates~~to ~~the~~120 ~~prepayment~~days ofdelinquent ~~the~~at ~~underlying~~September 30, ~~mortgages.~~2006 ~~Prepayment~~and ~~experience~~substandard isassets ~~more~~consisted ~~difficult~~of tothe $2.5 ~~estimate~~million ~~for~~in ~~adjustable~~non-~~rate~~accrual ~~mortgage-backed securities~~loans described above.

~~Mortgage-related~~Allowance ~~securities,~~for ~~which~~Loan ~~include collateralized~~Losses. ~~mortgage~~In ~~obligations~~originating ~~(“CMOs”)~~loans, ~~are~~the ~~typically~~Bank ~~issued~~recognizes bythat acredit losses ~~special~~will ~~purpose~~be ~~entity,~~experienced ~~which~~and ~~may~~that bethe ~~organized~~risk inof aloss ~~variety~~will ofvary ~~legal forms~~with, ~~such~~among asother ~~a trust~~things, athe ~~corporation~~type orof aloan ~~partnership.~~being ~~The~~made, ~~entity~~the ~~aggregates~~creditworthiness ~~pools~~ of ~~pass-through~~ ~~securities,~~the ~~which~~borrower ~~are~~over ~~used~~the toterm ~~collateralize~~of the ~~mortgage-related~~loan, ~~securities.~~general ~~Once~~economic ~~combined~~conditions and, in the ~~cash~~case ~~flows~~of ~~can~~a besecured ~~divided~~loan, ~~into~~the quality ~~“tranches”~~of orthe ~~“classes”~~security offor ~~individual~~the ~~securities,~~loan. ~~thereby~~It ~~creating~~is ~~more~~management’s ~~predictable average~~policy ~~lives~~to ~~for~~maintain ~~each~~an ~~security~~adequate ~~than~~allowance ~~the~~for ~~underlying~~loan ~~pass-through~~losses ~~pools.~~based ~~Accordingly~~on, ~~under~~among ~~this~~other ~~security structure~~things, ~~all~~the ~~principal~~Bank’s ~~paydowns~~and ~~from~~ the ~~various~~industry’s ~~mortgage~~historical ~~pools~~loan ~~are~~loss ~~allocated~~experience, toevaluation aof ~~mortgage-related securities’ class or classes~~economic ~~structured~~conditions, toregular ~~have~~reviews ~~priority~~of ~~until~~delinquencies itand ~~has~~loan ~~been~~portfolio ~~paid~~quality ~~off.~~and ~~These~~evolving ~~securities~~standards ~~generally~~imposed ~~have~~by ~~fixed~~federal ~~interest~~bank ~~rates,~~examiners. ~~and,~~The asBank aincreases ~~result,~~its ~~changes~~allowance infor ~~interest~~loan ~~rates~~losses ~~generally~~by ~~would~~charging ~~affect~~provisions ~~the~~for ~~market~~loan ~~value~~losses ~~and~~against ~~possibly~~ the ~~prepayment~~Bank’s ~~rates of such securities~~income.

~~Some~~Management ~~mortgage-related~~will ~~securities~~continue ~~instruments~~to ~~are~~actively ~~like traditional~~monitor ~~debt~~the ~~instruments~~Bank’s ~~due~~asset toquality ~~their stated principal amounts~~ and ~~traditionally~~allowance ~~defined~~for ~~interest~~loan ~~rate terms~~losses. ~~Purchasers~~Management ofwill ~~certain~~charge ~~other~~off ~~mortgage-related~~loans and ~~securities~~properties ~~instruments~~acquired ~~are~~in ~~entitled~~settlement toof loans against the ~~excess,~~allowances iffor ~~any,~~losses ofon ~~the~~such ~~issuer’s~~loans ~~cash flows.~~and ~~These~~such ~~mortgage-related~~properties ~~securities~~when ~~instruments~~appropriate ~~may~~and ~~include~~will ~~instruments~~provide ~~designated~~specific asloss ~~residual~~allowances ~~interest~~when ~~and~~necessary. ~~are~~Although ~~riskier~~management inbelieves ~~that~~it ~~they~~uses ~~could~~the ~~result~~best ininformation available ~~the~~to ~~loss~~make ofdeterminations awith ~~portion~~respect ofto the ~~original~~allowances ~~investment.~~for ~~Cash~~losses ~~flows~~and ~~from~~believes ~~residual~~such ~~interests~~allowances are ~~very sensitive~~adequate, tofuture ~~prepayments~~adjustments ~~and,~~may ~~thus,~~be ~~contain~~necessary aif ~~high~~economic ~~degree~~conditions ofdiffer ~~interest~~substantially ~~rate~~from ~~risk.~~the ~~The~~economic ~~Bank~~conditions ~~does~~in ~~not~~the ~~purchase~~assumptions used ~~residual~~in ~~interests~~making inthe ~~mortgage-related~~initial ~~securities~~determinations.

The Bank’s ~~mortgage-backed~~methodology ~~securities~~for ~~portfolio~~establishing ~~consists~~the ~~primarily~~allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but are expected to have occurred. Management conducts regular reviews of ~~seasoned~~the ~~fixed-rate~~Bank’s assets and ~~adjustable~~evaluates the ~~rate~~need ~~mortgage-backed~~to ~~securities~~establish allowances on the basis of this review. ~~The~~Allowances are established by management and reviewed by the Board of Directors on a monthly basis based on an assessment of risk in the Bank’s assets taking into consideration the ~~makes~~composition ~~such~~and ~~investments~~quality inof ~~order~~the toportfolio, ~~manage~~delinquency ~~cash~~trends, ~~flow~~current charge-off and loss experience, ~~diversify~~loan ~~assets~~concentrations, ~~obtain~~the ~~yield~~state of the real estate market, toregulatory ~~satisfy~~reviews ~~certain~~conducted ~~requirements~~in ~~for~~the ~~favorable~~regulatory ~~tax~~examination ~~treatment~~process and economic conditions generally. Additional provisions for losses on loans are made in order to ~~satisfy~~bring the ~~qualified~~allowance ~~thrift~~to ~~lender~~a ~~test~~level deemed adequate. ~~See~~Specific ~~“Regulation~~reserves —will ~~Depository~~be ~~Institution~~provided for individual assets, or portions of assets, when ultimate collection is ~~Regulation~~considered —improbable ~~Qualified~~by ~~Thrift~~management ~~Lender~~based ~~Test.”~~on the current payment status of the assets

~~At September~~12 30, 2004, mortgage-backed securities with an amortized cost of $26.6 million were classified as held to maturity. At September 30, 2004, the Bank’s held to maturity mortgage-backed securities had a weighted average yield of 5.49%.

AtTable September 30, 2004, mortgage-backed securities with an amortized cost of $146.0 million were classified as available for sale. At September 30, 2004, the Bank’s available for sale mortgage-backed securities had a weighted average yield of 3.77%. Contents

and the fair value of the security. At ~~September~~the ~~30,~~date ~~2004~~of foreclosure or other repossession, the Bank ~~did~~would ~~not~~transfer ~~have~~the ~~any~~property ~~CMOs,~~to real estate acquired in settlement of loans initially at the lower of cost or estimated fair value and subsequently at the ~~Bank’s investment~~lower ~~policy~~of ~~does~~book ~~not~~value ~~permit~~or ~~investments~~fair value less estimated selling costs. Any portion of the outstanding loan balance in ~~individual~~excess ~~issues~~of fair value less estimated selling costs would be charged off against the allowance for loan losses. If, upon ultimate disposition of ~~CMOs~~the orproperty, ~~Real~~net ~~Estate~~sales ~~Mortgage~~proceeds ~~Investment~~exceed ~~Conduits~~the ~~(“REMICs”)~~net carrying value of the property, a gain on sale of real estate would be recorded.

17The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated.

The following table sets forth the carrying value of the Bank’s investments at the dates indicated.


	At September 30,
	2006			2005			2004			2003			2002
	*(Dollars in thousands)*
Balance at the beginning of the period	$	2,746		$	2,587		$	2,698		$	2,199		1,563

Loans charged-off:
Real estate mortgage
Single-family residential		—			—			—			—		—
Multi-family residential		—			—			—			—		—
Commercial		—			—			—			—		—
Construction		—			—			—			—		—
Commercial loans secured		—			—			—			—		159
Consumer		275			392			1,021			1,239		530

Total charge-offs		275			392			1,021			1,239		689
Recoveries:
Real estate mortgage:
Single-family residential		—			—			—			—		—
Multi-family residential		—			—			—			—		—
Commercial		—			—			—			—		—
Construction		—			—			—			—		—
Commercial loans secured		—			—			—			—		—
Consumer		317			383			423			379		429

Total recoveries		317			383			423			379		429
Net loans recovered (charged off)		42			(9	)		(598	)		(860	)	(260	)
Recovery (provision) for loan losses		(109	)		168			487			1,359		509
Allowance assumed in the acquisition		—			—			—			—		387

Balance at the end of period	$	2,679		$	2,746		$	2,587		$	2,698		2,199

Ratio of net charge-offs to average loans outstanding during the period		.01	%		.01	%		.16	%		.22	%	.09	%

	At September 30,
	2004		2003		2002
	(Dollars in Thousands)
Securities available for sale:
U.S. government and agency securities	$	124,790	$	90,021	$	19,360
Mortgage-backed securities		144,260		116,204		60,411
Equity Investments in Mutual Funds		34,158		31,268		25,723
Total Available for Sale	$	303,208	$	237,493	$	105,494
Securities held to maturity:
U.S. government and agency securities	$	2,497	$	2,500	$	4,496
Mortgage-backed securities		26,631		18,394		33,691
FHLB stock		6,105		3,305		3,940
Total Held to Maturity	$	35,233	$	24,199	$	42,127
Total	$	338,441	$	261,692	$	147,621

18Table of Contents

The following table ~~sets~~allocates ~~forth~~the ~~information~~allowance infor loan losses by loan category at the ~~scheduled~~dates ~~maturities,~~indicated. ~~amortized~~The allocation ~~cost,~~of ~~market~~the ~~values~~allowance to each category is not necessarily indicative of future losses and ~~average~~ ~~yields~~does ~~for~~not restrict the ~~Bank’s~~use ~~investment~~of ~~portfolio~~the atallowance ~~September~~to ~~30,~~absorb ~~2004~~losses in any category.

	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Portfolio
	At September 30,
	CarryingValue		AverageYield		CarryingValue		AverageYield		CarryingValue		AverageYield		CarryingValue		AverageYield		CarryingValue		MarketValue		AverageYield
	2006				2005				2004				2003				2002
Securities available for sale:
	Amount		Percentof LoansinCategoryto TotalLoans		Amount		Percentof LoansinCategoryto TotalLoans		Amount		Percentof LoansinCategoryto TotalLoans		Amount		Percentof LoansinCategoryto TotalLoans		Amount		Percentof LoansinCategoryto TotalLoans
U.S. government and agency obligations	$	500	1.30	%	$	73,702	2.7	%	$	46,114	3.37	%	$	4,987	4.32	%	$	125,303	$	124,790	3.01	%
	(Dollars in Thousands)
Mortgage-backed securities		—	—			6,105	3.4			42,730	3.69			97,169	3.83			146,004		144,260	3.77
Real estate loans:
Equity Investment in Mutual Funds		34,762	3.47			—	—			—	—			—	—			34,762		34,158	3.47
Single-family residential	$	697	44.50	%	$	548	40.44	%	$	578	43.47	%	$	539	46.32	%	$	760	53.09	%
Total available for sale	$	35,262			$	79,807			$	88,844			$	102,156			$	306,069	$	303,208
Single-family rental property		64	6.04			40	5.58			29	4.68			22	3.70			17	2.00
	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Portfolio
Commercial		591	21.87			707	15.55			455	15.69			396	13.85			314	13.77
	CarryingValue		AverageValue		CarryingValue		AverageValue		CarryingValue		AverageValue		CarryingValue		AverageValue		CarryingValue		MarketValue		AverageValue
Construction		94	8.09			14	11.14			16	5.64			107	4.23			70	2.82
Securities held to maturity:
Commercial lines of credit		42	2.91			22	3.41			10	3.89			16	1.65			46	1.01
U.S. government and agency obligations	$	500	4.27	%	$	1,003	1.99	%	$	994	3.52	%	$	—	—	%	$	2,497	$	2,496	3.06	%
Commercial leases		28	.98			2	.68			—	.32			—	—			—	.28
Mortgage-backed securities		—	—			164	7.31			973	6.33			25,494	5.45			26,631		26,895	5.49
Commercial loans secured		1	.08			72	.39			52	.20			—	.21			—	.38
FHLB stock		—	—			—	—			—	—			6,105	5.95			6,105		6,105	5.95
Commercial loans unsecured		409	.08			537	.11			541	.13			569	.03			—	—
Total held to maturity	$	500			$	1,167			$	1,967			$	31,599			$	35,233	$	35,496
Consumer		753	15.45			804	22.70			906	25.98			1,049	29.83			992	26.65
Total	$	35,762			$	80,974			$	90,811			$	133,755			$	341,302	$	338,704
Total allowance for loan losses	$	2,679	100.00	%	$	2,746	100.00	%	$	2,587	100.00	%	$	2,698	100.00	%	$	2,199	100.00	%

1914

DepositTable Activity and Other Sources of Funds Contents

~~General.~~Investment ~~Deposits~~Activities are the primary source of the Bank’s funds for lending, investment activities and general operational purposes. In addition to deposits, the Bank derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general operational purposes. The Bank has access to borrow from the FHLB of Atlanta.

~~Deposits~~General. The Bank ~~attracts~~is ~~deposits~~permitted ~~principally~~under ~~from~~federal ~~within~~law ~~its~~to ~~market~~make ~~area~~certain byinvestments, ~~offering~~including ainvestments ~~variety~~in ofsecurities ~~deposit~~issued ~~instruments,~~by ~~including~~various ~~checking accounts,~~federal ~~money~~agencies ~~market~~and ~~accounts,~~state ~~statement~~ and ~~passbook~~municipal ~~savings accounts~~governments, ~~Individual~~deposits ~~Retirement~~at ~~Accounts,~~the ~~and~~FHLB of Atlanta, certificates of deposit ~~which~~in ~~range~~federally ininsured ~~maturity~~institutions, ~~from~~certain ~~seven~~bankers’ ~~days~~acceptances toand ~~five~~federal ~~years~~funds. ~~Deposit~~It ~~terms~~may ~~vary~~also ~~according~~invest, subject to ~~the~~certain ~~minimum balance required~~limitations, ~~the~~in ~~length~~commercial ofpaper ~~time~~rated in one of the ~~funds~~two ~~must~~highest ~~remain~~investment onrating categories ~~deposit~~of ~~and~~a ~~the~~nationally ~~interest~~recognized ~~rate.~~credit ~~Maturities,~~rating ~~terms~~agency, ~~service~~and ~~fees~~certain ~~and~~other ~~withdrawal~~types ~~penalties~~of ~~for~~corporate ~~its~~debt ~~deposit~~securities ~~accounts~~and ~~are~~mutual ~~established~~funds. byFederal regulations require the Bank onto amaintain ~~periodic~~an ~~basis.~~investment ~~The~~in ~~Bank~~FHLB ~~reviews~~stock ~~its deposit mix~~ and ~~pricing on~~ a ~~weekly~~minimum ~~basis.~~amount Inof ~~determining~~liquid ~~the~~assets which ~~characteristics~~may ofbe ~~its~~invested ~~deposit~~in ~~accounts,~~cash ~~the~~and ~~Bank~~specified ~~considers~~securities. ~~the~~From ~~rates~~time ~~offered~~to ~~by competing institutions~~time, ~~lending~~the ~~and~~OTS ~~liquidity~~adjusts ~~requirements,~~the ~~growth~~percentage ~~goals~~of ~~and~~liquid ~~federal~~assets ~~regulations.~~which ~~Management~~savings ~~believes it~~banks ~~prices~~are ~~its~~required ~~deposits comparably~~ to ~~rates~~maintain. ~~offered~~See by“ ~~its~~– ~~competitors.~~Regulation ~~The~~– ~~Bank~~Depository ~~does~~Institution ~~not~~Regulation ~~accept~~– Liquidity ~~brokered deposits~~Requirements.”

The Bank ~~attempts~~makes toinvestments ~~compete~~in ~~for~~order ~~deposits~~to ~~with~~maintain ~~other~~the ~~institutions~~levels inof ~~its~~liquid ~~market~~assets ~~area~~required by ~~offering~~regulatory authorities ~~competitively~~and ~~priced~~manage ~~deposit~~cash ~~instruments~~flow, ~~that~~diversify ~~are tailored~~its toassets, ~~the~~obtain ~~needs~~yield ofand ~~its~~to ~~customers.~~satisfy ~~Additionally,~~certain ~~the~~requirements ~~Bank~~for ~~seeks~~favorable totax ~~meet~~treatment. ~~customers’~~The ~~needs~~investment byactivities ~~providing~~of ~~convenient~~the ~~customer~~Bank ~~service~~consist toprimarily ~~the~~of ~~community,~~investments ~~efficient~~in ~~staff~~mortgage-backed securities and ~~convenient~~other investment ~~hours~~securities, consisting primarily of ~~service.~~securities ~~Substantially~~issued ~~all~~or ofguaranteed by the ~~Bank’s depositors~~U.S. ~~are~~government ~~Maryland~~or ~~residents~~agencies thereof. ToTypical ~~provide~~investments ~~additional~~include ~~convenience,~~federally ~~the~~sponsored ~~Bank~~agency ~~participates~~mortgage inpass-through ~~the~~and ~~STAR~~federally ~~Automated~~sponsored ~~Teller~~agency ~~Machine~~and mortgage-related ~~(“ATM”)~~securities. ~~network~~Investment atand ~~locations~~aggregate ~~throughout~~investment ~~the~~limitations ~~mid-Atlantic~~ and ~~the~~credit ~~South~~quality ~~and~~parameters ~~the~~of ~~CIRRUS~~each ~~Automated~~class ~~Teller~~of ~~Machine network~~investment atare ~~locations~~prescribed ~~throughout~~in the ~~United~~Bank’s ~~States,~~investment ~~through~~policy. ~~which~~The ~~customers~~Bank ~~can~~performs ~~gain~~analyses ~~access~~on mortgage-related securities prior to ~~their~~purchase ~~accounts~~and aton ~~any~~an ~~time.~~ongoing ~~The~~basis ~~Bank~~to ~~currently~~determine ~~has~~the ~~ATM~~impact ~~machines~~on inearnings ~~all~~and ofmarket ~~its~~value ~~fifteen~~under ~~offices~~various interest rate and prepayment conditions. ~~The~~Under the Bank’s ~~also~~current ~~has~~investment apolicy, ~~remote~~securities ~~ATM~~purchases atare ~~the~~made ~~Forest~~by ~~Hill~~the ~~Lanes in~~Bank’s ~~Forest~~President. ~~Hill,~~The ~~Maryland~~Bank’s President and ~~remote~~Treasurer ~~ATM’s~~have atauthority ~~three~~to ~~area~~sell ~~community~~investment ~~college~~securities subject to the Bank’s, ~~Dundalk~~designation ~~Community~~as ~~College,~~available ~~Catonsville~~for ~~Community~~sale ~~College~~ and ~~Essex~~purchase ~~Community~~comparable ~~College.~~investment ~~The~~securities ~~Bank~~with ~~also~~similar ~~has~~characteristics. anThe ~~Internet~~Board ~~based~~of Directors ~~banking~~reviews ~~system~~securities totransactions ~~provide~~on ~~additional customer~~a ~~convenience~~monthly basis.

20Securities designated as “held to maturity” are those assets which the Bank has the ability and intent to hold to maturity. Upon acquisition, securities are classified as to the Bank’s intent, and a sale would only be effected due to deteriorating investment quality. The held to maturity investment portfolio is not used for speculative purposes and is carried at amortized cost. In the event the Bank sells securities from this portfolio for other than credit quality reasons, all securities within the investment portfolio with matching characteristics may be reclassified as assets available for sale. Securities designated as “available for sale” are those assets which the Bank may not hold to maturity and thus are carried at market value with unrealized gains or losses, net of tax effect, recognized in retained earnings. At September 30, 2006 the Bank’s securities portfolio consists of both available for sale and held to maturity securities.

~~Savings~~Mortgage-Backed ~~deposits~~and Related Securities. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries that pool and repackage the participation interest in the form of securities to investors such as the Bank. atSuch ~~September~~intermediaries 30may include quasi-governmental agencies such as FHLMC, ~~2004~~FNMA and ~~were~~GNMA ~~represented~~which byguarantee the ~~various~~payment ~~types~~of principal and interest to investors. Mortgage-backed securities generally increase the quality of ~~savings~~the Bank’s assets by virtue of the guarantees that back them, are more liquid than individual mortgage ~~programs~~loans ~~described~~and ~~below~~may be used to collateralize borrowings or other obligations of the Bank.

Interest*Rate		Minimum Term	Category	Minimum Amount		Balances(in thousands)		Percentage ofTotal Savings
			Demand deposits:
.34	%	None	NOW and Super NOW accounts	$	250	$	55,869	9.63	%
.95		None	Money Market		250		15,356	2.64
			Total demand deposits				71,225	12.27
			Passbook savings deposits:
.84	%	None	Regular Passbook		25		84,316	14.53
1.03		None	Money market passbook		10,000		33,063	5.69
			Total passbook savings deposits			$	117,379	20.22	%
			Certificates of Deposit
.94	%	3 months or less	Fixed-term, fixed rate	$	1,000	$	9,803	1.69	%
2.15		6 months	Fixed-term, fixed rate		1,000		16,704	2.88
1.79		12 months	Fixed-term, fixed rate		100		66,081	11.38
1.89		18 months	Fixed-term, fixed rate		100		12,700	2.19
2.67		24 months	Fixed-term, fixed rate		100		56,817	9.78
2.52		30 months	Fixed-term, fixed rate		100		4,881	.84
3.08		36 months	Fixed-term, fixed rate		100		12,885	2.22
3.42		42 months	Fixed-term, fixed rate		100		21	.01
4.57		48 months	Fixed-term, fixed rate		100		3,948	.68
4.63		60 months	Fixed-term, fixed rate		100		89,429	15.40
3.34		$100,000 and over	Fixed-term, fixed rate		N/A		118,625	20.41
			Total Certificates of deposit				391,894	67.48
		Purchase accounting premiums, net					80	.02
			Accrued interest payable				44	.01
			Total deposits			$	580,622	100.00	%

Mortgage-related securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages.

*The ~~Represents~~actual ~~weighted~~maturity ~~average~~of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage-backed security. The yield is based upon the interest ~~rate~~income and the amortization of the premium or accretion of the discount related to

2115

TheTable following table sets forth the change in dollar amount of deposits in the various types of accounts offered by the Bank between the dates indicated. Contents

	Balance atSeptember 30,2004		% ofDeposit		Increase(Decrease)			Balance atSeptember 30,2003		% ofDeposits		Increase(Decrease)			Balance atSeptember 30,2002		% ofDeposits
NOW	$	55,869	9.63	%	$	5,312		$	50,557	9.15	%	$	4,729		$	45,827	9.19	%
Money market deposit		15,356	2.64			(184	)		15,540	2.82			(3,369	)		18,909	3.79
Passbook savings deposits		117,379	20.22			7,143			110,236	19.97			17,935			92,301	18.50
Certificate of deposit		273,269	47.07			591			272,678	49.42			6,328			266,527	53.44
Certificate of deposit $100,000 and over		118,625	20.41			16,107			102,518	18.57			28,776			73,742	14.78
Purchase accounting premiums, net		80	.02			(261	)		341	.06			(1,051	)		1,392	.28
Accrued interests payable		44	.01			(15	)		59	.01			(28	)		87	.02
	$	580,622	100.00	%	$	28,693		$	551,929	100.00	%	$	53,320		$	498,785	100.00	%

the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accredited over the estimated term of the securities using a level yield method. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect the actual prepayment. The actual prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.

22Mortgage-related securities, which include collateralized mortgage obligations (“CMOs”), are typically issued by a special purpose entity, which may be organized in a variety of legal forms, such as a trust, a corporation or a partnership. The entity aggregates pools of pass-through securities, which are used to collateralize the mortgage-related securities. Once combined, the cash flows can be divided into “tranches” or “classes” of individual securities, thereby creating more predictable average lives for each security than the underlying pass-through pools. Accordingly, under this security structure, all principal paydowns from the various mortgage pools are allocated to a mortgage-related securities’ class or classes structured to have priority until it has been paid off. These securities generally have fixed interest rates, and, as a result, changes in interest rates generally would affect the market value and possibly the prepayment rates of such securities.

~~The~~Some ~~following~~mortgage-related ~~tables~~securities ~~set~~instruments ~~forth~~are ~~the~~like ~~average~~traditional ~~balances~~debt instruments due to their stated principal amounts and ~~average~~traditionally defined interest ~~rates~~rate ~~based~~terms. onPurchasers ~~month~~of certain other mortgage-~~end~~related securities instruments are ~~balances~~entitled ~~for~~to ~~various~~the ~~types~~excess, if any, of ~~deposits~~the issuer’s cash flows. These mortgage-related securities instruments may include instruments designated as residual interest and are riskier in that they could result in the loss of a portion of the ~~dates~~original investment. ~~indicated~~Cash flows from residual interests are very sensitive to prepayments and, thus, contain a high degree of interest rate risk. The Bank does not purchase residual interests in mortgage-related securities.

	Year ended September 30,
	2004				2003				2002
	AverageBalance		AverageRate(1)		AverageBalance		AverageRate (1)		AverageBalance		AverageRate(1)
	(Dollars in thousands)
NOW	$	35,878	.53	%	$	43,579	.61	%	$	25,423	1.71	%
Money Market deposits		15,702	.82			15,628	1.03			9,920	1.74
Passbook savings deposits		115,155	.90			100,160	2.13			72,364	3.15
Non-interest bearing demand deposits		19,662	—			16,305	—			12,583	—
Certificate of deposit		384,708	3.17			354,349	3.29			262,439	4.23
Total	$	571,105	2.37	%	$	530,021	2.68	%	$	382,729	3.65	%

The Bank’s mortgage-backed securities portfolio consists primarily of seasoned fixed-rate and adjustable rate mortgage-backed securities. The Bank makes such investments in order to manage cash flow, diversify assets, obtain yield, to satisfy certain requirements for favorable tax treatment and to satisfy the qualified thrift lender test. See “Regulation – Depository Institution Regulation – Qualified Thrift Lender Test.”

~~(1)~~At ~~Annualized~~September 30, 2006, mortgage-backed securities with an amortized cost of $28.7 million were classified as held to maturity. At September 30, 2006, the Bank’s held to maturity mortgage-backed securities had a weighted average yield of 5.4%.

~~The~~At ~~following~~September 30, ~~table~~2006, ~~sets~~mortgage-backed ~~forth~~securities ~~the~~with ~~time~~an ~~deposits~~amortized incost ~~the~~of ~~Bank~~$90.2 million were classified byas ~~rates~~available atfor sale. At September 30, 2006, the ~~dates~~Bank’s ~~indicated~~available for sale mortgage-backed securities had a weighted average yield of 3.96%.

	At September 30,
	2004		2003		2002
	(Dollars in Thousands)
0.76 – 2%	$	97,949	$	84,309	$	16,369
2.01 – 4%		186,991		172,828		167,206
4.01 – 6%		62,612		70,523		80,228
6.01 – 8%		44,342		47,536		76,466
	$	391,894	$	375,196	$	340,269

At September 30, 2006, the Bank did not have any CMOs, and the Bank’s investment policy does not permit investments in individual issues of CMOs or Real Estate Mortgage Investment Conduits (“REMICs”).

~~The~~16 ~~following table sets forth the amount and maturities of time deposits at September 30, 2004.~~

	Amount Due
Rate	Less ThanOne Year	1 – 2 Years	2 – 3 Years	After 3 Years	Total
	(In thousands)
0.76 – 2%	87,589	10,020	275	65	97,949
2.01 – 4%	77,193	49,990	7,491	52,317	186,991
4.01 – 6%	2,504	6,063	25,333	28,712	62,612
6.01 – 8%	34,134	9,763	91	354	44,342

23The following table sets forth the carrying value of the Bank’s investments at the dates indicated.

The following table indicates the amount of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity as of September 30, 2004. At such date, such deposits represented 20.41% of total deposits and had a weighted average rate of 3.4%.


	At September 30,
	2006		2005		2004
	*(Dollars in Thousands)*
Securities available for sale:
U.S. government and agency securities	$	110,054	$	116,443	$	124,790
Mortgage-backed securities		86,801		112,120		144,260
Equity investments in mutual funds		33,014		34,943		34,158

Total Available for Sale	$	229,869	$	263,506	$	303,208

Securities held to maturity:
U.S. government and agency securities	$	4,496	$	1,995	$	2,497
Mortgage-backed securities		28,675		26,470		26,631
FHLB stock		6,972		8,060		6,105

Total Held to Maturity	$	40,143	$	36,525	$	35,233
Total	$	270,012	$	300,031	$	338,441

Maturity Period	Certificates ofDeposit
	(In thousands)
Three months or less	$	13,944
Over three through six months		14,886
Over six through 12 months		24,913
Over 12 months		64,882
Total	$	118,625

TheTable following table sets forth the savings activities of the Bank for the periods indicated. Contents

	At September 30,
	2004			2003			2002
	(Dollars in Thousands)
Deposits	$	579,338		$	998,644		$	682,641
Increase from WHG merger		—			—			118,218
Withdrawals		(564,198	)		(959,547	)		(641,844	)
Net increase before interest credit		15,140			39,097			159,015
Interest credited		13,553			14,223			13,984
Net increase in savings deposits	$	28,693		$	53,320		$	172,999

The following table sets forth information in the scheduled maturities, amortized cost, market value and average yields for the Bank’s investment portfolio at September 30, 2006.

In the unlikely event the Bank is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the sole stockholder of the Bank.


	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Portfolio
	Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Market Value		Average Yield
	*(Dollars in thousands)*
Securities available for sale:
U.S. government and agency obligations	$	12,004	2.95	%	$	80,221	3.67	%	$	16,494	3.97	%	$	3,498	5.62	%	$	112,217	$	110,054	3.70	%
Mortgage-backed securities		1	7.5			30,671	3.63			1,904	3.69			57,623	4.14			90,199		86,801	3.96
Equity Investment in mutual funds		34,546	4.66			—				—				—				34,546		33,014	4.66

Total available for sale	$	46,551			$	110,892			$	18,398			$	61,121			$	236,962	$	229,869

	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Portfolio
	Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Market Value		Average Yield
Securities held to maturity:
U.S. government and agency obligations	$	—	—	%	$	4,000	5.23	%	$	496	4.00	%	$	—	—	%	$	4,496	$	4,488	5.09	%
Mortgage-backed securities		6	7.50			343	6.05			170	7.48			28,156	5.38			28,675		28,356	5.40
FHLB stock		—				—	—			—				6,972	5.38			6,972		6,972	5.38

Total held to maturity	$	6			$	4,343			$	666			$	35,128			$	40,143	$	39,816
Total	$	46,557			$	115,235			$	19,064			$	96,249			$	277,105	$	269,685

~~Borrowings.~~18 Savings deposits historically have been the primary source of funds for the Bank’s lending, investments and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB System, the Bank is required to own stock in the FHLB of Atlanta and is authorized to apply for advances. Advances are pursuant to several different programs, each of which has its own interest rate and range of maturities. The Bank has a Blanket Agreement for advances with the FHLB under which the Bank may borrow up to 80% of assets subject to normal collateral and underwriting requirements. Advances from the FHLB of Atlanta are secured by the Bank’s stock in the FHLB of Atlanta and other eligible assets. At September 30, 2004, the Bank had $120.9 million in outstanding FHLB advances.

OnTable June 27, 2002, the Company established a Delaware business trust subsidiary (the “Business Trust”), which issued and sold to private investors 12,500 securities with a liquidation amount of $1,000 per security, for a total of $12.5 million of preferred securities. The Company funded the Business Trust with $387,000 in exchange for 100% of the Business Trust’s common securities. The Business Trust used the proceeds from these transactions to purchase $12,887,000 of floating rate subordinated debentures from the Company. The Company makes periodic interest payments on the debentures to the Business Trust, and the Business Trust in turn makes interest payments on the trust preferred securities to the private investors. Contents

~~The~~Deposit ~~trust~~Activity ~~preferred securities issued by the Business Trust~~ and ~~the subordinated~~Other ~~debentures~~Sources held by the Business Trust are due June 30, 2032. The rate is 3.65% per annum over the three-month LIBOR rate and resets quarterly. The rate at September 30, 2004 was 5.67%. The junior subordinated debentures are the sole assets of ~~the~~Funds Business Trust. The subordinated debt securities, unsecured, rank junior and are subordinate in right of payment of all senior debt of the Company, and the Company has guaranteed repayment on the trust preferred securities issued by the Business Trust. The Company used the proceeds from these transactions to increase the capital of the Bank.

24General. Deposits are the primary source of the Bank’s funds for lending, investment activities and general operational purposes. In addition to deposits, the Bank derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general operational purposes. The Bank has access to borrow from the FHLB of Atlanta.

Deposits. The ~~$12.5~~Bank ~~million~~attracts ~~proceeds~~deposits principally from ~~the~~within ~~subordinated~~its ~~debt~~market ~~securities~~area ~~are~~by ~~includable~~offering asa ~~part~~variety of ~~Tier~~deposit 1instruments, ~~regulatory~~including ~~capital~~checking accounts, money market accounts, statement and passbook savings accounts, Individual Retirement Accounts, and certificates of deposit which range in maturity from seven days to five years. Deposit terms vary according to the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. The Bank reviews its deposit mix and pricing on a weekly basis. In ~~2004~~determining the characteristics of its deposit accounts, the ~~Company~~Bank ~~had~~considers the rates offered by competing aninstitutions, ~~annual~~lending ~~expense~~and ofliquidity $1requirements, growth goals and federal regulations.1 ~~million~~Management ~~related~~believes it prices its deposits comparably to ~~the~~rates ~~trust~~offered ~~preferred~~by ~~securities~~its competitors.

~~Payments~~The Bank attempts to becompete ~~made~~for bydeposits ~~the~~with ~~Business~~other ~~Trust~~institutions onin ~~the~~its ~~trust~~market ~~preferred~~area ~~securities~~by ~~are~~offering ~~dependent~~competitively onpriced ~~payments~~deposit instruments that are tailored to the ~~Company~~needs ~~has~~of ~~undertaken~~its tocustomers. ~~make~~Additionally, ~~particularly~~ the ~~payment~~Bank seeks to bemeet ~~made~~customers’ needs by ~~the~~providing ~~Company~~convenient oncustomer ~~the~~service ~~debentures. Distributions~~to on the ~~trust~~community, ~~preferred~~efficient ~~securities~~staff ~~are~~and ~~payable~~convenient ~~quarterly~~hours ~~at a rate~~ of 3service.~~65%~~ ~~per~~Substantially ~~annum~~all ~~over~~of the ~~three-month~~Bank’s depositors ~~LIBOR~~are ~~rate~~Maryland residents. ~~The~~To ~~distributions~~provide ~~are~~additional ~~funded~~convenience, bythe ~~interest~~Bank ~~payments~~participates ~~received~~in on the ~~debentures~~STAR ~~and~~Automated ~~are~~Teller ~~subject~~Machine to(“ATM”) ~~deferral~~network ~~for~~at uplocations ~~to five~~throughout ~~years~~the ~~under~~mid-Atlantic ~~certain~~and ~~conditions.~~the ~~Distributions~~South ~~are~~and ~~included~~the inCIRRUS ~~interest~~Automated ~~expense.~~Teller ~~The~~Machine network ~~Company~~at ~~may~~locations ~~redeem~~throughout the ~~debentures~~United States, inthrough ~~whole~~which orcustomers incan ~~part,~~gain ataccess ~~par~~to their accounts at any time. ~~after~~The ~~June~~Bank ~~30,~~currently ~~2007,~~has orATM ~~under~~machines ~~certain~~in ~~conditions~~all inof ~~whole~~its ~~but~~eighteen ~~not~~offices. inThe ~~part,~~Bank also has remote ATM’s at ~~any~~three area community ~~time~~college’s, atDundalk aCommunity ~~redemption~~College, ~~price~~Catonsville ~~equal~~Community toCollege ~~103%~~and ofEssex ~~the~~Community ~~principal~~College. ~~amount~~The ~~plus~~Bank ~~any~~also ~~accrued~~has ~~unpaid~~an ~~interest~~Internet-based banking system to provide additional customer convenience.

On19 September 29, 2003, the Company established a second Delaware statutory trust subsidiary (the “Statutory Trust”), which issued and sold to private investors 10,000 securities with a liquidation amount of $1,000 per security, for a total of $10.0 million of preferred securities. The Company funded the Statutory Trust with $310,000 in exchange for 100% of the Statutory Trust’s common securities. The Statutory Trust used the proceeds from these transactions to purchase $10,310,000 of floating rate subordinated debentures from the Company. The Company makes periodic interest payments on the debentures to the Statutory Trust, and the Statutory Trust in turn makes interest payments on the trust preferred securities to the private investors.

TheTable trust preferred securities and subordinated debentures are due October 7, 2033. The rate is 3.00% per annum over the three-month LIBOR rate and resets quarterly. The rate at September 30, 2004 was 4.60%. The junior subordinated debentures are the sole assets of the Statutory Trust. The subordinated debt securities, unsecured, rank junior and are subordinate in right of payment of all senior debt of the Company, and the Company has guaranteed repayment on the trust preferred securities issued by the Statutory Trust. The Company used the proceeds from these transactions to increase the capital of the Bank. The $10.3 million proceeds from the subordinated debt securities are includable as part of Tier 1 regulatory capital for the Bank. Contents

~~Payments~~Savings todeposits bein ~~made by~~ the ~~Statutory~~Bank ~~Trust~~at ~~on the trust preferred securities are dependent on payments that the Company has undertaken to make~~September 30, ~~particularly~~2006 ~~the~~were ~~payment~~represented ~~to be made~~ by the ~~Company~~various ontypes ~~the debentures. Distributions on the trust preferred securities are payable quarterly at a rate~~ of ~~3.00% per annum over the three-month LIBOR rate. The distributions are funded by interest payments received on the debentures and are subject to deferral for up to~~savings ~~five~~programs ~~years~~described ~~under certain conditions~~below. Distributions are included in interest expense. The Company may redeem the debentures, in whole or in part, at par at any time after October 7, 2008, or under certain conditions in whole but not in part, at any time at a redemption price equal to 103% of the principal amount plus any accrued unpaid interest.

Subsidiary Activities


Interest* Rate		Minimum Term	Category	Minimum Amount		Balances (in thousands)		Percentage of Total Savings
			Demand deposits:
.64	%	None	NOW and Super NOW accounts	$	250	$	58,631	9.69	%
3.69		None	Money Market		250		17,650	2.92

			Total demand deposits				76,281	12.61
			Passbook savings deposits:
.85		None	Regular Passbook		25		71,640	11.84
1.21		None	Money market passbook		10,000		24,250	4.01

			Total passbook savings deposits			$	95,890	15.85	%

			Certificates of Deposit
3.64		3 months or less	Fixed-term, fixed rate	$	1,000	$	10,720	1.77	%
4.79		6 months	Fixed-term, fixed rate		1,000		36,019	5.96
4.95		12 months	Fixed-term, fixed rate		100		86,391	14.28
4.07		18 months	Fixed-term, fixed rate		100		18,198	3.01
4.28		24 months	Fixed-term, fixed rate		100		40,426	6.68
3.77		30 months	Fixed-term, fixed rate		100		2,762	.46
3.76		36 months	Fixed-term, fixed rate		100		7,653	1.27
4.79		48 months	Fixed-term, fixed rate		100		15,781	2.61
4.45		60 months	Fixed-term, fixed rate		100		83,826	13.86
4.55		$100,000 and over	Fixed-term, fixed rate		N/A		130,642	21.60

			Total Certificates of deposit				432,418	71.50
			Accrued interest payable				256	.04

			Total deposits			$	604,845	100.00	%

As* aRepresents ~~federally~~weighted ~~chartered~~average ~~savings~~interest bank, the Bank is permitted to invest an amount equal to 2% of its assets in subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. Under such limitations, as of September 30, 2004, the Bank was authorized to invest up to approximately $20.0 million in the stock of or loans to subsidiaries, including the additional 1% investment for community inner-city and community development purposes. Institutions meeting their applicable minimum regulatory capital requirements may invest up to 50% of their regulatory capital in conforming first mortgage loans to subsidiaries in which they own 10% or more of the capital stock. rate

~~The~~20 Bank has two subsidiary service corporations, Baltimore County Service Corp. (“BCSC”) and Ebenezer Road, Inc. (“Ebenezer Road”). Further, BCSC has a wholly owned subsidiary, Route 543, Incorporated (“Route 543”). BCSC was formed in the mid 1970’s for the purpose of participating in joint ventures for the development of real estate. The last development project was completed during the year ended September 30, 1996, and at September 30, 2004, BCSC conducted immaterial activities. Route 543 currently is inactive. At September 30, 2004, BCSC had substantially no assets or liabilities. The Bank does not intend to conduct real estate development activities in the future. Ebenezer Road is an insurance agency that sells primarily vendor’s single interest insurance on automobile loans, as well as annuity products. The fees from the activities of its subsidiaries were immaterial during the year ended September 30, 2004.

25Table of Contents

~~Competition~~The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by the Bank between the dates indicated.

The Bank faces strong competition both in originating real estate and consumer loans and in attracting deposits. The Bank competes for real estate and other loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Bank also competes by offering products which are tailored to the local community. Its competition in originating real estate loans comes primarily from other savings institutions, commercial banks and mortgage bankers. Commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions.


	Balance at September 30, 2006		% of Deposit		Increase (Decrease)			Balance at September 30, 2005		% of Deposits		Increase (Decrease)			Balance at September 30, 2004		% of Deposits
	*(Dollars in thousands)*
NOW	$	58,361	9.69	%	$	(4,866	)	$	63,497	10.62	%	$	7,628		$	55,869	9.63	%
Money market deposit		17,650	2.92			5,470			12,180	2.04			(3,176	)		15,356	2.64
Passbook savings deposits		95,890	15.85			(20,803	)		116,693	19.53			(686	)		117,379	20.22
Certificate of deposit		301,776	49.90			26,442			275,334	46.07			2,065			273,269	47.07
Certificate of deposit $100,000 and over		130,642	21.60			754			129,888	21.73			11,263			118,625	20.41
Purchase accounting premiums, net		—	—			(18	)		18	—			(62	)		80	.02
Accrued interests payable		256	.04			197			59	.01			15			44	.01

Total	$	604,845	100.00	%	$	7,176		$	597,669	100.00	%	$	17,047		$	580,622	100.00	%

~~The~~21 Bank attracts its deposits through its offices primarily from the local community. Consequently, competition for deposits is principally from other savings institutions, commercial banks, credit unions and brokers in the local community. The Bank competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff. The Bank believes it has developed strong relationships with local realtors and the community in general.

ManagementTable considers its market area for gathering deposits and making loans to be the Baltimore metropolitan area in Maryland. The Bank estimates that it competes with numerous banks and savings and loan associations for deposits and loans. Based on data provided by a private marketing firm, the Bank estimates that at September 30, 2004, it had approximately 2.9% of deposits held by all banks and savings institutions in the Baltimore Metropolitan Area. Contents

~~Employees~~The following tables set forth the average balances and average interest rates based on month-end balances for various types of deposits as of the dates indicated.

As of September 30, 2004, the Company had 169 full-time and 23 part-time employees, none of whom were represented by a collective bargaining agreement. Management considers the Bank’s relationships with its employees to be good.


	Year Ended September 30,
	2006				2005				2004
	Average Balance		Average Rate		Average Balance		Average Rate		Average Balance		Average Rate
	*(Dollars in thousands)*
NOW	$	41,296	.24	%	$	38,509	.32	%	$	35,878	.53	%
Money Market deposits		15,930	3.03			13,938	.95			15,702	.82
Passbook savings deposits		96,929	1.05			118,817	.93			115,155	.90
Non-interest bearing demand deposits		21,786	—			23,213	—			19,662	—
Certificate of deposit		432,011	3.88			395,372	3.38			384,708	3.17

Total	$	607,952	3.02	%	$	589,849	2.49	%	$	571,105	2.37	%

~~Depository~~The ~~Institution~~following ~~Regulation~~table sets forth the time deposits in the Bank classified by rates at the dates indicated.

General. The Bank is a federally chartered savings institution, is a member of the FHLB of Atlanta and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) through the Savings Association Insurance Fund (“SAIF”). As a federal savings institution, the Bank is subject to regulation and supervision by the Office of Thrift Supervision (“OTS”) and the FDIC and to OTS regulations governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities and general investment authority. The OTS periodically examines the Bank for compliance with various regulatory requirements and for safe and sound operations. The FDIC also has the authority to conduct special examinations of the Bank because its deposits are insured by the SAIF. The Bank must file reports with the OTS describing its activities and financial condition and must obtain the approval of the OTS prior to entering into certain transactions, such as mergers with or acquisitions of other depository institutions.


	At September 30,
	2006		2005		2004
	*(Dollars in Thousands)*
0.26 – 2.00%	$	226	$	19,290	$	97,949
2.01 – 4.00		84,540		237,946		186,991
4.01 – 6.00		347,596		138,052		62,612
6.01 – 7.25		56		9,934		44,342

Total	$	432,418	$	405,222	$	391,894

~~Regulatory~~The ~~Capital Requirements.~~following ~~Under~~table ~~the~~sets ~~OTS’s~~forth ~~regulatory capital requirements, savings associations must maintain “tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to at least 4.0% (or 3.0%, if~~ the ~~institution~~ isamount ~~rated composite 1 CAMELS under the OTS examination rating system) of adjusted total assets~~ and ~~“total”~~maturities ~~capital (a combination~~ of ~~“core”~~time ~~and~~deposits ~~“supplementary”~~at ~~capital) equal to 8.0% of risk-weighted assets. In addition~~September 30, the OTS has adopted regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio ~~of Tier 1 capital to adjusted total assets of less than 4~~2006.0% (or 3.0%, if the institution is rated composite 1 CAMELS under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definitions as core capital. See “—Prompt Corrective Regulatory Action.” Certain of the laws and regulations governing the Bank are described below. However, the description does purport to be a complete discussion of the legal and regulatory requirements to which the Bank is subject and is qualified in its entirety by reference to the actual laws and regulations.

Core capital is defined as common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated


Rate	Less Than One Year		1 – 2 Years		2 – 3 Years		After 3 Years		Total
0.26 - 2.00%	$	226	$	—		—	$	—	$	226
2.01 - 4.00		59,499		13,141	$	7,977		3,923		84,540
4.01 - 6.00		168,576		91,686		34,671		52,663		347,596
6.01 - 7.25		56		—		—		—		56

Total	$	228,357	$	104,827	$	42,648	$	56,586	$	432,418

2622

subsidiaries,Table certain nonwithdrawable accounts and pledged deposits and “qualifying supervisory goodwill.” Core capital is generally reduced by the amount of the savings association’s intangible assets for which no market exists. Limited exceptions to the deduction of intangible assets are provided for purchased mortgage servicing rights, purchased credit card relationships and qualifying supervisory goodwill. Tangible capital is given the same definition as core capital but does not include an exception for qualifying supervisory goodwill and is reduced by the amount of all the savings association’s intangible assets with only a limited exception for purchased mortgage servicing rights. Both core and tangible capital are further reduced by an amount equal to a savings institution’s debt and equity investments in subsidiaries engaged in activities not permissible to national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies). Investments in and extensions of credit to such subsidiaries are required to be fully netted against tangible and core capital. At September 30, 2004, the Bank had no such investments. Contents

~~Adjusted~~The ~~total~~following ~~assets~~table ~~are~~indicates ~~a savings association’s total assets as determined under generally accepted accounting principles increased by certain goodwill amounts and by a pro rated portion of~~ the ~~assets of unconsolidated includable subsidiaries in which the savings association holds a minority interest. Adjusted total assets are reduced by the~~ amount of ~~assets that have been deducted from capital,~~ the ~~portion of savings association~~Bank’s ~~investments~~certificates inof ~~unconsolidated~~deposit ~~includable~~of ~~subsidiaries~~$100,000 ~~and,~~or ~~for~~more by ~~purpose~~time ofremaining ~~the~~until ~~core~~maturity ~~capital~~as ~~requirement~~of September 30, ~~qualifying supervisory goodwill~~2006. At ~~September~~such 30date, ~~2004,~~such ~~the~~deposits ~~Bank’s~~represented ~~adjusted~~21.6% ~~total assets for the purposes~~ of ~~the~~total ~~core~~deposits and ~~tangible~~had ~~capital~~a ~~requirements~~weighted ~~were~~average ~~approximately~~rate ~~$759.5~~of ~~million~~4.55%.

In determining compliance with the risk-based capital requirement, a savings association is allowed to include both core capital and supplementary capital in its total capital provided the amount of supplementary capital included does not exceed the savings association’s core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments, a portion of the savings association’s general loss allowances and up to 45% of unrealized gains on equity securities. Total core and supplementary capital are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and all equity investments. As of September 30, 2004, the Bank had no investments for which OTS regulations require a deduction from total capital.


Maturity Period	Certificates of Deposit
	*(In thousands)*
Three months or less	$	19,055
Over three through six months		16,736
Over six through 12 months		27,586
Over 12 months		67,265

Total	$	130,642

The ~~risk-based~~following ~~capital~~table ~~requirement~~sets isforth ~~measured against risk-weighted assets which equal~~ the ~~sum~~savings ofactivities ~~each asset and the credit-equivalent amount~~ of ~~each off-balance sheet item after being multiplied by an assigned risk weight. Under~~ the ~~OTS risk-weighting~~Bank ~~system, one-to-four family first mortgages not more than 90 days past due with loan-to-value ratios under 80% and average annual occupancy rates of at least 80% and certain qualifying loans~~ for the ~~construction~~periods ~~of one-to-four-family residences pre-sold to home purchasers are assigned a risk weight of 50%~~indicated. ~~Consumer and residential construction loans are assigned a risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as to principal and interest by the FNMA~~ or FHLMC are assigned a 20% risk weight. Cash and U.S. Government securities backed by the full faith and credit of the U.S. Government (such as mortgage-backed securities issued by GNMA) are given a 0% risk weight.

For information with respect to the Bank’s compliance with its regulatory capital requirements at September 30, 2004, see Note 14 of Notes to Consolidated Financial Statements.


	At September 30,
	2006			2005			2004
	*(In Thousands)*
Deposits	$	827,491		$	771,529		$	579,338
Withdrawals		(838,694	)		(769,193	)		(564,198	)

Net increase before interest credit		(11,203	)		2,336			15,140
Interest credited		18,379			14,711			13,553

Net increase in savings deposits	$	7,176		$	17,047		$	28,693

~~The~~In ~~risk-based~~the ~~capital~~unlikely ~~requirements~~event of the ~~OTS~~Bank ~~also~~is ~~require~~liquidated, ~~that~~depositors ~~savings~~will ~~institutions~~be ~~with~~entitled ~~more~~to ~~than~~full apayment ~~“normal” level~~ of ~~interest~~their deposit ~~rate~~accounts ~~risk~~prior to ~~maintain~~ ~~additional~~any ~~total~~payment ~~capital.~~being Amade ~~savings~~to ~~institution’s~~the ~~interest~~sole ~~rate~~stockholder ~~risk is measured in terms~~ of the ~~sensitivity of its “net portfolio value” to changes in interest rates. The interest rate risk rule did not have a material effect on the~~ Bank~~’s risk-based capital at September 30, 2004~~.

InBorrowings. ~~addition~~Savings todeposits ~~requiring~~historically have ~~generally~~been ~~applicable~~the ~~capital~~primary ~~standards~~source of funds for ~~savings~~the ~~institutions~~Bank’s lending, ~~the~~investments ~~OTS~~and general operating activities. The Bank is authorized, however, to ~~establish~~use ~~the~~advances ~~minimum~~from ~~level~~the FHLB of ~~capital~~Atlanta ~~for~~to asupplement ~~savings~~its ~~institution~~supply atof ~~such~~lendable ~~amount~~funds orand atto ~~such~~meet ~~ratio~~deposit withdrawal requirements. The FHLB of ~~capital-to-assets~~Atlanta functions as ~~the OTS~~a ~~determines~~central toreserve bebank ~~necessary~~providing orcredit ~~appropriate~~ for ~~such~~savings ~~institution~~institutions inand ~~light~~certain ofother ~~the~~member ~~particular~~financial ~~circumstances~~institutions. As a member of the ~~institution.~~FHLB ~~Such~~System, ~~circumstances~~the ~~would~~Bank ~~include~~is arequired ~~high~~to ~~degree~~own stock in the FHLB of ~~exposure~~Atlanta and is authorized to ~~interest~~apply ~~rate~~for ~~risk~~advances. Advances are pursuant to several different programs, ~~concentration~~each of ~~credit~~which ~~risk~~has ~~and certain~~its ~~risks~~own ~~arising~~interest ~~from~~rate ~~non-traditional~~and ~~activity~~range of maturities. The ~~OTS~~Bank ~~may~~has ~~treat~~a ~~the~~Blanket ~~failure~~Agreement offor ~~any~~advances ~~savings~~with ~~institution~~the toFHLB ~~maintain~~under ~~capital~~which atthe Bank ormay ~~above~~borrow ~~such~~up ~~level~~to as80% anof ~~unsafe~~assets orsubject ~~unsound~~to ~~practice~~normal collateral and ~~may~~underwriting ~~issue~~requirements. aAdvances ~~directive~~from ~~requiring~~the ~~any~~FHLB ~~savings~~of ~~institution which~~Atlanta ~~fails~~are tosecured ~~maintain~~by ~~capital~~the atBank’s orstock ~~above~~in the ~~minimum~~FHLB ~~level~~of ~~required~~Atlanta byand ~~the~~other ~~OTS~~eligible toassets. ~~submit~~At ~~and~~September 30, ~~adhere~~2006, tothe Bank ahad ~~plan~~$118.0 ~~for~~million ~~increasing~~in ~~capital~~outstanding FHLB advances.

On June 27, 2002, the Company established a Delaware business trust subsidiary (the “Business Trust”), which issued and sold to private investors 12,500 securities with a liquidation amount of $1,000 per security, for a total of $12.5 million of preferred securities. The Company funded the Business Trust with $387,000 in exchange for 100% of the Business Trust’s common securities. The Business Trust used the proceeds from these transactions to purchase $12,887,000 of floating rate junior subordinated debentures from the Company. The Company makes periodic interest payments on the debentures to the Business Trust, and the Business Trust in turn makes interest payments on the trust preferred securities to the private investors.

~~Qualified~~The ~~Thrift~~trust ~~Lender~~preferred ~~Test.~~securities Aissued ~~savings~~by ~~institution~~the ~~that~~Business ~~does~~Trust ~~not~~and ~~meet~~ the ~~Qualified~~junior ~~Thrift~~subordinated ~~Lender (“QTL”)~~debentures ~~test~~held ~~must~~by ~~either~~the ~~convert~~Business toTrust aare ~~bank~~due ~~charter~~June 30, or2032. The ~~comply~~rate ~~with~~is ~~the~~3.65% per ~~following~~annum ~~restrictions~~over ~~on its operations: (i)~~ the ~~institution~~three-month ~~may~~LIBOR ~~not~~rate ~~engage~~and inresets ~~any~~quarterly. ~~new~~The ~~activity~~rate orat ~~make any new investment~~September 30, ~~directly~~2006 orwas ~~indirectly,~~9.16%. ~~unless~~The ~~such~~junior ~~activity or~~subordinated ~~investment~~debentures isare ~~permissible for both a national bank and a savings institution; (ii)~~ the ~~branching~~sole ~~powers~~assets of the ~~institution~~Business ~~shall~~Trust. beThe ~~restricted~~subordinated todebt ~~those~~securities, unsecured, ofrank ajunior ~~national~~and ~~bank;~~are ~~(iii)~~subordinate ~~the~~in ~~institution~~right ~~shall~~of ~~not~~payment beof ~~eligible~~all tosenior ~~obtain~~debt ~~any~~of ~~advances~~the ~~from its~~Company, ~~FHLB;~~ and ~~(iv) payment of dividends by~~ the ~~institution~~Company ~~shall~~has beguaranteed ~~subject~~repayment toon the ~~rules~~trust ~~regarding~~preferred ~~payment~~securities ofissued ~~dividends~~ by athe ~~national~~Business ~~bank~~Trust. InThe ~~addition,~~Company ~~any~~used ~~company~~the ~~that~~proceeds ~~controls~~from ~~a savings institution that fails to qualify as a QTL will be required~~these totransactions ~~register as, and~~ to beincrease ~~deemed, a bank holding company subject to all of~~ the ~~provisions~~capital of the Bank. ~~Holding~~The ~~Company Act of 1956 (the “BHCA”) and other statutes applicable to bank holding companies~~$12.5 ~~Upon~~million ~~the~~proceeds ~~expiration of three years~~ from ~~the~~ ~~date~~ the ~~institution~~subordinated ~~ceases~~debt tosecurities beare aincludable ~~QTL,~~as itpart ~~must~~of ~~cease~~Tier ~~any~~1 ~~activity~~regulatory ~~and~~capital ~~not retain any investment not permissible~~ for athe ~~national bank and a savings institution and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations)~~Bank.

To23 meet the QTL test, an institution’s “Qualified Thrift Investments” must total at least 65% of “portfolio assets.” Under OTS regulations, portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (ii) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, (iii) education loans, small business loans and credit card loans, and (iv) stock in an FHLB. In addition, subject to a 20% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments consumer loans, 200% of their investments in loans to finance “starter homes” and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in “credit-needy” areas. In order to maintain QTL status, the savings institution must maintain a weekly average percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a monthly average basis in nine out of 12 months. A savings institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired.

AtTable September 30, 2004, the percentage of the Bank’s portfolio assets invested in Qualified Thrift Investments was in excess of the percentage required to qualify the Bank under the QTL test. Contents

~~Dividend~~Payments ~~Limitations.~~to ~~Under~~be ~~the~~made ~~OTS~~by ~~prompt~~the ~~corrective~~Business ~~action~~Trust ~~regulations,~~on the ~~Bank~~trust ~~would~~preferred besecurities ~~prohibited~~are ~~from~~dependent ~~making~~on payments ~~any~~that ~~capital~~the ~~distributions~~Company ~~if,~~has ~~after~~undertaken ~~making~~to ~~the distribution~~make, itparticularly ~~would~~the ~~have:~~payment ~~(i)~~to abe ~~total~~made ~~risk-based~~by ~~capital~~the ~~ratio~~Company ofon ~~less~~the ~~than 8~~debentures.~~0%;~~ ~~(ii)~~Distributions aon ~~Tier~~the 1trust ~~risk-based~~preferred ~~capital~~securities ~~ratio~~are ofpayable ~~less~~quarterly ~~than~~at 4a rate of 3.065%; per orannum ~~(iii)~~over athe ~~Tier~~three-month 1LIBOR ~~leverage~~rate. The ~~ratio~~distributions ofare ~~less~~funded ~~than~~by ~~4.0%.~~interest ~~See “Prompt~~payments ~~Corrective~~received ~~Regulatory~~on ~~Action.”~~the ~~Under~~debentures ~~OTS~~and ~~regulations,~~are ~~the~~subject ~~Bank~~to isdeferral ~~not~~for ~~permitted~~up to ~~pay~~five ~~dividends~~years onunder ~~its~~certain ~~capital~~conditions. ~~stock~~Distributions ifare ~~its~~included ~~regulatory~~in ~~capital~~interest ~~would~~expense. ~~thereby~~The beCompany ~~reduced~~may ~~below~~redeem the ~~amount~~debentures, ~~then~~in ~~required~~whole or ~~for~~in ~~the~~part, ~~liquidation~~at ~~account established~~par ~~for~~at any time after the ~~benefit~~interest ofadjustment date following June 30, 2007, or under certain ~~depositors~~conditions ofin ~~the~~whole ~~Bank~~but not in part, at ~~the~~any time ofat ~~its~~a ~~conversion~~redemption price equal to ~~stock~~103% ~~form~~of the principal amount plus any accrued unpaid interest.

~~Savings~~On ~~institutions~~September 29, ~~must~~2003, ~~submit notice to~~ the ~~OTS~~Company ~~prior~~established ~~to making~~ a ~~capital~~second ~~distribution~~Delaware ifstatutory ~~(a)~~trust ~~they~~subsidiary ~~would not be well-capitalized after~~ (the “Statutory ~~distribution~~Trust”), ~~(b)~~which ~~the~~issued ~~distribution~~and ~~would~~sold ~~result~~to inprivate ~~the~~investors ~~retirement~~10,000 ofsecurities ~~any~~with ofa ~~the~~liquidation ~~institution’s~~amount ~~common~~of or$1,000 ~~preferred~~per ~~stock or debt counted as its regulatory capital~~security, orfor ~~(c) the institution is~~ a ~~subsidiary~~total of ~~a holding company~~$10.0 Amillion ~~savings institution~~of ~~must~~preferred ~~make~~securities. ~~application~~The toCompany ~~the~~funded ~~OTS to pay a capital distribution if (w)~~ the ~~institution~~Statutory ~~would~~Trust ~~not~~with be$310,000 ~~adequately~~in ~~capitalized~~exchange ~~following~~for 100% ~~the~~of ~~distribution, (x)~~ the ~~institution~~Statutory Trust’s ~~total~~common ~~distributions~~securities. ~~for~~The ~~the~~Statutory ~~calendar~~Trust ~~year~~used ~~exceeds~~ the ~~institution’s~~ ~~net~~proceeds ~~income~~from ~~for~~these ~~the~~transactions ~~calendar year~~ to ~~date~~purchase ~~plus~~$10,310,000 ~~its~~of ~~net~~floating ~~income~~rate ~~(less~~junior ~~distributions)~~subordinated ~~for~~debentures ~~the~~from ~~preceding two years,~~ the ~~Savings~~Company. ~~association~~The isCompany ~~not~~makes ~~eligible~~periodic ~~for “expedited treatment” under OTS regulations (generally,~~interest ~~examination~~payments ~~and~~on ~~Community~~the ~~Reinvestment~~debentures ~~Act~~to ~~ratings in one of~~ the ~~two~~Statutory ~~top categories)~~Trust, orand ~~(y)~~ the ~~distribution~~Statutory ~~would~~Trust ~~otherwise~~in ~~violate~~turn ~~applicable~~makes ~~law~~interest orpayments ~~regulation~~on orthe antrust ~~agreement~~preferred ~~with~~securities orto ~~condition imposed by~~ the ~~OTS~~private investors.

InThe ~~addition~~trust topreferred ~~the~~securities ~~foregoing,~~and ~~earnings~~junior ofsubordinated ~~the~~debentures ~~Bank~~are ~~appropriated~~due toOctober 7, ~~bad~~2033. ~~debt reserves~~The ~~and~~rate ~~deducted~~is ~~for~~3.00% per ~~federal~~annum ~~income~~over ~~tax~~the ~~purposes~~three-month ~~are~~LIBOR ~~not~~rate ~~available~~and ~~for~~resets ~~payment~~quarterly. ofThe ~~cash~~rate ~~dividends~~at orSeptember 30, 2006 ~~other~~was ~~distributions~~8.51%. toThe ~~the~~junior ~~Company~~subordinated ~~without~~debentures ~~payment~~are ofthe ~~taxes~~sole atassets of the ~~then~~Statutory ~~current~~Trust. ~~tax~~The ~~rate~~subordinated bydebt ~~the~~securities, ~~Bank~~unsecured, onrank ~~the~~junior ~~amount~~and ofare ~~earnings~~subordinate ~~removed~~in ~~from~~right ~~the reserves~~of ~~for~~payment ~~such~~of ~~distributions.~~all ~~See~~senior ~~“Taxation.”~~debt ~~The~~of the Company, ~~intends~~and tothe ~~make~~Company ~~full~~has guaranteed ~~use~~repayment ofon ~~this~~the ~~favorable~~trust ~~tax~~preferred ~~treatment~~securities ~~afforded~~issued toby the ~~Bank~~Statutory ~~and~~Trust. ~~the~~The Company ~~and~~used ~~does~~the ~~not~~proceeds ~~contemplate~~from ~~use~~these oftransactions ~~any~~to ~~earnings~~increase the capital of the Bank. inThe a$10.3 ~~manner~~million ~~which~~proceeds ~~would~~from the subordinated debt securities are ~~limit~~includable ~~either~~as ~~institution’s~~part ~~bad~~of ~~debt~~Tier ~~deduction~~1 orregulatory ~~create~~capital ~~federal~~for ~~tax~~the ~~liabilities~~Bank.

28In 2006, the Company had a total annual expense of $1.9 million related to its trust preferred securities. Payments to be made by the Statutory Trust on the trust preferred securities are dependent on payments that the Company has undertaken to make, particularly the payment to be made by the Company on the debentures. Distributions on the trust preferred securities are payable quarterly at a rate of 3.00% per annum over the three-month LIBOR rate. The distributions are funded by interest payments received on the debentures and are subject to deferral for up to five years under certain conditions. Distributions are included in interest expense. The Company may redeem the debentures, in whole or in part, at par at any time after October 7, 2008, or under certain conditions in whole but not in part, at any time at a redemption price equal to 103% of the principal amount plus any accrued unpaid interest.

~~Deposit~~Subsidiary ~~Insurance.~~Activities FDICIA required the FDIC to establish a risk-based assessment system for insured depository associations that takes into account the risks attributable to different categories and concentrations of assets and liabilities. Under the rule, the FDIC assigns an association to one of three capital categories consisting of (i) well capitalized, (ii) adequately capitalized, or (iii) undercapitalized, and one of three supervisory subcategories. The supervisory subgroup to which an association is assigned is based on a supervisory evaluation provided to the FDIC by the association’s primary federal regulator and information which the FDIC determines to be relevant to the association’s financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the association’s state supervisor). An association’s assessment rate depends on the capital category and supervisory category to which it is assigned. There are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from zero basis points for an association in the highest category (i.e., well-capitalized and healthy) to 27 basis points of assessable deposits for an association in the lowest category (i.e., undercapitalized and of substantial supervisory concern.) In addition to the assessment for deposit insurance, all FDIC-insured savings associations and commercial banks are required to make payments on bonds issued in the 1980s by the Financing Corporation to capitalize the predecessor to the SAIF. During fiscal 2003, such payments approximated 1.52 basis points.

Federal Home Loan Bank System. The Bank is a member of the FHLB System, which consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board (“FHFB”). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a ~~member~~federally ofchartered ~~the~~savings ~~FHLB of Atlanta~~bank, the Bank is ~~required~~permitted to ~~acquire~~invest ~~and hold shares of capital stock in the FHLB of Atlanta in~~ an amount ~~at least~~ equal to 12% of ~~the aggregate unpaid principal of~~ its ~~home~~assets ~~mortgage~~in ~~loans~~subsidiaries, ~~home~~with ~~purchase contracts,~~an ~~and~~additional ~~similar obligations at the beginning~~ investment of ~~each year, or~~ 1~~/20~~% of ~~its~~assets ~~advances~~where ~~(borrowings)~~such ~~from~~investment ~~the~~serves ~~FHLB~~primarily ~~of Atlanta~~community, ~~whichever~~inner-city isand ~~greater.~~community ~~The~~development ~~Bank~~purposes. ~~was~~Under insuch ~~compliance~~limitations, ~~with~~as ~~this requirement with investment in FHLB~~ of ~~Atlanta stock at~~ September 30, ~~2004~~2006, ofthe ~~$6.1~~Bank ~~million.~~was ~~The~~authorized ~~FHLB~~to ofinvest ~~Atlanta~~up ~~serves~~to asapproximately ~~a reserve or central bank for its member institutions within its assigned district~~$23.6 Itmillion isin ~~funded primarily from proceeds derived from~~ the ~~sale~~ stock of ~~consolidated~~or ~~obligations~~loans ~~of the FHLB System. It offers advances~~ to ~~members~~subsidiaries, inincluding ~~accordance~~the ~~with~~additional ~~policies~~1% ~~and~~investment ~~procedures~~for ~~established~~community byinner-city ~~the FHFB~~ and ~~the~~community ~~Board~~development ofpurposes. ~~Directors~~Institutions ofmeeting ~~the~~their ~~FHLB~~applicable ofminimum ~~Atlanta.~~regulatory ~~Long-term~~capital ~~advances~~requirements may ~~only~~invest beup ~~made~~to ~~for~~50% ~~the purpose~~ of ~~providing~~their ~~funds for residential~~regulatory ~~housing~~capital ~~finance.~~in Atconforming ~~September~~first ~~30,~~mortgage ~~2004,~~loans ~~the~~to ~~Bank~~subsidiaries ~~had~~in ~~$120.9~~which ~~million~~they inown ~~advances~~10% ~~outstanding~~or ~~from~~more of the ~~FHLB~~capital ~~of Atlanta~~stock.

~~Federal~~The ~~Reserve~~Bank ~~System.~~has ~~Pursuant~~one tosubsidiary service ~~regulations~~corporation, ofEbenezer ~~the Federal Reserve Board~~Road, ~~all FDIC-insured depository institutions must maintain average daily reserves equal to 3% on transaction accounts from $7~~Inc.0 ~~million~~(“Ebenezer ~~up to $47~~Road”).6 ~~million,~~Ebenezer ~~plus~~Road ~~10%~~is onan ~~the~~insurance ~~amount~~agency ~~over~~that ~~$47.6~~sells ~~million.~~primarily ~~These~~vendor’s ~~reserve~~single ~~requirements~~interest ~~are~~insurance ~~subject~~on toautomobile ~~adjustment~~loans, byas ~~the~~well ~~Federal~~as ~~Reserve~~annuity ~~Board~~products. ~~Because~~The ~~required~~fees ~~reserves~~from ~~must be maintained in~~ the ~~form~~activities of its ~~vault~~subsidiaries ~~cash~~were orimmaterial induring athe ~~non-interest~~year ~~bearing~~ended ~~account at a Federal Reserve Bank~~September 30, ~~the~~2006. ~~effect~~During of the ~~reserve~~year ~~requirement~~ended isSeptember to2005, ~~reduce~~Baltimore ~~the~~County ~~amount~~Service ofCorporation ~~the~~was ~~institution’s interest-earning assets~~dissolved. AsIt ofconducted ~~September~~no ~~30,~~business ~~2004,~~for the ~~Bank met~~last ~~its~~three ~~reserve requirements~~years.

~~Prompt~~24 Corrective Regulatory Action. Under FDICIA, the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or

29Table of Contents

~~the~~Competition institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective provisions. If an institution’s ratio of tangible capital to total assets falls below the “critical capital level” established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods.

~~Under~~The ~~the~~Bank ~~implementing~~faces ~~regulations,~~strong ~~the~~competition ~~federal~~both ~~banking~~in ~~regulators,~~originating ~~including the~~real ~~OTS,~~estate ~~generally~~and ~~measure~~consumer anloans ~~institution’s~~and ~~capital~~in ~~adequacy~~attracting deposits. The Bank competes for real estate and other loans principally on the basis of ~~its~~interest ~~total~~rates, ~~risk-based~~the ~~capital~~types ~~ratio~~of (loans it originates, the ~~ratio~~deposit products it offers and the quality of ~~its~~services ~~total~~it ~~capital~~provides to ~~risk-weighted~~borrowers. ~~assets),~~The ~~Tier~~Bank 1also ~~risk-based~~competes ~~capital~~by ~~ratio~~offering (products which are tailored to the ~~ratio~~local ofcommunity. ~~its~~Its ~~core~~competition ~~capital~~in tooriginating real estate loans comes primarily from other ~~risk-weighted~~savings ~~assets)~~institutions, commercial banks and ~~leverage~~mortgage ~~ratio~~bankers. ~~(the~~Commercial ~~ratio~~banks, ofcredit ~~its~~unions ~~core~~and ~~capital~~finance tocompanies ~~adjusted~~provide ~~total~~vigorous ~~assets)~~competition in consumer lending. ~~The~~Competition ~~following~~may ~~table~~increase ~~shows~~as a result of the ~~capital~~continuing ~~ratios~~reduction ~~required~~of ~~for~~restrictions on the ~~various~~interstate ~~prompt~~operations ~~corrective~~of ~~action~~financial ~~categories~~institutions.

	Well Capitalized	AdequatelyCapitalized	Undercapitalized		SignificantlyUndercapitalized
Total risk-based capital ratio	10.0% or more	8.0% or more	Less than 8.0	%	Less than 6.0	%
Tier I risk-based capital ratio	6.0% or more	4.0% or more	Less than 4.0	%	Less than 3.0	%
Leverage ratio	5.0% or more	4.0% or more	Less than 4.0	%	Less than 3.0	%

The Bank attracts its deposits through its offices primarily from the local community. Consequently, competition for deposits is principally from other savings institutions, commercial banks, credit unions and brokers in the local community. The Bank competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff. The Bank believes it has developed strong relationships with local realtors and the community in general.

*Management 3considers its market area for gathering deposits and making loans to be the Baltimore metropolitan area in Maryland.0 The Bank estimates that it competes with numerous banks and savings and loan associations for deposits and loans. Based on data provided by the FDIC as of June 30, 2006, the Bank estimates that at September 30, 2006, it had approximately .67% ifof ~~institution~~deposits ~~has~~held ~~composite~~by 1all ~~CAMELS~~banks ~~rating~~and savings institutions in the Baltimore Metropolitan Area.

AEmployees “critically undercapitalized” savings institution is defined as an institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category.

~~Safety~~As ~~and Soundness Standards. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act~~ of ~~1994 (the “CDRI Act”)~~September 30, ~~each Federal banking agency was required to establish safety and soundness standards for institutions under its authority. On July 10~~2006, ~~1995,~~ the ~~Federal~~Company ~~banking~~had ~~agencies,~~150 ~~including~~full-time ~~the OTS, released Interagency Guidelines Establishing Standards for Safety~~ and ~~Soundness~~23 ~~and~~part-time published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The guidelines require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the sizeemployees, ~~nature~~none ~~and scope~~ of ~~the~~whom ~~institution’s~~were ~~business.~~represented ~~The~~by guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the OTS determines that a ~~savings~~collective ~~institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit~~bargaining ~~an acceptable plan to achieve compliance with the guidelines~~agreement. AManagement ~~savings~~considers ~~institution must submit an acceptable compliance plan to~~ the ~~OTS~~Bank’s ~~within~~relationships 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Under the guidelines, a savings institution should maintain systems, commensurate with its ~~size~~employees ~~and the nature and scope of its operations,~~ to ~~identify~~be ~~problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves~~good. ~~Management believes that these regulatory standards do not materially affect the Bank’s operations.~~

30Depository Institution Regulation

~~Lending Limits~~General. ~~Savings~~The ~~institutions~~Bank ~~generally~~is ~~are~~a ~~subject~~federally tochartered ~~the lending limits applicable to national banks. With certain limited exceptions, the maximum amount that a~~ savings institution, oris a ~~national~~member ~~bank~~of ~~may~~the ~~lend~~FHLB toof ~~any~~Atlanta ~~borrower outstanding at one time~~ and ~~not~~its ~~fully~~deposits ~~secured~~are insured by ~~collateral having a market value at least equal to~~ the ~~amount~~FDIC of(“FDIC”) through the ~~loan~~Deposit orInsurance ~~extension~~Fund. ofAs ~~credit~~a ~~(including~~federal ~~certain~~savings ~~related~~institution, ~~entities of~~ the ~~borrower)~~Bank ~~outstanding~~is atsubject ~~one~~to ~~time~~regulation and ~~not~~supervision ~~fully secured~~ by ~~collateral~~the ~~having~~Office aof ~~market~~Thrift ~~value~~Supervision at(“OTS”) ~~least~~and ~~equal to~~ the ~~amount~~FDIC ofand ~~the~~to ~~loan~~OTS orregulations ~~extension~~governing ~~of credit may not exceed~~such ~~15%~~matters ofas ~~the unimpaired~~ capital ~~and~~standards, ~~surplus~~mergers, establishment of ~~the~~branch ~~institution.~~offices, ~~Loans~~subsidiary investments and ~~extensions~~activities ofand ~~credit~~general ~~fully~~investment ~~secured~~authority. byThe ~~readily~~OTS ~~marketable~~periodically ~~collateral~~examines ~~may~~the ~~comprise~~Bank anfor ~~additional~~compliance ~~10%~~with ofvarious ~~unimpaired~~regulatory ~~capital~~requirements and ~~surplus.~~for ~~Savings institutions are additionally~~safe ~~authorized~~and tosound ~~make~~operations. ~~loans~~The toFDIC ~~one~~also ~~borrower,~~has ~~for~~the ~~any~~authority ~~purpose:~~to ~~(i)~~conduct inspecial anexaminations ~~amount~~of ~~not~~the toBank ~~exceed~~because ~~$500,000,~~its ordeposits ~~(ii)~~are insured by ~~order of~~ the ~~Director~~Deposit ofInsurance ~~OTS,~~Fund. inThe anBank ~~amount~~must ~~not~~file toreports ~~exceed~~with the ~~lesser~~OTS ofdescribing ~~$30,000,000~~its oractivities ~~30% of unimpaired capital~~ and ~~surplus to develop~~financial ~~residential~~condition ~~housing,~~and ~~provided:~~must ~~(a)~~obtain the ~~purchase~~approval ~~price~~ of ~~each~~the ~~single-family~~OTS ~~dwelling~~prior into ~~the~~entering ~~development~~into ~~does~~certain ~~not exceed $500~~transactions,~~000;~~ ~~(b)~~such ~~the~~as ~~savings~~mergers ~~institution~~with isor ~~and~~acquisitions ~~continues~~of toother bedepository ininstitutions. ~~compliance~~Certain ~~with~~of ~~its~~the ~~fully~~laws ~~phased-in~~and ~~capital~~regulations ~~requirements;~~governing ~~(c)~~ the ~~loans~~ ~~comply~~Bank ~~with~~and ~~applicable~~Company ~~loan-to-value~~are ~~requirements~~described below. However, ~~and; (d)~~ the ~~aggregate~~description ~~amount~~does ofpurport ~~loans~~to ~~made~~be ~~under~~a ~~this~~complete ~~authority~~discussion ~~does not exceed 150%~~ of ~~unimpaired~~the ~~capital~~legal and ~~surplus,~~regulatory orrequirements ~~(iii) loans~~ to ~~finance~~which the ~~sale~~Bank ofand ~~real~~Company ~~property~~are ~~acquired~~subject ~~in satisfaction~~and ofis ~~debts~~qualified ~~previously contracted~~ in ~~good~~its ~~faith,~~entirety ~~not~~by reference to ~~exceed~~the ~~50%~~actual oflaws ~~unimpaired capital~~ and ~~surplus of the institution~~regulations.

AtRegulatory ~~September~~Capital 30Requirements. Under the OTS’s regulatory capital requirements, ~~2004~~savings associations must maintain “tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to at least 4.0% (or 3.0%, if the ~~maximum~~institution ~~amount~~is ~~that~~rated composite 1 CAMELS under the ~~Bank~~OTS ~~could~~examination ~~have~~rating ~~loaned~~system) of adjusted total assets and “total” capital (a combination of “core” and “supplementary” capital) equal to ~~any~~at ~~one~~least ~~borrower~~8.0% ~~without~~of ~~prior~~risk-weighted assets. In addition, the OTS ~~approval~~has ~~was~~adopted $regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.20%, ~~million~~a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% Ator ~~such~~a ~~date~~ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%, if the institution is rated composite 1 CAMELS under the ~~largest~~OTS ~~aggregate~~examination ~~amount~~rating system). For purposes of ~~loans~~these ~~that~~regulations, ~~the~~Tier ~~Bank~~1 ~~had~~capital ~~outstanding~~has tothe ~~any~~same ~~one~~definitions ~~borrower~~as ~~was~~core $6capital.9 ~~million~~See “–Prompt Corrective Regulatory Action.”

~~Uniform~~Core ~~Lending~~capital ~~Standards.~~is ~~Under~~defined ~~OTS~~as ~~regulations,~~common ~~savings~~stockholders’ ~~institutions~~equity ~~must~~(including ~~adopt~~retained ~~and~~earnings), ~~maintain~~noncumulative ~~written~~perpetual ~~policies~~preferred ~~that~~stock ~~establish~~and ~~appropriate~~related ~~limits~~surplus, ~~and~~minority ~~standards for extensions of credit that are secured by liens or~~ interests in ~~real estate or are made for~~ the ~~purpose~~equity accounts of ~~financing~~fully ~~permanent~~consolidated ~~improvements to real estate. These policies must establish loan portfolio diversification standards~~subsidiaries, ~~prudent~~ ~~underwriting~~certain ~~standards,~~nonwithdrawable ~~including~~accounts ~~loan-to-value limits, that are clear~~ and ~~measurable,~~pledged ~~loan administration procedures and documentation, approval and reporting requirements~~deposits. ~~The~~Core ~~real~~capital ~~estate~~is ~~lending~~generally ~~policies~~reduced ~~must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the “Interagency Guidelines”) that have been adopted~~ by the ~~federal bank regulators.~~

~~The~~25 Interagency Guidelines, among other things, call upon depository institutions to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits: (i) for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral; (ii) for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), the supervisory limit is 75%; (iii) for loans for the construction of commercial, multifamily or other nonresidential property, the supervisory limit is 80%; (iv) for loans for the construction of one-to-four family properties, the supervisory limit is 85%; and (v) for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property including non-owner-occupied, one-to-four family property), the limit is 85%. Although no supervisory loan-to-value limit has been established for owner-occupied, one-to-four family and home equity loans, the Interagency Guidelines state that for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.

TheTable Interagency Guidelines state that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits, based on the support provided by other credit factors. The aggregate amount of loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total capital and the total of such loans secured by commercial, agricultural, multifamily and other non-one-to-four family residential properties should not exceed 30% of total capital. The supervisory loan-to-value limits do not apply to certain categories of loans including loans insured or guaranteed by the U.S. government and its agencies or by financially capable state, local or municipal governments or agencies, loans backed by the full faith and credit of a state government, loans that are to be sold promptly after origination without recourse to a financially responsible party, loans that are renewed, refinanced or restructured without the advancement of new funds, loans that are renewed, refinanced or restructured in connection with a workout, loans to facilitate sales of real estate acquired by the institution in the ordinary course of collecting a debt previously contracted and loans where the real estate is not the primary collateral. Contents

~~Management~~ amount ~~believes~~of ~~that~~the savings institution’s intangible assets. Limited exceptions to the ~~Bank~~deduction of intangible assets are provided for certain mortgage servicing rights and credit card relationships and qualifying supervisory goodwill. Tangible capital is given the same definition as core capital but does not include an exception for qualifying supervisory goodwill and is reduced by the amount of all the savings association’s intangible assets with only a limited exception for purchased mortgage servicing rights. Both core and tangible capital are further reduced by an amount equal to a savings institution’s debt and equity ~~current~~investments ~~lending~~in ~~policies~~subsidiaries ~~conform~~engaged in activities not permissible to national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies). Investments in and extensions of credit to such subsidiaries are required to be fully netted against tangible and core capital. At September 30, 2006, the ~~Interagency~~Bank ~~Guidelines~~had no such investments.

31Adjusted total assets are a savings association’s total assets as determined under generally accepted accounting principles increased by certain goodwill amounts and by a prorated portion of the assets of unconsolidated includable subsidiaries in which the savings association holds a minority interest. Adjusted total assets are reduced by the amount of assets that have been deducted from capital, the portion of savings association’s investments in unconsolidated includable subsidiaries, and, for purpose of the core capital requirement, qualifying supervisory goodwill. At September 30, 2006, the Bank’s adjusted total assets for the purposes of the core and tangible capital requirements were approximately $780.5 million.

~~Transactions~~In determining compliance with the ~~Related~~risk-based ~~Parties.~~capital ~~Generally~~requirement, ~~transactions between~~ a savings ~~bank~~association oris ~~its subsidiaries~~allowed to include both core capital and supplementary capital in its ~~affiliates~~total ~~must~~capital beprovided onthe ~~terms~~amount asof ~~favorable~~supplementary tocapital ~~the~~included ~~Bank~~does asnot ~~transactions~~exceed ~~with~~the ~~non-affiliates~~savings association’s core capital. InSupplementary ~~addition~~capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain ofapproved ~~these~~subordinated ~~transactions~~debt, ~~are~~certain ~~restricted~~other tocapital instruments, a portion ~~percentage~~ of the ~~Bank~~savings association’s ~~capital.~~allowances ~~Affiliates~~for loan and lease losses and up to 45% of ~~the~~unrealized ~~Bank~~net ~~include~~gains ~~the Company,~~on equity securities. Total core and supplementary capital are reduced by the ~~MHC,~~amount ~~BCSB~~of ~~Bancorp~~capital ~~Capital~~instruments ~~Trust~~held I,by ~~BCSB~~other ~~Capital~~depository institutions ~~Trust~~pursuant IIto reciprocal arrangements and ~~any~~equity ~~company~~investments ~~which~~other isthan ~~under~~those ~~common~~deducted ~~control~~from ~~with~~core and tangible capital. As of September 30, 2006, the Bank had no investments for which OTS regulations require a deduction from total capital.

The ~~Bank’s~~risk-based ~~authority~~capital torequirement ~~extend~~is ~~credit~~measured toagainst ~~executive~~risk-weighted ~~officers,~~assets ~~trustees~~which ~~and~~equal ~~10%~~the ~~shareholders,~~sum asof ~~well~~each asasset ~~entities~~and ~~under~~the credit-equivalent ~~such~~amount ~~persons~~of ~~control~~each ~~are currently~~off-balance ~~governed~~sheet item after being multiplied by ~~Sections~~an ~~22(g)~~assigned ~~and~~risk ~~22(h)~~weight. ofUnder the ~~Federal~~OTS ~~Reserve~~risk-weighting ~~Act~~system, ~~and~~one-to-four ~~Regulation~~family Ofirst ~~promulgated~~mortgages bynot ~~the~~more ~~Federal~~than ~~Reserve~~90 ~~Board.~~days ~~Among~~past ~~other~~due ~~things,~~with ~~these~~loan-to-value ~~regulations~~ratios ~~generally~~under ~~require~~80% ~~such~~and average ~~loans~~annual tooccupancy berates ~~made~~of onat ~~terms~~least ~~substantially~~80% ~~similar~~and certain qualifying loans for the construction of one-to ~~those~~-four-family ~~offered~~residences pre-sold to ~~unaffiliated~~home ~~individuals,~~purchasers ~~place~~are ~~limits~~assigned ona ~~the~~risk ~~amount~~weight of 50%. Consumer and residential construction loans ~~the~~are ~~Bank~~assigned a ~~may~~risk ~~make~~weight toof ~~such~~100%. ~~persons~~Mortgage-backed ~~based~~securities issued, inor ~~part,~~fully onguaranteed as to principal and interest by the ~~Bank’s~~FNMA ~~capital~~or ~~position,~~FHLMC are assigned a 20% risk weight. Cash and ~~require~~U.S. ~~certain~~Government ~~approval~~securities ~~procedures~~backed toby bethe ~~followed~~full faith and credit of the U.S. Government (such as mortgage-backed securities issued by GNMA) are given a 0% risk weight.

~~Regulation~~For ofinformation with respect to the ~~Company~~Bank’s compliance with its regulatory capital requirements at September 30, 2006 see Note 14 of Notes to Consolidated Financial Statements.

The ~~Company~~risk-based iscapital arequirements of the OTS also require that savings ~~and~~institutions ~~loan~~with ~~holding~~more ~~company~~than ~~within~~a ~~the~~“normal” ~~meaning~~level of interest rate risk to maintain additional total capital. A savings institution’s interest rate risk is ~~Section~~measured 10in terms of the ~~HOLA~~sensitivity ~~and,~~of asits ~~such,~~“net ~~the~~portfolio ~~Company~~value” isto ~~subject~~changes toin ~~OTS~~interest ~~regulation,~~rates. ~~examination~~The ~~and~~interest ~~supervision~~rate risk rule did not have a material effect on the Bank’s risk-based capital at September 30, 2006.

~~According~~In addition to ~~federal~~requiring ~~law~~generally ~~and~~applicable ~~Office~~capital ofstandards ~~Thrift~~for ~~Supervision~~savings ~~regulations~~institutions, athe ~~mutual~~OTS ~~holding~~is ~~company,~~authorized ~~such~~to asestablish the ~~MHC,~~minimum ~~may~~level ~~generally~~of ~~engage in the following~~capital ~~activities:~~for ~~(1)~~a ~~investing~~savings ininstitution ~~the~~at ~~stock~~such ofamount aor ~~bank;~~at ~~(2)~~such ~~acquiring~~ratio aof ~~mutual~~capital-to-assets ~~association~~as ~~through~~ the ~~merger~~OTS ofdetermines ~~such~~to ~~association~~be ~~into~~necessary aor ~~bank~~appropriate ~~subsidiary~~for of such ~~holding~~institution ~~company~~in orlight anof ~~interim~~the ~~bank~~particular ~~subsidiary~~circumstances of ~~such~~the ~~holding~~institution. ~~company;~~Such ~~(3)~~circumstances ~~merging~~would ~~with~~include ora ~~acquiring~~high ~~another~~degree ~~holding~~of ~~company~~exposure to interest rate risk, ~~one~~concentration of ~~whose~~credit ~~subsidiaries~~risk isand acertain ~~bank;~~risks ~~and~~arising ~~(4)~~from ~~any~~non-traditional activity. ~~approved~~The byOTS ~~the~~may ~~Federal~~treat ~~Reserve~~the ~~Board~~failure ~~for~~of aany ~~bank~~savings ~~holding~~institution ~~company~~to ormaintain ~~financial~~capital ~~holding~~at ~~company~~ or ~~previously~~above ~~approved~~such bylevel ~~Office~~as ofan ~~Thrift~~unsafe ~~Supervision for~~or ~~multiple~~unsound ~~savings~~practice and ~~loan~~may ~~holding~~issue ~~companies.~~a ~~Recent~~directive ~~legislation,~~requiring ~~which~~any ~~authorized~~savings ~~mutual~~institution ~~holding~~which ~~companies~~fails to ~~engage~~maintain incapital ~~activities~~at ~~permitted~~or ~~for~~above ~~financial~~the ~~holding~~minimum ~~companies,~~level ~~expanded~~required by the ~~authorized~~OTS ~~activities.~~to ~~Financial~~submit ~~holding~~and ~~companies~~adhere ~~may~~to ~~engage in~~ a ~~broad~~plan ~~array~~for ofincreasing ~~financial service activities including insurance and securities~~capital.

~~The~~26 Company is permitted to, among other things: (i) invest in the stock of a savings institution; (ii) acquire a mutual institution through the merger of such institution into a savings institution subsidiary of such mutual holding company or an interim savings institution of such mutual holding company; (iii) merge with or acquire another mutual holding company, one of whose subsidiaries is a savings institution; (iv) acquire non-controlling amounts of the stock of savings institutions and savings institution holding companies, subject to certain restrictions; (v) invest in a corporation the capital stock of which is available for purchase by a savings institution under Federal law or under the law of any state where the subsidiary savings institution or institutions have their home offices; (vi) furnish or perform management services for a savings institution subsidiary of such company; (vi) hold, manage, or liquidate assets owned or acquired from a savings institution subsidiary of such company; (viii) hold or manage properties used or occupied by a savings institution subsidiary of such company; and (ix) acting as a trustee under deed or trust.

TheTable HOLA prohibits a savings and loan holding company, such as the Company, directly or indirectly, from (1) acquiring control (as defined) of a savings institution (or holding company thereof) without prior OTS approval, (2) acquiring more than 5% of the voting shares of a savings institution (or holding company thereof) which is not a subsidiary, subject to certain exceptions, without prior OTS approval, or (3) acquiring through merger, consolidation or purchase of assets, another savings institution (or holding company thereof) or acquiring all or substbantially all of the assets, another savings institution (or holding company thereof) without prior OTS approval, or (4) acquiring control of an uninsured institution. A savings and loan holding company may not acquire as a separate subsidiary a savings institution which has its principal offices outside of the state where the principal offices of its subsidiary institution is located, except (i) in the case of certain emergency acquisitions approved by the FDIC, (ii) if the holding company controlled (as defined) such savings institution as of March 5, 1987, (iii) when the laws of the state in which the savings institution to be acquired is located specifically authorize such an acquisition. No director or officer of a savings and loan holding company or person owning or controlling more than 25% of such holding company’s voting shares may, except with the prior approval of the OTS, acquire control of any savings institution which is not a subsidiary of such holding company. Contents

~~Acquisition~~Qualified ofThrift ~~Control~~Lender Test. ~~Under~~A savings institution that does not meet the ~~federal~~Qualified Thrift Lender ~~Change~~(“QTL”) test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in ~~Bank~~any ~~Control~~new ~~Act~~activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for both a ~~notice~~national ~~must~~bank and a savings institution; (ii) the branching powers of the institution shall be ~~submitted~~restricted to those of a national bank; (iii) the ~~Office~~institution ofshall ~~Thrift~~not ~~Supervision~~be ifeligible to obtain any ~~person~~advances from its FHLB; and (~~including~~iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a ~~company)~~national bank. In addition, orany ~~group~~company ~~acting~~that incontrols ~~concert~~a savings institution that fails to qualify as a QTL will be required to register as, ~~seeks~~and to ~~acquire~~be deemed, a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 (the “BHCA”) and other statutes applicable to bank holding companies. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and a savings institution and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations).

32To meet the QTL test, an institution must either qualify as a “domestic building and loan association” under the Internal Revenue Code or its “Qualified Thrift Investments” must total at least 65% of “portfolio assets.” Under OTS regulations, portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (ii) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, (iii) education loans, small business loans and credit card loans, and (iv) stock in an FHLB. In addition, subject to a 20% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments consumer loans, 200% of their investments in loans to finance “starter homes” and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in “credit-needy” areas. In order to maintain QTL status, the savings institution must maintain a weekly average percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a monthly average basis in nine out of 12 months. A savings institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired.

~~“control”~~At ofSeptember 30, ~~a savings and loan holding company or savings association. An acquisition of “control” can occur upon~~ 2006, the ~~acquisition~~percentage of ~~10% or more of~~ the ~~voting~~Bank’s ~~stock~~portfolio ofassets ainvested ~~savings~~in ~~and~~Qualified ~~loan holding company or savings insititution or as otherwise defined by the Office of~~ Thrift ~~Supervision.~~Investments ~~Under~~was ~~the Change~~ in ~~Bank~~excess ~~Control Act, the Office~~ of ~~Thrift Supervision has 60 days from~~ the ~~filing of~~percentage arequired ~~complete notice~~ to ~~act,~~qualify ~~taking into consideration certain factors, including~~ the ~~financial~~Bank ~~and~~under ~~managerial resources of~~ the ~~acquirer~~QTL ~~and the anti-trust effects of the acquisition~~test. ~~Any company that so acquires control would then be subject to regulation as a savings and loan holding company.~~

~~Sarbanes-Oxley~~Dividend ~~Act of 2002~~Limitations. OnUnder ~~July 30, 2002,~~ the ~~Sarbanes-Oxley~~OTS ~~Act~~prompt ofcorrective ~~2002~~action ~~(“SOX”)~~regulations, ~~was~~the ~~signed~~Bank ~~into~~would ~~law~~be ~~which~~prohibited ~~mandated~~from amaking ~~variety~~any ofcapital ~~reforms~~distributions ~~intended to address corporate and accounting fraud. SOX contains provisions~~if, ~~which~~after ~~amend~~making the ~~Securities Exchange Act of 1934~~distribution, asit ~~amended~~would ~~(the~~have: ~~“Act”~~(i) a ~~and~~total ~~provisions~~risk-based ~~which~~capital ~~directed~~ratio ~~the~~of ~~Securities~~less ~~and~~than ~~Exchange~~8.0%; ~~Commission~~ (~~the “SEC”~~ii) a toTier ~~promulgate~~1 ~~rules.~~risk-based ~~The~~capital ~~Act~~ratio ~~provides for the establishment~~ of aless ~~new~~than ~~Public Company~~4.0%; ~~Accounting~~or ~~Oversight Board~~ (~~“PCAOB”~~iii), a ~~which~~Tier ~~will~~1 ~~enforce~~leverage ~~auditing,~~ratio quality control and independence standards for firms that audit public reporting companies and will be funded by fees from all public reporting companies. The Act imposes higher standards for auditor independence and restricts provision of ~~consulting~~less ~~services~~than ~~by auditing firms to companies they audit~~4.0%. ~~Any~~See ~~non-audit services being provided to an audit client will require preapproval by the Company’s audit~~“Prompt ~~committee~~Corrective ~~members.~~Regulatory ~~In addition, certain audit partners must be rotated periodically~~Action.” ~~The~~Under ~~Act~~OTS ~~requires chief executive officers and chief financial officers~~regulations, orthe ~~their~~Bank ~~equivalent,~~is tonot ~~certify~~permitted to ~~the~~pay ~~accuracy~~dividends ofon ~~periodic~~its ~~reports~~capital ~~filed~~stock ~~with the SEC, subject to civil and criminal penalties~~ if ~~they~~its ~~knowingly~~regulatory orcapital ~~willfully~~would ~~violate~~thereby ~~this~~be ~~certification~~reduced ~~requirement.~~below ~~In addition, under~~ the ~~Act,~~amount ~~counsel~~then ~~will be~~ required tofor ~~report~~the ~~evidence~~liquidation ofaccount aestablished ~~material~~for the ~~violation~~benefit of ~~the~~certain ~~securities~~depositors ~~laws or a breach~~ of ~~fiduciary~~ ~~duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to~~ the ~~audit~~Bank ~~committee~~at ~~or other similar committee of~~ the ~~board~~time of ~~directors~~its orconversion ~~the board~~to ~~itself~~stock form.

~~Longer~~Savings ~~prison~~institutions ~~terms~~must ~~will~~submit ~~also~~notice beto ~~applied~~the OTS prior to ~~corporate~~ ~~executives~~making ~~who~~a ~~violate~~capital ~~federal~~distribution ~~securities~~if ~~laws~~(a) they would not be well-capitalized after the distribution, (b) the ~~period~~distribution ~~during~~would ~~which~~result ~~certain~~in ~~types~~the retirement of ~~suits~~any ~~can~~of bethe ~~brought~~institution’s ~~against~~common aor ~~company~~preferred stock or ~~its~~debt ~~officers~~counted ~~has~~as its ~~been~~regulatory ~~extended~~capital, ~~and~~or ~~bonuses~~(c) the ~~issued~~institution tois ~~top~~a ~~executives~~subsidiary ~~prior to restatement~~ of a ~~company’s~~ ~~financial~~holding ~~statements~~company. ~~are~~A ~~now~~savings ~~subject~~institution tomust ~~disgorgement~~make ifapplication ~~such~~to ~~restatement~~the ~~was~~OTS ~~due~~ to ~~corporate~~pay ~~misconduct.~~a ~~Executives~~capital ~~are~~distribution ~~also~~if ~~prohibited~~(w) the ~~from~~institution ~~trading~~would ~~during~~not ~~retirement~~be ~~plan~~adequately ~~“blackout”~~capitalized ~~periods~~following the distribution, ~~and~~(x) the ~~loans~~institution’s tototal ~~company~~distributions ~~executives are~~for ~~restricted.~~the Incalendar ~~addition,~~year aexceeds ~~provision~~the ~~directs~~institution’s ~~that~~net ~~civil~~income ~~penalties~~for ~~levied by~~ the ~~SEC~~calendar asyear ato ~~result~~date ofplus ~~any~~its ~~judicial~~net orincome ~~administrative~~(less ~~action~~distributions) ~~under~~for the ~~Act~~preceding betwo ~~deposited~~years, inthe asavings association ~~fund~~is ~~for~~not ~~the~~eligible ~~benefit~~for of“expedited ~~harmed~~treatment” ~~investors.~~under ~~Directors~~OTS ~~and~~regulations ~~executive~~(generally, ~~officers must~~examination ~~also~~and ~~report~~Community ~~most~~Reinvestment ~~changes~~Act ratings in ~~their~~one ~~ownership~~ of athe ~~company’s securities within~~ two ~~business~~top ~~days~~categories), ofor (y) the ~~change,~~distribution ~~and~~would asotherwise ofviolate ~~the~~applicable law ~~end~~or ofregulation ~~June,~~or ~~2003,~~an ~~all~~agreement ~~ownership~~with ~~reports~~or ~~must~~condition beimposed ~~electronically~~by ~~filed~~the OTS.

~~The~~In ~~Act~~addition ~~also~~to ~~increases~~ the ~~oversight~~foregoing, ~~and~~earnings ~~authority~~ of ~~audit~~the ~~committees~~Bank ofappropriated to ~~publicly~~bad ~~traded~~debt ~~companies.~~reserves ~~Audit~~and ~~committee~~deducted ~~members~~for ~~must~~federal beincome ~~independent~~tax ~~and~~purposes are ~~barred~~not ~~from~~available ~~accepting~~for ~~consulting,~~payment ~~advisory~~of cash dividends or other ~~compensatory~~distributions ~~fees~~to ~~from~~ the ~~issuer.~~Company Inwithout ~~addition,~~payment ~~all~~of ~~SEC-reporting~~taxes ~~companies must disclose whether~~ at ~~least one member of~~ the ~~committee~~then iscurrent antax ~~“audit~~rate ~~committee~~by ~~financial~~the ~~expert”~~Bank ~~(as~~on ~~such~~the ~~term~~amount isof ~~defined~~earnings byremoved from the ~~SEC~~reserves ~~rules)~~for ~~and~~such ifdistributions. ~~not,~~See ~~why not~~“Taxation.” ~~Audit~~The ~~committees~~Company ofintends ~~publicly traded companies will have authority~~ to ~~retain~~make ~~their~~full ~~own~~use ~~counsel~~of ~~and~~this ~~other~~favorable ~~advisors funded~~tax bytreatment ~~the~~afforded ~~company.~~to ~~Audit committees must establish procedures for~~ the ~~receipt,~~Bank ~~retention~~ and ~~treatment~~the ofCompany ~~complaints regarding accounting~~ and ~~auditing~~does ~~matters~~not ~~and~~contemplate ~~procedures~~use ~~for~~of ~~confidential,~~any ~~anonymous~~earnings ~~submission~~ of ~~employee concerns regarding questionable accounting or auditing matters. It is~~ the ~~responsibility~~Bank ofin ~~the~~a ~~audit~~manner ~~committee~~which would tolimit ~~hire,~~either ~~oversee~~institution’s ~~and~~bad ~~resolve~~debt ~~disagreements~~deduction ~~with~~or ~~the~~create ~~Company’s~~federal ~~independent~~tax ~~auditor~~liabilities.

~~Beginning~~27 six months after the SEC determines that the PCAOB is able to carry out its functions, it will be unlawful for any person that is not a registered public accounting firm (“RPAF”) to audit a public reporting company. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the Company’s financial statements for the purpose of rendering the financial statement’s materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. The Act requires the RPAF that issues the audit report to attest to and report on management’s assessment of the Company’s internal controls. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with

33Table of Contents

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the ~~SEC~~FDIC. ~~reflect~~The ~~all~~Deposit ~~material~~Insurance ~~correcting~~Fund ~~adjustments~~is ~~that~~the ~~are~~successor ~~identified~~to bythe aBank ~~RPAF~~Insurance Fund and the Savings Association Insurance Fund, which were merged in ~~accordance~~2006. ~~with~~The ~~generally~~FDIC ~~accepted~~recently ~~accounting~~amended ~~principles~~its risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution's assessment rate depends upon the ~~rules~~category to which it is assigned. Risk category I, which contains the least risky depository institutions, is expected to include more than 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and ~~regulations~~other information. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the ~~SEC~~riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.

~~Although~~The ~~the~~Reform ~~Company~~Act ~~anticipates~~also provided for a one-time credit for eligible institutions based on ittheir ~~will~~assessment ~~incur~~base ~~additional~~as ~~expense~~of inDecember 31, ~~complying~~1996. Subject to certain limitations with ~~the~~respect ~~provisions~~to ofinstitutions ~~the~~that ~~Act~~are ~~and~~exhibiting ~~the~~weaknesses, ~~related~~credits ~~rules~~can be used to offset assessments until exhausted. The Bank’s one-time credit is expected to be approximately $434,000. ~~management~~The ~~does~~Reform ~~not~~Act ~~expect~~also provided for the possibility that ~~such~~the ~~compliance~~FDIC ~~will~~may ~~have~~pay adividends ~~material~~to ~~impact~~insured oninstitutions once the ~~Company’s~~Deposit ~~financial~~Insurance ~~condition~~Fund reserve ratio equals or ~~results~~exceeds 1.35% of ~~operations~~estimated insured deposits.

~~Taxation~~In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the calendar year ending December 31, 2006 averaged 1.28 basis points of assessable deposits.

~~General.~~ The ~~Company~~Reform ~~and~~Act provided the ~~Bank,~~FDIC ~~together~~ with ~~the~~authority ~~Bank’s~~to ~~subsidiaries,~~adjust ~~file~~the aDeposit ~~consolidated~~Insurance ~~federal~~Fund ~~income~~ratio ~~tax return~~to ~~based~~insured ondeposits within a ~~fiscal~~range ~~year~~of ~~ending~~1.15% ~~September~~and 301.50%, ~~Consolidated~~in contrast ~~returns~~to ~~have~~ the ~~effect~~prior statutorily fixed ratio of ~~deferring~~1.25%. ~~gain~~The orratio, ~~loss~~which onis ~~intercompany~~viewed ~~transactions~~by ~~and~~the ~~allowing~~FDIC ~~companies~~as ~~included~~the ~~within~~level that the ~~consolidated~~fund ~~return~~should toachieve, ~~offset~~was ~~income~~established ~~against~~by ~~losses~~the ~~under certain~~agency ~~circumstances~~at 1.25% for 2007.

~~Federal~~The ~~Income~~FDIC ~~Taxation.~~has ~~Thrift institutions~~authority ~~are subject~~ to ~~the~~increase ~~provisions~~insurance ofassessments. ~~the~~A ~~Internal~~significant ~~Revenue~~increase ~~Code of 1986, as amended (the “Code”)~~ in ~~the~~insurance ~~same~~premiums ~~general~~would ~~manner~~likely ashave ~~other~~an ~~corporations.~~adverse ~~However,~~effect ~~institutions~~on ~~such as~~ the ~~Bank which met certain definitional tests and~~ ~~other~~operating ~~conditions~~expenses prescribed by the Code benefited from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans were separated into “qualifying real property loans,” which generally are loans secured by interests in certain real property, and ~~nonqualifying~~results ~~loans, which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans was based on actual loss experience, however, the amount~~ of ~~the~~operations ~~bad debt reserve deduction with respect to qualifying real property loans could be based upon actual loss experience (the “experience method”) or a percentage~~ of ~~taxable income determined without regard to such deduction (~~the ~~“percentage of taxable income method”)~~Bank. ~~Legislation~~Management ~~recently~~cannot ~~signed~~predict bywhat ~~the~~insurance ~~President~~assessment ~~repealed~~rates ~~the~~will ~~percentage~~be ofin ~~taxable income method of calculating~~ the ~~bad debt reserve~~future. ~~The Bank historically has elected to use the percentage method.~~

~~Earnings~~Insurance ~~appropriated~~of todeposits anmay ~~institution’s~~be ~~bad~~terminated ~~debt~~by ~~reserve~~the ~~and~~FDIC ~~claimed~~upon as a ~~tax~~finding ~~deduction~~that ~~were~~the ~~not~~institution ~~available~~has ~~for~~engaged ~~the~~in ~~payment~~unsafe ofor ~~cash~~unsound ~~dividends~~practices, is in an unsafe or ~~for~~unsound ~~distribution~~condition to ~~shareholders~~continue ~~(including~~operations ~~distributions~~or ~~made~~has onviolated ~~dissolution~~any orapplicable law, regulation, ~~liquidation)~~rule, ~~unless~~order ~~such~~or ~~amount~~condition ~~was~~imposed ~~included~~by inthe ~~taxable~~FDIC ~~income,~~or ~~along~~the ~~with~~Office ~~the~~of ~~amount~~Thrift ~~deemed~~Supervision. ~~necessary~~The tomanagement ~~pay~~of the ~~resulting~~Bank ~~federal~~does ~~income~~not ~~tax~~know of any practice, condition or violation that might lead to termination of deposit insurance.

~~Beginning~~Federal ~~with~~Home ~~the~~Loan ~~first~~Bank ~~taxable~~System. ~~year~~The ~~beginning~~Bank ~~after~~is ~~December~~a ~~31,~~member ~~1995,~~of ~~savings~~the ~~institutions~~FHLB System, ~~such~~which asconsists ~~the~~of ~~Bank,~~12 ~~will~~district beFederal ~~treated~~Home ~~the~~Loan ~~same~~Banks assubject ~~commercial~~to ~~banks.~~supervision ~~Associations~~and ~~with~~regulation ~~$500~~by ~~million~~the orFederal ~~more~~Housing inFinance ~~assets~~Board ~~will~~(“FHFB”). ~~only~~The beFederal ~~able~~Home toLoan ~~take~~Banks provide a ~~tax~~central ~~deduction~~credit ~~when~~facility primarily for member institutions. As a ~~loan~~member of the FHLB of Atlanta, the Bank is ~~actually~~required ~~charged~~to ~~off~~acquire and hold shares of capital stock in the FHLB of Atlanta. ~~Associations~~The Bank was in compliance with ~~less~~this ~~than~~requirement ~~$500~~with ~~million~~investment in ~~assets~~FHLB ~~will~~of ~~still~~Atlanta bestock ~~permitted~~at toSeptember 30, ~~make~~2006 ~~deductible~~of ~~bad~~$ ~~debt~~7.0 ~~additions~~million. The FHLB of Atlanta serves as a reserve or central bank tofor ~~reserves~~its member institutions within its assigned district. At September 30, ~~but~~2006, ~~only~~the ~~using~~Bank had $118.0 million in advances outstanding from the ~~experience~~FHLB ~~method~~of Atlanta.

~~The~~Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, all FDIC-insured depository institutions were required to maintain average daily reserves equal to 3% on transaction accounts from $8.5 million up to $45.8 million, plus 10% on the amount over $45.8 million. These reserve requirements are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank’s, ~~tax~~the ~~returns~~effect ~~were~~of ~~last~~the ~~audited~~reserve ~~for~~requirement is to reduce the ~~year~~amount ~~ended~~of ~~September~~the institution’s interest-earning assets. As of September 30, ~~1994~~2006, the Bank met its reserve requirements.

~~Under~~28 provisions of the Revenue Reconciliation Act of 1993 (“RRA”), enacted on August 10, 1993, the maximum federal corporate income tax rate was increased from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed on taxable income over $15.0 million. Also under provisions of RRA, a separate depreciation calculation requirement has been eliminated in the determination of adjusted current earnings for purposes of determining alternative minimum taxable income, rules relating to payment of estimated corporate income taxes were revised, and certain acquired intangible assets such as goodwill and customer-based intangibles were allowed a 15-year amortization period. Beginning with tax years ending on or after January 1, 1993, RRA also provides that securities dealers must use mark-to-market accounting and generally reflect changes in value during the year or upon sale as taxable gains or losses. The IRS has indicated that financial institutions which originate and sell loans will be subject to the rule.

StateTable Income Taxation. The State of Maryland imposes an income tax of approximately 7% on income measured substantially the same as federally taxable income. Until December 2000, Maryland imposed a franchise tax, at a rate of 0.013% of the total withdrawal value of the deposits that a savings and loan association held in Maryland at December 31 each year. The State of Maryland currently assesses a personal property tax for December 2000 and forward. Contents

~~For~~Prompt ~~additional~~Corrective ~~information~~Regulatory ~~regarding~~Action. ~~taxation~~Under FDICIA, ~~see~~the ~~Note~~federal 15banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of ~~Notes~~an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to ~~Financial~~satisfy ~~Statements~~the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective provisions. If an institution’s ratio of tangible capital to total assets falls below the “critical capital level” established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods.

34Under the implementing regulations, the federal banking regulators, including the OTS, generally measure an institution’s capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). The following table shows the capital ratios required for the various prompt corrective action categories. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category.

Item 2. Properties


	Well Capitalized	Adequately Capitalized	Undercapitalized	Significantly Undercapitalized
Total risk-based capital ratio	10.0% or more	8.0% or more	Less than 8.0%	Less than 6.0%
Tier I risk-based capital ratio	6.0% or more	4.0% or more	Less than 4.0%	Less than 3.0%
Leverage ratio	5.0% or more	4.0% or more	Less than 4.0%	Less than 3.0%

~~The~~* ~~following~~3.0% ~~table~~if ~~sets~~institution ~~forth~~has ~~the~~composite ~~location~~1 ~~and~~CAMELS ~~certain additional information regarding the Bank’s offices at September 30, 2004~~rating.

	YearOpened	Owned orLeased		Expiration Date (If Leased) (1)	Book Value atSeptember 30,2004		ApproximateSquareFootage	Deposits atSeptember 30,2004
								(Deposits inThousands)
Main Office:
Perry Hall	1955	Leased	(2)	November 2018	$	212,223	8,000	$	142,510
Branch Offices:
Bel Air	1975	Leased		June 2008		—	2,000		49,976
Dundalk (3)	1976	Leased		June 2006		—	1,700		49,137
Timonium	1978	Leased		July 2008		—	1,250		76,323
Catonsville	2003	Leased		April 2011		—	3,550		54,814
Abingdon	1999	Leased	(2)	October 2008		435,959	1,800		15,512
Forest Hill	1999	Leased	(2)	July 2019		379,068	1,800		23,042
Essex	1999	Leased		November 2004		—	3,200		13,853
Hickory	2000	Leased	(2)	January 2020		436,287	1,800		11,071
White Marsh	2000	Leased	(2)	January 2015		489,549	1,800		26,837
Carney	2001	Leased		July 2011		—	2,100		24,392
Lutherville (4)	2002	Owned				585,760	7,440		28,759
Golden Ring (4)	2002	Leased		May 2006		—			27,989
Hamilton (4)	2002	Owned				136,101	1,500		9,208
Ellicott City (4)	2002	Leased		August 2020		—			27,199
Administrative Office:
4111 E. Joppa Road	1994	Owned				1,209,167	18,000
Warehouse	1998	Leased		September 2006		—	4,800
4117 E. Joppa Road	2003	Owned				563,318	2,616

A “critically undercapitalized” savings institution is defined as an institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights.

~~(1)~~Safety –and ~~All~~Soundness ~~leases~~Standards. ~~have~~Interagency atGuidelines ~~least~~Establishing ~~one~~Standards ~~five-year~~for ~~option,~~Safety ~~except~~and Soundness require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for ~~Catonsville~~the size, ~~Ellicott~~nature ~~City~~ and ~~Golden~~scope ~~Ring~~of ~~locations~~the institution’s business. The guidelines also establish certain basic

~~(2)~~29 ~~– Building is owned, but the land is leased.~~

(3)Table –of The Bank also is leasing a kiosk and drive-in ATM facility at this location.Contents

~~(4)~~ standards –for ~~Branch~~loan ~~acquired~~documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the OTS determines that a savings institution is not in ~~WHG~~compliance ~~Brancshares~~with ~~acquisition~~the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A savings institution must submit an acceptable compliance plan to the OTS within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Under the guidelines, a savings institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that these regulatory standards do not materially affect the Bank’s operations.

~~The~~Lending ~~book~~Limits. ~~value~~Savings institutions generally are subject to the lending limits applicable to national banks. With certain limited exceptions, the amount that a savings institution or a national bank may lend to any borrower outstanding at one time may not exceed 15% of the ~~Bank’s~~unimpaired ~~investment~~capital inand ~~premises~~surplus of the institution. Loans and ~~equipment~~extensions ~~totaled~~of $9credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus.2 ~~million~~Savings atinstitutions ~~September~~are 30additionally authorized to make loans to one borrower, ~~2004.~~for ~~See~~any ~~Note~~purpose: 5(i) in an amount not to exceed $500,000, or (ii) by order of ~~Notes~~the Director of OTS, in an amount not to ~~Financial~~exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (a) the savings institution is and continues to be in compliance with its regulatory ~~Statements~~capital requirements; (b) the loans comply with applicable loan-to-value requirements; and (c) the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus.

~~Item~~At 3.September 30, ~~Legal~~2006, ~~Proceedings~~the Bank’s general lending limit was $7.3 million.

~~From~~Uniform ~~time~~Lending toStandards. ~~time,~~Under ~~the~~OTS ~~MHC~~regulations, ~~the~~savings ~~Company~~institutions ~~and/or~~must ~~the~~adopt ~~Bank~~and ismaintain awritten ~~party~~policies tothat ~~various~~establish ~~legal~~appropriate ~~proceedings~~limits and ~~incident~~standards tofor ~~its~~extensions ~~business.~~of ~~Except~~credit asthat ~~set~~are ~~forth~~secured ~~below,~~by ~~at September~~liens ~~30,~~or ~~2004,~~interests ~~there~~in ~~were~~real noestate ~~legal~~or ~~proceedings~~are tomade ~~which~~for the ~~MHC,~~purpose ~~the~~of ~~Company~~financing orpermanent ~~the~~improvements ~~Bank~~to ~~was~~real aestate. ~~party,~~These orpolicies tomust ~~which~~establish ~~any~~loan ofportfolio ~~their~~diversification ~~property~~standards, prudent ~~was~~underwriting ~~subject~~standards, ~~which~~including ~~were~~loan-to-value ~~expected~~limits, bythat ~~management~~are toclear ~~result~~and inmeasurable, aloan ~~material~~administration ~~loss~~procedures toand ~~the MHC~~documentation, ~~the~~approval ~~Company~~and orreporting ~~the Bank~~requirements. ~~There~~The ~~are~~real noestate ~~pending~~lending ~~regulatory~~policies ~~proceedings~~must toreflect ~~which~~consideration ~~the~~of ~~MHC,~~ the Interagency ~~Company,~~Guidelines ~~the~~for ~~Bank~~Real orEstate ~~their~~Lending ~~subsidiaries~~Policies is(the a“Interagency ~~party~~Guidelines”) orthat tohave ~~which~~been ~~any~~adopted ofby ~~their~~the ~~properties~~federal isbank ~~subject which are currently expected to result in a material loss~~regulators.

~~The~~Management ~~Bank~~believes ~~obtained~~that ~~judgments on June 5, 2002 in~~ the ~~amount~~Bank’s ofcurrent ~~$1,500,000 against~~lending ~~Key~~policies ~~Leasing~~conform &to ~~Rental, Inc. and related parties before~~ the ~~Circuit~~Interagency ~~Court of Baltimore County, and filed similar claims against the same Defendants in pending bankruptcy cases in the U~~Guidelines.S. Bankruptcy Court for the District of Maryland (Baltimore) on October 21, 2002 in the case of the individual defendants and on November 1, 2002 in the case of Key Leasing & Rental, Inc. The judgments and bankruptcy filing seek to secure the Bank’s interest in automobile leases pledged as

35Transactions with Related Parties. Generally, transactions between a savings bank or its subsidiaries and its affiliates must be on terms as favorable to the Bank as transactions with non-affiliates. In addition, certain of these transactions are restricted to a percentage of the Bank’s capital and are subject to specified collateral requirements. Affiliates of the Bank include the Company, the MHC, BCSB Bankcorp Capital Trust I, BCSB Bankcorp Capital Trust II and any company which is under common control with the Bank.

~~collateral~~The Bank’s authority to ~~Baltimore~~extend ~~County~~credit ~~Savings~~to ~~Bank~~executive officers, directors, trustees and to10% ~~recover~~stockholders, ~~any~~as ~~deficiency~~well ~~balances~~as ~~remaining~~entities ~~after~~under ~~the~~such ~~disposal~~persons control are currently governed by Sections 22(g) and 22(h) of the ~~collateral~~Federal Reserve Act and Regulation O promulgated by the Federal Reserve Board. ~~The~~Among ~~Bank~~other ~~has~~things, ~~foreclosed~~these regulations ~~upon~~generally ~~the~~require ~~collateral~~such ~~pursuant~~loans to abe ~~consent~~made ~~agreement~~on ~~reached~~terms ~~between~~substantially ~~the~~similar ~~Bank~~to ~~and~~those ~~the~~offered USto ~~Bankruptcy~~unaffiliated ~~Trustee~~individuals, place limits on ~~November~~the ~~22,~~amount ~~2002~~of ~~and~~loans ~~projected~~the aBank ~~loss~~may ofmake ~~$31~~to such persons based,~~000~~ in part, on the ~~most~~Bank’s ~~recent~~capital ~~filing~~position, ~~with~~and require ~~the~~certain ~~Bankruptcy~~board ~~court~~of directors approval procedures to be followed.

Enforcement. The ~~Bank~~OTS ~~obtained~~has ~~judgments~~primary onenforcement ~~September~~responsibility over ~~17,~~savings ~~2003~~institutions inand has the ~~amount~~authority ~~of $705,785.88~~to bring actions against ~~ATG~~the ~~Sales,~~institution ~~LLC~~and ~~T/A~~all ~~Auto~~institution-affiliated ~~Gallery~~parties, including stockholders, and ~~Robert~~any Pattorneys, appraisers and ~~Karen~~accountants R.who ~~King~~knowingly ~~before~~or ~~the~~recklessly ~~Circuit~~participate ~~Court~~in wrongful ofaction ~~Baltimore~~likely ~~County,~~to ~~and~~have ~~filed~~an aadverse ~~similar~~effect ~~claim~~on ~~against~~an ~~Robert~~insured Pinstitution. ~~King~~Formal inenforcement aaction ~~pending~~may ~~bankruptcy~~range ~~case~~from in the ~~United~~issuance ~~States~~of ~~Bankruptcy~~a ~~Court~~capital ~~for the~~directive ~~District~~or cease and desist order to removal of ~~Maryland~~officers ~~(Baltimore)~~and/or ondirectors ~~September~~in 3institution of receivership, ~~2004~~conservatorship or termination of deposit insurance. ~~The~~Civil ~~judgments~~penalties ~~seek~~cover toa ~~secure~~wide ~~the~~range ~~Bank’s~~of ~~interest~~violations inand ~~connection~~can ~~with~~amount ato ~~delinquent~~$25,000 ~~commercial~~per ~~loan~~day, ~~and~~or ~~over~~even ~~advance~~$1 ~~liability~~million ofper ~~the~~day ~~defendants~~in especially egregious cases. The ~~bank~~FDIC has ~~foreclosed~~the ~~upon~~authority ~~certain~~to recommend ~~collateral~~to ~~and~~the ~~entered~~Director ~~into~~of athe ~~forbearance~~OTS ~~and~~that ~~repayment~~enforcement ~~agreement~~action to be taken with ~~the~~respect ~~Defendant.~~to a particular savings

~~Item~~30 ~~4. Submission of Matters to Vote of Security Holders.~~

NotTable applicable.of Contents

~~PART~~ institution. IIIf action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

~~Item~~Holding 5.Company ~~Market~~Regulation ~~for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~

General. The ~~information~~Company ~~contained~~and ~~under~~MHC are savings and loan holding companies within the ~~sections~~meaning ~~captioned~~of ~~“Market Information”~~federal inlaw. As such, they are registered with the ~~Company’s~~Office ~~Annual~~of ~~Report~~Thrift Supervision and are subject to ~~Stockholders~~Office ~~for~~of Thrift Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the ~~Fiscal~~Office ~~Year~~of ~~Ended~~Thrift ~~September~~Supervision 30has enforcement authority over the Company and the MHC and their non-savings institution subsidiaries. Among other things, ~~2004~~this (authority permits the ~~“Annual~~Office ~~Report”)~~of ~~filed~~Thrift asSupervision ~~Exhibit~~to 13restrict ~~hereto~~or isprohibit ~~incorporated~~activities ~~herein~~that byare ~~reference~~determined to be a serious risk to the Bank.

~~The~~Restrictions Applicable to Mutual Holding Companies. According to federal law and Office of Thrift Supervision regulations, a mutual holding company, such as the MHC, may generally engage, with appropriate regulatory approvals, in the following ~~table~~activities: ~~sets~~(1) investing ~~forth~~in ~~information~~the ~~regarding~~stock of a savings association; (2) acquiring a mutual association through the ~~Company’s~~merger of such ~~repurchases~~association into a savings association subsidiary of ~~its~~such ~~common~~holding ~~stock~~company ~~during~~or an interim savings association subsidiary of such holding company; (3) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; and (4) any activity approved by the ~~quarter~~Federal ~~ended~~Reserve ~~September~~Board 30for a bank holding company or financial holding company or previously approved by the Office of Thrift Supervision for multiple savings and loan holding companies. Recent legislation, ~~2004~~which authorized mutual holding companies to engage in activities permitted for financial holding companies, expanded the authorized activities. Financial holding companies may engage in a broad array of financial service activities including insurance and securities.

Period	TotalNumberof SharesPurchased	AveragePrice PaidPer Share		Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms	MaximumNumber of Sharesthat May Yet BePurchased Underthe Plans orPrograms
July 2004 Beginning date: July 1 Ending date: July 31	420	$	14.00	—	—
August 2004 Beginning date: August 1 Ending date: August 31	—		—	—	—
September 2004 Beginning date: September 1 Ending date: September 30	—		—	—	—

Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5.0% of the voting stock of another savings institution, or its holding company, without prior written approval of the Office of Thrift Supervision. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. Federal law also prohibits a savings and loan holding company from acquiring more than 5.0% of a company engaged in activities other than those authorized for savings and loan holding companies by federal law; or acquiring or retaining control of a depository institution that is not insured by the FDIC.

The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (1) the ~~Shares~~approval ~~were~~of ~~repurchased~~interstate supervisory acquisitions by savings and loan holding companies; and (2) the ~~Company~~acquisition ~~upon~~of a savings institution in another state if the ~~vesting~~laws of ~~restricted~~the ~~stock~~state ~~awards~~of the target savings institution specifically permit such acquisitions. The states vary in the extent to ~~satisfy~~which ~~income~~they ~~tax~~permit ~~withholding~~interstate ~~obligations~~savings and loan holding company acquisitions. This limitation would not prohibit an interstate merger of the subsidiary savings institution.

36If the savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institution’s failure to so qualify.

~~Item~~Stock 6Holding Company Subsidiary Regulation. ~~Selected~~The ~~Financial~~Office ~~Data~~of Thrift Supervision has adopted regulations governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies. The Company is the stock holding company subsidiary of the MHC. The Company is permitted to engage in activities that are permitted for the MHC subject to the same restrictions and conditions.

~~The~~Waivers ~~information~~of ~~contained~~Dividends ~~under~~by the ~~section~~MHC. ~~captioned~~Office ~~“Selected~~of ~~Financial~~Thrift ~~Data”~~Supervision regulations require the MHC to notify the Office of Thrift Supervision if it proposes to waive receipt of dividends from the Company. The Office of Thrift Supervision reviews dividend waiver notices on ~~page~~a 2case-by-case basis, and, in general, does not object to a waiver if: (i) the ~~Annual~~waiver ~~Report~~would isnot ~~incorporated~~be ~~herein~~detrimental byto ~~reference.~~the safe and sound operation of the savings institution; and (ii) the mutual holding company’s board of directors determines that such waiver is consistent with such directors’ fiduciary duties

~~Item~~31 ~~7. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

TheTable information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 4 through 15 in the Annual Report is incorporated herein by reference. Contents

~~Item~~ to 7Athe mutual holding company’s members. ~~Quantitative~~We ~~and~~anticipate ~~Qualitative~~that ~~Disclosures~~the ~~About~~MHC ~~Market~~will ~~Risk~~waive dividends that the Company may pay, if any.

~~The~~Conversion ~~information~~of ~~contained~~the ~~under~~MHC to Stock Form. Office of Thrift Supervision regulations permit the ~~section~~MHC ~~captioned~~to ~~“Market~~convert ~~Risk”~~from the mutual form of organization to the capital stock form of organization. In a conversion transaction, each share of common stock held by stockholders other than the MHC would be automatically converted into a number of shares of common stock of the new holding company based on ~~page~~an 5exchange ratio determined at the time of conversion that ensures that stockholders other than the MHC own the same percentage of common stock in the ~~Annual~~new ~~Report~~holding iscompany ~~incorporated~~as ~~herein~~they byowned ~~reference~~in the Company immediately before conversion. The total number of shares held by stockholders other than the MHC after a conversion transaction would be increased by any purchases by such stockholders in the stock offering conducted as part of the conversion transaction.

~~Item~~Acquisition 8of Control. ~~Financial~~Under ~~Statements~~the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and ~~Supplementary~~loan ~~Data~~holding company or savings institution. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

~~The~~Sarbanes-Oxley ~~Consolidated~~Act ~~Financial~~of ~~Statements~~2002. On July 30, ~~Notes~~2002, the Sarbanes-Oxley Act of 2002 (“SOX”) was signed into law which mandated a variety of reforms intended to ~~Consolidated~~address ~~Financial~~corporate ~~Statements~~and accounting fraud. SOX contained provisions which amend the Securities Exchange Act of 1934, ~~Independent~~as ~~Auditor’s~~amended ~~Report~~(the “Act”) and ~~Selected~~provisions ~~Consolidated~~which ~~Financial~~directed the SEC ~~Data~~to promulgate rules. The resultant law and regulations under the Act as of the time of this annual report is set forth in the ~~Annual~~following ~~Report~~paragraphs. SOX provided for the establishment of the Public Company Accounting Oversight Board (“PCAOB”), which ~~are~~enforces ~~listed~~auditing, ~~under~~quality ~~Item~~control 14and ~~herein,~~independence ~~are~~standards ~~incorporated~~for ~~herein~~firms that audit Securities and Exchange Commission (“SEC”)-reporting companies and is funded by ~~reference~~fees from all SEC-reporting companies. SOX imposes higher standards for auditor independence and restricts the provision of consulting services by auditing firms to companies they audit. Any non-audit services being provided to an audit client must be preapproved by the Company's audit committee members. In addition, certain audit partners must be rotated periodically. SOX requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under SOX, legal counsel is required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

~~Item~~Longer 9prison terms apply to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers was extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. ~~Changes~~Executives are inalso prohibited from trading during retirement plan "blackout" periods, and ~~Disagreements~~loans ~~With~~to ~~Accountants~~company onexecutives ~~Accounting~~are restricted. Directors and ~~Financial~~executive ~~Disclosure~~officers must also report most changes in their ownership of a company's securities within two business days of the change, and all ownership reports must be electronically filed.

~~Not~~SOX ~~applicable~~also increased the oversight and authority of audit committees of publicly traded companies. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. Audit committees of publicly traded companies must have authority to retain their own counsel and other advisors funded by the company. Audit committees must establish procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters and procedures for confidential, anonymous submission of employee concerns regarding questionable accounting or auditing matters. It is the responsibility of the audit committee to hire, oversee and work on disagreements with the Company’s independent auditor.

~~Item~~It 9Ais unlawful for any person that is not a registered public accounting firm (“RPAF”) to audit an SEC-reporting company. ~~Controls~~Under the ~~and~~Act, ~~Procedures~~a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or

As32 of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

InTable addition, there have been no changes in the Company’s internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company’s last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Contents

~~Item~~ any 9Bperson serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. ~~Other~~SOX ~~Information~~also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the Company's financial statements for the purpose of rendering the financial statement's materially misleading. The SEC has prescribed rules requiring inclusion of an internal control report and assessment by management in the annual report to stockholders. Under current SEC rules, the Company will be required to provide the internal control report and management assessment beginning with the fiscal year ending September 30, 2007. SOX requires the RPAF that issues the audit report to attest to and report on management's assessment of the Company's internal control over financial reporting. In addition, SOX requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC.

~~None~~Although the Company anticipates it will incur additional expense in complying with the provisions of the Act and the related rules, management does not expect that such compliance will have a material impact on the Company’s financial condition or results of operations.

~~PART~~USA ~~III~~Patriot Act. The USA Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions of all kinds is significant and wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

~~Item~~Taxation ~~10. Directors and Executive Officers of the Registrant~~

General. The ~~information~~Company ~~contained~~and ~~under~~the Bank, together with the ~~sections~~Bank’s ~~captioned~~subsidiaries, ~~“Proposal~~file Ia —consolidated ~~Election~~federal ofincome ~~Directors”~~tax ~~and~~return ~~“Section~~based ~~16(~~on a) ~~Beneficial~~fiscal ~~Ownership Reporting~~year ~~Compliance”~~ending inSeptember 30. Consolidated returns have the ~~Company’s~~effect ~~definitive~~of ~~proxy~~deferring ~~statement~~gain ~~for~~or ~~the~~loss ~~Company’s~~on ~~2005~~intercompany ~~Annual~~transactions ~~Meeting~~and ofallowing companies ~~Stockholders~~included (within the ~~“Proxy~~consolidated ~~Statement”)~~return isto ~~incorporated~~offset ~~herein~~income byagainst ~~reference~~losses under certain circumstances.

37Federal Income Taxation. Thrift institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) in the same general manner as other corporations. However, institutions such as the Bank which met certain definitional tests and other conditions prescribed by the Code benefited from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans were separated into “qualifying real property loans,” which generally are loans secured by interests in certain real property, and nonqualifying loans, which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans was based on actual loss experience, however, the amount of the bad debt reserve deduction with respect to qualifying real property loans could be based upon actual loss experience (the “experience method”) or a percentage of taxable income determined without regard to such deduction (the “percentage of taxable income method”).

~~The~~Earnings appropriated ~~Company~~to ~~and~~an ~~its~~institution’s ~~subsidiaries~~bad ~~have~~debt ~~adopted~~reserve and claimed as a ~~code~~tax ofdeduction ~~ethics~~were ~~which~~not ~~applies~~available tofor ~~all~~the payment of ~~their~~cash ~~directors, officers~~dividends ~~and~~or ~~employees~~for ~~and~~distribution ~~thus~~to ~~applies~~stockholders to(including ~~the~~distributions ~~Company’s~~made ~~principal~~on ~~executive~~dissolution ~~officer~~or liquidation), ~~principal~~unless ~~financial~~such amount ~~officer~~was ~~and~~included ~~principal~~in ~~accounting~~taxable ~~officer.~~income, ~~The~~along ~~code~~with ofthe ~~ethics~~amount isdeemed ~~filed~~necessary ~~herewith~~to aspay ~~Exhibit~~the 14resulting federal income tax.

~~Item~~Beginning 11with the first taxable year beginning after December 31, 1995, savings institutions, such as the Bank, are treated the same as commercial banks. ~~Executive~~Associations ~~Compensation~~with $500 million or more in assets will only be able to take a tax deduction when a loan is actually charged off. Associations with less than $500 million in assets will still be permitted to make deductible bad debt additions to reserves, but only using the experience method.

The ~~information~~Bank’s ~~contained~~tax ~~under~~returns ~~the~~were ~~sections~~last ~~captioned~~audited ~~“Proposal~~for Ithe —year ~~Election~~ended ~~of Directors — Executive Compensation~~September 30,” “ — Director Compensation,” “— Compensation Committee Report on Executive Compensation,”—”Compensation Committee Interlocks and Insider Participation,” and “— Comparative Stock Performance Graph” in the Proxy Statement is incorporated herein by reference1994.

~~Item~~33 ~~12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~

(a)Table and (b) Security Ownership of Certain Beneficial Owners and Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Security Ownership” in the Proxy Statement. (c) Changes in Control Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Equity Compensation PlansContents

38Under provisions of the Revenue Reconciliation Act of 1993 (“RRA”), enacted on August 10, 1993, the maximum federal corporate income tax rate was increased from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed on taxable income over $15.0 million. Also under provisions of RRA, a separate depreciation calculation requirement has been eliminated in the determination of adjusted current earnings for purposes of determining alternative minimum taxable income, rules relating to payment of estimated corporate income taxes were revised, and certain acquired intangible assets such as goodwill and customer-based intangibles were allowed a 15-year amortization period. Beginning with tax years ending on or after January 1, 1993, RRA also provides that securities dealers must use mark-to-market accounting and generally reflect changes in value during the year or upon sale as taxable gains or losses. The IRS has indicated that financial institutions which originate and sell loans will be subject to the rule.

State Income Taxation. The ~~following~~state ~~table~~of ~~sets~~Maryland ~~forth~~imposes ~~certain~~an ~~information~~income ~~with~~tax ~~respect~~of toapproximately 7% on income measured substantially the ~~Company’s~~same ~~equity~~as ~~compensation~~federally ~~plans~~taxable asincome. The state of ~~September~~Maryland ~~30,~~currently ~~2004~~assesses a personal property tax for December 2000 and forward.

	Number of securitiesto be issued upon exerciseof outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	135,525	$	9.88	91,524
Equity compensation plans not approved by security holders	—		—	—
Total	135,525		9.88	91,524

For additional information regarding taxation, see Note 15 of Notes to Financial Statements.

Item 131A. ~~Certain~~Risk ~~Relationships and Related Transactions~~Factors

~~The~~Certain ~~information~~interest ~~required~~rate bymovements ~~this item is incorporated herein by reference to the section captioned “Proposal I — Election of Directors —~~may ~~Transactions~~hurt ~~with~~earnings ~~Management”~~and inasset ~~the Proxy Statement~~value.

~~PART~~Interest IVrates have recently been at historically low levels. However, since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate from 1.00% to 5.25%. While these short-term market interest rates (which are used as a guide to price the Bank’s deposits) have increased, longer-term market interest rates (which are used as a guide to price the Bank’s longer-term loans) have not. This “flattening” of the market yield curve has had a negative impact on the Bank’s interest rate spread and net interest margin to date, and if short-term interest rates continue to rise, and if rates on the Bank’s deposits and borrowings continue to reprice upwards faster than the rates on the Bank’s long-term loans and investments, the Bank would experience further compression of its interest rate spread and net interest margin, which would have a negative effect on the Bank’s profitability.

~~Item~~Changes 14in interest rates also affect the value of the Bank’s interest-earning assets, and in particular the Bank’s securities portfolio. ~~Principal~~Generally, ~~Accountant~~the ~~Fees~~value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and ~~Services~~losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.

~~The~~Strong ~~information~~competition ~~contained~~within ~~under~~ the ~~section~~Bank’s ~~captioned~~market ~~“Audit~~area ~~and~~could ~~Other~~hurt ~~Fees~~profits ~~Paid~~and toslow ~~Independent Accountant” in the Proxy Statement is hereby incorporated by reference~~growth.

~~Item~~The 15Bank faces intense competition both in making loans and attracting deposits. ~~Exhibits~~This competition has made it more difficult for the Bank to make new loans and ~~Financial~~at ~~Statement~~times ~~Schedules~~has forced the Bank to offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. Competition also makes it more difficult to hire and retain experienced employees. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than the Bank has and may offer services that the Bank does not provide. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Bank’s profitability depends upon its continued ability to compete successfully in its market area.

~~(a)~~The ~~List~~MHC’s majority control of ~~Documents~~the ~~Filed~~Company’s ascommon ~~Part~~stock enables it to exercise voting control over most matters put to a vote of ~~this~~stockholders ~~Report~~and will prevent stockholders from forcing a sale or a second-step conversion transaction which stockholders may find advantageous.

~~(1)~~The ~~Financial~~MHC ~~Statements~~owns a majority of the Company’s common stock and, through its board of directors, is able to exercise voting control over most matters put to a vote of stockholders. The ~~following~~same ~~consolidated~~directors ~~financial~~and ~~statements~~officers who manage the Company and the Bank also manage the MHC. As a federally chartered mutual holding company, the board of directors of the MHC must ensure that the interest of depositors of the Bank are ~~incorporated~~represented byand ~~reference~~considered ~~from~~in ~~Item~~matters 7put ~~hereof~~to ~~(see~~a ~~Exhibit~~vote ~~13):~~of stockholders of the Company. Therefore, the votes cast by the MHC may not be in

~~Independent~~34 ~~Auditors’ Report~~

ConsolidatedTable Statement of Financial Condition as of September 30, 2004 and 2003 Contents

~~Consolidated~~ ~~Statements~~stockholders’ ofpersonal ~~Operations~~best interests. For example, the MHC may exercise its voting control to defeat a stockholder nominee for election to the Company’s ~~Years~~board ~~Ended~~of ~~September~~directors. 30In addition, ~~2004~~stockholders will not be able to force a merger or second-step conversion transaction without the consent of the MHC. Some stockholders may desire a sale or merger transaction, ~~2003~~since ~~and~~stockholders typically ~~2002~~receive a premium for their shares, or a second-step conversion transaction, since fully converted institutions tend to trade at higher multiples than mutual holding companies.

~~Consolidated~~The ~~Statements~~Company, ofBank ~~Stockholders’~~and ~~Equity~~MHC ~~for~~operate ~~the~~in ~~Years~~a ~~Ended~~highly ~~September~~regulated ~~30,~~environment ~~2004,~~and ~~2003~~may be adversely affected by changes in laws and ~~2002~~regulations.

~~Consolidated~~The ~~Statements~~Bank is subject to extensive regulation, supervision and examination by the Office of ~~Cash~~Thrift ~~Flows~~Supervision, its primary federal regulator, and by the FDIC, as insurer of our deposits. The MHC, the Company and the Bank are all subject to regulation and supervision by the Office of Thrift Supervision. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the ~~Years~~protection ~~Ended~~of the insurance fund and the depositors and borrowers of the Bank rather than for holders of the Company’s common stock. Regulatory authorities have extensive discretion in ~~September~~their 30supervisory and enforcement activities, ~~2004~~including the imposition of restrictions on operations, ~~2003~~the classification of the Bank’s assets and ~~2002~~determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on operations.

~~Notes to~~The ~~Consolidated~~Company’s ~~Financial~~financial ~~Statements~~condition and results of operations are dependant on the economy in the Bank’s market area.

~~(b)~~The Bank’s ~~Exhibits~~market area consists of the Baltimore metropolitan area. As of June 30, 2006, management estimates that more than 95% of deposits and 95% of loans came from its market area. Because of the Bank’s concentration of business activities in its market area, the Company’s financial condition and results of operations depend upon economic conditions in its market area. Adverse economic conditions in the Bank’s market area could reduce the Company’s growth rate, affect the ability of the Bank’s customers to repay their loans and generally affect the Company’s financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect profitability. The ~~following~~Company is less able than a ~~list~~larger institution to spread the risks of ~~exhibits~~unfavorable ~~filed~~local aseconomic conditions ~~part~~across a large number of ~~this~~diversified ~~Annual~~economies. ~~Report~~Any onsustained ~~Form~~period ~~10-K~~of ~~and~~increased ispayment ~~also~~delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the ~~Exhibit~~value ~~Index~~of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

No.		Description
* 3.1		Charter of BCSB Bankcorp, Inc.
* 3.2		Bylaws of BCSB Bankcorp, Inc.
** 4.1		Form of Common Stock Certificate of BCSB Bankcorp, Inc.
*** 4.2		Indenture between BCSB Bancorp, Inc. and Wells Fargo, N.A. dated June 30, 2002
*** 4.3		Form of Floating Rate Junior Subordinated Deferrable Interest Debenture (Exhibit A to Exhibit 4.2)
*** 4.4		Indenture between BCSB Bancorp, Inc. and Wells Fargo N.A. dated September 30, 2004

The Company in the future may not have sufficient cash at the holding company to meet its trust preferred securities obligations.

39As of September 30, 2006, the Company had $23.2 million in outstanding trust preferred securities obligations. $ 12.9 million of these securities carried an adjustable interest rate equal to the London Interbank Offered Rate (“LIBOR”) plus a margin of 365 basis points, and the remaining $ 10.3 million of these securities carried an adjustable interest rate equal to the LIBOR rate plus a margin of 300 basis points, which amounted to 9.17% and 8.51%, respectively, at September 30, 2006. Pursuant to these instruments, the Company makes quarterly payments of principal and interest, which payments totaled $525,000 during the quarter ended September 30, 2006. In 2006, the Company had a total annual expense of $1.9 million related to its trust preferred securities.

*** 4.5		Form of Junior Subordinated Debt Securities (Exhibit A to Exhibit 4.4)
*** 10.1		BCSB Bankcorp, Inc. 1999 Stock Option Plan
*** 10.2		BCSB Bankcorp, Inc. Management Recognition Plan and Trust Agreement
* 10.3		Amended and Restated Form of Change-in-Control Severance Agreements between Baltimore County Savings Bank, F.S.B. and Gary C. Loraditch and William M. Loughran
****10.4		Baltimore County Savings Bank, F.S.B. Deferred Compensation Plan, as amended
* 10.5		Baltimore County Savings Bank, F.S.B. Incentive Compensation Plan
****10.6		Form of Change-in-Control Severance Agreements between Baltimore County Savings Bank, F.S.B. and David M. Meadows and Bonnie M. Klein
****10.7		Baltimore County Savings Bank, F.S.B. Cash Deferred Compensation Plan
*** 10.8		Trust Preferred Securities Guarantee Agreement by and between BCSB Bancorp, Inc. and Wells Fargo dated June 30, 2002
*** 10.9		Guarantee Agreement by and between BCSB Bancorp, Inc. and Wells Fargo, N.A. dated September 30, 2004
13		2004 Annual Report to Stockholders
*** 14		Code of Ethics
21		Subsidiaries of the Registrant
23		Consent of Beard Miller Company, LLP
31.1		Rule 13a-14(a) Certification of President
31.2		Rule 13a-14(a) Certification of Vice President and Treasurer
32		Section 1350 Certification

At September 30, 2006, the Company had cash and other liquid assets totaling $5.2 million at the holding company level. However, in light of losses incurred at the Bank level during the year ended September 30, 2006, under the Company’s tax allocation agreement with the Bank, the Company will be required to return to the Bank approximately $1.6 million in excess contributions the Bank made to the Company to pay its share of the Company’s consolidated federal income tax obligations. Assuming that (i) this amount is returned to the Bank, (ii) interests rates remain stable and (iii) there are no other changes in the Company’s ongoing holding company level expenses, management estimates that, absent cash dividends from the Bank, the Company would deplete its liquid assets by March 2009. The Company would deplete its liquid assets even sooner should LIBOR increase, thereby increasing the interest rate on the Company’s trust preferred securities obligations. In order to conserve liquid assets

*35 ~~Incorporated herein by reference from the Company’s Registration Statement on Form SB-2 (File No. 333-44831).~~

**Table Incorporatedof herein by reference from the Company’s Registration Statement on Form 8-A.Contents

~~***~~ at ~~Incorporated~~the ~~herin~~holding bycompany ~~reference~~level, ~~from~~at its November 29, 2006 meeting, the Board of Directors voted to suspend the Company’s ~~Form~~cash ~~10-K~~dividend ~~filed~~payments to its stockholders and agreed with the OTS not to make further dividend payments without prior OTS approval. Nevertheless, if the Bank is unable to generate earnings to support future dividend payments to the Company, or if the Bank is otherwise limited in its ability to pay dividends to the Company, in amounts sufficient to meet the Company’s debt service obligations, and the Company is unable to raise capital, the Company could at some point in the future default on ~~December~~its 29trust preferred securities obligations. In such event, ~~2003~~the holders of the trust preferred securities could require immediate redemption of such securities, which could cause the Company to suffer a significant decline in capital.

~~****~~Item ~~Incorporated~~1B. ~~herein~~Unresolved byStaff ~~reference from the Company’s Annual Report on Form 10-KSB for the year ended September 30, 1999.~~Comments

~~****~~Not ~~Incorporated herein by reference from the Company’s Annual Report for the year ended September 30, 2002~~applicable.

~~(c)~~Item ~~Financial Statement Schedules~~2. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. Properties

40The following table sets forth the location and certain additional information regarding the Bank’s offices at September 30, 2006.

SIGNATURES


	Year Opened	Owned or Leased	Expiration Date (If Leased) (1)	Book Value at September 30, 2006		Approximate Square Footage	Deposits at September 30, 2006
							(Deposits in Thousands)
Main Office:
Perry Hall	1955	Leased (2)	November 2018	$	181,071	8,000	$	138,757

Branch Offices:
Bel Air	1975	Leased	June 2008			2,000		50,897
Dundalk (3)	1976	Leased	June 2011			1,700		48,180
Timonium	1978	Leased	July 2013			1,250		65,583
Catonsville	2003	Leased	April 2011			3,550		50,581
Abingdon	1999	Leased (2)	October 2008		411,300	1,800		15,922
Forest Hill	1999	Leased (2)	July 2019		357,545	1,800		28,749
Essex	1999	Leased	November 2007			3,200		17,450
Hickory	2000	Leased (2)	January 2020		411,917	1,800		12,278
White Marsh	2000	Leased (2)	January 2015		497,619	1,800		32,710
Carney	2001	Leased	July 2011			2,100		27,461
Lutherville (4)	2002	Owned			636,310	7,440		30,679
Golden Ring (4)	2002	Leased	May 2011					30,129
Hamilton (4)	2002	Owned			159,598	1,500		10,473
Ellicott City (4)	2002	Leased	August 2020					28,274
Honeygo	2005	Leased (2)	December 2025		704,857	1,800		8,702
Sparks	2005	Leased (2)	December 2025		661,604	1,800		4,112
Owings Mills	2005	Leased (2)	September 2026		806,855	1,800		3,638

Administrative Office:
4111 E. Joppa Road	1994	Owned			1,150,321	18,000
4117 E. Joppa Road	2003	Owned			180,164	2,616

~~Pursuant to the requirements of Section 13 or 15~~(d1) ofAll ~~the~~leases ~~Securities Exchange~~have ~~Act~~at ofleast ~~1934,~~one ~~the~~five-year ~~registrant~~option, ~~has~~except ~~duly~~for ~~caused~~Catonsville, ~~this~~Dundalk, ~~report~~Ellicott toCity beand ~~signed~~Timonium ~~on its behalf by the undersigned, thereunto duly authorized~~locations.

	BCSB BANKCORP, INC.
December 28, 2004
	By:	/s/ Gary C. Loraditch
		Gary C. Loraditch
		President

(2)	Building is owned, but the land is leased.

~~Pursuant~~(3) toThe ~~the requirements~~Bank ofalso ~~the~~is ~~Securities~~leasing ~~Exchange~~a ~~Act~~kiosk ~~of 1934, this report has been signed below by the following persons on behalf of the registrant~~ and drive-in ~~the~~ATM ~~capacities~~facility ~~and~~at onthis ~~the dates indicated~~location.

/s/ Gary C. Loraditch				December 28, 2004
Gary C. Loraditch
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Bonnie M. Klein				December 28, 2004
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ Henry V. Kahl				December 28, 2004
Henry V. Kahl
Chairman of the Board
/s/ H. Adrian Cox				December 28, 2004
H. Adrian Cox
Vice Chairman of the Board
/s/ William J. Kappauf, Jr.				December 28, 2004
William J. Kappauf, Jr.
Director
/s/ William M. Loughran				December 28, 2004
William M. Loughran
Vice President and Director
/s/ John J. Panzer, Jr.				December 28, 2004
John J. Panzer, Jr.
Director
/s/ P. Louis Rohe, Jr.				December 28, 2004
P. Louis Rohe, Jr.
Director
/s/ Michael J. Klein				December 28, 2004
Michael J. Klein
Director

(4)	Branch acquired in WHG Bancshares acquisition.

The book value of the Bank’s investment in premises and equipment totaled $11.2 million at September 30, 2006. See Note 5 of Notes to Financial Statements.

Item 3.

Legal Proceedings.

From time to time, the MHC, the Company and/or the Bank is a party to various legal proceedings incident to its business. Except as set forth below, at September 30, 2006, there were no legal proceedings to which the MHC, the Company or the Bank was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the MHC, the Company or the Bank. There are no pending regulatory proceedings to which the MHC, the Company, the Bank and their subsidiaries is a party or to which any of their properties is subject which are currently expected to result in a material loss, however the Bank is under a supervisory agreement with the OTS. For discussion of the supervisory agreement see the Company’s annual report to stockholders filed as Exhibit 13 hereto.

The Bank has submitted a proof of claim and filed related claims in the pending Chapter 11 bankruptcy case of a former commercial deposit customer, Colleen, Inc., in the amount of $10,673,299.56, arising out of a check kiting scheme that was perpetrated against the Bank by the customer, and its principal owners, Alec C. Satisky and Brian I. Satisky. (In re Colleen, Inc., United States Bankruptcy Court for the District of Maryland, Baltimore Division, Case No.: 06-13748 NVA). The Bank has filed similar claims in the estate of Alec C. Satisky, pending before the Register of Wills of Baltimore County, Maryland (Estate No.: 140026), and in a civil action filed against Brian I. Satisky in the Circuit Court of Baltimore County, Maryland (Case No.: 03-C-06-6942). The civil action against Brian I. Satisky has been stayed by the filing of an involuntary Chapter 7 bankruptcy case against Brian I. Satisky (In re Brian I. Satisky, Case No.: 06-15796-MVA). The Bank continues to aggressively pursue collection of the check kiting loss from the customer as well as the above-referenced estate and individual, and to investigate and pursue possible recovery from insurance.

The Bank obtained judgments on June 5, 2002 in the amount of $1,500,000 against Key Leasing & Rental, Inc. and related parties before the Circuit Court of Baltimore County, and filed similar claims against the same Defendants in pending bankruptcy cases in the U.S. Bankruptcy Court for the District of Maryland (Baltimore) on October 21, 2002 in the case of the individual defendants and on November 1, 2002 in the case of Key Leasing & Rental, Inc. The judgments and bankruptcy filing seek to secure the Bank’s interest in automobile leases pledged as collateral to Baltimore County Savings Bank and to recover any deficiency balances remaining after the disposal of the collateral. The Bank has foreclosed upon the collateral pursuant to a consent agreement reached between the Bank and the US Bankruptcy Trustee on November 22, 2002 and projected a loss of $31,000 in the most recent filing with the Bankruptcy court.

The Bank obtained judgments on September 17, 2003 in the amount of $705,785.88 against ATG Sales, LLC T/A Auto Gallery and Robert P and Karen R. King before the Circuit Court of Baltimore County, and filed a similar claim against Robert P. King in a pending bankruptcy case in the United States Bankruptcy Court for the District of Maryland (Baltimore) on September 3, 2004. The judgments seek to secure the Bank’s interest in connection with a delinquent commercial loan and over advance liability of the defendants. The Bank has foreclosed upon certain collateral and entered into a forbearance and repayment agreement with the Defendant.

Item 4.

Submission of Matters to Vote of Security Holders.

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information contained under the sections captioned “Market Information” in the Company’s Annual Report to Stockholders for the Fiscal Year Ended September 30, 2006 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by reference.

The following table sets forth information regarding the Company's repurchases of its common stock during the quarter ended September 30, 2006.


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 2006
Beginning date: July 1	—		—	—	—
Ending date: July 31

August 2006
Beginning date: August 1	184	$	11.50	—	—
Ending date: August 31

September 2006
Beginning date: September 1	—		—	—	—
Ending date: September 30

(1)	Shares were repurchased by the Company upon the vesting of restricted stock awards to satisfy income tax withholding obligations.

Item 6.

Selected Financial Data

The information contained under the section captioned “Selected Financial Data” in the Annual Report is incorporated herein by reference.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report is incorporated herein by reference.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The information contained under the section captioned “Market Risk” in the Annual Report is incorporated herein by reference.

Item 8.

Financial Statements and Supplementary Data

The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Report of Registered Public Accounting Firms and Selected Consolidated Financial Data in the Annual Report, which are listed under Item 15 herein, are incorporated herein by reference.

The report of Beard Miller Company with respect to the consolidated statements of financial condition of the Company and its subsidiaries as of September 30, 2004, and the related consolidated statements of operations, stockholder’s equity, and cash flows for the year ended September 30, 2004 follows.

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

BCSB Bankcorp, Inc.

Baltimore, Maryland

We have audited the consolidated statements of operations, stockholders’ equity and cash flows of BCSB Bankcorp, Inc. and Subsidiaries for the year ended September 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of BCSB Bankcorp, Inc. and Subsidiaries for the year ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.

LOGO

Beard Miller Company LLP

Baltimore, Maryland

November 30, 2004

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.

Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s then acting principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that occurred during the Company’s last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors and Executive Officers of the Registrant

The information contained under the sections captioned “Proposal I—Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the Company’s 2007 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

The Company and its subsidiaries have adopted a code of ethics which applies to all of their directors, officers and employees and thus applies to the Company’s principal executive officer, principal financial officer and principal accounting officer. The code of ethics is incorporated herein by reference in Exhibit 14 to this Annual Report on Form 10-K.

Item 11.

Executive Compensation

The information contained under the sections captioned “Proposal I—Election of Directors—Executive Compensation,” “—Director Compensation,” “—Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “—Comparative Stock Performance Graph” in the Proxy Statement is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


(a) and (b)		Security Ownership of Certain Beneficial Owners and Security Ownership of Management. Information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Security Ownership” in the Proxy Statement.

(c)		Changes in Control. Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

(d)		Equity Compensation Plans.

The following table sets forth certain information with respect to the Company’s equity compensation plans as of September 30, 2006.


	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	113,500	$	10.30	108,870
Equity compensation plans not approved by security holders	—		—	—
Total	113,500	$	10.30	108,870

Item 13.

Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the section captioned “Proposal I — Election of Directors — Transactions with Management” in the Proxy Statement.

Item 14.

Principal Accountant Fees and Services

The information contained under the section captioned “Audit and Other Fees Paid to Independent Accountant” in the Proxy Statement is hereby incorporated by reference.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)

List of Documents Filed as Part of this Report

(1) Financial Statements. The following consolidated financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13):


Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of September 30, 2006 and 2005

Consolidated Statements of Operations for the Years Ended September 30, 2006, 2005 and 2004

Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the Years Ended September 30, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

(b) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index.


No.		Description
3.1		Charter of BCSB Bankcorp, Inc. (1)

3.2		Bylaws of BCSB Bankcorp, Inc. (1)

4.1		Form of Common Stock Certificate of BCSB Bankcorp, Inc. (2)

4.2		Indenture between BCSB Bankcorp, Inc. and Wells Fargo, N.A. dated June 30, 2002 (3)

4.3		Form of Floating Rate Junior Subordinated Deferrable Interest Debenture (Exhibit A to Exhibit 4.2) (3)

4.4		Indenture between BCSB Bankcorp, Inc. and Wells Fargo, N.A. dated September 30, 2003 (3)

4.5		Form of Junior Subordinated Debt Securities (Exhibit A to Exhibit 4.4) (3)

10.1		BCSB Bankcorp, Inc. 1999 Stock Option Plan † (4)

10.2		BCSB Bankcorp, Inc. Management Recognition Plan and Trust Agreement † (4)

10.3		Amended and Restated Form of Change-in-Control Severance Agreements between Baltimore County Savings Bank, F.S.B. and Gary C. Loraditch and William M. Loughran † (1)

10.4		Baltimore County Savings Bank, F.S.B. Deferred Compensation Plan, as amended † (5)

10.5		Baltimore County Savings Bank, F.S.B. Incentive Compensation Plan † (1)

10.6		Form of Change-of-Control Severance Agreements between Baltimore County Savings Bank, F.S.B. and David M. Meadows and Bonnie M. Klein † (5)

10.7		Baltimore County Savings Bank, F.S.B. Cash Deferred Compensation Plan † (5)

10.8		Trust Preferred Securities Guarantee Agreement by and between BCSB Bankcorp, Inc. and Wells Fargo dated June 30, 2002 (3)

10.9		Guarantee Agreement by and between BCSB Bankcorp, Inc. and Wells Fargo, N.A. dated September 30, 2004 (3)

10.10		Agreement and General Release among BCSB Bankcorp, Inc. Baltimore County Savings Bank, F.S.B. and Gary C. Loraditch † (6)

10.11		Employment Agreement by and between Baltimore County Savings Bank and Joseph J. Bouffard †

13		2006 Annual Report to Stockholders

14		Code of Ethics (3)

21		Subsidiaries of the Registrant

23.1		Consent of Stegman & Company

23.2		Consent of Beard Miller Company, LLP

31.1		Rule 13a-14(a) Certification of President

31.2		Rule 13a-14(a) Certification of Vice President and Treasurer

32		Section 1350 Certifications

99.1		Supervisory Agreement (7)

†	Management contract or compensatory agreement or arrangement.

(1)	Incorporated herein by reference from the Company’s Registration Statement on Form SB-2 (File No. 333-44831).

(2)	Incorporated herein by reference from the Company’s Registration Statement on Form 8-A.

(3)	Incorporated herein by reference from the Company’s Annual Report on Form 10-K for the year ended September 30, 2003.

(4)	Incorporated herein by reference from the Company’s Annual Report on Form 10-KSB for the year ended September 30, 1999.

(5)	Incorporated herein by reference from the Company’s Annual Report on Form 10-K for the year ended September 30, 2002.

(6)	Incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

(7)	Incorporated herein by reference from the Company’s Form 8-K filed on December 14, 2005.

(c) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BCSB BANKCORP, INC.
December 22, 2006

	By:	/s/ Joseph J. Bouffard
		Joseph J. Bouffard
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/ Joseph J. Bouffard Joseph J. Bouffard President and Chief Executive Officer (Principal Executive Officer)				December 22, 2006

/s/ Bonnie M. Klein Bonnie M. Klein Vice President and Treasurer (Principal Financial and Accounting Officer)				December 22, 2006

/s/ Henry V. Kahl Henry V. Kahl Chairman of the Board				December 22, 2006

/s/ H. Adrian Cox H. Adrian Cox Vice Chairman of the Board				December 22, 2006

/s/ William J. Kappauf, Jr. William J. Kappauf, Jr. Director				December 22, 2006

/s/ William M. Loughran William M. Loughran Vice President and Director				December 22, 2006

/s/ John J. Panzer, Jr. John J. Panzer, Jr. Director				December 22, 2006

/s/ P. Louis Rohe, Jr. P. Louis Rohe, Jr. Director				December 22, 2006

/s/ Michael J. Klein Michael J. Klein Director				December 22, 2006

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