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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended September 30, 2006

OR



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

For the transition period from  to

Commission File Number: 0-24589

BCSB BANKCORP, INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|United States                                                 |  | 52-2108333                         
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|4111 E. Joppa Road, Suite 300, Baltimore, Maryland            |  | 21236                              
|(Address of principal executive offices)                      |  | (Zip Code)                         

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

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

Common stock, par value $.01 per share

(Title of Class)

Nasdaq Global Market

(Name of exchange on which registered)

Securities registered pursuant to
Section 12(g) of the Act: None

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

Yes ̈No
x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act.

Yes ̈No x

Indicate by check mark whether the registrant: (1) has 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 x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, 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. ̈

Indicate by check 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):

Large Accelerated Filer ̈Accelerated
Filer ̈Non-accelerated Filer    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No x

The aggregate 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.

Number of shares of Common Stock outstanding as of
December 1, 2006: 5,913,743

DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:



| | 1. | Portions of the registrants Annual Report to Stockholders for the Fiscal Year ended September 30, 2006. (Parts II and III)
| | -- | ---------------------------------------------------------------------------------------------------------------------------



| | 2. | Portions of Proxy Statement for registrants 2007 Annual Meeting of Stockholders. (Part III)
| | -- | --------------------------------------------------------------------------------------------



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EXPLANATORY NOTE

On December 22, 2006, BCSB Bankcorp, Inc. (the Company) filed its annual report on Form 10-K for the year ended September 30, 2006. In June 2007, the Company discovered that losses resulting from
unpaid loan balances associated with repossessed automobiles had been included in the financial line Loss on repossessed assets rather than included as a loan charge-off within the allowance for loan losses. This reclassification has the
effect of reducing the amounts included in the line item Loss on repossessed assets and increasing, by a similar amount, the amounts included in Provision for losses on loans. While this reclassification of expenses within
the consolidated statements of operations does not affect net income (loss), net income (loss) per share, the consolidated statements of stockholders equity or consolidated balance sheets, management determined that the reclassification
required a restatement of the consolidated statements of operations and cash flows and related notes for each of the three years ended September 30, 2006.

This Annual Report on Form 10-K/A corrects and restates the Companys consolidated statements of operations and cash flows and related notes for all periods presented to properly reflect losses associated with unpaid loan balances
associated with repossessed automobiles. Related corrections have also been made to the five year summary of Selected Consolidated Financial and Other Data and Managements Discussion and Analysis of Financial Condition and Results of
Operations. Additionally, Note 19  Quarterly Financial Data (Unaudited) has been corrected to give effect to these reclassifications on a quarterly basis for the three years ended September 30, 2006. Please refer to Note 21 
Restatement, for a summary of the financial statement line items affected by this reclassification.





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##### Table of Contents

PART I



|Item 1. | Business
|------- | --------

General

BCSB Bankcorp, Inc.BCSB Bankcorp, Inc. (the Company) serves as the 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), a federal mutual holding company, owns 63.5% of the Companys
outstanding common stock. The Companys assets consist of its investment in the Bank and its portfolio of investment securities. The Company is primarily 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. 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.

The Companys and the Banks executive offices
are located at 4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236, and its main telephone number is (410) 256-5000.

Baltimore County Savings Bank, F.S.B.The Bank is a federally chartered stock savings bank operating through eighteen 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.

The 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.

Forward-Looking
Statements

When 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.



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The Company does not undertake, and specifically disclaims any obligation, to publicly release the result
of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Market Area

The 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.

The economy of the Banks market area is a diverse cross section of employment sectors, with a mix of services, manufacturing, wholesale/retail
trade, federal and local government, health care facilities and finance related employment This partially mitigates the risk associated with a decline in any particular economic sector. Once the backbone of the 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 market area. Baltimore County has the largest population at 768,000 followed by Baltimore City at 633,000, Anne Arundel County at 512,000, Howard County at 270,200 and Harford County at 238,750. Located adjacent to major
transportation corridors and Washington, DC, the Baltimore metropolitan area provides a diversified broad economic base. According to Baltimore County Department of Economic Development 78% of Baltimore Countys employees work in the private
sector with approximately 7% in manufacturing, 20% in trade, transportation and utilities, 12.0% in professional business services, 22.0% in education and health services, and 8% in leisure and hospitality. Government provides 17.5% of Baltimore
Countys jobs, with self-employed providing the remaining employment.

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.

Lending Activities

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.



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Loan 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, 2006, the Bank had no concentrations of loans exceeding 10% of gross loans other than as disclosed below.



|                                        |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|--------------------------------------- |  | ---------------------- | ------- | - | ------ | - | ------ | ---- | ------- |  | ------ | ------ |  | ---- | ------- |  | ------ | - | - | - | ------- | ------ | ------ | - |  | - | ------- |  | ------ | -
|                                        |  | 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 |  |        |  
|                                        |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  

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|(1) | Includes fixed-rate second mortgage loans.
|--- | ------------------------------------------



|(2) | Includes acquisition and development loans.
|--- | -------------------------------------------



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Loan 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.



|                              |  |                                            |        |                                             |         |                                   |         |       |        
|----------------------------- |  | ------------------------------------------ | ------ | ------------------------------------------- | ------- | --------------------------------- | ------- | ----- | -------
|                              |  | Due during theyear endingSeptember 30,2006 |        | Due 1 through5 years afterSeptember 30,2006 |         | Due 5 yearsafterSeptember 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
|                              |  |                                            |        |                                             |         |                                   |         |       |        

The following table sets forth at September 30, 2006, the dollar amount of all loans due
within one year and one year or more after September 30, 2006 which have predetermined interest rates and have floating or adjustable interest rates.



|                              |  |                   |         |                             |   |        
|----------------------------- |  | ----------------- | ------- | --------------------------- | - | -------
|                              |  | PredeterminedRate |         | Floating orAdjustable 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
|                              |  |                   |         |                             |   |        

Scheduled 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



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substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.

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.

The following table sets forth certain information with respect to the Banks loan origination, purchase and sale activity for the periods
indicated.



|                              |  |                          |         |      |   |         |  |   |        
|----------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                              |  | 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 loan originations are derived from a number of sources, including referrals by
realtors, 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 are originated by the Banks loan personnel and loan applications are accepted at the Banks offices.

Loan 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 $1 million, as well as all requests for lines of credit up to $500,000, may be approved by the Banks Loan Committee, which consists
of the Banks President, Executive Vice President of Lending and Treasurer and meets weekly. All loans in excess of these amounts must be approved by the 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, Senior Loan Officer and consumer loan underwriters and reviewed by the Banks Executive Vice
President who supervises lending operations.



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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 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.

It is the Banks policy to record a
lien on the real estate securing a loan and to obtain title insurance or an attorneys certification which ensures that the property is free of prior encumbrances and other possible title defects. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a flood plain as designated by Federal Emergency Management Agency, pay flood insurance policy premiums.

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.

The Bank is permitted to lend up to 97% of the lesser of the appraised value or the purchase
price of the real property securing a mortgage loan. However, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Banks policy is to obtain private mortgage insurance at the borrowers
expense on the principal amount of the loan. The Bank does provide a first time home buyers loan program in conjunction with the Federal Home Loan Bank of Atlanta where 100% of the loan amount will be funded for qualified buyers. The Bank will make
a single-family residential mortgage loan with up to a 97% loan-to-value ratio if the required private mortgage insurance is obtained. The Bank generally limits the loan-to-value ratio on commercial real estate mortgage loans to 80%, although the
loan-to-value ratio on commercial real estate loans in limited circumstances has been as high as 90%. The Bank limits the loan-to-value ratio on single-family rental property loans to 80%. Home equity loans are made in amounts which, when added to
any senior indebtedness, do not exceed 90% of the value of the property.

Under 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 $7.3 million at September 30, 2006. 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, 2006, the Bank had no lending relationships in excess of the loans-to-one-borrower limit. At September 30, 2006, the Banks largest loan customer was a $6.2 million relationship consisting of residential
properties. At September 30, 2006, the loans were current and performing in accordance with their terms.

Interest 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.

Single-Family
Residential Real Estate Lending. The Bank historically has been and continues to be an originator of single-family, residential real estate loans in its market area. At September 30, 2006, single-family,



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residential mortgage loans, excluding single-family rental property loans and home equity loans, totaled $214.7 million, or 44.5% of the Banks gross
loan portfolio.

The Bank originates fixed-rate mortgage loans at competitive interest rates. At September 30, 2006, the Bank had
$201.6 million of fixed-rate single-family mortgage loans, which amounted to 93.9% of the Banks single-family mortgage loans. The Bank emphasizes the origination of fixed-rate single-family residential mortgage loans with maturities of 30
years or less by offering competitive rates.

The Bank also offers adjustable-rate single-family residential mortgage loans. As of
September 30, 2006, $13.1 million, or 6.1% of the Banks single-family mortgage loans carried adjustable rates. After 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 one year, as made available by the Federal Reserve Board. 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 five years. The 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 provide for 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 by the end of the loan term and, 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 portfolio helps reduce the Banks exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the
event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Further, although
adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the
lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Banks adjustable-rate loans will fully adjust to compensate for increases in the Banks cost of funds. Finally, adjustable-rate loans
increase the Banks exposure to decreases in prevailing market interest rates, although decreases in the Banks cost of funds tend to offset this effect.

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, 2006, single-family rental property
loans totaled $29.1 million, or 6.0%, of the Banks gross loan portfolio. Originations of single-family rental property loans were $5.8 million, $10.6 million and $7.7 million for the years ended September 30, 2006, 2005 and 2004,
respectively. Single-family residential mortgage loans secured by non-owner-occupied properties are made on a fixed-rate or an adjustable-rate basis and carry interest rates generally from 0.5% to 1.0% above the rates charged on comparable loans
secured by owner-occupied properties. The maximum term on such loans is 30 years.

Construction 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, 2006, $39.0 million, or 8.1%, of the Banks gross loan portfolio consisted of commercial construction loans, acquisition and development loans, and construction loans on single family residences.



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Prior 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
based have limited the Banks ability to compete for some loans to builders because the Banks loans-to-one-borrower limitation limits its ability to meet the volume requirements of the large builders. The Banks construction loans
totaled $39.0 million, $53.8 million and $23.2 million at September 30, 2006, 2005 and 2004, respectively, and construction loan originations were $17.3 million, $12.4 million and $6.2 million during the years ended September 30, 2006,
2005 and 2004, respectively.

On occasion, the Bank makes acquisition and development loans to local developers to acquire and develop land
for sale to builders who will construct single-family residences. Acquisition and development loans, which are considered by the Bank to be construction loans, are made at a rate that adjusts monthly, based on the prime rate plus a negotiated
margin, for terms of up to three years. Interest only is paid during the term of the loan, and the principal balance of the loan is paid down as developed lots are sold to builders. Generally, in connection with acquisition and development loans,
the Bank issues a letter of credit to secure the developers obligation to local governments to complete certain work. If the developer fails to complete the required work, the Bank would be required to fund the cost of completing the work up
to the amount of the letter of credit. Letters of credit generate fee income for the Bank but create additional risk. At September 30, 2006, the Bank had 22 letters of credit outstanding totaling $754,000. All acquisition and development loans
were performing in accordance with their terms at such date.

Construction financing generally is considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the propertys value at completion of construction or development and
the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and 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 change orders, then the Bank will demand that the loan be paid off and, if necessary, institute foreclosure proceedings, or refinance the loan. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with collateral having a value which is insufficient to assure full repayment. The Bank has sought to minimize this risk by limiting construction
lending to qualified borrowers (i.e., borrowers who satisfy all credit requirements and whose loans satisfy all other underwriting standards which would apply to the Banks permanent mortgage loan financing for the subject property) in
the Banks market area. On loans to builders, the Bank works only with selected builders with whom it has experience and carefully monitors the creditworthiness of the builders.

Commercial Real Estate Lending. The Banks commercial real estate loan portfolio includes loans to finance the acquisition of small office
buildings, churches, medical condominiums, small shopping centers and small commercial and industrial buildings. Such loans generally range in size from $100,000 to $5 million, with the largest having an outstanding principal balance of $6.2 million
at September 30, 2006. At September 30, 2006, the Bank had $110.2 million of commercial real estate loans, which amounted to 22.8% of the Banks gross loan portfolio. Commercial real estate loans are originated on a fixed-rate or
adjustable-rate basis with terms of up to 25 years.

Commercial 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



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entity, the Bank seeks, whenever possible, to obtain personal guarantees and annual financial statements of the principals of the legal entity.

Commercial 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, 2006, the Bank had $9.6 million of such loans outstanding.

Consumer Lending. The consumer loans currently in the Banks loan portfolio consist of automobile loans, home equity lines of credit and loans secured by savings deposits.

Automobile loans totaled $53.5 million, or 11.1%, of the Banks gross loan portfolio, at September 30, 2006. Automobile loans are secured by
both new and used cars and, depending on the creditworthiness of the borrower, may be made for up to 110% of the invoice price or clean black book value, whichever is lower, or, with respect to used automobiles, the loan
values as published by a wholesale value listing utilized by the automobile industry. Automobile loans are made directly to the borrower-owner. New and relatively new cars (less than two years old or 20,000 miles or less) 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 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.

The Bank originates second mortgage loans and
home equity lines of credit. As of September 30, 2006, home equity lines of credit totaled $17.9 million, or 3.7% of the Banks gross loan portfolio. Second mortgage loans are made at fixed rates and for terms of up to 15 years and totaled
$23.1 million, or 4.8%, of the Banks gross loans at September 30, 2006.

The Banks home equity lines of credit currently
have adjustable interest rates tied to the prime rate and can be offered anywhere from as low as the prime rate less 0.50% up to the prime rate plus 1.0%. The interest rate may not adjust to a rate higher than 18%. The home equity lines of credit
require monthly payments until the loan is paid in full, with a loan term not to exceed 30 years. The minimum monthly payment is the outstanding interest. Home equity lines of credit are secured by subordinate liens against residential real
property. The Bank requires that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least sufficient to cover its loan.

The 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.

As part of the Banks loan strategy, the Bank has diversified its lending portfolio to afford
the Bank the opportunity to earn higher yields and to provide a fuller range of banking services. These products have generally been in the consumer area and include, boat loans and loans for the purchase of recreational vehicles. Such loans totaled
$1.5 million at September 30, 2006.

Consumer lending usually 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.



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Loan Fees and 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 points (one point being equal to 1% of the loan amount) on residential and commercial loan originations. The Bank
services loans sold to FHLMC and FNMA. The Bank also services participation loans originated and sold by the Bank with servicing retained, and earns minimal income from this activity.

Nonperforming 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.

Loans generally are placed on non-accrual status if the loan becomes past due more than 90 days, except in instances where in managements judgment there is no doubt as to full collectibility of principal and interest, or management
concludes that payment in full is not likely. Consumer loans are generally charged off, or any expected loss is reserved for, after they 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.

Real estate acquired by the Bank 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 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. See Note 1 of Notes to Financial Statements.



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



|                                                                 |  |                        |       |   |      |   |     |      |  |   |      |   |  |      |     |   |  |   |       |  
|---------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | --- | ---- |  | - | ---- | - |  | ---- | --- | - |  | - | ----- | -
|                                                                 |  | At September 30,       |      
|                                                                 |  | 2006                   |       |   | 2005 |   |     | 2004 |  |   | 2003 |   |  | 2002 |    
|                                                                 |  | (Dollars in thousands) |      
|Loans accounted for on a non-accrual basis: (1)                  |  |                        |       |   |      |   |     |      |  |   |      |   |  |      |     |   |  |   |       |  
|Real Estate:                                                     |  |                        |       |   |      |   |     |      |  |   |      |   |  |      |     |   |  |   |       |  
|Single-family residential                                        |  | $                      | 69    |   |      | $ | 647 |      |  | $ | 266  |   |  | $    | 59  |   |  | $ | 291   |  
|Single-family rental property                                    |  |                        |      |   |      |   |    |      |  |   |     |   |  |      |    |   |  |   |      |  
|Commercial                                                       |  |                        | 2,381 |   |      |   | 91  |      |  |   | 606  |   |  |      | 166 |   |  |   |      |  
|Construction                                                     |  |                        |      |   |      |   |    |      |  |   |     |   |  |      |    |   |  |   |      |  
|Commercial lines of credit                                       |  |                        |      |   |      |   |    |      |  |   |     |   |  |      |    |   |  |   |      |  
|Commercial loans secured                                         |  |                        |      |   |      |   |    |      |  |   |     |   |  |      |    |   |  |   | 1,100 |  
|Consumer                                                         |  |                        | 42    |   |      |   |    |      |  |   |     |   |  |      | 75  |   |  |   |      |  
|                                                                 |  |                        |       |   |      |   |     |      |  |   |      |   |  |      |     |   |  |   |       |  
|Total                                                            |  | $                      | 2,492 |   |      | $ | 738 |      |  | $ | 872  |   |  | $    | 300 |   |  | $ | 1,391 |  
|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-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                    |  | $                      |      |   |      | $ |    |      |  | $ |     |   |  | $    |    |   |  | $ |      |  
|                                                                 |  |                        |       |   |      |   |     |      |  |   |      |   |  |      |     |   |  |   |       |  

---

|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Other nonperforming assets include the Banks inventory of repossessed cars.
|--- | ----------------------------------------------------------------------------

During the year ended September 30, 2006, gross interest income of $152,000, would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the year. Interest on
such loans included in income during the year ended September 30, 2006 amounted to $139,000.

At September 30, 2006, the Bank had
no loans which were not classified as non-accrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with
present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured.

At September 30, 2006,
non-accrual loans consisted of 1 single-family residential mortgage loan aggregating $69,000, 1 commercial loan aggregating $2.4 million and 2 consumer loans aggregating $42,000.

Real estate acquired through foreclosure is initially recorded at the lower of cost or estimated fair value and subsequently at the lower of book value
or fair value less estimated costs to sell. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller, as measured
by market transactions. If a market does not exist, fair value of the item is estimated based on selling prices of similar items in active markets or, if there are no active markets for



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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.

Federal regulations require savings institutions
to classify their assets on the basis of quality on a regular basis. An asset meeting one of the classification definitions set forth below may be classified and still be a performing loan. An asset is classified as substandard if it is determined
to be inadequately protected by the current retained earnings and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified
as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving managements close attention. Such assets designated as special mention may include nonperforming loans consistent with the
above definition. Assets 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 amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with a savings institutions classifications. If a savings institution does not agree with an
examiners classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re-classification. At September 30, 2006,
the Bank had $5.0 million in classified assets consisting of $2.0 million in assets classified as special mention, $2.6 million in assets classified as substandard, no assets classified as doubtful and no assets classified as loss. Special mention
assets consisted of $538,000 in single-family residential mortgage loans 60 to 89 days delinquent at September 30, 2006, and $74,000 in consumer loans 60 to 120 days delinquent at September 30, 2006 and substandard assets consisted of the
$2.5 million in non-accrual loans described above.

Allowance 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.

Management 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.

The Banks methodology for establishing the 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 the Banks assets and evaluates
the need to establish allowances on the basis of this review. 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
composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Additional provisions for losses on loans are made in order to bring 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



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and the fair value of the security. At the date of foreclosure or other repossession, the Bank would transfer the property to real estate acquired in
settlement of loans initially at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value less estimated
selling costs would be charged off against the allowance for loan losses. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate would be recorded.

The following table sets forth an analysis of the Banks allowance for loan losses for the periods indicated as restated.



|                                                                        |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |       |  
|----------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | ----- | -
|                                                                        |  | 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                                                                |  |                        | 578   |   |      |   | 677   |      |  |   | 1,242 |   |  |      | 1,239 |   |  | 530   |  
|                                                                        |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |       |  
|Total charge-offs                                                       |  |                        | 578   |   |      |   | 677   |      |  |   | 1,242 |   |  |      | 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)                                       |  |                        | (261  | ) |      |   | (294  | )    |  |   | (819  | ) |  |      | (860  | ) |  | (260  | )
|Provision for loan losses                                               |  |                        | 194   |   |      |   | 453   |      |  |   | 708   |   |  |      | 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 |  |                        | .06   | % |      |   | .07   | %    |  |   | .22   | % |  |      | .22   | % |  | .09   | %
|                                                                        |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |       |  



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The following table allocates the allowance for loan losses by loan category 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,       |      
|                                |  | 2006                   |       |                                        | 2005   |   |        | 2004 |                                        |  | 2003   |        |  | 2002                                   |      
|                                |  | Amount                 |       | Percentof LoansinCategoryto TotalLoans |        |   | Amount |      | Percentof LoansinCategoryto TotalLoans |  |        | Amount |  | Percentof LoansinCategoryto TotalLoans |       |  | Amount |   | Percentof LoansinCategoryto TotalLoans |   |       | Amount |        | Percentof LoansinCategoryto TotalLoans | 
|                                |  | (Dollars in Thousands) |      
|Real estate loans:              |  |                        |       |                                        |        |   |        |      |                                        |  |        |        |  |                                        |       |  |        |   |                                        |   |       |        |        |                                        |  |   |       |  |        |  
|Single-family residential       |  | $                      | 697   |                                        | 44.50  | % |        | $    | 548                                    |  | 40.44  | %      |  | $                                      | 578   |  | 43.47  | % |                                        | $ | 539   |        | 46.32  | %                                      |  | $ | 760   |  | 53.09  | %
|Single-family rental property   |  |                        | 64    |                                        | 6.04   |   |        |      | 40                                     |  | 5.58   |        |  |                                        | 29    |  | 4.68   |   |                                        |   | 22    |        | 3.70   |                                        |  |   | 17    |  | 2.00   |  
|Commercial                      |  |                        | 591   |                                        | 21.87  |   |        |      | 707                                    |  | 15.55  |        |  |                                        | 455   |  | 15.69  |   |                                        |   | 396   |        | 13.85  |                                        |  |   | 314   |  | 13.77  |  
|Construction                    |  |                        | 94    |                                        | 8.09   |   |        |      | 14                                     |  | 11.14  |        |  |                                        | 16    |  | 5.64   |   |                                        |   | 107   |        | 4.23   |                                        |  |   | 70    |  | 2.82   |  
|Commercial lines of credit      |  |                        | 42    |                                        | 2.91   |   |        |      | 22                                     |  | 3.41   |        |  |                                        | 10    |  | 3.89   |   |                                        |   | 16    |        | 1.65   |                                        |  |   | 46    |  | 1.01   |  
|Commercial leases               |  |                        | 28    |                                        | .98    |   |        |      | 2                                      |  | .68    |        |  |                                        |      |  | .32    |   |                                        |   |      |        |       |                                        |  |   |      |  | .28    |  
|Commercial loans secured        |  |                        | 1     |                                        | .08    |   |        |      | 72                                     |  | .39    |        |  |                                        | 52    |  | .20    |   |                                        |   |      |        | .21    |                                        |  |   |      |  | .38    |  
|Commercial loans unsecured      |  |                        | 409   |                                        | .08    |   |        |      | 537                                    |  | .11    |        |  |                                        | 541   |  | .13    |   |                                        |   | 569   |        | .03    |                                        |  |   |      |  |       |  
|Consumer                        |  |                        | 753   |                                        | 15.45  |   |        |      | 804                                    |  | 22.70  |        |  |                                        | 906   |  | 25.98  |   |                                        |   | 1,049 |        | 29.83  |                                        |  |   | 992   |  | 26.65  |  
|                                |  |                        |       |                                        |        |   |        |      |                                        |  |        |        |  |                                        |       |  |        |   |                                        |   |       |        |        |                                        |  |   |       |  |        |  
|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 | %
|                                |  |                        |       |                                        |        |   |        |      |                                        |  |        |        |  |                                        |       |  |        |   |                                        |   |       |        |        |                                        |  |   |       |  |        |  



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Investment Activities

General. The Bank is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB of
Atlanta, certificates of deposit in federally insured institutions, certain bankers acceptances and federal funds. It may also invest, subject to certain limitations, in commercial paper rated in one 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. Federal regulations require the Bank to maintain an investment in FHLB stock and a minimum amount of liquid assets
which may be invested in cash and specified securities. From time to time, the OTS adjusts the percentage of liquid assets which savings banks are required to maintain. See   Regulation  Depository Institution Regulation 
Liquidity Requirements.

The Bank makes investments in order to maintain the levels of liquid assets required by regulatory
authorities and manage cash flow, diversify its assets, obtain yield and to satisfy certain requirements for favorable tax treatment. The investment activities of the Bank consist primarily of investments in mortgage-backed securities and other
investment securities, consisting primarily of securities issued or guaranteed by the U.S. government or agencies 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 parameters of each class of investment are prescribed in the Banks investment policy. The Bank performs analyses on mortgage-related securities
prior to purchase and on an ongoing basis to determine the impact on earnings and market value under various interest rate and prepayment conditions. Under the Banks current investment policy, securities purchases are made by the Banks
President. The Banks President and Treasurer have authority to sell investment securities subject to the Banks designation as available for sale and purchase comparable investment securities with similar characteristics. The Board of
Directors reviews securities transactions on a monthly basis.

Securities 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.

Mortgage-Backed 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. Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA
and GNMA which guarantee the payment of principal and interest to investors. Mortgage-backed securities generally increase the quality of the Banks assets by virtue of the guarantees that back them, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations of the Bank.

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 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



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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.

Mortgage-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.

Some mortgage-related securities instruments are like traditional debt instruments due to their stated principal amounts and traditionally defined interest rate terms. Purchasers of certain other mortgage-related securities instruments are
entitled to the excess, if any, of 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 original
investment. 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.

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.

At 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%.

At September 30, 2006, mortgage-backed securities with an amortized cost of $90.2 million were classified as available for sale. At
September 30, 2006, the Banks available for sale mortgage-backed securities had a weighted average yield of 3.96%.

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).



16



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##### Table of Contents

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



|                                      |  |                        |         |      |   |         |  |   |        
|------------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|                                      |  | 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
|                                      |  |                        |         |      |   |         |  |   |        



17



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##### Table of Contents

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.



|                                       |  |                        |        |              |                   |   |               |                   |              |  |                     |               |  |                            |        |  |               |   |              |   |        |               |      |             |  |              |         |  |   |         |  |      |  
|-------------------------------------- |  | ---------------------- | ------ | ------------ | ----------------- | - | ------------- | ----------------- | ------------ |  | ------------------- | ------------- |  | -------------------------- | ------ |  | ------------- | - | ------------ | - | ------ | ------------- | ---- | ----------- |  | ------------ | ------- |  | - | ------- |  | ---- | -
|                                       |  | One Year or Less       |        |              | One to Five Years |   |               | Five to Ten Years |              |  | More than Ten Years |               |  | Total Investment Portfolio |       
|                                       |  | CarryingValue          |        | AverageYield |                   |   | CarryingValue |                   | AverageYield |  |                     | CarryingValue |  | AverageYield               |        |  | CarryingValue |   | AverageYield |   |        | CarryingValue |      | MarketValue |  | AverageYield |        
|                                       |  | (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 |       
|                                       |  | CarryingValue          |        | AverageYield |                   |   | CarryingValue |                   | AverageYield |  |                     | CarryingValue |  | AverageYield               |        |  | CarryingValue |   | AverageYield |   |        | CarryingValue |      | MarketValue |  | AverageYield |        
|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 |  |      |  
|                                       |  |                        |        |              |                   |   |               |                   |              |  |                     |               |  |                            |        |  |               |   |              |   |        |               |      |             |  |              |         |  |   |         |  |      |  



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Deposit Activity and Other Sources of Funds

General. 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 Bank attracts deposits
principally from within its market area by offering a variety of deposit instruments, including 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 determining the characteristics of its deposit accounts, the Bank considers the rates offered by competing
institutions, lending and liquidity requirements, growth goals and federal regulations. Management believes it prices its deposits comparably to rates offered by its competitors.

The Bank attempts to compete for deposits with other institutions in its market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet customers needs by providing convenient customer service to the community, efficient staff and convenient hours of service. Substantially all of the Banks
depositors are Maryland residents. To provide additional convenience, the Bank participates in the STAR Automated Teller Machine (ATM) network at locations throughout the mid-Atlantic and the South and the CIRRUS Automated Teller Machine
network at locations throughout the United States, through which customers can gain access to their accounts at any time. The Bank currently has ATM machines in all of its eighteen offices. The Bank also has remote ATMs at three area community
colleges, Dundalk Community College, Catonsville Community College and Essex Community College. The Bank also has an Internet-based banking system to provide additional customer convenience.



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Savings deposits in the Bank at September 30, 2006 were represented by the various types of savings
programs described below.



|              |   |  |                   |  |                                 |  |               |        |                        |   |                            |  |        |  
|------------- | - |  | ----------------- |  | ------------------------------- |  | ------------- | ------ | ---------------------- | - | -------------------------- |  | ------ | -
|Interest*Rate |   |  | Minimum Term      |  | Category                        |  | MinimumAmount |        | Balances(in thousands) |   | Percentage ofTotal 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 | %
|              |   |  |                   |  |                                 |  |               |        |                        |   |                            |  |        |  

---

|* | Represents weighted average interest rate
|- | -----------------------------------------



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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.



|                                         |  |                              |         |             |        |   |                    |   |         |                              |  |              |         |  |                    |   |  |                              |        |              |  |   |         |  |        |  
|---------------------------------------- |  | ---------------------------- | ------- | ----------- | ------ | - | ------------------ | - | ------- | ---------------------------- |  | ------------ | ------- |  | ------------------ | - |  | ---------------------------- | ------ | ------------ |  | - | ------- |  | ------ | -
|                                         |  | Balance atSeptember 30, 2006 |         | % ofDeposit |        |   | Increase(Decrease) |   |         | Balance atSeptember 30, 2005 |  | % ofDeposits |         |  | Increase(Decrease) |   |  | Balance atSeptember 30, 2004 |        | % ofDeposits | 
|                                         |  | (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 | %
|                                         |  |                              |         |             |        |   |                    |   |         |                              |  |              |         |  |                    |   |  |                              |        |              |  |   |         |  |        |  



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##### Table of Contents

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.



|                                     |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|------------------------------------ |  | ------------------------ | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                     |  | Year Ended September 30, |        
|                                     |  | 2006                     |         |             | 2005 |   |                | 2004 |            
|                                     |  | AverageBalance           |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                                     |  | (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 | %
|                                     |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  

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



|             |  |                        |         |      |   |         |  |   |        
|------------ |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|             |  | 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
|             |  |                        |         |      |   |         |  |   |        

The following table sets forth the amount and maturities of time deposits at September 30,
2006.



|             |  |                    |         |            |   |            |  |              |        |       |   |        |  |   |        
|------------ |  | ------------------ | ------- | ---------- | - | ---------- |  | ------------ | ------ | ----- | - | ------ |  | - | -------
|Rate         |  | Less Than One Year |         | 1  2Years |   | 2  3Years |  | After 3Years |        | 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
|             |  |                    |         |            |   |            |  |              |        |       |   |        |  |   |        



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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, 2006. At such date, such deposits represented 21.6% of total deposits and had a weighted average rate of 4.55%.



|                              |  |                         |        
|----------------------------- |  | ----------------------- | -------
|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 following table sets forth the savings activities of the Bank for the periods indicated.



|                                    |  |                  |          |   |      |   |          |      |  |   |          |  
|----------------------------------- |  | ---------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                    |  | 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   |  
|                                    |  |                  |          |   |      |   |          |      |  |   |          |  

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.

Borrowings. 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, 2006, the
Bank had $118.0 million in 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.

The trust preferred securities issued by the Business Trust and the junior subordinated debentures 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, 2006 was 9.16%. The junior subordinated debentures are the sole assets of the 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. The $12.5 million proceeds from the subordinated debt securities are includable as part of Tier 1 regulatory capital for the Bank.



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Payments to be made by the Business 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 3.65% 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 the interest adjustment date following June 30, 2007, 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.

On 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 junior 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.

The trust preferred securities and junior 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,
2006 was 8.51%. 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.

In 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.

Subsidiary Activities

As a federally chartered savings 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, 2006, the Bank was authorized to invest up to approximately $23.6 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.

The Bank has one subsidiary
service corporation, Ebenezer Road, Inc. (Ebenezer Road). 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, 2006. During the year ended September 2005, Baltimore County Service Corporation was dissolved. It conducted no business for the last three years.



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Competition

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.

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 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 the FDIC as of June 30, 2006, the Bank estimates that at September 30, 2006, it had approximately
..67% of deposits held by all banks and savings institutions in the Baltimore Metropolitan Area.

Employees

As of September 30, 2006, the Company had 150 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.

Depository Institution Regulation

General. The Bank is a federally chartered savings institution, is a member of the FHLB of Atlanta and its deposits are insured by the FDIC
(FDIC) through the Deposit Insurance Fund. 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 Deposit Insurance Fund. 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. Certain of the laws and regulations governing the Bank and Company are described
below. However, the description does purport to be a complete discussion of the legal and regulatory requirements to which the Bank and Company are subject and is qualified in its entirety by reference to the actual laws and regulations.

Regulatory Capital Requirements. Under the OTSs 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 is rated composite 1 CAMELS under the OTS examination rating system) of adjusted total assets and total capital
(a combination of core and supplementary capital) equal to at least 8.0% of risk-weighted assets. In addition, 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 4.0% (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.

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 subsidiaries, certain nonwithdrawable accounts and pledged deposits. Core capital is generally reduced by the



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##### Table of Contents

amount of the savings institutions intangible assets. Limited exceptions to the 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
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, 2006, the Bank had no such investments.

Adjusted 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.

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 allowances for loan and lease losses and up to 45% of unrealized net 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 equity investments other than those deducted from 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 risk-based capital requirement is measured against risk-weighted assets which equal the sum of 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 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 of one-to-four-family residences pre-sold to home purchasers are assigned a risk weight of 50%. 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, 2006 see Note 14 of Notes to Consolidated Financial Statements.

The risk-based capital requirements of the OTS also require that savings institutions with more than a normal level of interest rate risk to maintain additional total capital. A savings institutions interest rate 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, 2006.

In addition to requiring generally applicable capital standards for savings institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets as the OTS determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. Such circumstances would include a
high degree of exposure to interest rate risk, concentration of credit risk and certain risks arising from non-traditional activity. The OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or
unsound practice and may issue a directive requiring any savings institution which fails to maintain capital at or above the minimum level required by the OTS to submit and adhere to a plan for increasing capital.



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Qualified Thrift Lender Test. A savings institution that does not meet the Qualified Thrift Lender
(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 any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for both a national bank and a savings institution; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain
any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. In addition, any company that controls a savings institution that fails to qualify as
a QTL will be required to register as, and to 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).

To 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.

At September 30, 2006,
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.

Dividend Limitations. Under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distributions if,
after making the distribution, it would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a Tier 1 leverage ratio of less than 4.0%. See Prompt
Corrective Regulatory Action. Under OTS regulations, the Bank is not permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for
the benefit of certain depositors of the Bank at the time of its conversion to stock form.

Savings institutions must submit notice to the
OTS prior to making a capital distribution if (a) they would not be well-capitalized after the distribution, (b) the distribution would result in the retirement of any of the institutions common or preferred stock or debt counted as
its regulatory capital, or (c) the institution is a subsidiary of a holding company. A savings institution must make application to the OTS to pay a capital distribution if (w) the institution would not be adequately capitalized following
the distribution, (x) the institutions total distributions for the calendar year exceeds the institutions net income for the calendar year to date plus its net income (less distributions) for the preceding two years, the savings
association is not eligible for expedited treatment under OTS regulations (generally, examination and Community Reinvestment Act ratings in one of the two top categories), or (y) the distribution would otherwise violate applicable
law or regulation or an agreement with or condition imposed by the OTS.

In addition to the foregoing, earnings of the Bank appropriated to
bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to the Company without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. See Taxation. The Company intends to make full use of this favorable tax treatment afforded to the Bank and the Company and does not contemplate use of any earnings of the Bank in a manner which
would limit either institutions bad debt deduction or create federal tax liabilities.



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Insurance of Deposit Accounts. The Banks deposits are insured up to applicable limits by the
Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC recently amended 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 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 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 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.

The Reform Act also provided for a one-time credit for eligible institutions based on
their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits can be used to offset assessments until exhausted. The Banks one-time credit is expected to
be approximately $434,000. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

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.

The Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC as the level that the fund should achieve, was established by the agency at 1.25% for 2007.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC or the Office of Thrift Supervision. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

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 of the FHLB of Atlanta, the Bank is required to acquire
and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock at September 30, 2006 of $ 7.0 million. The FHLB of Atlanta serves as a reserve or central bank
for its member institutions within its assigned district. At September 30, 2006, the Bank had $118.0 million in advances outstanding from the FHLB of Atlanta.

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, the effect of the reserve requirement is to reduce the amount of the institutions interest-earning assets. As of September 30, 2006, the Bank met its reserve requirements.



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Prompt 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 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.

Under 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.



|                                |  |                  |  |                       |  |                  |  |                              
|------------------------------- |  | ---------------- |  | --------------------- |  | ---------------- |  | -----------------------------
|                                |  | 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%               

---

|* | 3.0% if institution has composite 1 CAMELS rating.
|- | --------------------------------------------------

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.

Safety and Soundness Standards. Interagency Guidelines Establishing Standards for Safety and Soundness require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institutions business. The guidelines also establish certain basic



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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 institution is not in compliance with 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.

Lending Limits. 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 unimpaired capital and surplus of the institution. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of unimpaired capital and surplus. Savings institutions are additionally authorized to make loans to one borrower, for any purpose: (i) in an amount not to exceed $500,000, or (ii) by order of the
Director of OTS, in an amount not to 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
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.

At September 30, 2006, the Banks general lending limit was $7.3 million.

Uniform Lending Standards. Under OTS regulations, savings institutions must adopt and maintain written policies that establish appropriate limits
and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards,
prudent underwriting standards, including loan-to-value limits, that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (the Interagency Guidelines) that have been adopted by the federal bank regulators.

Management believes that the Banks current lending policies conform to the Interagency Guidelines.

Transactions 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.

The Banks authority to extend credit to executive officers, directors, trustees
and 10% stockholders, as well as entities under such persons control are currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the Federal Reserve Board. Among other things, these regulations
generally require such loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans the Bank may make to such persons based, in part, on the Banks capital position, and
require certain board of directors approval procedures to be followed.

Enforcement. The OTS has primary enforcement responsibility
over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors in institution of
receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend
to the Director of the OTS that enforcement action to be taken with respect to a particular savings



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institution. If 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.

Holding Company Regulation

General. The Company and MHC are savings and loan holding companies within the meaning of federal law. As such, they are registered with the Office of Thrift Supervision and are subject to Office of Thrift
Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the Office of Thrift Supervision has enforcement authority over the Company and the MHC and their
non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the Bank.

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 activities: (1) investing in the stock of a savings association; (2) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company 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 Federal Reserve Board for 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, 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.

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 approval of interstate supervisory acquisitions by savings and loan holding companies; and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit
such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. This limitation would not prohibit an interstate merger of the subsidiary savings institution.

If 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.

Stock Holding Company Subsidiary Regulation.The Office 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.

Waivers of Dividends by the MHC.Office of Thrift 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 a case-by-case basis, and, in general, does not object to a waiver if: (i) the waiver would not be detrimental to
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



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to the mutual holding companys members. We anticipate that the MHC will waive dividends that the Company may pay, if any.

Conversion of the MHC to Stock Form.Office of Thrift Supervision regulations permit the MHC to convert 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 an exchange ratio determined at the time of conversion that ensures that stockholders other than the MHC own the same percentage of common stock in the new holding company as they owned 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.

Acquisition of Control.Under 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 loan 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.

Sarbanes-Oxley Act of 2002.On July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOX) was
signed into law which mandated a variety of reforms intended to address corporate and accounting fraud. SOX contained provisions which amend the Securities Exchange Act of 1934, as amended (the Act) and provisions which directed the SEC
to promulgate rules. The resultant law and regulations under the Act as of the time of this annual report is set forth in the following paragraphs. SOX provided for the establishment of the Public Company Accounting Oversight Board
(PCAOB), which enforces auditing, quality control and independence standards for firms that audit Securities and Exchange Commission (SEC)-reporting companies and is funded by 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.

Longer prison 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. Executives
are also prohibited from trading during retirement plan "blackout" periods, and loans to company executives are restricted. Directors and executive 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.

SOX 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.

It is unlawful for any person that is not a registered public accounting firm (RPAF) to audit an SEC-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



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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. SOX 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.

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.

USA 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.

Taxation

General. The Company and the Bank,
together with the Banks subsidiaries, file a consolidated federal income tax return based on a fiscal year ending September 30. Consolidated returns have the effect of deferring gain or loss on intercompany transactions and allowing
companies included within the consolidated return to offset income against losses under certain circumstances.

Federal 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).

Earnings
appropriated to an institutions bad debt reserve and claimed as a tax deduction were not available for the payment of cash dividends or for distribution to stockholders (including distributions made on dissolution or liquidation), unless such
amount was included in taxable income, along with the amount deemed necessary to pay the resulting federal income tax.

Beginning with the
first taxable year beginning after December 31, 1995, savings institutions, such as the Bank, are treated the same as commercial banks. Associations 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 Banks tax returns were last audited for the year ended September 30, 1994.



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Under 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 state of Maryland imposes an income tax of approximately 7% on income measured substantially the same as federally
taxable income. The state of Maryland currently assesses a personal property tax for December 2000 and forward.

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



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------

SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA

Selected Consolidated Financial Condition Data



|                               |  |                  |         |      |   |         |  |      |         |      |   |         |  |   |        
|------------------------------ |  | ---------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                               |  | At September 30,
|                               |  | 2006             |         | 2005 |   | 2004    |  | 2003 |         | 2002
|                               |  | (In Thousands)  
|Total assets                   |  | $                | 785,857 |      | $ | 812,745 |  | $    | 773,618 |      | $ | 668,198 |  | $ | 587,065
|Loans receivable, net          |  |                  | 463,776 |      |   | 454,347 |  |      | 386,136 |      |   | 365,055 |  |   | 396,617
|Investment securities:         |  |                  |         |      |   |         |  |      |         |      |   |         |  |   |        
|Available for sale             |  |                  | 143,068 |      |   | 151,386 |  |      | 158,948 |      |   | 121,290 |  |   | 45,083 
|Held to maturity               |  |                  | 4,496   |      |   | 1,995   |  |      | 2,497   |      |   | 2,500   |  |   | 4,496  
|Mortgage-backed securities     |  |                  |         |      |   |         |  |      |         |      |   |         |  |   |        
|Available for sale             |  |                  | 86,801  |      |   | 112,120 |  |      | 144,260 |      |   | 116,204 |  |   | 60,411 
|Held to maturity               |  |                  | 28,675  |      |   | 26,470  |  |      | 26,631  |      |   | 18,394  |  |   | 33,691 
|FHLB stock                     |  |                  | 6,972   |      |   | 8,060   |  |      | 6,105   |      |   | 3,305   |  |   | 3,940  
|Deposits                       |  |                  | 604,845 |      |   | 597,669 |  |      | 580,622 |      |   | 551,929 |  |   | 498,785
|FHLB advances                  |  |                  | 118,473 |      |   | 144,796 |  |      | 120,920 |      |   | 32,268  |  |   | 26,968 
|Trust Preferred Securities     |  |                  |        |      |   |        |  |      |        |      |   | 22,500  |  |   | 12,500 
|Junior Subordinated Debentures |  |                  | 23,197  |      |   | 23,197  |  |      | 23,197  |      |   |        |  |   |       
|Stockholders equity           |  |                  | 33,421  |      |   | 42,040  |  |      | 44,129  |      |   | 44,768  |  |   | 45,306 

Selected Consolidated Operations Data



|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                        |  | For the Years Ended September 30,
|                                                        |  | 2006                              |         |   | 2005 |   | 2004   |  | 2003 |        | 2002
|                                                        |  | (In Thousands)                   
|Interest income                                         |  | $                                 | 39,995  |   |      | $ | 36,223 |  | $    | 32,234 |      | $ | 33,167 |  | $ | 28,480
|Interest expense                                        |  |                                   | 25,776  |   |      |   | 20,384 |  |      | 16,362 |      |   | 16,107 |  |   | 14,946
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Net interest income                                     |  |                                   | 14,219  |   |      |   | 15,839 |  |      | 15,872 |      |   | 17,060 |  |   | 13,534
|Provision for loan losses (1)                           |  |                                   | 194     |   |      |   | 453    |  |      | 708    |      |   | 1,359  |  |   | 509   
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses (1) |  |                                   | 14,025  |   |      |   | 15,386 |  |      | 15,164 |      |   | 15,701 |  |   | 13,025
|Other income (1)                                        |  |                                   | 1,501   |   |      |   | 2,140  |  |      | 1,600  |      |   | 1,587  |  |   | 1,053 
|Non-interest expenses                                   |  |                                   | 26,968  |   |      |   | 16,814 |  |      | 15,735 |      |   | 15,336 |  |   | 11,363
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|(Loss) income before income taxes                       |  |                                   | (11,442 | ) |      |   | 712    |  |      | 1,029  |      |   | 1,952  |  |   | 2,715 
|Income tax (benefit) provision                          |  |                                   | (4,049  | ) |      |   | 111    |  |      | 144    |      |   | 655    |  |   | 984   
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Net (loss) income                                       |  | $                                 | (7,393  | ) |      | $ | 601    |  | $    | 885    |      | $ | 1,297  |  | $ | 1,731 
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Net (loss) income per share of Common Stock:            |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Basic                                                   |  | $                                 | (1.26   | ) |      | $ | .10    |  | $    | .15    |      | $ | .23    |  | $ | .31   
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Diluted                                                 |  | $                                 | (1.26   | ) |      | $ | .10    |  | $    | .15    |      | $ | .22    |  | $ | .30   
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       
|Cash dividend declared per share                        |  | $                                 | .50     |   |      | $ | .50    |  | $    | .50    |      | $ | .50    |  | $ | .50   
|                                                        |  |                                   |         |   |      |   |        |  |      |        |      |   |        |  |   |       

---

|(1) | As restated for the years ended September 30, 2006, 2005 and 2004.
|--- | ------------------------------------------------------------------



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Key Operating Ratios:



|                                                                                                                        |  |                                        |    |  |        |   |  |        |   |  |        |   |  |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | -- |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                                                                                                        |  | At or for the Year Ended September 30, |   
|                                                                                                                        |  | 2006                                   |    |  | 2005   |   |  | 2004   |   |  | 2003   |   |  | 2002   |  
|Performance Ratios:                                                                                                     |  |                                        |    |  |        |   |  |        |   |  |        |   |  |        |  
|Return on average assets (net (loss) income divided by average total assets)                                            |  | (.92                                   | )% |  | .08    | % |  | .12    | % |  | .21    | % |  | .37    | %
|Return on average equity (net (loss) income divided by average equity)                                                  |  | (19.86                                 | )  |  | 1.40   |   |  | 2.03   |   |  | 2.94   |   |  | 4.01   |  
|Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost) |  | 1.96                                   |    |  | 2.16   |   |  | 2.43   |   |  | 2.81   |   |  | 2.94   |  
|Net interest margin (net interest income divided by average interest-earning assets)                                    |  | 1.89                                   |    |  | 2.15   |   |  | 2.41   |   |  | 2.90   |   |  | 3.15   |  
|Ratio of average interest-earning assets to average interest-bearing liabilities                                        |  | 98.30                                  |    |  | 99.68  |   |  | 99.48  |   |  | 103.38 |   |  | 105.92 |  
|Ratio of non-interest expense to average total assets                                                                   |  | 3.35                                   |    |  | 2.12   |   |  | 2.20   |   |  | 2.46   |   |  | 2.46   |  
|Dividend payout ratio (dividend declared per share divided by net income per share)                                     |  | n/m                                    |    |  | 500.00 |   |  | 333.33 |   |  | 217.39 |   |  | 161.29 |  
|                                                                                                                        |  |                                        |    |  |       
|Asset Quality Ratios:                                                                                                   |  |                                        |    |  |        |   |  |        |   |  |        |   |  |        |  
|Nonperforming assets to total assets at end of period                                                                   |  | .32                                    |    |  | .09    |   |  | .11    |   |  | .09    |   |  | .28    |  
|Nonperforming loans to gross loans at end of period                                                                     |  | .51                                    |    |  | .15    |   |  | .21    |   |  | .08    |   |  | .33    |  
|Allowance for loan losses to gross loans at end of period                                                               |  | .56                                    |    |  | .57    |   |  | .63    |   |  | .70    |   |  | .55    |  
|Allowance for loan losses to nonperforming loans at end of period                                                       |  | 109.30                                 |    |  | 372.09 |   |  | 296.67 |   |  | 899.33 |   |  | 158.09 |  
|Provision for loan losses to gross loans                                                                                |  | .04                                    |    |  | .09    |   |  | .17    |   |  | .12    |   |  | .12    |  
|Net charge-offs to average loans outstanding                                                                            |  | .06                                    |    |  | .07    |   |  | .22    |   |  | .22    |   |  | .09    |  
|                                                                                                                        |  |                                        |    |  |       
|Capital Ratios:                                                                                                         |  |                                        |    |  |        |   |  |        |   |  |        |   |  |        |  
|Equity to total assets at end of period                                                                                 |  | 4.25                                   |    |  | 5.17   |   |  | 5.70   |   |  | 6.70   |   |  | 7.72   |  
|Average equity to average assets                                                                                        |  | 4.63                                   |    |  | 5.42   |   |  | 6.08   |   |  | 7.09   |   |  | 8.61   |  



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

General

The Company was formed in June 1998 by the Bank to become the holding company for the Bank following the Banks reorganization into the mutual
holding company form of organization (the Reorganization). As part of the Reorganization, the Company became a majority-owned subsidiary of the MHC. The Reorganization was consummated on July 8, 1998.

The Companys net income is dependent primarily on its net interest income, which is the difference between interest income earned on its interest
earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate
spread) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Companys interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. To a lesser extent, the Companys net income also is affected by the level of other income, which primarily consists of fees and charges, and levels of non-interest expenses such as salaries and related expenses.

The operations of the Company are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and
regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are
influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Companys market area.

Strategic Overview

With the addition of a new President and Chief Executive Officer, the
Companys Board of Directors has identified a long-term strategy to improve earnings. The strategy has three initiatives:



| |  |  | Transformation of the Balance Sheet - The Company will seek to transform the Companys balance sheet by emphasizing assets and liabilities that allow
the Company to increase its net interest margin while reducing exposure to risk from interest rate fluctuations. The Company will seek to increase gradually its investment in high quality, commercial real estate loans and commercial business loans,
which will be funded through the gradual sale of and redeployment of payments on mortgage-backed securities, while maintaining or even decreasing asset size. Commercial real estate loans and commercial business loans generally have higher yields
than single-family mortgage loans and mortgage-backed securities and tend to have shorter terms to maturity or adjustable interest rates.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase Non-interest Income - The Board of Directors has directed management to identify opportunities within the organization to generate increased
non-interest income. The Company will seek to capitalize on its existing branch network by developing additional products and/or services to offer its existing customers, although no specific new products or services have been selected at this time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued Expense Control - In recent years, management has achieved success in reducing the Companys non-interest expenses such as losses on
repossessed automobiles and decreases in personnel cost. The Board of Directors will continue to make it a management priority to identify cost savings opportunities throughout all phases of the Companys operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

While these initiatives represent the strategy the Board of Directors will pursue, this strategy may not increase the
Companys income for a long period of time, if at all. The success of the Companys strategy is subject to many factors, including all the factors listed below under Forward-Looking Statements and the risk factors listed in
Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended September 30, 2006.



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In addition, it should be noted that commercial real estate loans generally expose a lender to greater
risk of non-payment and loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the
estimate of the propertys value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential
mortgage loans. Commercial business loans expose a lender to additional risks since they typically are made on the basis of the borrowers ability to make repayments from the cash flow of the borrowers business and are secured by non-real
estate collateral that may depreciate over time.

Supervisory Agreement

On December 8, 2005, the Bank entered into a Supervisory Agreement with the Office of Thrift Supervision (OTS).

Pursuant to the terms of Supervisory Agreement, the Bank agreed as follows:



| | (1) | To review and revise as necessary the Banks written policy for compliance with the Bank Secrecy Act (the BSA) laws and regulations (the BSA Compliance
Program). In amending the BSA Compliance Program, the Board of Directors must: (i) review and revise as necessary the Banks written methodology for assigning risk levels; (ii) strengthen the Banks customer identification
program; (iii) review and revise as necessary the Banks written internal controls, due diligence processes and oversight and monitoring procedures; (iv) strengthen the Banks currency transaction reporting procedures;
(v) review and revise as necessary the Banks specific review procedures to ensure the accurate completion and timely filing of all currency transaction reports; and (vi) complete all other actions discussed in the Banks 2005
examination. The Board also must review the Banks BSA Compliance Program on an annual basis to assess its adequacy and compliance with applicable BSA laws and regulations and, within 60 days, review and revise the Banks policies and
procedures for conducting annual independent testing of the Banks BSA Compliance Program.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | To review and amend as necessary the Banks Flood Disaster Protection Act Policy and procedures to ensure that appropriate flood insurance, if required, is obtained and
maintained for all properties securing a loan from the Bank.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | To review and revise as necessary the Banks written indirect automobile loan underwriting policies and procedures.
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (4) | Within 60 days, to prepare, adopt and submit for review and approval by the OTS a comprehensive three year business plan that considers the Banks existing operations, business
strategies, current market conditions, local demographics, earnings, available resources and existing capital levels.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Supervisory Agreement will remain in effect until terminated, modified, or suspended in writing by the OTS.

The Bank has fully adopted and
implemented the various plans, policies and procedures required by the Supervisory Agreement. A failure to comply with the Supervisory Agreement could result in the initiation of a formal enforcement action by the OTS, including the imposition of
civil monetary penalties. While the Supervisory Agreement is expected to result in additional regulatory compliance expense for the Company, the amount of such expense is not anticipated to have a material financial impact on the Company. The Bank
has filed its business plan with the OTS and under the terms of the agreement may not make deviations from the plan without prior OTS approval.

The foregoing information does not purport to be a complete summary of the Supervisory Agreement and is qualified in its entirety by reference to the Supervisory Agreement filed as Exhibit 99 to the Companys Current Report on Form 8-K
filed on December 14, 2005.



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Significant Event

On June 29, 2006, the Company announced that it had been victimized by a check kiting scheme perpetrated by one of its commercial deposit customers. The Company sustained an after tax loss during the year ended
September 30, 2006 of $6.9 million. The Company has a federal net operating carry forward loss of $11.7 million which expires in 2026. The Company is aggressively pursuing collection of the check kiting loss from the customer, and there is also
the possible recovery from insurance policies. The customer has filed for bankruptcy, and the recovery process is expected to require an extended period of time to resolve. Notwithstanding this loss, the Bank will continue to satisfy all regulatory
capital requirements and will be well capitalized under applicable government regulations.

Critical Accounting Policies and Estimates

Managements discussion and analysis of the Companys financial condition is based on the consolidated financial statements,
which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses.

Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in
the preparation of the consolidated financial statements. The allowance for loan losses is based on managements evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management
believes the allowance for loan losses is a significant estimated loss and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business
and economic conditions and managements estimation of losses. The use of different estimates or assumptions could produce different provisions for loan losses. Refer to the discussion of Allowance for Loan Losses in Note 1 to the Consolidated
Financial Statements for a detailed description of managements estimation process and methodology related to the allowance for loan losses.

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term other than temporary is not intended to indicate a permanent decline in value. Rather, it means that the
prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews criteria such as the magnitude
and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized.

The Company accounts for income taxes under the asset/liability method. Deferred tax
assets are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established for deferred tax assets when, in the judgment of management, it is more likely than not that such
deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Companys control. It is at least reasonably possible that
managements judgment about the need for a valuation allowance for deferred tax assets could change in the near term.



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Forward-Looking Statements

When 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.

The Company does not undertake, and specifically disclaims
any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated
events.

Asset/Liability Management

The Company strives to achieve consistent net interest income and reduce its exposure to adverse changes in interest rates by attempting to match the terms to re-pricing of its interest-sensitive assets and liabilities. Factors beyond the
Banks control, such as market interest rates and competition, may also have an impact on the Banks interest income and interest expense.

In the absence of any other factors, the overall yield or return associated with the Banks earning assets generally will increase from existing levels when interest rates rise over an extended period of time,
and conversely interest income will decrease when interest rates decrease. In general, interest expense will increase when interest rates rise over an extended period of time, and conversely interest expense will decrease when interest rates
decrease. By managing the increases and decreases in its interest income and interest expense which are brought about by changes in market interest rates, the Bank can significantly influence its net interest income.

The senior officers of the Bank meet on a regular basis to monitor the Banks interest rate risk position and to set prices on loans and deposits to
manage interest rate risk within the parameters set by the Board of Directors. The President of the Bank reports to the Board of Directors on a regular basis on interest rate risk and trends, as well as liquidity and capital ratios and requirements.
The Board of Directors reviews the maturities of the Banks assets and liabilities and establishes policies and strategies designed to regulate the Banks flow of funds and to coordinate the sources, uses and pricing of such funds. The
first priority in structuring and pricing the Banks assets and liabilities is to maintain an acceptable interest rate spread while reducing the net effects of changes in interest rates. The Banks management is responsible for
administering the policies and determinations of the Board of Directors with respect to the Banks asset and liability goals and strategies.

The Banks principal strategy in managing interest rate risk has been to emphasize the acquisition of short- and intermediate-term assets, including locally originated short term (15-years or less) fixed-rate mortgage loans and
consumer loans. In addition, in managing its portfolio of investment securities and mortgage-backed securities, the Bank in recent quarters has purchased investment securities so as to reduce the Banks exposure to fluctuations in interest
rates by purchasing adjustable rate mortgage backed securities and step-up agency notes. To further manage interest rate risk, the Bank may sell long term fixed rate loans into the secondary market, while retaining the servicing of said loans. In
addition to shortening the average repricing period of its assets, the Bank has sought to lengthen the average maturity of its liabilities by adopting a tiered pricing program for its certificates of deposit, which provides higher rates of interest
on its longer term certificates in order to encourage depositors to invest in certificates with longer maturities.



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##### Table of Contents

Market Risk

Management measures the Banks interest rate risk by computing estimated changes in the net portfolio value (NPV) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. NPV represents the market value of portfolio equity and is the difference between incoming and outgoing discounted cash flows from assets and liabilities, with adjustments made for off-balance sheet items. These
computations estimate the effect on the Banks NPV of sudden and sustained increases and decreases in market interest rates. The Banks Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the
Banks estimated NPV in the event of 1%, 2% and 3% increases in market interest rates, and in the event of a 1%, decrease in market interest rates. The following table presents the Banks projected change in NPV for the various rate shock
levels at September 30, 2006. All changes meet the Banks policy requirements.



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##### Table of Contents

|                |          |                        |              |                          |              |         |               |      |  |            |   |  |        
|--------------- | -------- | ---------------------- | ------------ | ------------------------ | ------------ | ------- | ------------- | ---- |  | ---------- | - |  | -------
|Change in Rates |          | Net Portfolio Value    |              | NPV as % of PV of Assets
|                | $ Amount |                        | $ Change (1) |                          | % Change (2) |         | NPV Ratio (3) |      |  | Change (4)
|                |          | (Dollars in Thousands) |              |                          |              |         |               |      | 
|+300 bp         |          | $                      | 44,489       |                          | $            | -24,678 |               | -36% |  | 5.87       | % |  | -278 bp
|+200 bp         |          |                        | 53,298       |                          |              | -15,869 |               | -23  |  | 6.91       |   |  | -175 bp
|+100 bp         |          |                        | 61,829       |                          |              | -7,337  |               | -11  |  | 7.87       |   |  | -79 bp 
|0 bp            |          |                        | 69,829       |                          |              |         |               |      |  | 8.66       |   |  |        
|-100 bp         |          |                        | 74,849       |                          |              | 5,682   |               | 8    |  | 9.24       |   |  | 58 bp  
|-200 bp         |          |                        | 80,520       |                          |              | 11,353  |               | 16   |  | 9.81       |   |  | 116 bp 

---

|(1) | Represents the excess (deficiency) of the estimated NPV assuming the indicated change in interest rates minus the estimated NPV assuming no change in interest rates.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates.
|--- | --------------------------------------------------------------------------------------------------------------------------



|(3) | Calculated as the estimated NPV divided by average total assets.
|--- | ----------------------------------------------------------------



|(4) | Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

***Risk Measures: 200 bp rate shock***



|                                              |  |                  |   |  |        |  
|--------------------------------------------- |  | ---------------- | - |  | ------ | -
|                                              |  | At September 30, |  
|                                              |  | 2006             |   |  | 2005   |  
|Pre-Stock NPV Ratio: NPV as % of PV of Assets |  | 8.66             | % |  | 8.87   | %
|Exposure Measure: Post Shock NPV Ratio        |  | 6.91             |   |  | 5.97   |  
|Sensitivity Measure: Change in NPV Ratio      |  | 175 bp           |   |  | 290 bp |  

The above table indicates that at September 30, 2006, in the event of sudden and sustained
increases in prevailing market interest rates, the Banks NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Banks NPV would be expected to increase, by a
much smaller amount than if there were an increase in interest rates. The Banks Board of Directors reviews the Banks NPV position quarterly, and, if estimated changes in NPV are not within the targets established by the Board, the Board
may direct management to adjust its asset and liability mix to bring interest rate risk within Board approved targets. At September 30, 2006, the Banks estimated changes in NPV were within the targets established by the Board of
Directors.

NPV is calculated by the Office of Thrift Supervision (OTS) by using information provided by the Bank. The calculation is based
on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by Bloomberg quotations and surveys performed during the quarter ended September 30, 2006, with adjustments made to
reflect the shift in the Treasury yield curve between the survey date and the quarter-end date.

Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do
not contemplate any actions the Bank may undertake in response to changes in interest rates.

Certain shortcomings are inherent in the
method of analysis presented in the computation of NPV. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Additionally, certain assets, such
as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in the Banks portfolio could decrease in future periods
if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the
tables. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.



42



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##### Table of Contents

Average Balance, Interest and Average Yields and Rates

The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and cost of
liabilities for the periods indicated and the average yields earned and rates paid. Such yield and cost are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the years ended
September 30, 2006, September 30, 2005 and September 30, 2004. Total average assets are computed using month-end balances.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or "interest rate spread,"
which banks have traditionally used as an indicator of profitability. Another indicator of net interest income is "net interest margin," which is its net interest income divided by the average balance of interest-earning assets.



|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|-------------------------------------------------------------------------------- |  | ------------------------ | ------- | -------- | ---- | ----------------- |  | ----- | -------------- |  | -------- | ------- | ----------------- | - | ------ | -------------- | ----- | -------- |  | ----------------- | ------- |  | - | ------ |  | ----- | -
|                                                                                 |  | Year Ended September 30, |        
|                                                                                 |  | 2006                     |         |          | 2005 |                   |  | 2004  |               
|                                                                                 |  | AverageBalance           |         | Interest |      | AverageYield/Cost |  |       | AverageBalance |  | Interest |         | AverageYield/Cost |   |        | AverageBalance |       | Interest |  | AverageYield/Cost |        
|                                                                                 |  | (Dollars in Thousands)   |        
|Interest-earning assets:                                                         |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Loans receivable (1)                                                             |  | $                        | 462,799 |          | $    | 28,352            |  | 6.13  | %              |  | $        | 412,093 |                   | $ | 24,286 |                | 5.89  | %        |  | $                 | 364,260 |  | $ | 22,056 |  | 6.06  | %
|Mortgage backed securities                                                       |  |                          | 124,458 |          |      | 5,095             |  | 4.09  |                |  |          | 161,415 |                   |   | 6,231  |                | 3.86  |          |  |                   | 142,337 |  |   | 5,548  |  | 3.90  |  
|Investment securities and FHLB stock                                             |  |                          | 160,365 |          |      | 6,342             |  | 3.95  |                |  |          | 162,138 |                   |   | 5,637  |                | 3.48  |          |  |                   | 143,689 |  |   | 4,552  |  | 3.17  |  
|Other interest-earning assets                                                    |  |                          | 3,372   |          |      | 206               |  | 6.11  |                |  |          | 2,578   |                   |   | 69     |                | 2.68  |          |  |                   | 7,471   |  |   | 78     |  | 1.04  |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total interest earning assets                                                    |  |                          | 750,994 |          |      | 39,995            |  | 5.33  |                |  |          | 738,224 |                   |   | 36,223 |                | 4.91  |          |  |                   | 657,757 |  |   | 32,234 |  | 4.90  |  
|Bank Owned Life Insurance                                                        |  |                          | 12,913  |          |      |                   |  |       |                |  |          | 12,242  |                   |   |        |                |       |          |  |                   | 11,912  |  |   |        |  |       |  
|Non-interest-earning assets                                                      |  |                          | 40,006  |          |      |                   |  |       |                |  |          | 40,869  |                   |   |        |                |       |          |  |                   | 46,094  |  |   |        |  |       |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total assets                                                                     |  | $                        | 803,913 |          |      |                   |  |       |                |  | $        | 791,335 |                   |   |        |                |       |          |  | $                 | 715,763 |  |   |        |  |       |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest-bearing liabilities:                                                    |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Deposits                                                                         |  | $                        | 607,952 |          | $    | 18,379            |  | 3.02  | %              |  | $        | 589,849 |                   | $ | 14,711 |                | 2.49  | %        |  | $                 | 571,105 |  | $ | 13,553 |  | 2.37  | %
|FHLB advances short-term                                                         |  |                          | 63,457  |          |      | 2,484             |  | 3.91  |                |  |          | 53,632  |                   |   | 1,471  |                | 2.74  |          |  |                   | 23,141  |  |   | 323    |  | 1.40  |  
|FHLB advances long-term                                                          |  |                          | 67,529  |          |      | 2,992             |  | 4.43  |                |  |          | 72,056  |                   |   | 2,738  |                | 3.80  |          |  |                   | 43,000  |  |   | 1,400  |  | 3.26  |  
|Junior Subordinated Debentures                                                   |  |                          | 23,197  |          |      | 1,921             |  | 8.28  |                |  |          | 23,197  |                   |   | 1,464  |                | 6.31  |          |  |                   | 22,500  |  |   | 1,086  |  | 4.83  |  
|Other liabilities                                                                |  |                          | 1,824   |          |      |                  |  |      |                |  |          | 1,864   |                   |   |       |                |      |          |  |                   | 1,449   |  |   |       |  |      |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total interest-bearing liabilities                                               |  |                          | 763,959 |          |      | 25,776            |  | 3.37  |                |  |          | 740,598 |                   |   | 20,384 |                | 2.75  |          |  |                   | 661,195 |  |   | 16,362 |  | 2.47  |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Non-interest-bearing liabilities                                                 |  |                          | 2,723   |          |      |                   |  |       |                |  |          | 7,856   |                   |   |        |                |       |          |  |                   | 11,050  |  |   |        |  |       |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total liabilities                                                                |  |                          | 766,682 |          |      |                   |  |       |                |  |          | 748,454 |                   |   |        |                |       |          |  |                   | 672,245 |  |   |        |  |       |  
|Stockholders equity                                                             |  |                          | 37,231  |          |      |                   |  |       |                |  |          | 42,881  |                   |   |        |                |       |          |  |                   | 43,518  |  |   |        |  |       |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total liabilities and stockholders equity                                       |  | $                        | 803,913 |          |      |                   |  |       |                |  | $        | 791,335 |                   |   |        |                |       |          |  | $                 | 715,763 |  |   |        |  |       |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Net interest income                                                              |  |                          |         |          | $    | 14,219            |  |       |                |  |          |         |                   | $ | 15,839 |                |       |          |  |                   |         |  | $ | 15,872 |  |       |  
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest rate spread                                                             |  |                          |         |          |      |                   |  | 1.96  | %              |  |          |         |                   |   |        |                | 2.16  | %        |  |                   |         |  |   |        |  | 2.43  | %
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Net interest margin (2)                                                          |  |                          |         |          |      |                   |  | 1.89  | %              |  |          |         |                   |   |        |                | 2.15  | %        |  |                   |         |  |   |        |  | 2.41  | %
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                          |         |          |      |                   |  | 98.30 | %              |  |          |         |                   |   |        |                | 99.68 | %        |  |                   |         |  |   |        |  | 99.48 | %
|                                                                                 |  |                          |         |          |      |                   |  |       |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  

---

|(1) | Includes nonaccrual loans.
|--- | --------------------------



|(2) | Represents net interest income divided by the average balance of interest-earning assets.
|--- | -----------------------------------------------------------------------------------------



43



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##### Table of Contents

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by old volume); and (iii) changes in rate/volume
(changes in rate multiplied by the changes in volume).



|                                     |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  
|------------------------------------ |  | -------------------------- | ------ | - | ------------ | - | ------ | ----------- |  | - | ----- | - |  | ------ | ------ | - | ---- | - | ----- | ----------- |  | - | ------ | - |  | - | ---- | - |  | - | ----- | -
|                                     |  | Year Ended September 30,   |       
|                                     |  | 2006 v. 2005               |        |   | 2005 v. 2004 |  
|                                     |  | Increase (Decrease) Due to |       
|                                     |  | Volume                     |        |   | Rate         |   |        | Rate/Volume |  |   | Total |   |  | Volume |        |   | Rate |   |       | Rate/Volume |  |   | Total  |  
|                                     |  | (In Thousands)             |       
|Interest income:                     |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  
|Loans receivable                     |  | $                          | 2,955  |   |              | $ | 989    |             |  | $ | 122   |   |  | $      | 4,066  |   |      | $ | 2,930 |             |  | $ | (619   | ) |  | $ | (81  | ) |  | $ | 2,230 |  
|Mortgage-backed securities           |  |                            | (1,422 | ) |              |   | 371    |             |  |   | (85   | ) |  |        | (1,136 | ) |      |   | 748   |             |  |   | (57    | ) |  |   | (8   | ) |  |   | 683   |  
|Investment securities and FHLB stock |  |                            | (62    | ) |              |   | 775    |             |  |   | (8    | ) |  |        | 705    |   |      |   | 583   |             |  |   | 445    |   |  |   | 57   |   |  |   | 1,085 |  
|Other interest-earning assets        |  |                            | 21     |   |              |   | 89     |             |  |   | 27    |   |  |        | 137    |   |      |   | (52   | )           |  |   | 123    |   |  |   | (80  | ) |  |   | (9    | )
|                                     |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  
|Total interest-earning assets        |  |                            | 1,492  |   |              |   | 2,224  |             |  |   | 56    |   |  |        | 3,772  |   |      |   | 4,209 |             |  |   | (108   | ) |  |   | (112 | ) |  |   | 3,989 |  
|Interest expense:                    |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  
|Deposits                             |  |                            | 451    |   |              |   | 3,121  |             |  |   | 96    |   |  |        | 3,668  |   |      |   | 444   |             |  |   | 691    |   |  |   | 23   |   |  |   | 1,158 |  
|FHLB advances short-term             |  |                            | 267    |   |              |   | 632    |             |  |   | 114   |   |  |        | 1,013  |   |      |   | 426   |             |  |   | 310    |   |  |   | 412  |   |  |   | 1,148 |  
|FHLB advances long-term              |  |                            | (144   | ) |              |   | 420    |             |  |   | (22   | ) |  |        | 254    |   |      |   | 946   |             |  |   | 234    |   |  |   | 158  |   |  |   | 1,338 |  
|Subordinate Debentures               |  |                            |       |   |              |   | 457    |             |  |   |      |   |  |        | 457    |   |      |   | 34    |             |  |   | 334    |   |  |   | 10   |   |  |   | 378   |  
|Other liabilities                    |  |                            |       |   |              |   |       |             |  |   |      |   |  |        |       |   |      |   |      |             |  |   |       |   |  |   |     |   |  |   |      |  
|                                     |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  
|Total interest-bearing liabilities   |  |                            | 574    |   |              |   | 4,630  |             |  |   | 188   |   |  |        | 5,392  |   |      |   | 1,850 |             |  |   | 1,569  |   |  |   | 603  |   |  |   | 4,022 |  
|                                     |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  
|Change in net interest income        |  | $                          | 918    |   |              | $ | (2,406 | )           |  | $ | (132  | ) |  | $      | (1,620 | ) |      | $ | 2,359 |             |  | $ | (1,677 | ) |  | $ | (715 | ) |  | $ | (33   | )
|                                     |  |                            |        |   |              |   |        |             |  |   |       |   |  |        |        |   |      |   |       |             |  |   |        |   |  |   |      |   |  |   |       |  

Comparison of Financial Condition at September 30, 2006 and 2005

During the twelve months ended September 30, 2006, the Company's assets decreased by $26.9 million, or 3.31% from $812.7 million at
September 30, 2005 to $785.8 million at September 30, 2006. The Companys interest bearing deposits in other banks increased by $1.3 million or 80.9%, from $1.6 million at September 30, 2005 to $2.9 million at September 30,
2006. The Companys investment portfolio available for sale decreased $8.3 million or 5.5%, from $151.4 million at September 30, 2005 to $143.1 million at September 30, 2006. The Companys investment portfolio held to maturity
increased by $2.5 million, or 125.4% from $2.0 million at September 30, 2005 to $4.5 million at September 30, 2006. Loans receivable, net increased by $9.5 million, or 2.1%, from $454.3 million at September 30, 2005 to $463.8 million
at September 30, 2006. The Company's mortgage-backed securities available for sale decreased by $25.3 million, or 22.6%, from $112.1 million at September 30, 2005 to $86.8 million at September 30, 2006. The Companys
mortgage-backed securities held to maturity increased by $2.2 million or 8.3% from $26.5 million at September 30, 2005 to $28.7 million at September 30, 2006. In an effort to protect against risk from rising rates the Company has placed
emphasis on short term loans such as variable rate commercial loans, home equity loans and short term mortgages. The Company increased commercial real estate loans by $35.5 million, or 40.7% from $75.0 million at September 30, 2005 to $110.0
million at September 30, 2006. Construction loans decreased by $14.8 million, or 27.5% from $53.8 million to $39.0 million due to decreased demand from individual builders. The Bank updates its three year business plan every year as part of its
budget process. The current plan calls for minimal growth until interest margins return to an amount sufficient to allow growth. An increase in deposits will be offset by decreases in levels of borrowings. New loans will be made to offset payments
received on existing loans and securities. If payments received on loans exceed demand, than comparable securities may be purchased or borrowing further reduced.

Deposits increased by $7.1 million, or 1.2%, from $597.7 million at September 30, 2005 to $604.8 million at September 30, 2006. The increase in deposits was achieved through normal marketing efforts. The
growth in deposits helped to fund loan demand. Advances from Federal Home Loan Bank of Atlanta decreased by $26.3 million, or 18.2% from $144.8 million at September 30, 2005 to $118.5 million at September 30, 2006. Advances will be used
when necessary to fund loan demand if deposit growth does not meet this demand.

Stockholders equity decreased by $8.6 million or
20.5%, from $42.0 million at September 30, 2005 to $33.4 million at September 30, 2006. This decrease was primarily due to the loss of $6.9 million net of taxes due to the check-kiting fraud perpetrated against the bank. See  The
Comparison of Other Operating Results for the Years Ended September 30, 2006 and 2005 Non-Interest Expenses. Also contributing to the decrease in equity was the increase in accumulated other



44



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##### Table of Contents

comprehensive income of $476,000 from a loss of $3.9 million at September 30, 2005 to a loss of $4.4 million at September 30, 2006. These
unrealized losses are considered temporary as they reflect market values as of September 30, 2006 and are subject to change daily as interest rates fluctuate. This decrease is due to the adjustment for the available for sale securities recorded
at market value in a rising rate environment and has no impact on the Banks regulatory capital.

Comparison of Financial Condition at
September 30, 2005 and 2004

During the twelve months ended September 30, 2005, the Companys assets increased by $39.1
million, or 5.06% from $773.6 million at September 30, 2004 to $812.7 million at September 30, 2005. The Companys interest bearing deposits in other banks decreased by $1.0 million or 38.8%, from $2.6 million at September 30,
2004 to $1.6 million at September 30, 2005. The Companys investment portfolio available for sale decreased $7.5 million or 4.7%, from $158.9 million at September 30, 2004 to $151.4 million at September 30, 2005. The
Companys investment portfolio held to maturity decreased by $500,000, or 20.1% from $2.5 million at September 30, 2004 to $2.0 million at September 30, 2005. Loans receivable, net increased by $68.2 million, or 17.7%, from $386.1
million at September 30, 2004 to $454.3 million at September 30, 2005. The Company's mortgage-backed securities available for sale decreased by $32.2 million, or 22.3%, from $144.3 million at September 30, 2004 to $112.1 million at
September 30, 2005. The Companys mortgage-backed securities held to maturity decreased by $161,000 or .60% from $26.6 million at September 30, 2004 to $26.5 million at September 30, 2005. In an effort to take advantage of the
rising rate environment the Company has placed emphasis on short term loans such as variable rate commercial loans, automobile loans, home equity loans and short term mortgages. The Company increased commercial real estate loans by $10.4 million, or
16.1% from $64.6 million at September 30, 2004 to $75.0 million at September 30, 2005. The Bank updates its three year business plan every year as part of its budget process. The current plan calls for minimal growth until interest margins
return to an amount sufficient to allow growth. An increase in deposits will be offset by decreases in levels of borrowings. New loans will be made to offset payments received on existing loans and securities. If payments received on loans exceed
demand, than comparative securities may be purchased or borrowing further reduced.

Deposits increased by $17.1 million, or 2.9%, from
$580.6 million at September 30, 2004 to $597.7 million at September 30, 2005. The increase in deposits was achieved through normal marketing efforts. The growth in deposits helped to fund loan demand. Advances from Federal Home Loan Bank
of Atlanta increased by $23.9 million, or 19.7% from $120.9 million at September 30, 2004 to $144.8 million at September 30, 2005. The advances from the Federal Home Loan Bank of Atlanta were used to fund loans.

Stockholders equity decreased by $2.1 million or 4.7%, from $44.1 million at September 30, 2004 to $42.0 million at September 30, 2005,
which was partially attributable to the decrease in accumulated other comprehensive income of $2.1 million from a loss of $1.8 million at September 30, 2004 to a loss of $3.9 million at September 30, 2005. These unrealized losses are
considered temporary as they reflect market values as of September 30, 2005 and are subject to change daily as interest rates fluctuate. This decrease is due to the adjustment for the available for sale securities recorded at market value in a
rising rate environment and has no impact on the Banks regulatory capital.

Comparison of Operating Results for the Years Ended September 30,
2006 and 2005

Net Income:Net income decreased from income of $601,000 for the year ended September 30, 2005 to a net loss
of $7.4 million for the year ended September 30, 2006. The decrease was primarily due to an increase in non-interest expenses of $10.2 million, or 60.4% from $16.8 million for the year ended September 30, 2005 to $27.0 million for the year
ended September 30, 2006. Non-Interest expenses for the year ended September 30, 2006 includes a $10.8 million loss on dishonored checks as a result of the check-kiting scheme perpetrated on the Bank.

Net Interest Income:Net interest income decreased by $1.6 million or 10.2% from $15.9 million for the year ended September 30, 2005 to $14.2
million for the year ended September 30, 2006. The decrease in net interest income primarily was the result of increases in the average rate on interest bearing liabilities and an increase in the average balance of interest bearing liabilities.
Due to rising interest rates and deposits re-pricing faster than loans, the interest rate spread decreased 20 basis points from 2.16% for the year ended September 30, 2005 to 1.96% for the year ended September 30, 2006. The Companys
ratio of average interest-earning assets to average interest-bearing liabilities decreased from 99.68% for the year ended September 30, 2005 to 98.30% for the year ended September 30, 2006. The primary reason for the decrease in this ratio
is that funds are being invested in other income producing assets such as Bank Owned Life Insurance. The Companys interest rate spread has decreased due to the rising rates paid on borrowed funds and deposits not being completely offset by
rising rates for new loans. Improvements in interest spread should occur if long-term interest rates rise and the Company has



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the resources from either re-pricing assets or new funds received to re-pay the borrowed funds. If short term rates fall, the interest rate spread should
increase as borrowed funds tied to LIBOR re-price at lower rates.

Interest Income. Interest income increased by $3.8 million, or
10.4% from $36.2 million for the year ended September 30, 2005 to $40.0 million for the year ended September 30, 2006. Interest and fees on loans increased by $4.1 million, or 16.7%, from $24.3 million for the year ended September 30,
2005 to $28.4 million for the year ended September 30, 2006. This was primarily due to an increase in the average balance of loans receivable of $50.7 million from $412.1 million at September 30, 2005 to $462.8 at September 30, 2006,
and an increase in the average yield earned on loans receivable of 24 basis points from 5.89% at September 30, 2005 to 6.13% at September 30, 2006. The increase in the average balance of loans was primarily attributable to the Bank having
competitive rates and current economic conditions and managements strategy to focus lending on variable rate commercial real estate loans and short term home equity loans. The increase in the average yield was attributable to the prevailing
market rates in the economy. Interest on mortgage-backed securities decreased by $1.1 million or 18.2% from $6.2 million for the year ended September 30, 2005 to $5.1 million for the year ended September 30, 2006. This decrease was
primarily due to the decrease in the average balance of mortgage-backed securities from $161.4 million at September 30, 2005 to $124.5 million at September 30, 2006. The decrease in the average balance more than offset an increase in the
average rate from 3.9% at September 30, 2005 to 4.1% at September 30, 2006. Interest and dividends on investment securities increased by $705,000, or 12.5% from $5.6 million for the year ended September 30, 2005 to $6.3 million for
the year ended September 30, 2006. This was primarily due to an increase in the average yield on investments of 47 basis points from 3.48% for the year ended September 30, 2005 to 3.95% for the year ended September 30, 2006 due to
step up provisions on some investment securities. However, this was partially offset by a decrease in the average balance of investments of $1.7 million, from $162.1 million for the year ended September 30, 2005 to $160.4 million for the year
ended September 30, 2006.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed
money and other interest expense increased from $20.4 million for the year ended September 30, 2005 to $25.8 million for the year ended September 30, 2006 a change of $5.4 million or 26.5%. Interest on deposits increased $3.7 million from
$14.7 million at September 30, 2005 to $18.4 million at September 30, 2006 due to an increase in the average cost of deposits of 53 basis points from 2.49% for the year ended September 30, 2005 to 3.02% for the year ended
September 30, 2006. Also contributing to the increase in interest expense was an increase in the average balance of deposits of $18.1 million, or 3.1% from $589.8 million at September 30, 2005 to $607.9 million at September 30, 2006.
The Company was able to increase its deposits through normal marketing efforts. Interest on short-term borrowings increased by $1.0 million or 68.9% for the year ended September 30, 2006. Interest on long-term borrowings increased by $254,000
or 9.3% for the year ended September 30, 2006. The overall increase in interests on borrowings was primarily due to an increase in the average rate paid on short term borrowings which increased by 117 basis points from 2.7% for the year ended
September 30, 2005 to 3.9% for the year ended September 30, 2006. The average rate on long term borrowings also increased by 63 basis points from 3.8% for the year ended September 30, 2005 to 4.4% for the year ended September 30,
2006. An increase in the average balance of advances from the Federal Home Loan Bank of Atlanta of $5.3 million during the year ended September 30, 2006 also contributed to the increase in interest on borrowings. Also contributing to interest
expense was interest on the Junior Subordinated Debentures which increased by $457,000 from $1.5 million for the year ended September 30, 2005 to $1.9 million for the year ended September 30, 2006. This increase was due to the increase in
the average rate paid on the Junior Subordinated Debentures from 6.3%, during 2005 to 8.3% during 2006. The rates on the Junior Subordinate Debentures are based on LIBOR and adjust quarterly.

Provision for Loan Losses.The Companys significant accounting policies are set forth in Note 1 of Notes to Consolidated Financial
Statements. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy and estimate, because it requires managements most subjective and complex
judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Companys assessments may be impacted in future periods
by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.

The Company charges provisions for loan losses which affects earnings to maintain the total allowance for loan losses at a level management considers
adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, management considers a number of factors such as existing loan levels, prior loss experience, current economic conditions and
the probability of these conditions affecting existing loans. The Company recorded provisions for losses on loans of $194,000 for the year ended September 30, 2006, as compared to establishing a provision for losses on loans of $453,000 for the
year ended September 30, 2005.



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Loan chargeoffs for the year ended September 30, 2006 were $578,000 as compared to $677,000 for the year ended September 30, 2005 a decrease of
$99,000. The decrease in loan chargeoffs was due to prevailing low loan delinquency and a decrease in actual losses in the Banks consumer loan portfolio as the automobile loan portfolio decreases due to the discontinuation of indirect auto
lending. Loan recoveries were $317,000 for the year ended September 30, 2006 compared to $383,000 for the year ended September 30, 2005. Non performing loans at September 30, 2006 were $2.5 million as compared to $738,000 at
September 30, 2005. The total loss allowance allocated to loans is $2.7 million at September 30, 2006. In establishing such provisions, management considered an analysis of the risk inherent in the loan portfolio. For additional
information see Asset Quality.

Other Income.Other income decreased by $639,000, or 29.9% from $2.1 million for the year
ended September 30, 2005 to $1.5 million for the year ended September 30, 2006. The decrease in other income for the year ended September 30, 2006 was primarily due to the decrease in gain on sale of investments and mortgaged backed
securities of $879,000 from $884,000 for the year ended September 30, 2005 to $5,000 for the year ended September 30, 2006. The $884,000 gain on sale of investments for the year ended September 30, 2005 was primarily due to the
acquisition of Intrieve, the Banks data processing provider, by Harland for cash. The Bank owned shares of Intrieve. This was partially offset by a decrease in losses on repossessed assets of $252,000 from $276,000 for the year ended
September 30, 2005 to $24,000 for the year ended September 30, 2006. Also contributing to the decrease in other income was a decrease in fees on transaction accounts of $125,000 from $686,000 for the year ended September 30, 2005 to
$561,000 for the year ended September 30, 2006 as we eliminated fees on certain products in an effort to compete in the market and increase our transaction accounts which are our lowest cost source of funding. Income from Bank Owned Life
Insurance (BOLI ) increased $20,000 for the year ended September 30, 2006 from $454,000 for the year ended September 30, 2005, to $474,000 for the year ended September 30, 2006. This increase was due to an adjustment in the rate of
dividends earned on the BOLI investment.



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Non-interest Expenses.Total non-interest expenses increased by $10.2 million, or 60.4%, from
$16.8 million for the year ended September 30, 2005 to $27.0 million for the year ended September 30, 2006. The increase in non-interest expenses was primarily due to the occurrence of a $10.8 million loss on dishonored checks during the
year ended September 30, 2006. This loss was from a check kiting fraud perpetrated on the Bank. The Company is aggressively pursuing collection of the check kiting loss from the customer, and there is also the possible recovery from insurance
policies. The customer has filed for bankruptcy, and the recovery process is expected to require an extended period of time to resolve. Notwithstanding this loss, the Bank continues to satisfy all regulatory capital requirements and is well
capitalized under applicable government regulations. This loss was partially offset by a decrease in salaries and related expenses of $477,000 from $9.2 million for the year ended September 30, 2005 to $8.7 million for the year ended
September 30, 2006 as the Bank continued with its cost cutting strategies. Certain positions were eliminated allowing for the hiring of staff in the three new offices with a minimum increase in the overall workforce. Employee benefits were
adjusted to be less costly while still offering competitive benefits. In December 2005, the Bank ceased its indirect automobile lending operations due to the current interest rate environment. The loan rates necessary to compete in this market made
for marginal profitability. This allowed for less staffing in this area. Data processing cost decreased by $515,000 from $2.2 million for the year ended September 30, 2005 to $1.7 million for the year ended September 30, 2006. This
decrease was due to the savings generated from the conversion of data processors. In November 2005 the Company entered into a long-term contract with Fiserv to be its data service provider . The Company anticipates net savings over the life of the
contract of approximately $2.8 million. The actual number could be more or less depending on the activity and the number of accounts serviced. Occupancy expense increased by $180,000, from $2.0 million for the year ended September 30, 2005 to
$2.1 million for the year ended September 30, 2006. This was mainly due to the opening of three offices and normal increases in rent and electricity. Advertising expense decreased by $30,000 or 4.7%, from $642,000 for the year ended
September 30, 2005 to $612,000 for the year ended September 30, 2006. This decrease was due to a reduction in advertising during the period.

Income Taxes. The Companys income tax (benefit) expense was $(4.0) million and $111,000 for the year ended September 30, 2006 and 2005, respectively. The Companys effective tax rate decreased
for the year ended September 30, 2006 as compared to the same quarter in the prior year due to the tax benefit from the loss on dishonored checks.

Comparison of Operating Results for the Years Ended September 30, 2005 and 2004

Net Income.Net income
decreased by $284,000, from $885,000 for the year ended September 30, 2004 to $601,000 for the year ended September 30, 2005. The decrease was due primarily to an increase in non-interest expenses of $1.0 million. This was partially offset
by an increase in other income and decreases in the provision for loan losses and income taxes.

Net Interest Income.Net interest
income decreased by $33,000 or 0.2% from $15.9 million for the year ended September 30, 2004 to $15.8 million for the year ended September 30, 2005. The decrease in net interest income primarily was the result of increases in the average
rate on interest bearing liabilities and an increase in the average balance of interest bearing liabilities. Due to rising interest rates and deposits re-pricing faster than loans, the interest rate spread decreased 27 basis points from 2.43% for
the year ended September 30, 2004 to 2.16% for the year ended September 30, 2005. The Companys ratio of average interest-earning assets to average interest-bearing liabilities increased from 99.48% for the year ended
September 30, 2004 to 99.68% for the year ended September 30, 2005. The Companys spread has decreased due to the rising rates paid on borrowed funds and deposits not completely offset by rising rates for new loans.

Interest Income. Interest income increased by $4.0 million, or 12.4% from $32.2 million for the year ended September 30, 2004 to $36.2
million for the year ended September 30, 2005. Interest and fees on loans increased by $2.2 million, or 10.1%, from $22.1 million for the year ended September 30, 2004 to $24.3 million for the year ended September 30, 2005. This was
primarily due to an increase in the average balance of loans receivable of $47.8 million from 364.3 million at September 30, 2004 to $412.1 at September 30, 2005, despite a decrease in the average yield earned on loans receivable of
17 basis points from 6.06% at September 30, 2004 to 5.89% at September 30, 2005. The increase in the average balance of loans was primarily attributable to the Bank having competitive rates and current economic conditions and
managements strategy to focus lending on variable rate commercial loans and short term home equity loans. The decrease in the average yield was attributable to the prevailing market rates in the economy. Interest on mortgage-backed securities
increased by $683,000 or 12.3% from $5.5 million for the year ended September 30, 2004 to $6.2 million for the year ended September 30, 2005. This increase was primarily due to the increase in the average balance of mortgage-backed
securities from $142.3 million at September 30, 2004 to $161.4 million at September 30, 2005. The actual balance of mortgage-backed securities decreased, however the average balance increased due to high balances at the beginning of the
period. The increase in the average balance more than offset a decrease in the average rate from 3.9% at September 30, 2004 to 3.86% at September 30, 2005. Interest and dividends on investment securities increased by $1.0 million or 21.7%
from $4.6 million for



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the year ended September 30, 2004 to $5.6 million for the year ended September 30, 2005. This was primarily due to an increase in the average
balance of investments of $18.4 million, or 12.8% from $143.7 million for the year ended September 30, 2004 to $162.1 million for the year ended September 30, 2005. There was also an increase in the average yield on investments from 3.17%
for the year ended September 30, 2004 to 3.48% for the year ended September 30, 2005 due to step up provisions on some investment securities.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense increased from $16.4 million for the year ended September 30, 2004 to $20.4
million for the year ended September 30, 2005 a change of $4.0 million or 24.6%. Interest on deposits increased $1.1 million from $13.6 million at September 30, 2004 to $14.7 million at September 30, 2005 due to a increase in the
average yield on deposits of 12 basis points from 2.37% for the year ended September 30, 2004 to 2.49% for the year ended September 30, 2005. Also contributing to the increase in interest expense was an increase in the average balance of
deposits of $18.7 million, or 3.3% from $571.1 million at September 30, 2004 to $589.8 million at September 30, 2005. The Company was able to increase its deposits through normal marketing efforts. Interest on short-term borrowings
increased by $1.1 million or 355.4% for the year ended September 30, 2005. Interest on long-term borrowings increased by $1.3 million or 95.6% for the year ended September 30, 2005. This increase was primarily due to an increase of $59.5
million in the average balances of advances from the Federal Home Loan Bank of Atlanta during the year ended September 30, 2005. Also contributing to interest expense was interest on the Trust Preferred Securities/Junior Subordinated Debentures
which increased by $378,000 from $1.1 million for the year ended September 30, 2004 to $1.5 million for the year ended September 30, 2005. This increase was due to the increase in the average yield paid on the Junior Subordinated
Debentures from 4.83%, during 2004 to 6.31% during 2005.

Provision for Loan Losses.The Company charges provisions for loan losses
to earnings to maintain the total allowance for loan losses at a level management considers adequate to provide for probable loan losses existing within the loan portfolio as of the balance sheet date. In determining the provision, management
considers prior loss experience, current economic conditions and the probability of these conditions affecting future loan performance. The Company made a provision for losses of $453,000 for the year ended September 30, 2005, as compared to
$708,000 for the year ended September 30, 2004, representing a decrease of $255,000. This decrease was partially attributable to the decrease in historical chargeoffs, and loan delinquencies, particularly in the indirect auto loans. Loan
chargeoffs for the year ended September 30, 2005 were $677,000 as compared to $1.2 million for the year ended September 30, 2004, a decrease of $565,000. Loan recoveries were $383,000 for the year ended September 30, 2005 compared to
$423,000 for the year ended September 30, 2004. Non performing loans at September 30, 2005 were $738,000 as compared to $872,000 at September 30, 2004. The total loss allowance allocated to loans is $2.7 million. In establishing such
provisions, management considered an analysis of the risk inherent in the loan portfolio. As discussed in Note 21 to the Consolidated Financial Statements, the Company has restated its financial statements for the years ended September 31, 2006,
2005 and 2004. The restatement resulted in reducing amounts included in Loss on repossessed assets and increasing, by a similar amount, the amounts included in Provision for losses on loans. Please refer to Note 21 to the
Consolidated Financial Statements for the effects on the quarterly financial results during the years ended September 30, 2006, 2005 and 2004. The increase in Provision for losses on loans was to provide for losses that were previously
recorded as Loss on repossessed assets and not as a result of change in asset quality.

Other Income.Other
income increased by $540,000, or 33.8% from $1.6 million for the year ended September 30, 2004 to $2.1 million for the year ended September 30, 2005. This increase in other income for the year ended September 30, 2005 was primarily
attributable to a one time gain of $884,000 on investments due to the acquisition of Intrieve, the Banks data processing provider by Harland for cash. This was partially offset by an increase in the loss on repossessed assets of $242,000 from
$34,000 for the year ended September 30, 2004 to $276,000 for the year ended September 30, 2005.

Non-interest Expenses.
Total non-interest expenses increased by $1.1 million, or 6.9%, from $15.7 million for the year ended September 30, 2004 to $16.8 million for the year ended September 30, 2005. The increase in non-interest expenses was primarily due to the
increase in data processing fees of $635,000, from $1.6 million for the year ended September 30, 2004 to $2.2 million for the year ended September 30, 2005. This increase was due to the one- time penalty to terminate Intrieves
existing electronic banking contract which did not expire at the same time as the other two data processing contract. Data processing cost are expected to decrease in the future due to savings realized due to the data processing conversion to
Fiserve. Salaries and related expenses also increased by $340,000, or 3.9%. Occupancy expense also increased by $140,000, from $1.8 million for the year ended September 30, 2004 to $2.0 million for the year ended September 30, 2005. This
was mainly due to the opening of two offices and normal increases in rent and electricity. These increases were partially offset by a decrease in advertising expense. Advertising expense decreased by $228,000 or 26.2%, from $870,000 for the year
ended September 30, 2004 to $642,000 for the year ended September 30, 2005. This decrease was due to a change in the advertising mix during the period. The Bank initiated several cost cutting strategies in 2005. Certain positions were
eliminated during the year allowing for the hiring of staff in the two offices opened and one planned for 2005 with a minimum increase in the workforce. Employee benefits were adjusted to be less costly while still offering complete benefits. In
December 2005, the Bank ceased its indirect lending operations due to the current interest rate environment. The loan rates necessary to compete in this market made for marginal profitability. This allowed for less staffing in this area.

Income Taxes. The Companys income tax expense was $111,000 and $144,000 for the year ended September 30, 2005 and 2004,
respectively. The Companys effective tax rates were 15.6% and 14.0% for the year ended September 30,



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2005 and 2004, respectively. The increase in the effective tax rate was primarily attributable to the Banks earning taxable income from the gain on
sale of investments.

Liquidity and Capital Resources

The Company has no business other than that of the Bank and investing the net stock issuance proceeds retained by it. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to
the Company.

At September 30, 2006, the Bank exceeded all regulatory minimum capital requirements. For information regarding the
Banks retained earnings as reported in its financial statements at September 30, 2006 to its tangible, core and risk-based capital levels and a comparison of regulatory requirements, see Note 14 of Notes to Consolidated Financial
Statements.

The Companys primary sources of funds are deposits and proceeds from maturing investment securities and mortgage-backed
securities and principal and interest payments on loans. While maturities and scheduled amortization of mortgage-backed securities and loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and other factors.

The primary investing activities of the Company are the origination of
loans and the purchase of investment securities and mortgage-backed securities. During the years ended September 30, 2006, 2005, and 2004, the Bank had $149.1 million, $193.9 million and $148.6 million respectively, of loan originations. During
the years ended September 30, 2006, 2005 and 2004, the Company purchased investment securities in the amounts of $4.7 million, $11.5 million, and $78.9 million respectively, and mortgage-backed securities in the amounts of $6.7 million, $15.9
million, and $77.8 million respectively. The primary financing activity of the Company is the attraction of savings deposits.

The Company
has other sources of liquidity if there is a need for funds. The Bank has the ability to obtain advances from the FHLB of Atlanta. In addition, the Company maintains a portion of its investments in interest-bearing deposits at other financial
institutions that will be available, if needed.

The Banks average daily liquidity ratio for the month of September 2006 was
approximately 37.82%. Management seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide for lower rates of return, the
Banks relatively high liquidity will, to a certain extent, result in lower rates of return on assets.

The Companys most liquid
assets are cash, interest-bearing deposits in other banks and federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of
these assets are dependent on the Companys operating, financing and investing activities during any given period. At September 30, 2006, cash, interest-bearing deposits in other banks and federal funds sold totaled $8.4 million, $2.9
million and $462,000, respectively.

The Company anticipates that it will have sufficient funds available to meet its current commitments.
Certificates of deposit which are scheduled to mature in less than one year at September 30, 2006 totaled $228.4 million. Based on past experience, management believes that a significant portion of such deposits will remain with the Bank. The
Bank is a party to financial instruments with off-balance-sheet risk made in the normal course of business to meet the financing needs of its customers. These financial instruments are standby letters of credit, lines of credit and commitments to
fund mortgage loans and involve to varying degrees elements of credit risk in excess of the amount recognized in the statement of financial position. The contract amounts of those instruments express the extent of involvement the Bank has in this
class of financial instruments and represents the Banks exposure to credit loss from nonperformance by the other party. The Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit
risk. At September 30, 2006, the Bank had commitments under standby letters of credit, lines of credit and commitments to originate mortgage loans of $754,000, $30.5 million and $7.2 million, respectively. See Note 3 of Notes to Consolidated
Financial Statements.

The Company announced a stock repurchase program on February 14, 2002. The company repurchased 420 shares at an
aggregate cost of $6,000, 371 shares at an aggregate cost of $5,200 and 184 shares at an aggregate cost of $2,100 during the years ended September 30, 2004, 2005 and 2006 respectively.

In June, 2003, the Company issued $12,887,000 of junior subordinated debentures (the debentures) to BCSB Bankcorp Capital Trust I (the Trust), a Delaware
business trust, in which the Company owns all of the common equity. The debentures carry a rate of 3.65% over the three month LIBOR rate, and resets quarterly, the rate was 9.16% and 7.25% at September 30, 2006 and 2005 respectively.



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The debentures are the sole asset of BCSB Bankcorp Capital Trust I. BCSB Bankcorp Capital Trust I issued
$12,500,000 of mandatory redeemable preferred securities to investors. The Companys obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of BCSB Bankcorp Capital
Trust I obligations under the preferred securities. The Preferred securities are redeemable by the Company on or after June 30, 2007 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 interest.

In September, 2004, the Company issued $10,310,000 of junior subordinated debentures (the
debentures) to BCSB Bankcorp Capital Trust II (the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures carry a rate of 3.00% over the three month LIBOR rate, and resets quarterly, the rate was 8.51%
and 6.60% at September 30, 2006 and 2005 respectively. The debentures are the sole asset of BCSB Bankcorp Capital Trust II. BCSB Bankcorp Capital Trust II issued $10,000,000 of mandatory redeemable preferred securities to investors. The
Companys obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of BCSB Bankcorp Capital Trust II obligations under the Preferred securities. The Preferred securities
are redeemable by the Company on or 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 interest.

Pursuant to these Trust Preferred securities, the Company makes quarterly payments of principal and interest, which totaled $525,000 during the quarter
ended September 30, 2006.

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 at the holding company level, at its
November 29, 2006 meeting, the Board of Directors voted to suspend the Companys cash dividend 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 its trust preferred securities obligations. In such event, 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.

Quarterly dividends were declared on
November 23, 2005, February 22, May 24, and September 6, 2006 of 12.5¢ each. In keeping with Federal regulations, Baltimore County Savings Bank, M.H.C. (the MHC) applied for, and elected to waive
receipt of, dividends from the Company as to its shares, which amounted to 3,754,960 shares as of December 1, 2006, or 63.5% of all outstanding shares of the Companys common stock. December 2006 the Company announced that it has
determined to suspend its dividend program and has agreed with its primary regulator, the Office of Thrift Supervision, that it will not issue a dividend to its stockholders going forward without the regulators consent as the Company seeks to
implement its business plan to improve earnings, capital position and liquidity.



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Commitments, Contingencies and Off-balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit and
commitments to sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:



|                                                                                                |  |                        |        |      |   |       
|----------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                                                                                |  | September 30,         
|                                                                                                |  | 2006                   |        | 2005
|                                                                                                |  | (Dollars in Thousands)
|Commitments to originate new loans                                                              |  | $                      | 7,205  |      | $ | 16,071
|Unfunded commitments to extend credit under existing equity line and commercial lines of credit |  |                        | 30,485 |      |   | 27,023
|Commercial letters of credit                                                                    |  |                        | 754    |      |   | 701   

Commitments to originate new loans or to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line commitments for the unfunded portion of equity lines are for a term of 20 years, and commercial
lines of credit are generally renewable on an annual basis. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on managements credit evaluation of the borrower.

Contractual Obligations

The following table sets forth the Companys contractual obligations as of September 30, 2006.



|                                   |  |                        |         |            |   |            |  |              |         |       |   |        |  |   |        
|---------------------------------- |  | ---------------------- | ------- | ---------- | - | ---------- |  | ------------ | ------- | ----- | - | ------ |  | - | -------
|                                   |  | Payments due by period
|                                   |  | (Dollars in Thousands)
|                                   |  | Less than 1year        |         | 1 3 Years |   | 4 5 Years |  | Over 5 Years |         | Total
|Time Deposits                      |  | $                      | 228,357 |            | $ | 147,475    |  | $            | 56,586  |       | $ |       |  | $ | 432,418
|Long-term borrowings               |  |                        | 25,000  |            |   | 44,000     |  |              | 49,000  |       |   |       |  |   | 118,000
|Junior Subordinated Debenture      |  |                        |        |            |   |           |  |              |        |       |   | 23,197 |  |   | 23,197 
|Lease Obligations                  |  |                        | 1,201   |            |   | 1,915      |  |              | 1,686   |       |   | 7,556  |  |   | 12,358 
|                                   |  |                        |         |            |   |            |  |              |         |       |   |        |  |   |        
|Total Contractual Cash Obligations |  | $                      | 254,558 |            | $ | 193,390    |  | $            | 107,272 |       | $ | 30,753 |  | $ | 585,973
|                                   |  |                        |         |            |   |            |  |              |         |       |   |        |  |   |        



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Impact of Inflation and Changing Prices

The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in
the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Companys operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact
on the Companys performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Off-Balance Sheet Arrangements

As of the date of
this Annual Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Companys financial condition, change in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that are material to investors, except for the guarantees made by the Company with respect to the trust preferred securities issued by each of the Business Trust and the
Statutory Trust, which are discussed in the Liquidity and Capital Resources subsection of this Annual Report and in footnote 9 to the audited financial statements. The term off-balance sheet arrangement generally means
any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable
interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. Additionally, the Bank does have commitments to originate
loans in the ordinary course of business, as disclosed herein.

Impact of New Accounting Standards

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 154, Accounting Changes and Error Corrections, which changes the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle and changes required by
an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior period financial statements of changes in accounting principle,
unless it is impractical to determine either the period-specific or cumulative effects of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of this standard did not
have a material effect on financial condition, results of operations, or liquidity.

In February 2006, The FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. This statement amends Statements No. 133 and 140 by: permitting fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation; clarifying which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishing a requirement to
evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifying that concentrations of credit
risk in the form of subordination are not embedded derivatives; and amending Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. The statement is effective for fiscal years beginning after September 15, 2006. The adoption of this standard is not anticipated to have a material impact on the financial condition,
results of operations or liquidity.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assetsan amendment of FASB Statement No. 140. This statement amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. It requires an entity to recognize a
servicing asset or servicing liability each time an obligation is undertaken to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and liabilities to be
initially measured at fair value, if practicable. The statement permits the choice between the amortization method and the fair value measurement method for the subsequent measurement of the servicing assets or liabilities
and allows for a one-time reclassification of available-for-sale securities to trading securities at initial adoption. The statement also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair
value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. The statement is effective for fiscal years beginning after



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September 30, 2006. The adoption of this standard is not anticipated to have a material impact on our financial condition, results of operations or
liquidity.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement 109, which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing
authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an
adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact, if any, that the adoption may have on its
financial statements.

In September 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability and related compensation costs for endorsement split-dollar life insurance
policies that provide a benefit to an employee that extends to postretirement periods as defined in SFAS No. 106,  Employers Accounting for Postretirement Benefits Other Than Pensions. The EITF reached a consensus that Bank
Owned Life Insurance policies purchased for this purpose do not effectively settle the entitys obligation to the employee in this regard and thus the entity must record compensation cost and a related liability. Entities should recognize the
effects of applying this Issue through either, (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the balance sheet as of the beginning of the year
of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. Management is currently evaluating the impact of adopting this Issue on the Companys financial statements. This Issue is
effective for fiscal years beginning after December 15, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. While the Statement applies under other accounting
pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Management does not expect the adoption of this Statement to have a material impact on the Companys consolidated financial statements.

In September 2006, the Securities and Exchange Commission (the SEC) released Staff Accounting Bulletin No. 108 (SAB 108),
which provides detail in the quantification and correction of financial statement misstatements. SAB 108 specifies that companies should apply a combination of the rollover and iron curtain methodologies when making
determinations of materiality. The rollover method quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies misstatements based on the effects of correcting the
misstatement existing in the balance sheet at the end of the current year, regardless of the year(s) of origination. SAB 108 instructs companies to quantify the misstatement under both methodologies and if either method results in the determination
of a material error, then the company must adjust its financial statements to correct the error. SAB 108 also reminds preparers that a change from an accounting principle that is not generally accepted to a principle that is generally accepted is a
correction of an error. The Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Management does not expect the adoption of this Bulletin to have a material impact on the
Companys consolidated financial statements.



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

LOGO



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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.

As discussed in Note 21, Restatement, certain reclassifications were made to the consolidated statements of operations and cash
flows to correct errors in presentation.

LOGO

Beard Miller Company LLP

Baltimore, Maryland

November 30, 2004, except for Note 21, Restatement, as to which the date is July 13, 2007



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                          |  | September 30,                               |        
|                                                                                                                                                          |  | 2006                                        |         |   | 2005 |  
|                                                                                                                                                          |  | (dollars in thousandsexcept per share data) |        
|Assets                                                                                                                                                    |  |                                             |         |   |      |   |         |  
|Cash                                                                                                                                                      |  | $                                           | 8,421   |   |      | $ | 21,713  |  
|Interest bearing deposits in other banks                                                                                                                  |  |                                             | 2,854   |   |      |   | 1,578   |  
|Federal funds sold                                                                                                                                        |  |                                             | 462     |   |      |   | 238     |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Cash and Cash Equivalents                                                                                                                                 |  |                                             | 11,737  |   |      |   | 23,529  |  
|Interest bearing time deposits                                                                                                                            |  |                                             | 100     |   |      |   | 100     |  
|Investment securities, available for sale                                                                                                                 |  |                                             | 143,068 |   |      |   | 151,386 |  
|Investment securities, held to maturity (fair value approximates $4,489, and $1,982)                                                                      |  |                                             | 4,496   |   |      |   | 1,995   |  
|Loans receivable, net of allowances of ($2,679), and ($2,746)                                                                                             |  |                                             | 463,776 |   |      |   | 454,347 |  
|Mortgage-backed securities, available for sale                                                                                                            |  |                                             | 86,801  |   |      |   | 112,120 |  
|Mortgage-backed securities, held to maturity (fair value approximates $28,356 and $26,259)                                                                |  |                                             | 28,675  |   |      |   | 26,470  |  
|Foreclosed real estate                                                                                                                                    |  |                                             | 94      |   |      |   |        |  
|Premises and equipment, net                                                                                                                               |  |                                             | 11,225  |   |      |   | 10,782  |  
|Federal Home Loan Bank of Atlanta stock, at cost                                                                                                          |  |                                             | 6,972   |   |      |   | 8,060   |  
|Bank Owned Life Insurance                                                                                                                                 |  |                                             | 13,218  |   |      |   | 12,667  |  
|Goodwill and other intangible assets                                                                                                                      |  |                                             | 2,536   |   |      |   | 2,592   |  
|Accrued interest and other assets                                                                                                                         |  |                                             | 13,159  |   |      |   | 8,697   |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Total assets                                                                                                                                              |  | $                                           | 785,857 |   |      | $ | 812,745 |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                                                      |  |                                             |         |   |      |   |         |  
|Liabilities                                                                                                                                               |  |                                             |         |   |      |   |         |  
|Deposits:                                                                                                                                                 |  |                                             |         |   |      |   |         |  
|Non-Interest bearing                                                                                                                                      |  | $                                           | 23,406  |   |      | $ | 24,653  |  
|Interest-bearing                                                                                                                                          |  |                                             | 581,439 |   |      |   | 573,016 |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Total deposits                                                                                                                                            |  |                                             | 604,845 |   |      |   | 597,669 |  
|Federal Home Loan Bank of Atlanta advances short-term                                                                                                     |  |                                             | 40,000  |   |      |   | 81,150  |  
|Federal Home Loan Bank of Atlanta advances long-term                                                                                                      |  |                                             | 78,473  |   |      |   | 63,646  |  
|Junior Subordinated Debentures                                                                                                                            |  |                                             | 23,197  |   |      |   | 23,197  |  
|Other liabilities                                                                                                                                         |  |                                             | 5,921   |   |      |   | 5,043   |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Total liabilities                                                                                                                                         |  |                                             | 752,436 |   |      |   | 770,705 |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Commitments and contingencies (Notes 3, 5, 7, 8, 9, 10, 11, 12 and 13)                                                                                    |  |                                             |         |   |      |   |         |  
|Stockholders Equity                                                                                                                                      |  |                                             |         |   |      |   |         |  
|Common stock (par value $.01  13,500,000 authorized, 5,913,743 and 5,912,177 shares issued and outstanding at September 30, 2006
and 2005, respectively) |  |                                             | 59      |   |      |   | 59      |  
|Additional paid-in capital                                                                                                                                |  |                                             | 21,390  |   |      |   | 21,247  |  
|Obligation under Rabbi Trust                                                                                                                              |  |                                             | 1,246   |   |      |   | 1,238   |  
|Retained earnings                                                                                                                                         |  |                                             | 16,511  |   |      |   | 24,963  |  
|Accumulated other comprehensive (loss)                                                                                                                    |  |                                             | (4,354  | ) |      |   | (3,878  | )
|Employee Stock Ownership Plan                                                                                                                             |  |                                             | (227    | ) |      |   | (410    | )
|Stock held by Rabbi Trust                                                                                                                                 |  |                                             | (1,204  | ) |      |   | (1,179  | )
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                |  |                                             | 33,421  |   |      |   | 42,040  |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                |  | $                                           | 785,857 |   |      | $ | 812,745 |  
|                                                                                                                                                          |  |                                             |         |   |      |   |         |  

The accompanying notes to consolidated financial statements are an integral part of these
statements.



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BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED)



|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------ |  | -------------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                             |  | For Years Ended September 30,                |        
|                                                             |  | 2006                                         |         |   | 2005 |   |        | 2004 | 
|                                                             |  | (dollars in thousands except per share data) |        
|Interest and fees on loans                                   |  | $                                            | 28,352  |   |      | $ | 24,286 |      |  | $ | 22,056 |  
|Interest on mortgage-backed securities                       |  |                                              | 5,095   |   |      |   | 6,231  |      |  |   | 5,548  |  
|Interest and dividends on investment securities              |  |                                              | 6,342   |   |      |   | 5,637  |      |  |   | 4,552  |  
|Other interest income                                        |  |                                              | 206     |   |      |   | 69     |      |  |   | 78     |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Total interest income                                        |  |                                              | 39,995  |   |      |   | 36,223 |      |  |   | 32,234 |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|                                                             |  |                                              |        
|Interest on deposits                                         |  |                                              | 18,379  |   |      |   | 14,711 |      |  |   | 13,553 |  
|Interest on borrowings  short term                          |  |                                              | 2,484   |   |      |   | 1,471  |      |  |   | 323    |  
|Interest on borrowings  long term                           |  |                                              | 2,992   |   |      |   | 2,738  |      |  |   | 1,400  |  
|Other interest expense                                       |  |                                              | 1,921   |   |      |   | 1,464  |      |  |   | 1,086  |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Total interest expense                                       |  |                                              | 25,776  |   |      |   | 20,384 |      |  |   | 16,362 |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Net interest income                                          |  |                                              | 14,219  |   |      |   | 15,839 |      |  |   | 15,872 |  
|Provision for losses on loans                                |  |                                              | 194     |   |      |   | 453    |      |  |   | 708    |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Net interest income after provision for losses on loans      |  |                                              | 14,025  |   |      |   | 15,386 |      |  |   | 15,164 |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|                                                             |  |                                              |        
|Other Income                                                 |  |                                              |         |   |      |   |        |      |  |   |        |  
|Loss on repossessed assets                                   |  |                                              | (24     | ) |      |   | (276   | )    |  |   | (34    | )
|Mortgage Banking Operations                                  |  |                                              | 33      |   |      |   | 1      |      |  |   | (45    | )
|Fees on transaction accounts                                 |  |                                              | 561     |   |      |   | 686    |      |  |   | 759    |  
|Gain from sale of investments and mortgage backed securities |  |                                              | 5       |   |      |   | 884    |      |  |   | 22     |  
|Income from Bank Owned Life Insurance                        |  |                                              | 474     |   |      |   | 454    |      |  |   | 487    |  
|Miscellaneous income                                         |  |                                              | 452     |   |      |   | 391    |      |  |   | 411    |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Total other income                                           |  |                                              | 1,501   |   |      |   | 2,140  |      |  |   | 1,600  |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|                                                             |  |                                              |        
|Non-Interest Expenses                                        |  |                                              |         |   |      |   |        |      |  |   |        |  
|Salaries and related expense                                 |  |                                              | 8,673   |   |      |   | 9,150  |      |  |   | 8,810  |  
|Occupancy expense                                            |  |                                              | 2,141   |   |      |   | 1,961  |      |  |   | 1,821  |  
|Data processing expense                                      |  |                                              | 1,680   |   |      |   | 2,195  |      |  |   | 1,560  |  
|Property and equipment expense                               |  |                                              | 1,301   |   |      |   | 1,151  |      |  |   | 1,115  |  
|Advertising                                                  |  |                                              | 612     |   |      |   | 642    |      |  |   | 870    |  
|Telephone, postage and office supplies                       |  |                                              | 437     |   |      |   | 579    |      |  |   | 580    |  
|Loss on dishonored checks                                    |  |                                              | 10,752  |   |      |   |       |      |  |   |       |  
|Other expenses                                               |  |                                              | 1,372   |   |      |   | 1,136  |      |  |   | 979    |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Total non-interest expenses                                  |  |                                              | 26,968  |   |      |   | 16,814 |      |  |   | 15,735 |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|                                                             |  |                                              |        
|(Loss) income before tax (benefit) provision                 |  |                                              | (11,442 | ) |      |   | 712    |      |  |   | 1,029  |  
|Income tax provision                                         |  |                                              | (4,049  | ) |      |   | 111    |      |  |   | 144    |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Net (loss) income                                            |  | $                                            | (7,393  | ) |      | $ | 601    |      |  | $ | 885    |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|                                                             |  |                                              |        
|Net (loss) income Per Share of Common Stock :                |  |                                              |         |   |      |   |        |      |  |   |        |  
|Basic                                                        |  | $                                            | (1.26   | ) |      | $ | 0.10   |      |  | $ | 0.15   |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  
|Diluted                                                      |  | $                                            | (1.26   | ) |      | $ | 0.10   |      |  | $ | 0.15   |  
|                                                             |  |                                              |         |   |      |   |        |      |  |   |        |  

The accompanying notes to consolidated financial statements are an integral part of these
statements.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED SEPTEMBER 30, 2006, 2005, AND 2004



|                                                                                                                    |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -- | ------------------------ | - | ------ | -------------------------- |  | - | ---------------- | - |  | ------------------------------------------ | ------ | - | ---------------------------- | - | ------ | ----------------------- |  | - | ------------------------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                                    |  | CommonStock                                  |    | AdditionalPaid-InCapital |   |        | ObligationUnderRabbi Trust |  |   | RetainedEarnings |   |  | AccumulatedOtherComprehensiveIncome (loss) |        |   | Employee StockOwnership Plan |   |        | Stock HeldByRabbi Trust |  |   | TotalStockholdersEquity |  
|                                                                                                                    |  | (dollars in thousands except per share data) |   
|Balance  September 30, 2003                                                                                        |  | $                                            | 59 |                          | $ | 20,652 |                            |  | $ | 1,243            |   |  | $                                          | 25,557 |   |                              | $ | (770   | )                       |  | $ | (776                     | ) |  | $ | (1,197 | ) |  | $ | 44,768 |  
|Compensation under stock based benefit plans                                                                        |  |                                              |   |                          |   | 206    |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   | 183                      |   |  |   |       |   |  |   | 389    |  
|Exercised options                                                                                                   |  |                                              |   |                          |   | 117    |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | 117    |  
|Rabbi Trust Liability                                                                                               |  |                                              |   |                          |   |       |                            |  |   | (4               | ) |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (4     | )
|Distribution of stock for Rabbi Trust                                                                               |  |                                              |    |                          |   |        |                            |  |   | (17              | ) |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   | 17     |   |  |   |       |  
|Treasury stock purchased (420 shares)                                                                               |  |                                              |   |                          |   | (6     | )                          |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (6     | )
|Cash dividends declared ($.50 per share)                                                                            |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            | (1,035 | ) |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (1,035 | )
|Comprehensive income                                                                                                |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|Net income for the year ended September 30, 2004                                                                    |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            | 885    |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   |       |  
|Net change in unrealized gains on investment securities and mortgage backed securities, net of tax of $612          |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   | (970   | )                       |  |   |                         |   |  |   |       |   |  |   |       |  
|Reclassification adjustments for gains included in net income on available for sale securities, net of tax of $7    |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   | (15    | )                       |  |   |                         |   |  |   |       |   |  |   |       |  
|Comprehensive loss                                                                                                  |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (100   | )
|                                                                                                                    |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|Balance  September 30, 2004                                                                                        |  |                                              | 59 |                          |   | 20,969 |                            |  |   | 1,222            |   |  |                                            | 25,407 |   |                              |   | (1,755 | )                       |  |   | (593                     | ) |  |   | (1,180 | ) |  |   | 44,129 |  
|Compensation under stock based benefit plans                                                                        |  |                                              |   |                          |   | 168    |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   | 183                      |   |  |   |       |   |  |   | 351    |  
|Exercised options                                                                                                   |  |                                              |   |                          |   | 115    |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | 115    |  
|Rabbi Trust Liability                                                                                               |  |                                              |   |                          |   |       |                            |  |   | 44               |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   | (27    | ) |  |   | 17     |  
|Treasury stock purchased (371 shares)                                                                               |  |                                              |   |                          |   | (5     | )                          |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (5     | )
|Distribution of stock for Rabbi Trust                                                                               |  |                                              |   |                          |   |       |                            |  |   | (28              | ) |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   | 28     |   |  |   |       |  
|Cash dividends declared ($.50 per share)                                                                            |  |                                              |   |                          |   |       |                            |  |   |                  |   |  |                                            | (1,045 | ) |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   | (1,045 | )
|Comprehensive Loss                                                                                                  |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|Net income for the year ended September 30, 2005                                                                    |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            | 601    |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   |       |  
|Net change in unrealized gains (loss) on investment securities and mortgage backed securities, net of tax of $1,325 |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   | (2,131 | )                       |  |   |                         |   |  |   |       |   |  |   |       |  
|Reclassification adjustment for loss included in net income on available for sale securities, net of tax of $5      |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   | 8      |                         |  |   |                         |   |  |   |       |   |  |   |       |  
|Comprehensive loss                                                                                                  |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (1,522 | )
|                                                                                                                    |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|Balance- September 30, 2005                                                                                         |  |                                              | 59 |                          |   | 21,247 |                            |  |   | 1,238            |   |  |                                            | 24,963 |   |                              |   | (3,878 | )                       |  |   | (410                     | ) |  |   | (1,179 | ) |  |   | 42,040 |  
|Compensation under stock based benefit plans                                                                        |  |                                              |   |                          |   | 130    |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   | 183                      |   |  |   |       |   |  |   | 313    |  
|Exercised options                                                                                                   |  |                                              |   |                          |   | 15     |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | 15     |  
|Rabbi Trust Liability                                                                                               |  |                                              |   |                          |   |       |                            |  |   | 37               |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |        |   |  |   | 37     |  
|Treasury stock purchased (184 shares)                                                                               |  |                                              |   |                          |   | (2     | )                          |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (2     | )
|Acquisition of stock for Rabbi Trust                                                                                |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   | (54    | ) |  |   | (54    | )
|Distribution of stock for Rabbi Trust                                                                               |  |                                              |   |                          |   |       |                            |  |   | (29              | ) |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   | 29     |   |  |   |       |  
|Cash dividends declared ($.50 per share)                                                                            |  |                                              |   |                          |   |       |                            |  |   |                  |   |  |                                            | (1,059 | ) |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   | (1,059 | )
|Comprehensive Loss                                                                                                  |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|Net loss for the year ended September 30, 2006                                                                      |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            | (7,393 | ) |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   |       |  
|Net change in unrealized gains (loss) on investment securities and mortgage backed securities, net of tax of $1,393 |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   | (476   | )                       |  |   |                         |   |  |   |       |   |  |   |       |  
|Comprehensive loss                                                                                                  |  |                                              |   |                          |   |       |                            |  |   |                 |   |  |                                            |       |   |                              |   |       |                         |  |   |                         |   |  |   |       |   |  |   | (7,869 | )
|                                                                                                                    |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  
|Balance  September 30, 2006                                                                                        |  | $                                            | 59 |                          | $ | 21,390 |                            |  | $ | 1,246            |   |  | $                                          | 16,511 |   |                              | $ | (4,354 | )                       |  | $ | (227                     | ) |  | $ | (1,204 | ) |  | $ | 33,421 |  
|                                                                                                                    |  |                                              |    |                          |   |        |                            |  |   |                  |   |  |                                            |        |   |                              |   |        |                         |  |   |                          |   |  |   |        |   |  |   |        |  

The accompany notes to consolidated financial statements are an integral part of these statements.



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BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)



|                                                                                               |  |                               |         |   |      |   |         |      |  |   |          |  
|---------------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                               |  | For Years Ended September 30, |        
|                                                                                               |  | 2006                          |         |   | 2005 |   |         | 2004 | 
|                                                                                               |  | (dollars in thousands)        |        
|Operating Activities                                                                           |  |                               |         |   |      |   |         |      |  |   |          |  
|Net (loss) income                                                                              |  | $                             | (7,393  | ) |      | $ | 601     |      |  | $ | 885      |  
|Adjustments to Reconcile Net (Loss) Income to Net Cash (Used) Provided by Operating Activities |  |                               |         |   |      |   |         |      |  |   |          |  
|Gain on sale of investments and mortgage backed securities                                     |  |                               | (5      | ) |      |   | (884    | )    |  |   | (22      | )
|Loans originated for sale                                                                      |  |                               |        |   |      |   |        |      |  |   | (3,201   | )
|Proceeds from loans sold                                                                       |  |                               |        |   |      |   |        |      |  |   | 3,491    |  
|Gain on loans sold                                                                             |  |                               |        |   |      |   |        |      |  |   | (42      | )
|Amortization of deferred loan fees, net                                                        |  |                               | (173    | ) |      |   | (157    | )    |  |   | (232     | )
|Provision for losses on loans                                                                  |  |                               | 194     |   |      |   | 453     |      |  |   | 708      |  
|Non-cash compensation under Stock-based Benefit Plan                                           |  |                               | 313     |   |      |   | 351     |      |  |   | 389      |  
|Amortization of premiums and discounts, net                                                    |  |                               | 319     |   |      |   | 122     |      |  |   | 331      |  
|Provision for depreciation                                                                     |  |                               | 1,052   |   |      |   | 890     |      |  |   | 898      |  
|Loss on disposal of premises and equipment                                                     |  |                               |        |   |      |   |        |      |  |   | 11       |  
|Loss on sale of repossessed assets                                                             |  |                               | 24      |   |      |   | 276     |      |  |   | 34       |  
|Income from Bank Owned Life Insurance                                                          |  |                               | (474    | ) |      |   | (452    | )    |  |   | (487     | )
|Increase in accrued interest and other assets                                                  |  |                               | (4,153  | ) |      |   | (52     | )    |  |   | (50      | )
|Increase (decrease) in other liabilities                                                       |  |                               | 1,652   |   |      |   | (444    | )    |  |   | 1,904    |  
|Increase (decrease) in obligation under Rabbi Trust                                            |  |                               | 38      |   |      |   | 44      |      |  |   | (4       | )
|                                                                                               |  |                               |         |   |      |   |         |      |  |   |          |  
|Net cash (used) provided by operating activities                                               |  |                               | (8,606  | ) |      |   | 748     |      |  |   | 4,613    |  
|                                                                                               |  |                               |         |   |      |   |         |      |  |   |          |  
|Cash Flows from Investing Activities                                                           |  |                               |         |   |      |   |         |      |  |   |          |  
|Purchase of Bank Owned Life Insurance                                                          |  |                               | (78     | ) |      |   | (303    | )    |  |   | (11,425  | )
|Purchase of investment securities  available for sale                                         |  |                               | (1,707  | ) |      |   | (11,491 | )    |  |   | (76,442  | )
|Proceeds from maturities of investment securities  available for sale                         |  |                               | 4,500   |   |      |   | 2,000   |      |  |   | 21,130   |  
|Proceeds from sale of investment securities  available for sale                               |  |                               | 5,405   |   |      |   | 15,536  |      |  |   | 16,976   |  
|Purchases of investment securities  held to maturity                                          |  |                               | (3,000  | ) |      |   |        |      |  |   | (2,498   | )
|Proceeds from maturities of investment securities  held to maturity                           |  |                               | 500     |   |      |   | 500     |      |  |   | 2,500    |  
|Net increase in loans                                                                          |  |                               | (10,090 | ) |      |   | (69,217 | )    |  |   | (22,322  | )
|Purchase of mortgage backed securities  available for sale                                    |  |                               |        |   |      |   | (10,616 | )    |  |   | (59,968  | )
|Principal collected on mortgage backed securities                                              |  |                               | 28,918  |   |      |   | 38,508  |      |  |   | 32,964   |  
|Proceeds from sale of mortgage backed securities- available for sale                           |  |                               |        |   |      |   | 8,351   |      |  |   | 2,704    |  
|Purchase of mortgage backed securities  held to maturity                                      |  |                               | (6,704  | ) |      |   | (5,271  | )    |  |   | (13,273  | )
|Proceeds from sale of premises and equipment                                                   |  |                               |        |   |      |   |        |      |  |   | 15       |  
|Proceeds from sales of repossessed assets                                                      |  |                               | 307     |   |      |   | 422     |      |  |   | 362      |  
|Investment in premises and equipment                                                           |  |                               | (1,495  | ) |      |   | (2,432  | )    |  |   | (937     | )
|Redemption (purchase) of Federal Home Loan Bank of Atlanta stock                               |  |                               | 1,088   |   |      |   | (1,955  | )    |  |   | (2,800   | )
|Decrease in accounts payable Trade Date Securities                                             |  |                               |        |   |      |   |        |      |  |   | (13,998  | )
|                                                                                               |  |                               |         |   |      |   |         |      |  |   |          |  
|Net cash provided (used) by investing activities                                               |  |                               | 17,644  |   |      |   | (35,968 | )    |  |   | (127,012 | )
|                                                                                               |  |                               |         |   |      |   |         |      |  |   |          |  



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BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AS
RESTATED)



|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------ |  | ----------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                         |  | For Years Ended September 30, |         
|                                                                         |  | 2006                          |          |   | 2005 |   |          | 2004 | 
|                                                                         |  | (dollars in thousands)        |         
|Cash Flows from Financing Activities                                     |  |                               |          |   |      |   |          |      |  |   |          |  
|Net increase in deposits                                                 |  | $                             | 6,997    |   |      | $ | 17,094   |      |  | $ | 28,969   |  
|Net (decrease) increase in advances by borrowers for taxes and Insurance |  |                               | (577     | ) |      |   | 752      |      |  |   | 111      |  
|Proceeds from Federal Home Loan Bank of Atlanta advances                 |  |                               | 232,125  |   |      |   | 383,600  |      |  |   | 210,127  |  
|Repayment of Federal Home Loan Bank of Atlanta advances                  |  |                               | (258,275 | ) |      |   | (359,550 | )    |  |   | (121,277 | )
|Acquisition of stock for Rabbi Trust                                     |  |                               | (54      | ) |      |   | (27      | )    |  |   |         |  
|Treasury stock purchased                                                 |  |                               | (2       | ) |      |   | (5       | )    |  |   | (6       | )
|Exercised stock options                                                  |  |                               | 15       |   |      |   | 115      |      |  |   | 117      |  
|Dividends paid                                                           |  |                               | (1,059   | ) |      |   | (1,045   | )    |  |   | (1,035   | )
|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|Net cash (used) provided by financing activities                         |  |                               | (20,830  | ) |      |   | 40,934   |      |  |   | 117,006  |  
|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|                                                                         |  |                               |         
|(Decrease) increase in cash equivalents                                  |  |                               | (11,792  | ) |      |   | 5,714    |      |  |   | (5,393   | )
|Cash and cash equivalents at beginning of period                         |  |                               | 23,529   |   |      |   | 17,815   |      |  |   | 23,208   |  
|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                               |  | $                             | 11,737   |   |      | $ | 23,529   |      |  | $ | 17,815   |  
|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|                                                                         |  |                               |         
|Supplemental Disclosure of Cash Flows Information:                       |  |                               |          |   |      |   |          |      |  |   |          |  
|Cash paid during the period for:                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|Interest                                                                 |  | $                             | 25,371   |   |      | $ | 20,258   |      |  | $ | 16,101   |  
|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  
|Income taxes                                                             |  | $                             |         |   |      | $ | 510      |      |  | $ | 220      |  
|                                                                         |  |                               |          |   |      |   |          |      |  |   |          |  

The accompanying notes to consolidated financial statements are an integral part of these
statements.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation - BCSB Bankcorp, Inc. (the Company) owns 100% of the voting stock of Baltimore County Savings Bank, F.S.B. (the Bank). The Bank owns 100% of Ebenezer Road,
Inc. The accompanying consolidated financial statements include the accounts and transactions of these companies on a consolidated basis since date of acquisition. All intercompany transactions have been eliminated in the consolidated financial
statements. Ebenezer Road, Inc. sells insurance products. Its operations are not material to the consolidated financial statements.

Reclassifications - Certain prior years amounts have been reclassified to conform to the current years method of presentation.

Business - The Companys primary purpose is ownership of the Bank. The Banks primary business activity is the acceptance of deposits from the general public in its market area and using the proceeds
for investments and loan originations. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.

Basis of Financial Statement Presentation - The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement
of financial condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses, valuations of foreclosed real estate, goodwill and intangible assets, deferred income taxes and other than temporary impairment of investment securities.

Investments and Mortgage Backed Securities - Investment securities in equity mutual funds, certain federal agency notes and mortgage backed
securities may be held for an indefinite period of time. However, management may sell them in response to changes in interest rates or other similar factors and, accordingly, carries them at fair value. Other investment securities consisting of
federal agency notes and bonds and mortgage backed securities are carried at cost, since management has the ability and intention to hold them to maturity. Amortization of related premiums and discounts are computed using the level yield method over
the life of the security. Gains and losses on all investments and mortgage backed securities are determined using the specific identification method.

Restricted Stock Investments- The Bank, as a member of the Federal Home Loan Bank System, is required to maintain an investment in capital stock of the Federal Home Loan Bank of Atlanta (FHLB) in
varying amounts based on balances of outstanding home loans and on amounts borrowed from the FHLB. Because no ready market exists for this stock and it has no quoted market value, the Banks investment in this stock is carried at cost.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans Receivable - Loans
receivable are stated at unpaid principal balances, less undisbursed portion of loans in process, unearned interest on consumer loans, deferred loan origination fees and the allowance for loan losses, since management has the ability and intention
to hold them to maturity.

Interest income is accrued on the unpaid principal balance. Unearned interest on consumer loans is amortized to
income over the terms of the related loans on the level yield method. Loan origination fees and certain direct loan origination costs are deferred and recognized by the interest method over the contractual life of the related loan as an adjustment
of yield.

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and
collection efforts, that the borrowers financial condition is such that collection of interest is doubtful or when payment of principal and interest has become ninety days past due unless the obligation is well secured and in the process of
collection. When a payment is received on a loan on non-accrual status, the amount received is allocated to principal and interest in accordance with the contractual terms of the loan. A loan is considered past due or delinquent when a contractual
payment is not paid in the month it is due.

Loans Held for Sale - Loans held for sale are carried at lower of cost or market value
in the aggregate. Market value is derived from secondary market quotations for similar instruments. Net unrealized losses are recognized through a valuation allowance by charges to income.

Allowance for Loan Losses - An allowance for loan losses is provided through charges to income in an amount that management believes will be
adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. Loans deemed to be uncollectible are charged against the allowance for loans losses and
subsequent recoveries if any, are credited to the allowance. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrowers ability to pay. Management believes the allowance for losses on loans is adequate. While management uses available information to estimate losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions, particularly in the state of Maryland. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for losses on
loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

In accordance with the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan, (SFAS No. 114) as amended by SFAS No., 118 Accounting by Creditors for Impairment of a Loan  Income Recognition and Disclosures, collectively referred to as Statement Nos. 114 and 118, The
Bank determines and recognizes impairment of certain loans. A loan is determined to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms
of the loan agreement. A loan is not considered impaired during a period of delay in payment if the Bank expects to collect all amounts due, including past-due interest. The Bank generally considers a period of delay in payment to include
delinquency up to and including 90 days. SFAS Nos. 114 and 118 require that impaired loans be measured at the present value of its expected future cash flows discounted at the loans effective interest rate, or at the loans observable
market price or the fair value of the collateral if the loan is collateral dependent.

SFAS Nos. 114 and 118 are generally applicable for
all loans except large groups of smaller-balance homogeneous loans that are evaluated collectively for impairment, including residential first and second mortgage loans and consumer installment loans. Impaired loans are therefore generally comprised
of commercial mortgage, real estate development, and certain restructured residential loans. In addition, impaired loans are generally loans which management has placed in non-accrual



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



status since loans are placed in non-accrual status on the earlier of the date that management determined that the collection of principal and/or interest is
in doubt or the date that principal or interest is 90 days or more past due.

The Bank recognized interest income for impaired loans
consistent with its method for non-accrual loans. Specifically, interest payments received are recognized as interest income or, if the ultimate collectibility of principal is in doubt, are applied to principal.

Foreclosed Real Estate - Real estate acquired through foreclosure is recorded at fair value. Management periodically evaluates the recoverability
of the carrying value of the real estate acquired through foreclosure using estimates as described above in Allowance for Loan Losses. In the event of a subsequent decline, management provides an additional allowance to reduce real estate acquired
through foreclosure to its fair value less estimated disposal cost. 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. There was no provision for losses during the years ended September 30, 2006, 2005, and 2004.

Loan
Servicing  The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair
values are estimated by calculating the net present values of the interest payments over the life of the loans. Impairment is determined on a loan by loan basis. The amount of impairment recognized, if any, is the amount by which the capitalized
mortgage servicing rights for a loan exceed its fair value.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Mortgage Servicing Rights Following is an analysis of the change in mortgage servicing
rights for loans originated and sold during the year and the unamortized balance and change in excess servicing fees from loans originated and sold in prior periods.



|                                                             |  |                |     |   |      |   |     |      |  |   |     |  
|------------------------------------------------------------ |  | -------------- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                             |  | 2006           |     |   | 2005 |   |     | 2004 | 
|                                                             |  | (in thousands) |    
|Balance October 1,                                           |  | $              | 134 |   |      | $ | 178 |      |  | $ | 269 |  
|Capitalized                                                  |  |                |    |   |      |   |    |      |  |   | 47  |  
|(Reversal) provision for losses on mortgage servicing rights |  |                | 24  |   |      |   |    |      |  |   | (74 | )
|Amortization                                                 |  |                | (34 | ) |      |   | (44 | )    |  |   | (64 | )
|                                                             |  |                |     |   |      |   |     |      |  |   |     |  
|Balance September 30,                                        |  | $              | 124 |   |      | $ | 134 |      |  | $ | 178 |  
|                                                             |  |                |     |   |      |   |     |      |  |   |     |  

Premises and Equipment - Premises and equipment are recorded at cost. Depreciation is
computed on the straight-line method, based on the useful lives of the respective assets.

Income Taxes - Deferred income taxes are
recognized for temporary differences between the financial reporting bases and income tax bases of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are
recognized only to the extent that is more likely than not that such amounts will be realized based on consideration of available evidence. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Transfer of Financial Assets- Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it
from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Significant Group Concentrations of Credit Risk- Most of the Banks activities are with customers located within the greater Baltimore
metropolitan area. The Bank does not have any significant concentrations to any one industry or customer.

Earnings Per Share - Basic
per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per share. No adjustments were made to net income (numerator). For the years ended September 30, 2006, 2005, 2004 there were no option shares excluded from the computation
of diluted earnings per share. The basic and diluted weighted average shares outstanding for the years ended September 30, 2006, 2005 and 2004 are as follows:



|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|--------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------- | ----- | ---------------- | - | ----- | -
|                                                          |  | 2006                                  |       
|                                                          |  | (Loss) Income(Numerator)              |        |   | Shares(Denominator) |       | Per Share Amount |  
|                                                          |  | ( in thousands except per share data) |       
|Basic EPS                                                 |  |                                       |        |   |                     |       |                  |   |       |  
|(Loss) available to shareholders                          |  | $                                     | (7,393 | ) |                     | 5,855 |                  | $ | (1.26 | )
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|Diluted EPS                                               |  |                                       |        |   |                     |       |                  |   |       |  
|Effect of dilutive shares                                 |  |                                       |       |   |                     |      |                  |   |      |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|(Loss) available to shareholders plus assumed conversions |  | $                                     | (7,393 | ) |                     | 5,855 |                  | $ | (1.26 | )
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|                                                          | 
|                                                          |  | 2005                                  |       
|Basic EPS                                                 |  |                                       |        |   |                     |       |                  |   |       |  
|Income available to shareholders                          |  | $                                     | 601    |   |                     | 5,877 |                  | $ | 0.10  |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|Diluted EPS                                               |  |                                       |        |   |                     |       |                  |   |       |  
|Effect of dilutive shares                                 |  |                                       |       |   |                     | 36    |                  |   |      |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|Income available to shareholders plus assumed conversions |  | $                                     | 601    |   |                     | 5,913 |                  | $ | 0.10  |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|                                                          | 
|                                                          |  | 2004                                  |       
|Basic EPS                                                 |  |                                       |        |   |                     |       |                  |   |       |  
|Income available to shareholders                          |  | $                                     | 885    |   |                     | 5,792 |                  | $ | 0.15  |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|Diluted EPS                                               |  |                                       |        |   |                     |       |                  |   |       |  
|Effect of dilutive shares                                 |  |                                       |       |   |                     | 53    |                  |   |      |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  
|Income available to shareholders plus assumed conversions |  | $                                     | 885    |   |                     | 5,845 |                  | $ | 0.15  |  
|                                                          |  |                                       |        |   |                     |       |                  |   |       |  

Statement of Cash Flows - In the statement of cash flows, cash and equivalents include
cash, Federal Home Loan Bank of Atlanta overnight deposits, federal funds and certificates of deposit and Federal Home Loan Bank of Atlanta time deposits with an original maturity date less than ninety days.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Employee Stock Ownership Plan -The Company accounts for its Employee Stock Ownership Plan
(ESOP) in accordance with Statement of Position 93-6 of the Accounting Standards Division of the American Institute of Certified Public Accountants. (See Note 11) ESOP shares are considered to be outstanding for the computation of EPS as
they are committed to be released.

Advertising- All advertising costs are expensed as incurred.

Stock-Based Employee Compensation- In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock Issued to Employees. SFAS No. 123R requires that all share-based payments to
employees, including grants of employee stock options, be valued at fair value on the grant date and be expensed over the applicable vesting period. SFAS No. 123R became effective for the Company on October 1, 2005. The Company adopted
SFAS No. 123R using the modified prospective application. Under the modified prospective application, compensation costs are recognized in the financial statements for all new share-based payments granted after
October 1, 2005.

The adoption of SFAS No. 123R resulted in the recognition of compensation expense recognized in earnings of
$33,000 for the year ended September 30, 2006. In accordance with the modified prospective application method of SFAS No. 123R, prior period amounts have not been restated to reflect the recognition of stock-based compensation costs.

Prior to October 1, 2005, the Company applied the intrinsic value method of accounting as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. Under the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. If the Company had used the fair value based method, net
earnings and earnings per share for the years ended September 30, 2005 and 2004 would have been reduced to the pro forma amounts listed in the below table.



|                                                                                                             |  |                              |      |   |      |   |      |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                                                                                             |  | For Years EndedSeptember 30, |     
|(dollars in thousands except per share data)                                                                 |  | 2005                         |      |   | 2004 |  
|Net Income, as reported                                                                                      |  | $                            | 601  |   |      | $ | 885  |  
|Add: Stock-based compensation included in the determination of net income as reported, net of tax            |  |                              | 280  |   |      |   | 275  |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of tax |  |                              | (313 | ) |      |   | (328 | )
|                                                                                                             |  |                              |      |   |      |   |      |  
|Pro forma net income                                                                                         |  | $                            | 568  |   |      | $ | 832  |  
|                                                                                                             |  |                              |      |   |      |   |      |  
|                                                                                                             |  |                             
|Earnings per share:                                                                                          |  |                              |      |   |      |   |      |  
|Basic-as reported                                                                                            |  | $                            | 0.10 |   |      | $ | 0.15 |  
|                                                                                                             |  |                              |      |   |      |   |      |  
|Basic-pro forma                                                                                              |  | $                            | 0.10 |   |      | $ | 0.14 |  
|                                                                                                             |  |                              |      |   |      |   |      |  
|Diluted-as reported                                                                                          |  | $                            | 0.10 |   |      | $ | 0.15 |  
|                                                                                                             |  |                              |      |   |      |   |      |  
|Diluted-pro forma                                                                                            |  | $                            | 0.10 |   |      | $ | 0.14 |  
|                                                                                                             |  |                              |      |   |      |   |      |  



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Segment Reporting- The Company acts as an independent community financial services provider,
offering traditional banking and related financial services to individuals and business customers. The Bank offers a full array of commercial and retail financial services, through its branch and automated teller machine networks. This includes
taking time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and providing other financial services.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail and mortgage banking operations of the Bank. As such discrete financial information is not available and segment
reporting would not be meaningful.

Guarantees- The Company does not issue any guarantees that would require liability recognition or
disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have
expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees
supporting these commitments. The Company has $754,000 of standby letters of credit as of September 30, 2006. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of September 30, 2006 for guarantees under standby letters of credit issued is not material.

Comprehensive Income- Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the statement of financial condition, such items, along
with net income are components of comprehensive income.

Goodwill- The Company accounts for goodwill in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill no longer be amortized, but rather that it be tested for impairment on an annual basis at the reporting unit level, which is either at the same
level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives. The Company annually assesses if events or changes in
circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired. The Company has evaluated Goodwill for impairment and found no change in the carrying amount of Goodwill. Goodwill was $2,294,000 at
September 30, 2006 and 2005.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Bank Owned Life Insurance-The Company purchased single-premium life insurance policies on
certain employees of the Company. The net cash surrender value of those policies is classified in other assets. Appreciation in the value of the insurance policies is classified in non-interest income.

Core Deposit Intangible - The Company recognized a core deposit intangible as a result of the merger with WHG Bancshares Corporation. This deposit
base is assumed to decay over time as funds are withdrawn by customers. Amortization is calculated using algebraic formulas taking into account current portfolio costs and the current short term LIBOR.



|                                       |  |                        |     |                        |   |    
|-------------------------------------- |  | ---------------------- | --- | ---------------------- | - | ---
|(dollars in thousands)                 |  | As ofSeptember 30,2006 |     | As ofSeptember 30,2005
|Core Deposit Intangible                |  | $                      | 630 |                        | $ | 630
|Accumulated Amortization               |  |                        | 388 |                        |   | 330
|                                       |  |                        |     |                        |   |    
|Net Balance                            |  | $                      | 242 |                        | $ | 300
|                                       |  |                        |     |                        |   |    
|Aggregate Amortization Expense         |  |                        |     |                        |   |    
|For the year ended September 30, 2006  |  | $                      | 58  |                        |   |    
|For the year ended September 30, 2005  |  |                        | 62  |                        |   |    
|For the year ended September 30, 2004  |  |                        | 59  |                        |   |    
|For the year ended September 30, 2003  |  |                        | 121 |                        |   |    
|                                       |  |                       
|Estimated Amortization Expense         |  |                        |     |                        |   |    
|For the year ending September 30, 2007 |  |                        | 59  |                        |   |    
|For the year ending September 30, 2008 |  |                        | 46  |                        |   |    
|For the year ending September 30, 2009 |  |                        | 36  |                        |   |    
|For the year ending September 30, 2010 |  |                        | 26  |                        |   |    
|For the year ending September 30, 2011 |  |                        | 24  |                        |   |    



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Recent Accounting Pronouncements-In May 2005, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections, which changes the accounting for and reporting of a change in accounting
principle. This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement
requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific or cumulative effects of the change. SFAS 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005. The adoption of this standard did not have a material effect on financial condition, results of operations, or liquidity.

In February 2006, The FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB
Statements No. 133 and 140. This statement amends Statements No. 133 and 140 by: permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
clarifying which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishing a requirement to evaluate interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifying that concentrations of credit risk in the form of subordination are not embedded derivatives; and amending
Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The statement is
effective for fiscal years beginning after September 15, 2006. The adoption of this standard is not anticipated to have a material impact on the financial condition, results of operations or liquidity.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement
No. 140. This statement amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. It requires an entity to recognize a servicing asset or servicing liability each
time an obligation is undertaken to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable.
The statement permits the choice between the amortization method and the fair value measurement method for the subsequent measurement of the servicing assets or liabilities and allows for a one-time reclassification of
available-for-sale securities to trading securities at initial adoption. The statement also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and
additional disclosures for all separately recognized servicing assets and servicing liabilities. The statement is effective for fiscal years beginning after September 30, 2006. The adoption of this standard is not anticipated to have a material
impact on our financial condition, results of operations or liquidity.

In July 2006, the FASB issued FASB Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109, which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a
tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be
sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative
effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company is assessing the impact,
if any, that the adoption may have on its financial statements.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



In September 2006, the FASB ratified the consensus reached by the EITF on Issue
No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability and related compensation costs for
endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods as defined in SFAS No. 106,  Employers Accounting for Postretirement Benefits Other Than Pensions.
The EITF reached a consensus that Bank Owned Life Insurance policies purchased for this purpose do not effectively settle the entitys obligation to the employee in this regard and thus the entity must record compensation cost and a related
liability. Entities should recognize the effects of applying this Issue through either, (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the
balance sheet as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. Management is currently evaluating the impact of adopting this Issue on the
Companys financial statements. This Issue is effective for fiscal years beginning after December 15, 2007.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair
value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management does not expect the adoption of this Statement to have a material impact on the
Companys consolidated financial statements.

In September 2006, the Securities and Exchange Commission (the
SEC) released Staff Accounting Bulletin No. 108 (SAB 108), which provides detail in the quantification and correction of financial statement misstatements. SAB 108 specifies that companies should apply a combination of
the rollover and iron curtain methodologies when making determinations of materiality. The rollover method quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron
curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, regardless of the year(s) of origination. SAB 108 instructs companies to quantify the
misstatement under both methodologies and if either method results in the determination of a material error, then the company must adjust its financial statements to correct the error. SAB 108 also reminds preparers that a change from an accounting
principle that is not generally accepted to a principle that is generally accepted is a correction of an error. The Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Management
does not expect the adoption of this Bulletin to have a material impact on the Companys consolidated financial statements.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 2 - Investment Securities

The amortized cost and estimated fair values of investment securities are as follows as of September 30, 2006 and 2005.



|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|------------------------------------ |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|(in thousands)                       |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Available for sale:                  |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2006                   |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|US Government and Agency obligations |  | $             | 112,217 |                      | $ | 2                     |  | $ | (2,165              | ) |  | $ | 110,054
|Investment in bond mutual funds      |  |               | 34,546  |                      |   |                      |  |   | (1,532              | ) |  |   | 33,014 
|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                     |  | $             | 146,763 |                      | $ | 2                     |  | $ | (3,697              | ) |  | $ | 143,068
|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|Held to Maturity:                    |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2006                   |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|US Government and Agency obligations |  | $             | 4,496   |                      | $ |                      |  | $ | (8                  | ) |  | $ | 4,488  
|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                     |  |               |         |                     
|                                     |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Available for sale:                  |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2005                   |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|US Government and Agency obligations |  | $             | 118,697 |                      | $ |                      |  | $ | (2,254              | ) |  | $ | 116,443
|Investment in bond mutual funds      |  |               | 36,238  |                      |   |                      |  |   | (1,295              | ) |  |   | 34,943 
|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                     |  | $             | 154,935 |                      | $ |                      |  | $ | (3,549              | ) |  | $ | 151,386
|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|Held to maturity:                    |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2005                   |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|US Government and Agency obligations |  | $             | 1,995   |                      | $ |                      |  | $ | (13                 | ) |  | $ | 1,982  
|                                     |  |               |         |                      |   |                       |  |   |                     |   |  |   |        



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 -
Investment Securities - Continued



The following is a summary of investment securities by maturity:



|                                           |  |                    |         |            |   |        
|------------------------------------------ |  | ------------------ | ------- | ---------- | - | -------
|                                           |  | September 30, 2006
|(in thousands)                             |  | AmortizedCost      |         | Fair Value
|Available for sale:                        |  |                    |         |            |   |        
|US Government and Agency obligations       |  |                    |         |            |   |        
|Due within 12 months                       |  | $                  | 12,004  |            | $ | 11,931 
|Due beyond 12 months by within five years  |  |                    | 80,221  |            |   | 78,576 
|Due beyond five years but within ten years |  |                    | 16,494  |            |   | 16,127 
|Due beyond ten years                       |  |                    | 3,498   |            |   | 3,420  
|Investments in bond mutual funds           |  |                    | 34,546  |            |   | 33,014 
|                                           |  |                    |         |            |   |        
|                                           |  | $                  | 146,763 |            | $ | 143,068
|                                           |  |                    |         |            |   |        
|Held to Maturity:                          |  |                    |         |            |   |        
|US Government and Agency obligations       |  |                    |         |            |   |        
|Due within 12 months                       |  | $                  |        |            | $ |       
|Due beyond 12 months by within five years  |  |                    | 4,000   |            |   | 3,994  
|Due beyond five years but within ten years |  |                    | 496     |            |   | 494    
|                                           |  |                    |         |            |   |        
|                                           |  | $                  | 4,496   |            | $ | 4,488  
|                                           |  |                    |         |            |   |        

Proceeds from sales of available for sale securities during the year ended
September 30, 2006 were $5,405,000. Net gains amounted to $5,000 for the year ended September 30, 2006. This consisted of gross gains of $56,000 and gross losses of $51,000. The tax provisions applicable to these net realized gains
amounted to $2,000.

Proceeds from sales of available for sale securities during the year ended September 30, 2005 were
$15,536,000. Net gains amounted to $865,000 for the year ended September 30, 2005. This consisted of gross gains of $898,000 and gross losses of $33,000. The tax provisions applicable to these net realized gains amounted to $334,000.

Proceeds from sales of available for sale securities during the year ended September 30, 2004 were $16,976,000. Net
gains amounted to $6,000 for the year ended September 30, 2004. This consisted of gross gains of $62,000 and gross losses of $56,000. The tax provisions applicable to these net realized gains amounted to $2,000.

Investments pledged as collateral have a cost of $4.5 million and a fair value of $4.4 million as of September 30, 2006. The only
issues over 10% of capital as of September 30, 2006 and 2005 are government sponsored agencies.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 3 - Loans Receivable

Loans receivable at September 30, 2006 and 2005 consist of the following:



|                                               |  |               |         |   |      |   |         |  
|---------------------------------------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                                               |  | September 30, |        
|(in thousands)                                 |  | 2006          |         |   | 2005 |  
|Single-family residential mortgages            |  | $             | 214,724 |   |      | $ | 195,203 |  
|Single-family rental property loans            |  |               | 29,131  |   |      |   | 26,914  |  
|Commercial real estate loans                   |  |               | 110,179 |   |      |   | 75,034  |  
|Construction loans                             |  |               | 39,021  |   |      |   | 53,755  |  
|Commercial loans secured                       |  |               | 365     |   |      |   | 1,869   |  
|Commercial loans unsecured                     |  |               | 409     |   |      |   | 538     |  
|Commercial lease loans                         |  |               | 4,749   |   |      |   | 3,300   |  
|Commercial lines of credit                     |  |               | 9,606   |   |      |   | 16,463  |  
|Automobile loans                               |  |               | 53,530  |   |      |   | 88,287  |  
|Home equity loans                              |  |               | 17,942  |   |      |   | 17,901  |  
|Other consumer loans                           |  |               | 2,849   |   |      |   | 3,377   |  
|                                               |  |               |         |   |      |   |         |  
|                                               |  |               | 482,505 |   |      |   | 482,641 |  
|Add  purchase accounting premiums, net        |  |               | 451     |   |      |   | 665     |  
|Less  undisbursed portion of loans in process |  |               | (12,014 | ) |      |   | (16,874 | )
|- unearned interest                            |  |               | (4,132  | ) |      |   | (9,067  | )
|- deferred loan origination fees and costs     |  |               | (355    | ) |      |   | (272    | )
|- allowance for loans losses                   |  |               | (2,679  | ) |      |   | (2,746  | )
|                                               |  |               |         |   |      |   |         |  
|                                               |  | $             | 463,776 |   |      | $ | 454,347 |  
|                                               |  |               |         |   |      |   |         |  

The following is a summary of the allowance for loan losses (as restated):



|                              |  |                           |       |   |      |   |       |      |  |   |        |  
|----------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                              |  | Years Ended September 30, |      
|(in thousands)                |  | 2006                      |       |   | 2005 |   |       | 2004 | 
|Balance  beginning of year   |  | $                         | 2,746 |   |      | $ | 2,587 |      |  | $ | 2,698  |  
|Provision for losses on loans |  |                           | 194   |   |      |   | 453   |      |  |   | 708    |  
|Charge-offs                   |  |                           | (578  | ) |      |   | (677  | )    |  |   | (1,242 | )
|Recoveries                    |  |                           | 317   |   |      |   | 383   |      |  |   | 423    |  
|                              |  |                           |       |   |      |   |       |      |  |   |        |  
|Balance  end of year         |  | $                         | 2,679 |   |      | $ | 2,746 |      |  | $ | 2,587  |  
|                              |  |                           |       |   |      |   |       |      |  |   |        |  

Residential lending is generally considered to involve less risk than other forms
of lending, although payment experience on these loans is dependent to some extent on economic and market conditions in the Banks lending area. Multifamily residential, commercial, construction and other loan repayments are generally dependent
on the operations of the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy.

A significant portion of the Banks loans receivable include, mortgage loans secured by residential and commercial real estate
properties located in the State of Maryland. Loans are extended only after evaluation by management of customers creditworthiness and other relevant factors on a case-by-case basis. The Bank generally does not lend more than 97% of the
appraised value of a property and requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 90%. In addition, the Bank generally obtains personal guarantees of repayment from borrowers and/or others for
multifamily residential, commercial and construction loans and disburses the proceeds of construction and similar loans only as work progresses on the related projects.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 3 - Loans Receivable - Continued

Automobile loans are secured by vehicles and home equity loans are secured by subordinated liens on real estate properties. Repayments of
automobile loans and home equity loans are expected primarily from the cash flows of the borrowers.

Non-accrual loans
totaled approximately $2.5 million, $738,000 and $872,000 at September 30, 2006, 2005 and 2004, respectively. There was one impaired loan as defined by SFAS No. 114 for $2.4 million at September 30, 2006. There were no impaired loans
at September 30, 2005 and 2004. There was no interest income recognized on impaired loans during these periods. The Bank was not committed to fund additional amounts on these loans.

Interest income that would have been recorded under the original terms of non-accrual loans and the interest actually recognized for the
years ended September 30, are summarized below:



|                                                |      |                          |      |  |      |    |  |   |   
|----------------------------------------------- | ---- | ------------------------ | ---- |  | ---- | -- |  | - | --
|(in thousands)                                  |      | Years EndedSeptember 30,
|                                                | 2006 |                          | 2005 |  | 2004
|Interest income that would have been recognized |      | $                        | 152  |  | $    | 66 |  | $ | 83
|Interest income recognized                      |      |                          | 139  |  |      | 29 |  |   | 28
|                                                |      |                          |      |  |      |    |  |   |   
|Interest income not recognized                  |      | $                        | 13   |  | $    | 37 |  | $ | 55
|                                                |      |                          |      |  |      |    |  |   |   

The Bank has had, and may be expected to have in the future, banking transactions
in the ordinary course of business with directors, officers, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms including interest rates and collateral, as those prevailing at the time for
comparable transactions with others. The following table presents a summary of the activity of loans receivable from related parties:



|                                       |      |               |       |      |  |   |     |  
|-------------------------------------- | ---- | ------------- | ----- | ---- |  | - | --- | -
|(in thousands)                         |      | September 30, |      
|                                       | 2006 |               |       | 2005 | 
|Beginning balance                      |      | $             | 921   |      |  | $ | 922 |  
|New loans                              |      |               | 362   |      |  |   | 29  |  
|Loan repayments                        |      |               | (181  | )    |  |   | (30 | )
|Change in related party classification |      |               | (102  | )    |  |   |    |  
|                                       |      |               |       |      |  |   |     |  
|Ending balance                         |      | $             | 1,000 |      |  | $ | 921 |  
|                                       |      |               |       |      |  |   |     |  

The Bank services loans for others. The amount of such loans serviced at
September 30, 2006 and 2005 was $21,939,000 and $21,520,000, respectively. At September 30, 2006 and 2005, the balance of loans sold by the Bank with recourse amounted to $0 and $0, respectively.

Custodial escrow balances maintained in connection with the foregoing loan servicings were approximately $76,000 and $73,000 at
September 30, 2006 and 2005, respectively.

The Bank is a party to financial instruments with off-balance-sheet risk
made in the normal course of business to meet the financing needs of its customers. These financial instruments are standby letters of credit, lines of credit and commitments to fund mortgage loans and involve to varying degrees elements of credit
risk in excess of the amount recognized in the statement of financial position. The contract amounts of those instruments express the extent of involvement the Bank has in this class of financial instruments and represents the Banks exposure
to credit loss from nonperformance by the other party.

Unless noted otherwise, the Bank does not require collateral or
other security to support financial instruments with off-balance-sheet credit risk.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 3 - Loans Receivable - Continued

Financial Instruments Whose Contract Amounts Represents Credit Risk



|                                 |  |                     |        |                    |   |       
|-------------------------------- |  | ------------------- | ------ | ------------------ | - | ------
|                                 |  | Contract Amount at,
|(in thousands)                   |  | September 30, 2006  |        | September 30, 2005
|Standby letters of credit        |  | $                   | 754    |                    | $ | 701   
|Commercial lines of credit       |  |                     | 9,715  |                    |   | 7,002 
|Home equity lines of credit      |  |                     | 20,770 |                    |   | 20,021
|Loan commitments, fixed rates    |  |                     | 6,070  |                    |   | 14,019
|Loan commitments, variable rates |  |                     | 1,135  |                    |   | 2,052 

Standby letters of credit are conditional commitments issued by the Bank
guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support private borrowing arrangements, generally limited to real estate transactions. Unless otherwise noted, the standby letters of credit are not
collateralized. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Home equity and commercial lines of credit are loan commitments to individuals and companies and have fixed expiration dates as long as there is no violation of any condition established in the contract. The Bank
evaluates each customers credit worthiness on a case-by-case basis.

Rates on mortgage loan commitments for fixed rate
loans ranged from 5.875% and 7.0% and 4.87% to 6.49% at September 30, 2006 and 2005, respectively. There were no mortgage loan commitments for variable rate loans at September 30, 2006 and 2005. Rates on home equity loan commitments for
fixed rate loans ranged from 6.3% to 7.23% and 4.96% to 6.48% at September 30, 2006 and 2005, respectively. Rates on home equity loan commitments for variable rate loans were at prime and .25% to .50% over prime at September 30, 2006.

Rates on commercial loan commitments for fixed rate loans ranged from 7.00% to 10.00% at September 30, 2006. Rates on
commercial loan commitments for variable rate loans ranged from 1.00% over prime to 1.5% over prime at September 30, 2006. Rates on commercial loan commitments for fixed rate loans ranged from 6.20% to 10.00% at September 30, 2005. Rates
on commercial loan commitments for variable rate loans ranged from 1.0% over prime to 1.5% over prime at September 30, 2005.

No amount was recognized in the statement of financial position at September 30, 2006 and 2005, as liability for credit loss nor was any liability recognized for fees received for standby letters of credit.

The Bank grants loans to customers, substantially all of whom are residents of the Metropolitan Baltimore and Harford County areas.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 4 - Mortgage Backed Securities

The amortized cost and estimated fair values of mortgage backed securities are as follows as of September 30, 2006 and 2005:



|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|(in thousands)                   |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Available for sale:              |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2006               |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|GNMA certificates                |  | $             | 6,166   |                      | $ |                      |  | $ | (97                 | ) |  | $ | 6,069  
|FNMA certificates                |  |               | 60,727  |                      |   |                      |  |   | (2,284              | ) |  |   | 58,443 
|FHLMC participating certificates |  |               | 23,306  |                      |   | 2                     |  |   | (1,019              | ) |  |   | 22,289 
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                 |  | $             | 90,199  |                      | $ | 2                     |  | $ | (3,400              | ) |  | $ | 86,801 
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2005               |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|GNMA certificates                |  | $             | 9,574   |                      | $ |                      |  | $ | (120                | ) |  | $ | 9,454  
|FNMA certificates                |  |               | 76,655  |                      |   |                      |  |   | (1,870              | ) |  |   | 74,785 
|FHLMC participating certificates |  |               | 28,648  |                      |   |                      |  |   | (767                | ) |  |   | 27,881 
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                 |  | $             | 114,877 |                      | $ |                      |  | $ | (2,757              | ) |  | $ | 112,120
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                 |  |               |         |                     
|(in thousands)                   |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Held to maturity                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 20, 2006               |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|GNMA certificates                |  | $             | 4,124   |                      | $ | 92                    |  | $ |                    |   |  | $ | 4,216  
|FNMA certificates                |  |               | 14,560  |                      |   | 40                    |  |   | (345                | ) |  |   | 14,255 
|FHLMC participating certificates |  |               | 9,991   |                      |   | 77                    |  |   | (183                | ) |  |   | 9,885  
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                 |  | $             | 28,675  |                      | $ | 209                   |  | $ | (528                | ) |  | $ | 28,356 
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|September 30, 2005               |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|GNMA certificates                |  | $             | 4,322   |                      | $ | 96                    |  | $ | (1                  | ) |  | $ | 4,417  
|FNMA certificates                |  |               | 14,904  |                      |   | 45                    |  |   | (260                | ) |  |   | 14,689 
|FHLMC participating certificates |  |               | 7,244   |                      |   | 42                    |  |   | (133                | ) |  |   | 7,153  
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        
|                                 |  | $             | 26,470  |                      | $ | 183                   |  | $ | (394                | ) |  | $ | 26,259 
|                                 |  |               |         |                      |   |                       |  |   |                     |   |  |   |        

There were no sales of available for sale mortgage backed securities during the
year ended September 30, 2006.

Proceeds from sales of available for sale mortgage backed securities during the year
ended September 30, 2005 were $8,351,000. Net gains amounted to $19,000 for the year ended September 30, 2005. This consisted of gross gains of $30,000 and gross losses of $11,000. The tax provision applicable to these net realized gains
was $7,000.

Proceeds from sales of available for sale mortgage backed securities during the year ended September 30,
2004 were $2,704,000. Net gains amounted to $16,000 for the year ended September 30, 2004. This consisted of gross gains of $17,000 and gross losses of $1,000. The tax provision applicable to these net realized gains was $6,000.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 -
Mortgage Backed Securities - Continued



Below are schedules of both investment securities and mortgage backed securities with unrealized
losses as of September 30, 2006 and the length of time the individual security has been in a continuous unrealized loss position. Unrealized losses are the result of interest rate levels differing from those existing at the time of purchase of
the securities and, as to mortgage backed securities, estimated prepayment speeds. These unrealized losses are considered temporary as they reflect fair values on September 30, 2006 and are subject to change daily as interest rates fluctuate.
The Company has the ability and intent to hold these securities until the earlier of recovery or maturity.



|                                      |  |                     |       |                  |                   |     |            |       |                  |         |  |            |        |                  |  |   |         |  |   |        |  
|------------------------------------- |  | ------------------- | ----- | ---------------- | ----------------- | --- | ---------- | ----- | ---------------- | ------- |  | ---------- | ------ | ---------------- |  | - | ------- |  | - | ------ | -
|                                      |  | Less than 12 months |       |                  | 12 months or more |     |            | Total |                 
|(in thousands)                        |  | FairValue           |       | UnrealizedLosses |                   |     | Fair Value |       | UnrealizedLosses |         |  | Fair Value |        | UnrealizedLosses | 
|U.S. Government agencies              |  | $                   | 1,997 |                  | $                 | (3  | )          |       | $                | 111,039 |  | $          | (2,170 | )                |  | $ | 113,036 |  | $ | (2,173 | )
|Mortgage-backed securities            |  |                     | 1,707 |                  |                   | (8  | )          |       |                  | 99,387  |  |            | (3,920 | )                |  |   | 101,094 |  |   | (3,928 | )
|Equity securities                     |  |                     |      |                  |                   |    |            |       |                  | 33,014  |  |            | (1,532 | )                |  |   | 33,014  |  |   | (1,532 | )
|                                      |  |                     |       |                  |                   |     |            |       |                  |         |  |            |        |                  |  |   |         |  |   |        |  
|Total temporarily impaired securities |  | $                   | 3,704 |                  | $                 | (11 | )          |       | $                | 243,440 |  | $          | 7,622  |                  |  | $ | 247,144 |  | $ | (7,633 | )
|                                      |  |                     |       |                  |                   |     |            |       |                  |         |  |            |        |                  |  |   |         |  |   |        |  

At September 30, 2006 the Company has three-hundred fourteen securities in an
unrealized loss position. The decline in fair value is due to interest rate fluctuations.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 5 - Premises and Equipment

Premises and equipment at September 30, 2006 and 2005 are summarized by major classification as follows:



|                                  |  |               |        |   |      |   |        |      |  |           
|--------------------------------- |  | ------------- | ------ | - | ---- | - | ------ | ---- |  | ----------
|                                  |  | September 30, |        |   |     
|(in thousands)                    |  | 2006          |        |   | 2005 |   |        | Life
|Office Building                   |  | $             | 8,982  |   |      | $ | 8,079  |      |  | 50 Years  
|Leasehold improvements            |  |               | 1,173  |   |      |   | 1,164  |      |  | 7-31 Years
|Furniture, fixtures and equipment |  |               | 8,641  |   |      |   | 8,058  |      |  | 10 Years  
|                                  |  |               |        |   |      |   |        |      |  |           
|                                  |  |               | 18,796 |   |      |   | 17,301 |      |  |           
|Accumulated depreciation          |  |               | (7,571 | ) |      |   | (6,519 | )    |  |           
|                                  |  |               |        |   |      |   |        |      |  |           
|                                  |  | $             | 11,225 |   |      | $ | 10,782 |      |  |           
|                                  |  |               |        |   |      |   |        |      |  |           

The Bank has entered into long-term leases for the land on which the main office
and branches are located. Rental expense under long-term leases for property for the years ended September 30, 2006, 2005 and 2004 was $1.2 million and $990,000, and $943,000, respectively. At September 30, 2006, minimum rental commitments
under noncancellable leases are as follows:



|                          |  |        |       
|------------------------- |  | ------ | ------
|Years Ended September 30, |  | Amount
|(in thousands)            |  |       
|2007                      |  | $      | 1,201 
|2008                      |  |        | 1,067 
|2009                      |  |        | 848   
|2010                      |  |        | 876   
|2011                      |  |        | 810   
|After 2011                |  |        | 7,556 
|                          |  |        |       
|                          |  | $      | 12,358
|                          |  |        |       

Note 6  Deposits

Deposits are summarized as follows at September 30, 2006 and 2005:



|                                  |  |        |         |   |        |   |        |   |         |  |        |  
|--------------------------------- |  | ------ | ------- | - | ------ | - | ------ | - | ------- |  | ------ | -
|                                  |  | 2006   |         |   | 2005   |  
|(dollars in thousands)            |  | Amount |         | % |        |   | Amount |   | %       | 
|Type of Account                   |  |        |         |   |        |   |        |   |         |  |        |  
|NOW                               |  | $      | 35,225  |   | 5.82   | % |        | $ | 38,844  |  | 6.50   | %
|Non-interest bearing NOW          |  |        | 23,406  |   | 3.87   |   |        |   | 24,653  |  | 4.12   |  
|Money market                      |  |        | 17,650  |   | 2.92   |   |        |   | 12,180  |  | 2.04   |  
|Passbook savings                  |  |        | 95,890  |   | 15.85  |   |        |   | 116,693 |  | 19.53  |  
|Certificates                      |  |        | 432,418 |   | 71.49  |   |        |   | 405,222 |  | 67.80  |  
|Purchase accounting premiums, net |  |        | 0       |   |       |   |        |   | 18      |  |       |  
|                                  |  |        |         |   |        |   |        |   |         |  |        |  
|                                  |  |        | 604,589 |   | 99.96  |   |        |   | 597,610 |  | 99.99  |  
|Accrued interest payable          |  |        | 256     |   | .04    |   |        |   | 59      |  | .01    |  
|                                  |  |        |         |   |        |   |        |   |         |  |        |  
|                                  |  | $      | 604,845 |   | 100.00 | % |        | $ | 597,669 |  | 100.00 | %
|                                  |  |        |         |   |        |   |        |   |         |  |        |  



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 -
Deposits - Continued



The aggregate amount of jumbo certificates of deposit with a minimum denomination of
$100,000 was approximately $130,642,236 and $129,888,000 at September 30, 2006 and 2005, respectively. Deposits in excess of $100,000 are not insured by the Savings Association Insurance Fund of the FDIC. The Bank has approximately $1.0 million
in securities pledged as collateral for deposits held by Maryland government entities.

At September 30, 2006,
scheduled maturities of certificates of deposit are as follows:



|     |  |                |        
|---- |  | -------------- | -------
|     |  | (in thousands)
|2007 |  | $              | 228,357
|2008 |  |                | 104,827
|2009 |  |                | 42,648 
|2010 |  |                | 41,670 
|2011 |  |                | 14,916 
|     |  |                |        
|     |  | $              | 432,418
|     |  |                |        

Interest expense on deposits for the years ended September 30, 2006, 2005 and
2004 is as follows:



|                 |  |      |        |      |   |        |  |   |       
|---------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|(in thousands)   |  | 2006 |        | 2005 |   | 2004  
|NOW              |  | $    | 98     |      | $ | 123    |  | $ | 191   
|Money market     |  |      | 482    |      |   | 132    |  |   | 128   
|Passbook savings |  |      | 1,020  |      |   | 1,107  |  |   | 1,037 
|Certificates     |  |      | 16,779 |      |   | 13,349 |  |   | 12,197
|                 |  |      |        |      |   |        |  |   |       
|                 |  | $    | 18,379 |      | $ | 14,711 |  | $ | 13,553
|                 |  |      |        |      |   |        |  |   |       

Note 7 - Federal Home Loan Bank of Atlanta Advances

The Bank has the following outstanding Federal Home Loan Bank advances as of September 30:



|                             |  |              |  |       |         |      |             |       |   |        
|---------------------------- |  | ------------ |  | ----- | ------- | ---- | ----------- | ----- | - | -------
|                             |  | 2006         |  | 2005 
|(dollars in thousands)       |  | Rate         |  | Total |         | Rate |             | Total
|Due                          |  |              |  |       |         |      |             |       |   |        
|2006                         |  |              |  | $     |        |      | 3.28%-4.23% |       | $ | 81,150 
|2007                         |  | 3.66%-5.28%  |  |       | 40,000  |      | 3.00%-3.66% |       |   | 35,000 
|2008                         |  | 4.34%-5.51%  |  |       | 16,000  |      | 4.34%-5.51% |       |   | 11,000 
|2009                         |  | 4.44%-4.89%  |  |       | 13,000  |      | 4.44%-4.89% |       |   | 8,000  
|2010                         |  | 6.33%-       |  |       | 9,000   |      | 6.33%-      |       |   | 9,000  
|2011 and thereafter          |  | 4.99%-5.011% |  |       | 40,000  |      |             |       |   |       
|Purchase accounting premiums |  |              |  |       | 473     |      |             |       |   | 646    
|                             |  |              |  |       |         |      |             |       |   |        
|Total                        |  |              |  | $     | 118,473 |      |             |       | $ | 144,796
|                             |  |              |  |       |         |      |             |       |   |        

The Bank has variable rate advances totaling $63,000,000 with interest rates
ranging from 4.89% to 6.33% and fixed rate advances totaling $55,000,000 with rates ranging from 3.00% to 4.44%.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 -
Federal Home Loan Bank of Atlanta Advances - Continued



The Bank has a line of credit with the Federal Home Loan Bank of Atlanta equal to 20% of total
assets. This line is secured by blanket floating lien on eligible 1-4 family residential loans, and eligible commercial loans. At September 30, 2006, the Bank had an available unused line of credit of $37.0 million. The line of credit requires
no compensating balances.

Note 8 - Junior Subordinated Debentures

In June, 2002, the Company issued $12,887,000 of junior subordinated debentures (the debentures) to BCSB Bankcorp Capital Trust I (the
Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures carry a rate of 3.65% over the three month LIBOR rate, and resets quarterly, the rate was 9.16% and 7.25% at September 30, 2006 and 2005
respectively. The debentures are the sole asset of BCSB Bankcorp Capital Trust I. BCSB Bankcorp Capital Trust I issued $12,500,000 of mandatory redeemable preferred securities to investors. The Companys obligation under the debentures and
related documents, taken together, constitute a full and unconditional guarantee by the Company of BCSB Bankcorp Capital Trust I obligations under the preferred securities. The Preferred securities are redeemable by the Company beginning with the
interest rate adjustment date after June 30, 2007 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 interest.

In September, 2004, the Company issued $10,310,000 of junior subordinated debentures (the debentures) to BCSB Bankcorp Capital Trust II
(the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures carry a rate of 3.00% over the three month LIBOR rate, and resets quarterly, the rate was 8.51% and 6.60% at September 30, 2006 and 2005
respectively. The debentures are the sole asset of BCSB Bankcorp Capital Trust II. BCSB Bankcorp Capital Trust II issued $10,000,000 of mandatory redeemable preferred securities to investors. The Companys obligation under the debentures and
related documents, taken together, constitute a full and unconditional guarantee by the Company of BCSB Bankcorp Capital Trust II obligations under the preferred securities. The Preferred securities are redeemable by the Company on or 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 interest.

Note 9 - Pension Plan

The Bank has a 401(k) Retirement Savings Plan. Employees may
contribute a percentage of their salary up to a maximum of $15,000 for 2006. The Bank was obligated to contribute 100% of the employees contribution, not to exceed 4% of the employees annual salary. The 4% contribution was temporarily
discontinued in April 2006. All employees who have completed one year of service with the Bank are eligible to participate. The Banks contribution to this plan amounted to $75,000, $253,000, and $282,000 for the years ended September 30,
2006, 2005 and 2004, respectively.

Note 10 - Directors Retirement Plan

On October 1, 2004, the Directors Retirement Plan was amended. The Companys retirement plan allows directors to defer
directors fees into Company stock, and will be paid out by delivering only Company stock to the participants, or they can defer their fees into a phantom investment vehicle which allows them to get a return based upon the mutual fund market.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 11- Employee Stock Ownership Plan

In 1998, the Bank reorganized from a federally chartered mutual savings bank to a federally chartered stock savings bank.

At the same time as the reorganization, the Bank established an Employee Stock Ownership Plan (ESOP) for its employees. On
July 8, 1998 the ESOP acquired 182,930 shares of the Companys common stock in connection with the Banks Reorganization to a mutual holding company form of organization. The ESOP holds the common stock in a trust for allocation among
participating employees, in trust or allocated to the participants accounts and an annual contribution from the Bank to the ESOP and earnings thereon.

All employees of the Bank who attain the age of 21 and complete one year of service with the Bank will be eligible to participate in the
ESOP. Participants must be employed at least 500 hours in a plan year in order to receive an allocation. Each participants vested interest under the ESOP is determined according to the following schedule: 0% for less than 2 years of service
with the Company or the Bank, 20% for 2 years of service, 40% for 3 years of service, 60% for 4 years of service, 80% for 5 years of service, and 100% for 6 years of service. For vesting purposes, a year of service means any plan year in which an
employee completes at least 1,000 hours of service (whether before or after the ESOPs January 1, 1998 effective date). Vesting accelerates to 100% upon a participants attainment of age 65, death or disability.

The ESOP will be funded by contributions made by the Bank in cash or common stock and dividends on the shares held in the Trust. The Bank
will recognize compensation expense as shares are committed for release from collateral at their current market price. Dividends on allocated shares are recorded as a reduction of retained earnings and dividends on unallocated shares are recorded as
a reduction of the debt service. The compensation costs for the years ended September 30, 2006, 2005 and 2004 were $286,000, $329,000, and $341,000, respectively.

The ESOP shares were as follows as of September 30:



|                              |  |      |         |      |   |        
|----------------------------- |  | ---- | ------- | ---- | - | -------
|                              |  | 2006 |         | 2005
|Shares released and allocated |  |      | 160,060 |      |   | 141,766
|Unearned shares               |  |      | 22,870  |      |   | 41,164 
|                              |  |      |         |      |   |        
|                              |  |      | 182,930 |      |   | 182,930
|                              |  |      |         |      |   |        
|Fair value of unearned shares |  | $    | 287,247 |      | $ | 563,535
|                              |  |      |         |      |   |        

Note 12 - Management Recognition Plan

On July 15, 1999, the Bank established a Management Recognition Plan (MRP) to retain personnel of experience and ability
in key positions of responsibility. Members of the Board of Directors and certain executive officers may be awarded a total of 91,464 shares of stock, which will be held in a separate trust that manages the MRP. The Bank funded the MRP by purchasing
the shares of common stock in the open market. The Bank initially awarded an aggregate of 45,600 shares of common stock. During the year ended September 30, 2002 the Bank awarded an additional 26,500



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##### Table of Contents

BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 -
Management Recognition Plan - Continued



shares, and intends to reserve the remaining 19,364 shares for possible future awards. Shares awarded to the participants in the MRP vest at a rate of
25% per year on each anniversary of the effective date of the MRP award. As of September 30, 2006, and 2005, 71,350, and 65,475 shares have vested respectively. If a participant terminates employment for reasons other than death,
disability, change in control or retirement he or she forfeits all rights to unvested shares. Compensation expense in the amount of the fair market value of the common stock at the date of the grant is recognized on a pro-rata basis over the years
during which the shares are earned. Compensation expense of $28,000, $53,300, and $52,000 was recognized for the MRP for the years ended September 30, 2006, 2005 and 2004, respectively.

Note 13 - Stock Option Plan

The
Company has a Stock Option Plan (the Plan) whereby 228,660 shares of common stock have been reserved for issuance under the Plan. Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the
Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. Options are exercisable in four annual installments at the market price of common stock at the date of grant. The Options must be exercised within ten years from the date of
grant. There were 82,500 options granted during the year ended September 30, 2002. No options were granted during the years ended September 30, 2006, 2005, 2004.

The following table summarizes the status of and changes in the Companys stock option plan during the past three years.

At September 30, 2006 there were 36,250 shares under option with an exercise price of $8.00 and a weighted average contractual life of 2.8 years and 77,250 shares with an exercise price of $11.375 and a weighted
average contractual life of 5.8 years. The total exercisable shares of 113,500 have a weighted average contractual life of 4.8 years, and an aggregate intrinsic value of $256,000.



|                                  |  |         |   |  |                                |      
|--------------------------------- |  | ------- | - |  | ------------------------------ | -----
|                                  |  | Shares  |   |  | Weighted AverageExercise Price
|Outstanding at October 1, 2003    |  | 142,625 |   |  | $                              | 9.93 
|Options exercised                 |  | (14,000 | ) |  |                                | 8.36 
|Granted                           |  |        |   |  |                                |     
|                                  |  |         |   |  |                                |      
|Outstanding at September 30, 2004 |  | 128,625 |   |  | $                              | 10.10
|                                  |  |        
|Options exercised                 |  | (13,375 | ) |  |                                | 8.60 
|Granted                           |  |        |   |  |                                |     
|                                  |  |         |   |  |                                |      
|Outstanding at September 30, 2005 |  | 115,250 |   |  | $                              | 10.28
|                                  |  |        
|Options exercised                 |  | (1,750  | ) |  |                                | 10.41
|Granted                           |  |        |   |  |                                |      
|                                  |  |         |   |  |                                |      
|Outstanding at September 30, 2006 |  | 113,500 |   |  | $                              | 10.30
|                                  |  |         |   |  |                                |      
|                                  |  |        
|Exercisable at September 30, 2006 |  | 113,500 |   |  | $                              | 10.30
|                                  |  |         |   |  |                                |      



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##### Table of Contents

BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 -
Stock Option Plan - Continued



The total intrinsic value of options exercised during the year ended
September 30, 2006 was approximately $3,782.

Our adoption of SFAS No. 123R will continue to affect our Financial
Position and Results of Operations in future periods. At September 30, 2006, the total value of all remaining options both outstanding and vesting to be expensed after October 1, 2006 is expected to be approximately $0. This amount,
however, may be affected by additional future option grants.

The Company estimated the grant date fair value of each option
awarded in fiscal 2002 using the Black-Scholes Option-Pricing model with the following relevant assumptions: dividend yield of 4.08%, risk-free interest rate of 4.49% and expected lives of 10 years. The assumption for expected volatility was 32.63%.
The estimated fair value of each option granted was $2.80. No additional options have been granted since May 2002.

Note 14 - Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Banks capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the regulations) and risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2006, that
the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 2006, the most recent
notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I
risk- based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks category. The Banks actual capital amounts and ratios are also
presented in the table.



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##### Table of Contents

BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 -
Regulatory Capital - Continued



The following table presents the Banks capital position based on the September 30
financial statements and the current capital requirements.



|                   |  |                        |        |       |                             |   |        |                                                              |        |  |     |        |  |       |        |  |      |  
|------------------ |  | ---------------------- | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------ | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                   |  | Actual                 |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalizedUnder PromptCorrective ActionProvisions |       
|                   |  | Amount                 |        | Ratio |                             |   | Amount |                                                              | Ratio  |  |     | Amount |  | Ratio |       
|                   |  | (dollars in thousands) |       
|September 30, 2006 |  |                        |        |       |                             |   |        |                                                              |        |  |     |        |  |       |        |  |      |  
|Tangible (1)       |  | $                      | 46,833 |       | 6.01                        | % |        | $                                                            | 11,685 |  | 1.5 | %      |  | $     | N/A    |  | N/A  | %
|Tier I capital (2) |  |                        | 46,833 |       | 10.61                       |   |        |                                                              | N/A    |  | N/A |        |  |       | 26,487 |  | 6.0  |  
|Core (1)           |  |                        | 46,833 |       | 6.01                        |   |        |                                                              | 31,161 |  | 4.0 |        |  |       | 38,951 |  | 5.0  |  
|Risk-weighted (2)  |  |                        | 49,103 |       | 11.12                       |   |        |                                                              | 35,315 |  | 8.0 |        |  |       | 44,144 |  | 10.0 |  
|                   |  |                        |        |       |                             |  
|September 30, 2005 |  |                        |        |       |                             |   |        |                                                              |        |  |     |        |  |       |        |  |      |  
|Tangible (1)       |  | $                      | 55,325 |       | 6.89                        | % |        | $                                                            | 12,051 |  | 1.5 | %      |  | $     | N/A    |  | N/A  | %
|Tier I capital (2) |  |                        | 55,325 |       | 12.58                       |   |        |                                                              | N/A    |  | N/A |        |  |       | 26,395 |  | 6.0  |  
|Core (1)           |  |                        | 55,325 |       | 6.89                        |   |        |                                                              | 32,138 |  | 4.0 |        |  |       | 40,172 |  | 5.0  |  
|Risk-weighted (2)  |  |                        | 57,534 |       | 13.08                       |   |        |                                                              | 35,194 |  | 8.0 |        |  |       | 43,992 |  | 10.0 |  



|(1) | To adjust total assets
|--- | ----------------------



|(2) | To risk-weighted assets
|--- | -----------------------

The OTS has
adopted an interest rate risk component of regulatory capital requirements effective January 1, 1994. The rule requires additional capital to be maintained if the Banks interest rate risk exposure, measured by the decline in the market
value of the Banks net portfolio value, exceeds 2% of assets as a result of a 200 basis point shift in interest rates. As of September 30, 2006, the Bank is not subject to the interest rate risk requirement.

OTS regulations limit the payment of dividends and other capital distributions by the Bank. The Bank is able to pay dividends during a
calendar year without regulatory approval to the extent of the greater of (i) an amount which will reduce by one-half its surplus capital ratio at the beginning of the year plus all its net income determined on the basis of generally accepted
accounting principles for that calendar year or (ii) 75% of net income for the last four calendar quarters.

The Bank
is restricted in paying dividends on its stock to the greater of the restrictions described in the preceding paragraph, or an amount that would reduce its retained earnings below its regulatory capital requirement or the accumulated bad debt
deduction.

As of December 2, 2005 the Bank formally entered into a Supervisory Agreement with the Office of Thrift
Supervision (OTS). The entry into the Supervisory Agreement was based on the Banks 2005 report of examination in which the OTS concluded that grounds existed for the initiation of administrative proceedings against the Bank.
Without admitting or denying that such grounds existed, the Bank determined to enter into the Supervisory Agreement to cooperate with the OTS and as evidence of the Banks intent to comply with all applicable laws and regulations and engage in
safe and sound practices.

The Company was notified in November 2006 by the Office of Thrift Supervision that is must cease
paying dividends to public stockholders.

During December 2006, the Company announced that it has determined to suspend its
dividend program and has agreed with its primary regulator, the Office of Thrift Supervision, that it will not issue dividend to its stockholders going forward without the regulators consent as the Company seeks to implement its business plan
to improve earnings, capital position and liquidity.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 15- Income Taxes

The income tax provision consists of the following for the years ended September 30, 2006, 2005 and 2004:



|                  |  |                        |        |   |      |   |      |      |  |   |      |  
|----------------- |  | ---------------------- | ------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                  |  | 2006                   |        |   | 2005 |   |      | 2004 | 
|                  |  | (dollars in thousands) |       
|Current expense   |  | $                      | (4,015 | ) |      | $ | 242  |      |  | $ | 348  |  
|Deferred benefit  |  |                        | (34    | ) |      |   | (131 | )    |  |   | (204 | )
|                  |  |                        |        |   |      |   |      |      |  |   |      |  
|Total tax expense |  | $                      | (4049  | ) |      | $ | 111  |      |  | $ | 144  |  
|                  |  |                        |        |   |      |   |      |      |  |   |      |  

The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at September 30, 2006 and 2005 are as follows:



|                                                  |  |      |       |   |      |   |       |  
|------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                  |  | 2006 |       |   | 2005 |  
|Deferred Tax Assets:                              |  |      |       |   |      |   |       |  
|ESOP and MRP                                      |  | $    | 38    |   |      | $ | 44    |  
|Deferred compensation                             |  |      | 817   |   |      |   | 572   |  
|Allowance for loan losses                         |  |      | 1,035 |   |      |   | 1,061 |  
|Allowance for uncollected interest                |  |      | 10    |   |      |   | 14    |  
|Net operating loss carry forward                  |  |      | 3,981 |   |      |   |      |  
|Unrealized holding losses on securities           |  |      | 2,739 |   |      |   | 2,429 |  
|                                                  |  |      |       |   |      |   |       |  
|Total gross deferred tax assets                   |  |      | 8,620 |   |      |   | 4,120 |  
|Deferred Tax Liabilities:                         |  |      |       |   |      |   |       |  
|Federal Home Loan Bank of Atlanta stock dividends |  |      | (209  | ) |      |   | (209  | )
|Depreciation                                      |  |      | (602  | ) |      |   | (395  | )
|Market value change in Rabbi Trust assets         |  |      | (44   | ) |      |   | (68   | )
|Purchase accounting premiums, net                 |  |      | 6     |   |      |   | (4    | )
|                                                  |  |      |       |   |      |   |       |  
|Total gross deferred tax liabilities              |  |      | (849  | ) |      |   | (676  | )
|                                                  |  |      |       |   |      |   |       |  
|Net Deferred Tax Assets                           |  | $    | 7,771 |   |      | $ | 3,444 |  
|                                                  |  |      |       |   |      |   |       |  

As of September 30, 2006 the Company has a federal net operating loss carry forward of $11.7
million which expires in the year 2026.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 15 - Income Taxes - Continued

The amount computed by applying the statutory federal income tax rate to income before taxes is greater than the taxes provided for the following reasons:



|                                                   |  |                                   |        |   |                        |        |    |        |   |      |                        |  |        |        |  |   |                        |   |  |        |  
|-------------------------------------------------- |  | --------------------------------- | ------ | - | ---------------------- | ------ | -- | ------ | - | ---- | ---------------------- |  | ------ | ------ |  | - | ---------------------- | - |  | ------ | -
|                                                   |  | For the Years Ended September 30, |       
|                                                   |  | 2006                              |        |   | 2005                   |        |    | 2004   |  
|(dollars in thousands)                             |  | Amount                            |        |   | Percent ofPretaxIncome |        |    | Amount |   |      | Percent ofPretaxIncome |  |        | Amount |  |   | Percent ofPretaxIncome |  
|Statutory federal income tax rate                  |  | $                                 | (3,890 | ) |                        | (34.00 | )% |        | $ | 242  |                        |  | 34.00  | %      |  | $ | 350                    |   |  | 34.00  | %
|Changes Resulting From                             |  |                                   |        |   |                        |        |    |        |   |      |                        |  |        |        |  |   |                        |   |  |        |  
|State income tax net of federal income tax benefit |  |                                   |       |   |                        |       |    |        |   |     |                        |  |       |        |  |   | (14                    | ) |  | (1.36  | )
|Income from life insurance                         |  |                                   | (183   | ) |                        | (1.60  | )  |        |   | (154 | )                      |  | (21.63 | )      |  |   | (166                   | ) |  | (16.09 | )
|Other                                              |  |                                   | 24     |   |                        | .21    |    |        |   | 23   |                        |  | 3.23   |        |  |   | (26                    | ) |  | (2.56  | )
|                                                   |  |                                   |        |   |                        |        |    |        |   |      |                        |  |        |        |  |   |                        |   |  |        |  
|                                                   |  | $                                 | (4,049 | ) |                        | (35.39 | )% |        | $ | 111  |                        |  | 15.60  | %      |  | $ | 144                    |   |  | 13.99  | %
|                                                   |  |                                   |        |   |                        |        |    |        |   |      |                        |  |        |        |  |   |                        |   |  |        |  

The Company and its subsidiaries file a consolidated income tax return on a fiscal year basis. The
returns have been audited by the Internal Revenue Service through the year ended September 30, 1994.

Qualified thrift
lenders such as the Bank are not required to provide a deferred tax liability for bad debt reserves for tax purposes that arose in fiscal years beginning before December 31, 1987. Such bad debt reserve for the Bank amounted to approximately
$6.2 million with an income tax effect of approximately $2.4 million at September 30, 2006. This bad debt reserve would become taxable if certain conditions are met by the Bank.

Note 16- Related Party Transactions

Director Michael J. Klein is a member holding a
20% ownership interest in Colgate Investments, LLC, a limited liability company that owns real property that the Bank leases for a branch office site. The Bank paid $65,000, $67,000 and $57,000 in rent to Colgate Investments, LLC during the years
ended September 30, 2006, 2005 and 2004 respectively, and expects to pay $67,000 during the year ended September 30, 2007. The remaining 80% of Colgate Investments, LLC is owned by Mr. Kleins siblings.

Note 17- Disclosures About Fair Value of Financial Instruments

The estimated fair values of the Banks financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques
prescribed by the FASB and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The carrying amount is a reasonable estimate of fair value for cash, federal funds and interest-bearing deposits in other
banks. Fair value is based upon market prices quoted by dealers for investment securities and mortgage backed securities. The carrying amount of Federal Home Loan Bank of Atlanta stock is a reasonable estimate of fair value. Loans receivable were
discounted using a single discount rate, comparing the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. These rates were used for each aggregated category of loans as
reported on the Office of Thrift Supervision Quarterly Report. The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. Trust Preferred Securities are considered to be at
fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered on deposits



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 -
Disclosures About Fair Value of Financial Instruments- Continued



of similar remaining maturities. The fair value of Federal Home Loan Bank advances is estimated using rates currently offered on advances of similar
remaining maturities. The carrying amounts of accrued interest receivable, accrued interest payable, and mortgage servicing rights approximate fair value. Fair values for off-balance-sheet, credit-related financial instruments are based on fees
currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.

The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of
credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

The estimated fair values of the Banks financial instruments are as follows:



|                                                |  |                        |         |                     |         |                |   |                     |  |        
|----------------------------------------------- |  | ---------------------- | ------- | ------------------- | ------- | -------------- | - | ------------------- |  | -------
|                                                |  | September 30, 2006     |         | September 30, 2005 
|                                                |  | CarryingAmount         |         | EstimatedFair Value |         | CarryingAmount |   | EstimatedFair Value
|                                                |  | (Amounts in Thousands)
|Financial Assets                                |  |                        |         |                     |         |                |   |                     |  |        
|                                                |  |                        |         |                    
|Cash                                            |  | $                      | 8,421   |                     | 8,421   |                | $ | 21,713              |  | 21,713 
|Interest bearing deposits in other banks        |  |                        | 2,854   |                     | 2,854   |                |   | 1,578               |  | 1,578  
|Federal funds sold                              |  |                        | 462     |                     | 462     |                |   | 238                 |  | 238    
|Interest bearing time deposits                  |  |                        | 100     |                     | 100     |                |   | 100                 |  | 100    
|Investment securities  available for sale      |  |                        | 143,068 |                     | 143,068 |                |   | 151,386             |  | 151,386
|Investment securities  held to maturity        |  |                        | 4,496   |                     | 4,488   |                |   | 1,995               |  | 1,982  
|                                                |  |                        |         |                    
|Loans Receivable                                |  |                        |         |                     |         |                |   |                     |  |        
|Mortgage loans                                  |  |                        | 412,120 |                     | 402,508 |                |   | 379,344             |  | 381,685
|Share loans                                     |  |                        | 1,256   |                     | 1,256   |                |   | 1,399               |  | 1,399  
|Consumer loans                                  |  |                        | 50,400  |                     | 51,063  |                |   | 73,604              |  | 75,732 
|Mortgage backed securities  available for sale |  |                        | 86,801  |                     | 86,801  |                |   | 112,120             |  | 112,120
|Mortgage backed securities  held to maturity   |  |                        | 28,675  |                     | 28,356  |                |   | 26,470              |  | 26,259 
|Federal Home Loan Bank of Atlanta stock         |  |                        | 6,972   |                     | 6,972   |                |   | 8,060               |  | 8,060  
|Accrued interest receivable                     |  |                        | 2,752   |                     | 2,752   |                |   | 2,676               |  | 2,676  
|Mortgage servicing rights                       |  |                        | 124     |                     | 124     |                |   | 134                 |  | 134    
|                                                |  |                        |         |                    
|Financial Liabilities                           |  |                        |         |                     |         |                |   |                     |  |        
|                                                |  |                        |         |                    
|Deposits                                        |  | $                      | 604,845 |                     | 604,585 |                | $ | 597,669             |  | 596,920
|Federal Home Loan Bank of Atlanta advances      |  |                        | 118,473 |                     | 118,378 |                |   | 144,796             |  | 144,748
|Junior Subordinated Debt                        |  |                        | 23,197  |                     | 23,197  |                |   | 23,197              |  | 23,197 
|Accrued interest payable                        |  |                        | 256     |                     | 256     |                |   | 429                 |  | 429    



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 18- Condensed Financial Information (Parent Company Only)

Information as to the financial position of BCSB Bankcorp as of September 30, 2006, and 2005 and the results of operations and cash
flows for the years ended September 30, 2006, 2005, and 2004 are summarized below.



|                                           |  |                |        |      |   |       
|------------------------------------------ |  | -------------- | ------ | ---- | - | ------
|Statements of Financial Condition          |  | September 30, 
|                                           |  | 2006           |        | 2005
|                                           |  | (in thousands)
|Assets                                     |  |                |        |      |   |       
|Cash                                       |  | $              | 1,994  |      | $ | 56    
|Interest bearing deposits in other banks   |  |                | 33     |      |   | 1,116 
|Investment securities  available for sale |  |                | 3,258  |      |   | 5,407 
|Investment securities  held to maturity   |  |                | 1,496  |      |   | 1,995 
|Employee Stock Ownership Plan loan         |  |                | 364    |      |   | 547   
|Accrued interest receivable                |  |                | 39     |      |   | 28    
|Investment in subsidiaries                 |  |                | 47,888 |      |   | 54,301
|Prepaid income taxes                       |  |                | 48     |      |   | 98    
|Other assets                               |  |                | 732    |      |   | 885   
|                                           |  |                |        |      |   |       
|Total assets                               |  | $              | 55,852 |      | $ | 64,433
|                                           |  |                |        |      |   |       
|Liabilities and Stockholders Equity       |  |                |        |      |   |       
|Liabilities                                |  |                |        |      |   |       
|Junior Subordinated Debentures             |  | $              | 23,197 |      | $ | 23,197
|Dividends payable                          |  |                | 270    |      |   | 269   
|Other liabilities                          |  |                | 209    |      |   | 165   
|                                           |  |                |        |      |   |       
|                                           |  |                | 23,676 |      |   | 23,631
|Total stockholders equity                 |  |                | 32,176 |      |   | 40,802
|                                           |  |                |        |      |   |       
|Total liabilities and stockholders equity |  | $              | 55,852 |      | $ | 64,433
|                                           |  |                |        |      |   |       



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 -
Condensed Financial Information (Parent Company Only) - Continued



|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                      |  | Years Ended September 30, |       
|                                                      |  | 2006                      |        |   | 2005 |   |        | 2004 | 
|                                                      |  | (in thousands)            |       
|Statements of Operations                              |  |                           |        |   |      |   |        |      |  |   |        |  
|Interest and fees on loans                            |  | $                         | 27     |   |      | $ | 29     |      |  | $ | 32     |  
|Interest and dividends on investment securities       |  |                           | 367    |   |      |   | 311    |      |  |   | 273    |  
|Other interest income                                 |  |                           | 17     |   |      |   | 35     |      |  |   | 26     |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Total interest income                                 |  |                           | 411    |   |      |   | 375    |      |  |   | 331    |  
|Interest on borrowings                                |  |                           | 1,921  |   |      |   | 1,464  |      |  |   | 1,086  |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Net interest (expense)                                |  |                           | (1,510 | ) |      |   | (1,089 | )    |  |   | (755   | )
|Other income                                          |  |                           | (46    | ) |      |   |       |      |  |   | 4      |  
|Non interest expense                                  |  |                           |        |   |      |   |        |      |  |   |        |  
|Professional fees                                     |  |                           | 102    |   |      |   | 93     |      |  |   | 78     |  
|Other expenses                                        |  |                           | 215    |   |      |   | 220    |      |  |   | 204    |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Total non-interest expense                            |  |                           | 317    |   |      |   | 313    |      |  |   | 282    |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Loss before tax benefit                               |  |                           | (1,873 | ) |      |   | (1,402 | )    |  |   | (1,033 | )
|Income tax benefit                                    |  |                           | (637   | ) |      |   | (477   | )    |  |   | (351   | )
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Loss before equity in net (loss) income of subsidiary |  |                           | (1,236 | ) |      |   | (925   | )    |  |   | (682   | )
|Equity in net (loss) income of subsidiary             |  |                           | (6,157 | ) |      |   | 1,526  |      |  |   | 1,567  |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Net (loss) income                                     |  | $                         | (7,393 | ) |      | $ | 601    |      |  | $ | 885    |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|                                                      | 
|                                                      |  | Years Ended September 30, |       
|                                                      |  | 2006                      |        |   | 2005 |   |        | 2004 | 
|                                                      |  | (in thousands)            |       
|Statements of Cash Flows                              |  |                           |        |   |      |   |        |      |  |   |        |  
|                                                      |  |                           |       
|Net (loss) income                                     |  | $                         | (7,393 | ) |      | $ | 601    |      |  | $ | 885    |  
|Adjustments to reconcile Net Income to Net Cash Used  |  |                           |        |   |      |   |        |      |  |   |        |  
|By Operating Activities                               |  |                           |        |   |      |   |        |      |  |   |        |  
|Accretion of discount on investments                  |  |                           |       |   |      |   | 2      |      |  |   | 1      |  
|Loss (gain) on sale of investments                    |  |                           | 46     |   |      |   |       |      |  |   | (4     | )
|Equity in net (loss) income of subsidiary             |  |                           | 6,157  |   |      |   | (1,526 | )    |  |   | (1,567 | )
|(Increase) decrease in accrued interest receivable    |  |                           | (12    | ) |      |   | 12     |      |  |   | 25     |  
|Decrease (increase) in prepaid taxes                  |  |                           | 51     |   |      |   | 461    |      |  |   | (334   | )
|Decrease in receivable from subsidiary                |  |                           | 183    |   |      |   | 183    |      |  |   | 183    |  
|Decrease (increase) in other assets                   |  |                           | 154    |   |      |   | (324   | )    |  |   | 137    |  
|Decrease in income taxes payable                      |  |                           |       |   |      |   | (174   | )    |  |   | (15    | )
|Increase in other liabilities                         |  |                           | 44     |   |      |   | 60     |      |  |   | 75     |  
|Noncash compensation under stock-based benefit plan   |  |                           | 52     |   |      |   | 52     |      |  |   | 52     |  
|                                                      |  |                           |        |   |      |   |        |      |  |   |        |  
|Net cash used by operating activities                 |  |                           | (718   | ) |      |   | (653   | )    |  |   | (562   | )



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 -
Condensed Financial Information (Parent Company Only) - Continued



|                                                                     |  |                           |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Years Ended September 30, |       
|                                                                     |  | 2006                      |        |   | 2005 |   |        | 2004 | 
|                                                                     |  | (in thousands)            |       
|Cash Flows from Investing Activities                                 |  |                           |        |   |      |   |        |      |  |   |        |  
|Proceeds from maturities of investment securities  held to maturity |  | $                         | 500    |   |      | $ | 500    |      |  | $ | 2,000  |  
|Proceeds from sale of investment securities  available for sale     |  |                           | 2,376  |   |      |   |       |      |  |   | 21     |  
|Purchase of investment securities  available for sale               |  |                           | (257   | ) |      |   | (210   | )    |  |   | (2,153 | )
|Purchase of investment securities  held to maturity                 |  |                           |       |   |      |   |       |      |  |   | (2,498 | )
|                                                                     |  |                           |        |   |      |   |        |      |  |   |        |  
|Net cash provided (used) by investing activities                     |  |                           | 2,619  |   |      |   | 290    |      |  |   | (2,630 | )
|                                                                     |  |                           |       
|Cash Flows from Financing Activities                                 |  |                           |        |   |      |   |        |      |  |   |        |  
|Treasury Stock repurchase                                            |  |                           | (2     | ) |      |   | (5     | )    |  |   | (6     | )
|Exercised options                                                    |  |                           | 15     |   |      |   | 115    |      |  |   | 117    |  
|Dividends paid                                                       |  |                           | (1,059 | ) |      |   | (1,045 | )    |  |   | (1,033 | )
|                                                                     |  |                           |        |   |      |   |        |      |  |   |        |  
|Net cash used by financing activities                                |  |                           | (1,046 | ) |      |   | (935   | )    |  |   | (922   | )
|                                                                     |  |                           |       
|Increase (decrease) in cash and cash equivalents                     |  |                           | 855    |   |      |   | (1,298 | )    |  |   | (4,114 | )
|Cash and cash equivalents at beginning of period                     |  |                           | 1,172  |   |      |   | 2,470  |      |  |   | 6,584  |  
|                                                                     |  |                           |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of period                           |  | $                         | 2,027  |   |      | $ | 1,172  |      |  | $ | 2,470  |  
|                                                                     |  |                           |        |   |      |   |        |      |  |   |        |  

Note 19  Quarterly Financial Data (Unaudited)

Summarized unaudited quarterly financial data for the year ended September 30, 2006 (as restated) is as follows:



|                                                    |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------ | ----- | - | ------------- | - | ----- | ------------ |  | - | ------------- | - |  | - | ------ | -
|Operating Summary:                                  |  | FirstQuarter                         |       |   | SecondQuarter |   |       | ThirdQuarter |  |   | FourthQuarter |  
|                                                    |  | (in thousands except per share data) |      
|Interest Income                                     |  | $                                    | 9,596 |   |               | $ | 9,881 |              |  | $ | 10,179        |   |  | $ | 10,339 |  
|Interest Expense                                    |  |                                      | 5,970 |   |               |   | 6,135 |              |  |   | 6,607         |   |  |   | 7,064  |  
|                                                    |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|Net Interest Income                                 |  |                                      | 3,626 |   |               |   | 3,746 |              |  |   | 3,572         |   |  |   | 3,275  |  
|Provision for Loan Losses                           |  |                                      | 6     |   |               |   | 126   |              |  |   | 20            |   |  |   | 42     |  
|                                                    |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|Net Interest Income after provision for loan losses |  |                                      | 3,620 |   |               |   | 3,620 |              |  |   | 3,552         |   |  |   | 3,233  |  
|Other Income                                        |  |                                      | 380   |   |               |   | 385   |              |  |   | 400           |   |  |   | 336    |  
|Other Expenses                                      |  |                                      | 4,275 |   |               |   | 3,893 |              |  |   | 14,445        |   |  |   | 4,355  |  
|                                                    |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|Income (loss) before income tax expense             |  |                                      | (275  | ) |               |   | 112   |              |  |   | (10,493       | ) |  |   | (786   | )
|Income Taxes (benefit)                              |  |                                      | (156  | ) |               |   | (2    | )            |  |   | (3,603        | ) |  |   | (288   | )
|                                                    |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|Net Income                                          |  | $                                    | (119  | ) |               | $ | 114   |              |  | $ | (6,890        | ) |  | $ | (498   | )
|                                                    |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|Per share date (a):                                 |  |                                      |       |   |               |   |       |              |  |   |               |   |  |   |        |  
|Earnings  basic                                    |  | $                                    | (.02  | ) |               | $ | .02   |              |  | $ | (1.18         | ) |  | $ | (.08   | )
|Earnings  diluted                                  |  | $                                    | (.02  | ) |               | $ | .02   |              |  | $ | (1.18         | ) |  | $ | (.08   | )



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 19  Quarterly Financial Data (Unaudited) - Continued

Summarized unaudited quarterly financial data for the year ended September 30, 2005 (as restated) is as follows:



|                                                    |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|--------------------------------------------------- |  | ------------------------------------ | ----- | - | ------------- | - | ----- | ------------ |  | ------------- | ----- |  | - | ----- | -
|Operating Summary:                                  |  | FirstQuarter                         |       |   | SecondQuarter |   |       | ThirdQuarter |  | FourthQuarter |      
|                                                    |  | (in thousands except per share data) |      
|Interest Income                                     |  | $                                    | 8,633 |   |               | $ | 8,918 |              |  | $             | 9,119 |  | $ | 9,553 |  
|Interest Expense                                    |  |                                      | 4,624 |   |               |   | 4,836 |              |  |               | 5,238 |  |   | 5,686 |  
|                                                    |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|Net Interest Income                                 |  |                                      | 4,009 |   |               |   | 4,082 |              |  |               | 3,881 |  |   | 3,867 |  
|Provision for Loan Losses                           |  |                                      | 201   |   |               |   | 54    |              |  |               | 98    |  |   | 100   |  
|                                                    |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|Net Interest Income after provision for loan losses |  |                                      | 3,808 |   |               |   | 4,028 |              |  |               | 3,783 |  |   | 3,767 |  
|Other Income                                        |  |                                      | 379   |   |               |   | 269   |              |  |               | 1,198 |  |   | 294   |  
|Other Expenses                                      |  |                                      | 4,114 |   |               |   | 4,208 |              |  |               | 4,230 |  |   | 4,262 |  
|                                                    |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|Income (loss) before income tax expense             |  |                                      | 73    |   |               |   | 89    |              |  |               | 751   |  |   | (201  | )
|Income Taxes                                        |  |                                      | (13   | ) |               |   | (7    | )            |  |               | 217   |  |   | (86   | )
|                                                    |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|Net Income                                          |  | $                                    | 86    |   |               | $ | 96    |              |  | $             | 534   |  | $ | (115  | )
|                                                    |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|Per share date (a):                                 |  |                                      |       |   |               |   |       |              |  |               |       |  |   |       |  
|Earnings  basic                                    |  | $                                    | .01   |   |               | $ | .02   |              |  | $             | .09   |  | $ | (.02  | )
|Earnings  diluted                                  |  | $                                    | .01   |   |               | $ | .02   |              |  | $             | .09   |  | $ | (.02  | )

Summarized unaudited quarterly financial data for the year ended September 30,
2004 (as restated) is as follows:



|                                                    |  |                                      |       |               |   |              |  |               |       |  |   |      
|--------------------------------------------------- |  | ------------------------------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- |  | - | -----
|Operating Summary:                                  |  | FirstQuarter                         |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|                                                    |  | (in thousands except per share data)
|Interest Income                                     |  | $                                    | 7,810 |               | $ | 7,660        |  | $             | 8,275 |  | $ | 8,489
|Interest Expense                                    |  |                                      | 3,943 |               |   | 3,912        |  |               | 4,145 |  |   | 4,362
|                                                    |  |                                      |       |               |   |              |  |               |       |  |   |      
|Net Interest Income                                 |  |                                      | 3,867 |               |   | 3,748        |  |               | 4,130 |  |   | 4,127
|Provision for Loan Losses                           |  |                                      | 182   |               |   | 86           |  |               | 170   |  |   | 270  
|                                                    |  |                                      |       |               |   |              |  |               |       |  |   |      
|Net Interest Income after provision for loan losses |  |                                      | 3,685 |               |   | 3,662        |  |               | 3,960 |  |   | 3,857
|Other Income                                        |  |                                      | 526   |               |   | 448          |  |               | 349   |  |   | 277  
|Other Expenses                                      |  |                                      | 3,931 |               |   | 3,926        |  |               | 4,015 |  |   | 3,863
|                                                    |  |                                      |       |               |   |              |  |               |       |  |   |      
|Income before income tax expense                    |  |                                      | 280   |               |   | 184          |  |               | 294   |  |   | 271  
|Income Taxes                                        |  |                                      | 54    |               |   | 23           |  |               | 61    |  |   | 6    
|                                                    |  |                                      |       |               |   |              |  |               |       |  |   |      
|Net Income                                          |  | $                                    | 226   |               | $ | 161          |  | $             | 233   |  | $ | 265  
|                                                    |  |                                      |       |               |   |              |  |               |       |  |   |      
|Per share data:                                     |  |                                      |       |               |   |              |  |               |       |  |   |      
|Earnings - basic                                    |  | $                                    | .04   |               | $ | .03          |  | $             | .04   |  | $ | .04  
|Earnings - diluted                                  |  | $                                    | .04   |               | $ | .03          |  | $             | .04   |  | $ | .04  



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 20  Subsequent Events

In December 2006, the company announced that it has determined to suspend its dividend program and has agreed with its primary regulator, the Office of Thrift Supervision that it will not issue a dividend to its
stockholders going forward without the regulators consent as the Company seeks to implement its business plan to improve earnings, capital position and liquidity.

On February 14, 2007, the Board of Directors of BCSB Bankcorp, Inc. (the Company), Baltimore County Savings Bank, F.S.B. (the Bank) and Baltimore County Savings Bank, M.H.C. (the
MHC), unanimously adopted a Plan of Conversion and Reorganization (the Plan), pursuant to which Baltimore County Savings Bank, F.S.B. will reorganize from the mutual holding company structure to the stock holding company
structure. Pursuant to the terms of the Plan, the MHC will convert from the mutual form to a federal interim stock savings association and simultaneously merge with and into Baltimore County Savings Bank, with Baltimore County Savings Bank as
survivor. Additionally, BCSB Bankcorp, Inc. will convert to a federal interim stock savings association and simultaneously merge with and into Baltimore County Savings Bank, with Baltimore County Savings Bank as survivor. Baltimore County Savings
Bank will form a new Maryland corporation that will acquire all of the outstanding shares of Baltimore County Savings Banks common stock. Shares of BCSB Bankcorp, Incs common stock, other than those held by the MHC, will be converted
into shares of the new Maryland corporation pursuant to an exchange ratio designed to approximate the percentage ownership interests of such persons.

The Plan of Conversion and Reorganization is subject to the approval of: (1) the Office of Thrift Supervision; (2) at least a majority of the total number of votes eligible to be cast by members of the MHC; (3) the
holders of at least two-thirds of the outstanding shares BCSB Bankcorp, Inc. common stock; and (4) at least a majority of outstanding shares held by holders of BCSB Bankcorp, Inc. common stock other than the MHC. The new Maryland holding company
will offer shares of its common stock for sale to Baltimore County Savings Banks eligible account holders, to Baltimore County Savings Banks tax-qualified employee benefit plans and to members of the general public in a subscription and
community offering in the manner and subject to the priorities set forth in the Plan. The highest priority will be depositors with qualifying deposits as of December 31, 2005.

At the time of the Conversion and Reorganization, the Bank shall establish a liquidation account. The function of the liquidation account will be to
preserve the rights of certain holders of Deposit Accounts in the Bank who maintain such accounts in the Bank following the Conversion and Reorganization to receive a priority in any distributions in the unlikely event of a liquidation of the Bank
subsequent to the Conversion and Reorganization.

The Company estimates costs associated with offering to be between $3.0 million and $3.7
million, depending on the range of the offering. These costs will be a reduction of the proceeds from the offering. If the Company determines that it is unable to successfully complete the offering, these costs will be expensed in the period in
which that determination is made.



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 21  Restatement

In June 2007, the Company discovered that losses resulting from unpaid loan balances associated with repossessed automobiles had been included in the financial line Loss on repossessed assets rather than
included as a loan charge-off within the allowance for loan losses. This reclassification has the effect of reducing the amounts included in the line item Loss on repossessed assets and increasing, by a similar amount, the amounts
included in Provision for losses on loans. While this reclassification of expenses within the consolidated statements of operations does not affect net income (loss), net income (loss) per share, the consolidated statements of
stockholders equity or consolidated balance sheets, management determined that the reclassification required a restatement of the consolidated statements of operations and cash flows and related notes for the three years ended September
30,2006.

The following table presents the effect of the restatement on the Consolidated Statements of Operations for the years ended
September 30, 2006, 2005 and 2004.



|                                                        |  |                    |        |                      |                    |        |                    |  |                      |        |            |   |                      |  |   |        |  |   |       
|------------------------------------------------------- |  | ------------------ | ------ | -------------------- | ------------------ | ------ | ------------------ |  | -------------------- | ------ | ---------- | - | -------------------- |  | - | ------ |  | - | ------
|                                                        |  | September 30, 2006 |        |                      | September 30, 2005 |        | September 30, 2004
|                                                        |  | AsRestated         |        | AsPreviouslyReported |                    |        | AsRestated         |  | AsPreviouslyReported |        | AsRestated |   | AsPreviouslyReported
|Provision (Recovery) for losses on loans                |  | $                  | 194    |                      | $                  | (109   | )                  |  | $                    | 453    |            | $ | 168                  |  | $ | 708    |  | $ | 487   
|Loss on repossessed assets                              |  |                    | 24     |                      |                    | 327    |                    |  |                      | 276    |            |   | 561                  |  |   | 34     |  |   | 255   
|Net interest income after provision for losses on loans |  |                    | 14,025 |                      |                    | 14,328 |                    |  |                      | 15,386 |            |   | 15,671               |  |   | 15,164 |  |   | 15,385
|Total other income                                      |  |                    | 1,501  |                      |                    | 1,198  |                    |  |                      | 2,140  |            |   | 1,855                |  |   | 1,600  |  |   | 1,379 

The following table presents the effect of the restatement on the Consolidated
Statements of Cash Flows for the years ended September 30, 2006, 2005 and 2004.



|                                         |  |                    |     |                      |                    |      |                    |  |                      |     |            |   |                      |  |   |     |  |   |    
|---------------------------------------- |  | ------------------ | --- | -------------------- | ------------------ | ---- | ------------------ |  | -------------------- | --- | ---------- | - | -------------------- |  | - | --- |  | - | ---
|                                         |  | September 30, 2006 |     |                      | September 30, 2005 |      | September 30, 2004
|Operating Activities:                    |  | AsRestated         |     | AsPreviouslyReported |                    |      | AsRestated         |  | AsPreviouslyReported |     | AsRestated |   | AsPreviouslyReported
|Provision (Recovery) for losses on loans |  | $                  | 194 |                      | $                  | (109 | )                  |  | $                    | 453 |            | $ | 168                  |  | $ | 708 |  | $ | 487
|Loss on repossessed assets               |  |                    | 24  |                      |                    | 327  |                    |  |                      | 276 |            |   | 561                  |  |   | 34  |  |   | 255

The following tables present the effect of the restatement on the summarized unaudited quarterly
financial data for each quarter ended in the three years ended September 30, 2006.

Summarized unaudited quarterly
financial data for the year ended September 30, 2006 (as restated) is as follows:



|                                                    |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------- | ----- | - | -------------------- | - | ----- | ------------- |  | - | -------------------- | - |  | ---------- | ----- | - | -------------------- | - | ------- | ---------- |  | - | -------------------- | - |  | - | ------ | - |  | - | ------ | -
|Operating Summary:                                  |  | First Quarter |       |   | Second Quarter       |   |       | Third Quarter |  |   | Forth Quarter        |  
|                                                    |  | Asrestated    |       |   | Aspreviouslyreported |   |       | Asrestated    |  |   | Aspreviouslyreported |   |  | Asrestated |       |   | Aspreviouslyreported |   |         | Asrestated |  |   | Aspreviouslyreported |  
|Interest Income                                     |  | $             | 9,596 |   |                      | $ | 9,596 |               |  | $ | 9,881                |   |  | $          | 9,881 |   |                      | $ | 10,179  |            |  | $ | 10,179               |   |  | $ | 10,339 |   |  | $ | 10,339 |  
|Interest Expense                                    |  |               | 5,970 |   |                      |   | 5,970 |               |  |   | 6,135                |   |  |            | 6,135 |   |                      |   | 6,607   |            |  |   | 6,607                |   |  |   | 7,064  |   |  |   | 7,064  |  
|                                                    |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|Net Interest Income                                 |  |               | 3,626 |   |                      |   | 3,626 |               |  |   | 3,746                |   |  |            | 3,746 |   |                      |   | 3,572   |            |  |   | 3,572                |   |  |   | 3,275  |   |  |   | 3,275  |  
|Provision for Loan Losses                           |  |               | 6     |   |                      |   | (109  | )             |  |   | 126                  |   |  |            |      |   |                      |   | 20      |            |  |   |                     |   |  |   | 42     |   |  |   |       |  
|                                                    |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|Net Interest Income after provision for loan losses |  |               | 3,620 |   |                      |   | 3,735 |               |  |   | 3,620                |   |  |            | 3,746 |   |                      |   | 3,552   |            |  |   | 3,572                |   |  |   | 3,233  |   |  |   | 3,275  |  
|Other Income                                        |  |               | 380   |   |                      |   | 265   |               |  |   | 385                  |   |  |            | 259   |   |                      |   | 400     |            |  |   | 380                  |   |  |   | 336    |   |  |   | 294    |  
|Other Expenses                                      |  |               | 4,275 |   |                      |   | 4,275 |               |  |   | 3,893                |   |  |            | 3,893 |   |                      |   | 14,445  |            |  |   | 14,445               |   |  |   | 4,355  |   |  |   | 4,355  |  
|                                                    |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|Income ( loss) before income tax expense            |  |               | (275  | ) |                      |   | (275  |               |  |   | 112                  |   |  |            | 112   |   |                      |   | (10,493 | )          |  |   | (10,493              | ) |  |   | (786   | ) |  |   | (786   | )
|Income Taxes                                        |  |               | (156  | ) |                      |   | (156  | )             |  |   | (2                   | ) |  |            | (2    | ) |                      |   | (3,603  | )          |  |   | (3,603               | ) |  |   | (288   | ) |  |   | (288   | )
|                                                    |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|Net Income                                          |  |               | (119  | ) |                      |   | (119  | )             |  |   | 114                  |   |  |            | 114   |   |                      |   | (6,890  | )          |  |   | (6,890               | ) |  |   | (498   | ) |  |   | (498   | )
|                                                    |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|Per share date:                                     |  |               |       |   |                      |   |       |               |  |   |                      |   |  |            |       |   |                      |   |         |            |  |   |                      |   |  |   |        |   |  |   |        |  
|Earnings - basic                                    |  | $             | (.02  | ) |                      | $ | (.02  | )             |  | $ | .02                  |   |  | $          | .02   |   |                      | $ | (1.18   | )          |  | $ | (1.18                | ) |  | $ | (.08   | ) |  | $ | (.08   | )
|Earnings - diluted                                  |  |               | (.02  | ) |                      |   | (.02  | )             |  | $ | .02                  |   |  |            | .02   |   |                      |   | (1.18   | )          |  |   | (1.18                | ) |  | $ | (.08   | ) |  | $ | (.08   | )



94



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21
 Restatement - Continued



Summarized unaudited quarterly financial data for the year ended September 30, 2005 (as
restated) is as follows:



|                                                    |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|--------------------------------------------------- |  | ------------- | ----- | - | -------------------- | - | ----- | ------------- |  | ------------- | -------------------- | - |  | ---------- | ----- | -------------------- |  | ---------- | ----- |  | -------------------- | ----- |  | - | ----- | - |  | - | ----- | -
|                                                    |  | First Quarter |       |   | Second Quarter       |   |       | Third Quarter |  | Forth Quarter |                     
|Operating Summary:                                  |  | Asrestated    |       |   | Aspreviouslyreported |   |       | Asrestated    |  |               | Aspreviouslyreported |   |  | Asrestated |       | Aspreviouslyreported |  | Asrestated |       |  | Aspreviouslyreported |      
|Interest Income                                     |  | $             | 8,633 |   |                      | $ | 8,633 |               |  | $             | 8,918                |   |  | $          | 8,918 |                      |  | $          | 9,119 |  | $                    | 9,119 |  | $ | 9,553 |   |  | $ | 9,553 |  
|Interest Expense                                    |  |               | 4,624 |   |                      |   | 4,624 |               |  |               | 4,836                |   |  |            | 4,836 |                      |  |            | 5,238 |  |                      | 5,238 |  |   | 5,686 |   |  |   | 5,686 |  
|                                                    |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|Net Interest Income                                 |  |               | 4,009 |   |                      |   | 4,009 |               |  |               | 4,082                |   |  |            | 4,082 |                      |  |            | 3,881 |  |                      | 3,881 |  |   | 3,867 |   |  |   | 3,867 |  
|Provision for Loan Losses                           |  |               | 201   |   |                      |   | 120   |               |  |               | 54                   |   |  |            | 0     |                      |  |            | 98    |  |                      | 48    |  |   | 100   |   |  |   | 0     |  
|                                                    |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|Net Interest Income after provision for loan losses |  |               | 3,808 |   |                      |   | 3,889 |               |  |               | 4,028                |   |  |            | 4,082 |                      |  |            | 3,783 |  |                      | 3,833 |  |   | 3,767 |   |  |   | 3867  |  
|Other Income                                        |  |               | 379   |   |                      |   | 298   |               |  |               | 269                  |   |  |            | 215   |                      |  |            | 1,198 |  |                      | 1,148 |  |   | 294   |   |  |   | 194   |  
|Other Expenses                                      |  |               | 4,114 |   |                      |   | 4,114 |               |  |               | 4,208                |   |  |            | 4,208 |                      |  |            | 4,230 |  |                      | 4,230 |  |   | 4,262 |   |  |   | 4,262 |  
|                                                    |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|Income ( loss) before income tax expense            |  |               | 73    |   |                      |   | 73    |               |  |               | 89                   |   |  |            | 89    |                      |  |            | 751   |  |                      | 751   |  |   | (201  | ) |  |   | (201  | )
|Income Taxes                                        |  |               | (13   | ) |                      |   | (13   | )             |  |               | (7                   | ) |  |            | (7    | )                    |  |            | 217   |  |                      | 217   |  |   | (86   | ) |  |   | (86   | )
|                                                    |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|Net Income                                          |  | $             | 86    |   |                      | $ | 86    |               |  | $             | 96                   |   |  | $          | 96    |                      |  | $          | 534   |  | $                    | 534   |  | $ | (115  | ) |  | $ | (115  | )
|                                                    |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|Per share date:                                     |  |               |       |   |                      |   |       |               |  |               |                      |   |  |            |       |                      |  |            |       |  |                      |       |  |   |       |   |  |   |       |  
|Earnings - basic                                    |  | $             | .01   |   |                      | $ | .01   |               |  | $             | .02                  |   |  | $          | .02   |                      |  | $          | .09   |  | $                    | .09   |  | $ | (.02  | ) |  | $ | (.02  | )
|Earnings - diluted                                  |  | $             | .01   |   |                      | $ | .01   |               |  | $             | .02                  |   |  | $          | .02   |                      |  | $          | .09   |  | $                    | .09   |  | $ | (.02  | ) |  | $ | (.02  | )



95



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BCSB BANKCORP, INC.

AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21
 Restatement - Continued



Summarized unaudited quarterly financial data for the year ended September 30,
2004 (as restated) is as follows:



|                                                    |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|--------------------------------------------------- |  | ------------- | ----- | -------------------- | - | ------------- |  | -------------------- | ----- | ---------- | - | -------------------- |  | ---------- | ----- | -------------------- | - | ----- |  | - | ----- |  | - | -----
|Operating Summary:                                  |  | First Quarter |       | Second Quarter       |   | Third Quarter |  | Forth Quarter       
|                                                    |  | Asrestated    |       | Aspreviouslyreported |   | Asrestated    |  | Aspreviouslyreported |       | Asrestated |   | Aspreviouslyreported |  | Asrestated |       | Aspreviouslyreported
|Interest Income                                     |  | $             | 7,810 |                      | $ | 7,810         |  | $                    | 7,660 |            | $ | 7,660                |  | $          | 8,275 |                      | $ | 8,275 |  | $ | 8,489 |  | $ | 8,489
|Interest Expense                                    |  |               | 3,943 |                      |   | 3,943         |  |                      | 3,912 |            |   | 3,912                |  |            | 4,145 |                      |   | 4,145 |  |   | 4,362 |  |   | 4,362
|                                                    |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|Net Interest Income                                 |  |               | 3,867 |                      |   | 3,867         |  |                      | 3,748 |            |   | 3,748                |  |            | 4,130 |                      |   | 4,130 |  |   | 4,127 |  |   | 4,127
|Provision for Loan Losses                           |  |               | 182   |                      |   | 182           |  |                      | 86    |            |   | 86                   |  |            | 170   |                      |   | 89    |  |   | 270   |  |   | 130  
|                                                    |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|Net Interest Income after provision for loan losses |  |               | 3,685 |                      |   | 3,685         |  |                      | 3,662 |            |   | 3,662                |  |            | 3,960 |                      |   | 4,041 |  |   | 3,857 |  |   | 3,997
|Other Income                                        |  |               | 526   |                      |   | 526           |  |                      | 448   |            |   | 448                  |  |            | 349   |                      |   | 268   |  |   | 277   |  |   | 137  
|Other Expenses                                      |  |               | 3,931 |                      |   | 3,931         |  |                      | 3,926 |            |   | 3,926                |  |            | 4,015 |                      |   | 4,015 |  |   | 3,863 |  |   | 3,863
|                                                    |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|Income (loss) before income tax expense             |  |               | 280   |                      |   | 280           |  |                      | 184   |            |   | 184                  |  |            | 294   |                      |   | 294   |  |   | 271   |  |   | 271  
|Income Taxes                                        |  |               | 54    |                      |   | 54            |  |                      | 23    |            |   | 23                   |  |            | 61    |                      |   | 61    |  |   | 6     |  |   | 6    
|                                                    |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|Net Income                                          |  |               | 226   |                      |   | 226           |  |                      | 161   |            |   | 161                  |  |            | 2,33  |                      |   | 2,33  |  |   | 265   |  |   | 265  
|                                                    |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|Per share date:                                     |  |               |       |                      |   |               |  |                      |       |            |   |                      |  |            |       |                      |   |       |  |   |       |  |   |      
|Earnings  basic                                    |  | $             | .04   |                      | $ | .04           |  | $                    | .03   |            | $ | .03                  |  | $          | .04   |                      | $ | .04   |  | $ | .04   |  | $ | .04  
|Earnings  diluted                                  |  | $             | .04   |                      | $ | .04           |  | $                    | .03   |            | $ | .03                  |  | $          | .04   |                      | $ | .04   |  | $ | .04   |  | $ | .04  





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|Item 9A. | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure
Controls and Procedures

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. At September 30, 2006, the Companys management, with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Companys disclosure
controls and procedures. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer initially concluded that the Companys disclosure controls and procedures were effective. As a result of the restatement
described in Note 21 to the consolidated financial statements and the Explanatory Note, management has since concluded that the Company did not maintain effective controls to ensure the appropriate classification of losses resulting from unpaid loan
balances associated with repossessed automobiles. This control deficiency resulted in the restatement of the Companys financial statements for the years ended September 30, 2006, 2005 and 2004. Solely because of this material weakness,
management restates its assessment as of the last date of each quarter within those periods, and concluded that the Companys disclosure controls and procedures were not effective as of September 30, 2006.

The restatements do not affect the Companys Consolidated Statements of Financial Condition and Consolidated Statement of Changes in Stockholders
Equity for the affected periods and are a reclassification within the Consolidated Statement of Operations. Accordingly, the Companys historical revenues, net income, earnings per share, total assets and regulatory capital remain unchanged.

Changes in Internal Controls over Financial Reporting

The Company reviews its disclosure controls and procedures, which includes its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their
effectiveness. As previously reported, no such control enhancements occurred during the year ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting. Subsequently, the Company has taken action to strengthen the internal reporting and tracking of repossessed automobiles to ensure any losses associated with their ultimate disposition are classified correctly in the consolidated
statements of operations.

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 (Restated) |  | 
|                                                                                                       | 
|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 (Restated) |  | 
|                                                                                                       | 
|Notes to Consolidated Financial Statements                                                             |  | 



97



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(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.
|--- | ----------------------------------------------------------------------------------------



|* | Previously filed
|- | ----------------

(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.



98



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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.
|July 16, 2007 |  |  |  |                    
|              |  |  |  |                    
|              |  |  |  |                     |  | By: |  | /s/ Joseph J. Bouffard               
|              |  |  |  |                     |  |     |  | Joseph J. Bouffard                   
|              |  |  |  |                     |  |     |  | President and Chief Executive Officer