Versailles Financial Corp - FORM 10-K

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Versailles Financial Corp	ex31_1.htm
EX-32 - EXHIBIT 32 - Versailles Financial Corp	ex32.htm
EX-31.2 - EXHIBIT 31.2 - Versailles Financial Corp	ex31_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2011


o		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 000-53870

VERSAILLES FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Maryland		27-1330256
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

27 East Main Street, Versailles, Ohio		45380
(Address of Principal Executive Offices)		(Zip Code)

(937) 526-4515

(Telephone Number, including Area Code)

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

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

Title of Each Class

Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of August 31, 2011, there were issued and outstanding 427,504 shares of the Registrant’s Common Stock.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on December 31, 2010, was $0.

DOCUMENTS INCORPORATED BY REFERENCE:

Document		Part of Form 10-K

Proxy Statement for the 2011 Annual Meeting of Stockholders of the Registrant		Part III

Versailles Financial Corporation

Annual Report on Form 10-K

For The Year Ended

June 30, 2011

Table of Contents

ITEM 1.	Business	3

ITEM 1A.	Risk Factors	38

ITEM 1B.	Unresolved Staff Comments	38

ITEM 2.	Properties	38

ITEM 3.	Legal Proceedings	39

ITEM 4.	Reserved and Removed	39

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	39

ITEM 6.	Selected Financial Data	40

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	52

ITEM 8.	Financial Statements and Supplementary Data	53

ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	98

ITEM 9A.	Controls and Procedures	98

ITEM 9B.	Other Information	99

ITEM 10.	Directors, Executive Officers and Corporate Governance	99

ITEM 11.	Executive Compensation	99

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	99

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	99

ITEM 14.	Principal Accountant Fees and Services	99

ITEM 15.	Exhibits and Financial Statement Schedules	100

Signatures		101

Note:

Because there were no reported transactions in our stock during the year ended June 30, 2011, there is no market price information for our common stock for the period ended June 30, 2011, including the quarter ended December 31, 2010, our most recently completed second fiscal quarter, and, accordingly, the market value as of the end of that quarter, computed by reference to the last sale price during that quarter, was $0.

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PART I

ITEM 1.

Business

Forward Looking Statements

This annual report contains certain forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

Statements of our goals, intentions and expectations;

Statements regarding our business plans, prospects, growth and operating strategies;

Statements regarding the asset quality of our loan and investment portfolios; and

Estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

our ability to manage our operations under the current adverse economic conditions, nationally and in our market area;

adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

further declines in the yield on our assets resulting from the current low market interest rate environment;

adverse changes in the local, national and international agricultural markets, including weather, pests and government regulation and support, which impact the value of our farmland loans;

our ability to successfully implement our plan to increase our non-residential lending without significant decrease in asset quality;

risks related to high concentration of loans secured by real estate located in our market area;

our success in building our new home office on a cost effective basis;

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our ability to offer new deposit products on a cost-effective basis and develop and gather core deposits;

our ability to manage costs as a public company;

our reliance on a small executive staff;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

adverse changes in the securities markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, additional consumer protection requirements and changes in the level of government support of housing finance;

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder, including the likely impact on our compliance costs of our being subject to regulations by the Federal Reserve Board and the FDIC rather than the Office of Thrift Supervision;

our ability to enter new markets successfully and capitalize on growth opportunities;

our ability to successfully integrate acquired entities, if any;

changes in consumer spending, borrowing and savings habits;

decreases in asset quality, including significant increases in our loan losses;

future deposit insurance premium levels and special assessments;

significantly increased competition with depository and non-depository financial institutions;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

changes in our organization, compensation and benefit plans;

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

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Versailles Financial Corporation

Versailles Financial Corporation is a Maryland corporation that owns all of the outstanding shares of common stock of Versailles Savings and Loan Company, which we sometimes refer to as “Versailles Savings.” Versailles Financial Corporation’s assets consist primarily of its ownership in the shares of Versailles Savings’ common stock and a loan to its employee stock ownership plan.

Our executive offices are located at 27 E. Main Street, Versailles, Ohio 45380. Our telephone number at this address is (937) 526-4515.

Versailles Savings and Loan Company

Versailles Savings and Loan Company is an Ohio chartered savings and loan company headquartered in Versailles, Ohio. Versailles Savings and Loan Company was originally chartered in 1887.

Versailles Savings and Loan Company’s business consists primarily of accepting savings accounts and certificates of deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in first lien one- to four-family mortgage loans and, to a lesser extent, non-residential real estate loans, including farm loans, consumer loans (consisting primarily of automobile loans), commercial business loans and other loans. We also invest in investment securities, primarily consisting of residential mortgage-backed United States government agency securities and mutual funds. Versailles Savings offers a variety of deposit accounts, including savings accounts and certificates of deposit. We provide financial services to individuals, families and businesses through our banking office located in Versailles, Ohio. Our revenues are derived primarily from interest on loans, mortgage-backed securities and other investment securities. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, principal and interest payments on securities and loans, and advances from the Federal Home Loan Bank of Cincinnati.

Versailles Savings and Loan Company had total assets of $44.5 million, total loans of $37.5 million, total liabilities of $33.5 million, including total deposits of $26.5 million, and equity of $11.0 million as of June 30, 2011. At that date, 62.6% of our assets were one- to four-family residential mortgage loans, 17.2% were non-residential real estate loans, and 1.6% were mortgage-backed securities.

Versailles Savings and Loan Company’s executive and banking offices are located at 27 E. Main Street, Versailles, Ohio 45380. Our telephone number at this address is (937) 526-4515.

Our website address is www.versaillessavingsbank.com. Information on our website is not incorporated into this annual report and should not be considered a part of this annual report.

Market Area

Versailles Savings conducts business from its single office located in Versailles, located in Darke County, Ohio. Versailles Savings’ primary market area is northeastern Darke County and western Shelby County, in west central Ohio, near the Indiana border.

Versailles Savings and Loan’s primary market area has a diversified employment base and a higher level of manufacturing employment than the State of Ohio and the country in general. The major employers include consumer products manufacturers and retailers, health care providers and transportation and distribution companies, as well as governmental entities. The top ten employers in Darke County are Whirlpool Corporation (manufacturer of home appliances), Midmark Corporation (manufacturer of health care products), Greenville Technology, Inc. (manufacturer of plastic products and

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automobile parts), Wayne Hospital, Brethren Retirement Community, Honeywell (manufacturer of a wide range of products, including aerospace and technology for buildings), Neff Co. (custom lettering and graphic design), Beauty Systems Group (distributor of hair care and makeup products), Dick Lavy Trucking, and Norcold Inc. (manufacturer of refrigerators and freezers for RVs, boats and trucks). Darke County is predominantly rural and is one of the top agricultural counties in Ohio.

The unemployment rate in Darke County in June 2011 was 9.3%, compared to 9.0% for the State of Ohio and 9.1% for the United States. The population of Darke County reflected net out-migration from 2000 to 2010, declining from approximately 53,300 to approximately 52,959. The median household income in Darke County increased from $39,307 in 2000 to $40,879 in 2009, or 4.0%, while the median household income in the State of Ohio increased by 9.6% from $41,499 to $45,467 and median household income in the United States increased at a higher rate of 17.5%, from $42,729 to $50,221.

Shelby County is a slightly smaller county lying northeast of Darke County. The largest city in Shelby County is Sidney, Ohio. The major employers in Shelby County relate to manufacturing, including the four largest employers: Honda of America Manufacturing, PlastiPak Packaging, Emerson Climate Technologies and NK Parts. Additional large employers include Sidney City Board of Education, Superior Metal Products/Am Trim, Wal-Mart Stores, Inc. and Wilson Memorial Hospital.

The economy of Shelby County has experienced higher unemployment in recent months due to its heavy reliance on manufacturing. In June 2011, the unemployment rate in Shelby County was 10.0% compared to 9.3% for Darke County. Shelby County population has reflected some modest growth since 2000, increasing from 47,910 to 49,423, or 3.2%. Median household income increased at a similar pace as Darke County, increasing 5.8% from $44,507 to $47,083.

Competition

Our deposit sources and loan customers are primarily concentrated in the communities surrounding our banking offices, located in Shelby and Darke Counties, Ohio. We face intense competition in our market area both in making loans and attracting deposits. The Versailles area has a moderate concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking, and have greater name recognition and market presence that benefit them in attracting business.

Lending Activities

The principal lending activity of Versailles Savings and Loan Company is originating first lien one- to four-family residential mortgage loans and, to a lesser extent, non-residential real estate loans, including farm loans, and consumer loans consisting primarily of automobile loans, commercial business loans and other loans. In recent years we have expanded our non-residential real estate loan portfolio in an effort to diversify our overall loan portfolio, increase the yield of our loans and shorten asset duration. We expect that non-residential real estate lending may be an area of loan growth, and we have focused our efforts in this area on borrowers seeking loans in the $200,000 to $750,000 range. We currently retain in our portfolio all the loans we originate, but we are considering selling loans in the future to manage interest rate risk, capital and our liquidity needs. As a long-standing community lender, we believe we can effectively compete for this business by emphasizing superior customer service and local underwriting, which differentiates us from larger commercial banks that operate in our primary market area.

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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

	At June 30,
	2011						2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	27,845			73.87	%	$	27,556			74.76	%
Multi-family		235			0.63	%		189			0.51	%
Construction		403			1.07	%		171			0.47	%
Non-residential real estate (1)		7,676			20.36	%		7,254			19.68	%
Total real estate loans		36,159			95.93	%		35,170			95.42	%

Commercial loans		487			1.29	%		474			1.28	%
Consumer loans		1,046			2.78	%		1,215			3.30	%
Total loans	$	37,692			100.00	%	$	36,859			100.00	%

Net deferred loan fees		44			0.12			55			0.15
Allowance for losses		(221	)		0.59	%		(191	)		0.52	%
Loans, net	$	37,515					$	36,723

_________________________

(1)

Includes $5.1 million secured by farmland for the year ended June 30, 2011 and $4.9 million for the year ended June 30, 2010.

(2)

At June 30, 2011, all of our construction loans were secured by one- to four-family real estate.

The majority of our loan portfolio is one- to four-family real estate and consumer loans made to individuals in our market area. Repayment of these loans is dependent on general economic conditions and unemployment levels in our market area. Nonresidential real estate loans consist of agricultural and business purpose income producing properties. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conduced on the properties, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current economic recession. We typically require additional collateral or personal guarantees on nonresidential real estate and commercial loans. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At June 30, 2011, we had no nonresidential real estate loans that were delinquent or nonperforming. Multi-family, construction real estate and commercial loans in total make up less than 3.0% of our loan portfolio.

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Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2011. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

	One- to Four-Family Real Estate					Multi-Family Real Estate					Non-Residential Real Estate					Construction
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending June 30,
2012	$	1,708		4.96	%	$	21		6.24	%	$	721		5.65	%	$	15		4.59	%
2013 and 2014		3,153		4.95			35		6.27			1,131		5.74			39		4.60
2015 and 2016		3,165		4.96			26		6.44			1,121		5.77			42		4.60
2017 to 2021		7,574		4.96			66		6.62			2,192		5.78			124		4.60
2022 to 2031		10,236		5.01			43		6.79			2,222		5.99			171		4.65
2031 and beyond		2,009		5.19			44		6.50			289		6.26			12		5.50

Total	$	27,845		5.00	%	$	235		6.52	%	$	7,676		5.84	%	$	403		4.65	%

	Consumer					Commercial					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending June 30,
2012	$	456		7.33	%	$	148		5.51	%	$	3,069		5.51	%
2013 and 2014		322		6.99			205		6.07			4,885		5.32
2015 and 2016		122		6.72			115		5.95			4,591		5.24
2017 to 2021		106		6.38			19		5.31			10,081		5.16
2022 to 2031		40		5.25			—		—			12,712		5.19
2031 and beyond		—		—			—		—			2,354		5.35

Total	$	1,046		6.98	%	$	487		5.84	%	$	37,692		5.24	%

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The following table sets forth our fixed and adjustable-rate loans at June 30, 2011 that are contractually due after June 30, 2012. Loans are presented net of loans in process.

	Due After June 30, 2012
	Fixed		Adjustable		Total
	(In thousands)
Real Estate:
One- to four-family	$	20,355	$	5,782	$	26,137
Multi-family		214		—		214
Construction		388		—		388
Non-residential / commercial real estate		5,792		1,163		6,955
Total real estate loans		26,749		6,945		33,694

Commercial		339		—		339
Consumer loans		590		—		590

Total loans	$	27,678	$	6,945	$	34,623

One- to Four-Family Residential Real Estate Lending. The cornerstone of our lending program has long been the origination of long-term first lien permanent loans secured by mortgages on owner-occupied one- to four-family residences. At June 30, 2011, $27.8 million, or 73.9% of our total loan portfolio, consisted of loans on one- to four-family residences. At that date, our average outstanding one- to four-family residential loan balance was $79,000 and our largest outstanding one- to four-family residential loan had a principal balance of $433,500. Virtually all of the residential loans we originate are secured by properties located in our market area. We currently retain in our portfolio all the loans we originate, but may begin to sell loans in the secondary market within the next 12 months. See “—Originations, Sales and Purchases of Loans.”

Due to consumer demand in the current low interest rate environment, many of our recent originations have been 15- to 25-year fixed-rate loans secured by one- to four-family residential real estate. We generally originate our fixed-rate and adjustable rate one- to four-family residential loans in accordance with secondary market standards. At June 30, 2011, we had $12.7 million of fixed-rate residential loans maturing in 10 years or less, $7.7 million of fixed-rate residential loans maturing between 10 and 20 years and $1.4 million of fixed-rate residential loans maturing in excess of 20 years in our portfolio.

In order to reduce the term to repricing of our loan portfolio, we also originate adjustable-rate one- to four-family residential mortgage loans. Our current adjustable-rate mortgage loans carry interest rates that adjust annually at a margin (generally 300 basis points) over the one-year U.S. Treasury constant maturity index. Most of our adjustable-rate one- to four-family residential mortgage loans have fixed rates for initial terms of three or five years. Such loans carry terms to maturity of up to 30 years. The adjustable-rate mortgage loans currently offered by us generally provide for a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over the initial rate.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on many of our adjustable-rate loans do not adjust for the first three or five years. As a result, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest

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rates. At June 30, 2011, $6.1 million, or 21.9% of our one- to four-family residential loans, had adjustable rates of interest.

We evaluate both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. Our one- to four-family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. Our one- to four-family residential mortgage loans customarily include due-on-sale clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. We currently originate residential mortgage loans for our portfolio with loan-to-value ratios of up to 90% for owner-occupied one- to four-family homes and up to 80% for non-owner occupied homes. We do not require private mortgage insurance for loans in excess of 80%, but charge a higher interest rate and also obtain additional collateral and/or personal guarantees on these loans.

At June 30, 2011, we had one one- to four-family residential mortgage loan in the amount of $93,000 that was 60 days or more delinquent.

We also originate closed end variable-rate and fixed-rate second mortgage loans secured by a lien on the borrower’s primary residence on a very limited basis. The total balance of these loans at June 30, 2011, which are included in the previous totals, was $0.8 million. We only make such loans on properties where we hold the first lien. Generally, these second mortgages are limited to 80% of the property value less any other mortgages. We use the same underwriting standards for home equity loans as we use for one- to four-family residential mortgage loans. Our variable-rate second mortgage loan product carries an interest rate tied to the same indices we use for purchase money first lien residential mortgages.

Non-residential Real Estate Lending. In recent years, we have sought to increase our non-residential real estate loans. At June 30, 2011, we had $7.7 million in non-residential real estate loans, representing 20.4% of our total loan portfolio, an increase of $0.4 million, or 5.8%, over non-residential loans of $7.3 million, representing 19.7% of our total loan portfolio, at June 30, 2010. Typically we obtain personal guarantees as well as additional collateral on these loans.

The following table shows the composition of our non-residential real estate portfolio at the dates indicated:

	At June 30,
Type of Loan	2011		2010
	(In thousands)

Office	$	805	$	417
Industrial		562		310
Retail		1,017		1,083
Farm/Agriculture		5,104		4,945
Mixed use		79		382
Other Improved Real Estate		109		117
Total	$	7,676	$	7,254

Most of our non-residential real estate loans have amortization periods of up to 20 years. We offer both fixed and variable rate loans. Our variable rate loans typically have initial fixed rates of three or five years. The maximum loan-to-value ratio of our non-residential real estate loans is generally 70%. At June 30, 2011, our largest non-residential real estate loan totaled $597,000 and was secured by a mortgage on farmland in our primary market area. At June 30, 2011, this loan was performing in

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accordance with its terms. At June 30, 2011, $1.3 million, or 17.1%, of our non-residential real estate loans carried adjustable rates.

We consider a number of factors in originating non-residential real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All non-residential real estate loans are appraised by outside independent appraisers approved by the Board of Directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of non-residential real estate borrowers.

Loans secured by non-residential real estate generally are typically larger than one- to four-family residential loans and involve greater credit risk. Non-residential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including today’s economic recession. We typically require additional collateral or personal guarantees. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At June 30, 2011, we had no non-residential real estate loans that were non-performing. We also make a limited amount of multi-family loans on the same general terms as non-residential real estate loans. At June 30, 2011, we had $235,000 of multi-family loans, representing 0.63% of our total loans.

Commercial Business Lending. From time to time, we originate commercial business loans and lines of credit to small- and medium-sized companies in our primary market area. Our commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. The commercial business loans that we offer are short term fixed-rate loans with generally a one-year term or less. Our commercial business loan portfolio consists primarily of secured loans, along with a small amount of unsecured loans.

At June 30, 2011, Versailles Savings had $487,000 of commercial business loans outstanding, representing 1.3% of the total loan portfolio.

When making commercial business loans, we consider the borrower’s financial statements, lending history, debt service capabilities, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial business loans are generally secured by accounts receivable, inventory and equipment.

Commercial business loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans is likely substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.

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At June 30, 2011, our largest commercial business loan relationship was a $126,000 loan to a farming implement dealer secured by real estate and limited personal guarantees by several individuals. At June 30, 2011, this loan was performing in accordance with its terms.

Consumer Lending. To date, our consumer lending has been limited. At June 30, 2011, Versailles Savings had $1.0 million of consumer loans outstanding, representing 2.8% of the total loan portfolio. Consumer loans consist of loans secured by deposits, auto loans and miscellaneous other types of installment loans. At June 30, 2011, we had $390,000 in new and used automobile loans made on a direct basis with our customers. We do not actively market automobile loans. We also plan to offer home equity lines of credit in the future.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 2011, we had no consumer loans that were non-performing.

Originations, Purchases and Sales of Loans

Lending activities are conducted primarily by our salaried loan personnel. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed-rate and adjustable-rate loans. Our ability to originate fixed or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.

We currently retain all the loans we originate. We may, however, sell loans we originate in the future for interest rate risk management, capital management and for liquidity purposes. We also currently do not purchase loans nor have any significant participation interests in loans.

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The following table shows our loan origination and principal repayment activity for loans originated for our portfolio during the periods indicated. Loans are presented net of loans in process.

	Years Ended June 30,
	2011		2010
	(In thousands)

Total loans at beginning of period	$	36,723	$	34,428

Loans originated:
Real estate loans:
One- to four-family		8,584		5,556
Multi-family		86		82
Construction		1,104		706
Non-residential		2,607		2,633
Total real estate loans		12,381		8.977
Commercial loans		313		220
Consumer loans		1,492		1,330
Total loans originated		14,186		10,527

Deduct:
Principal repayments		13,353		8,299
Loan sales		—		—
Home equity lines of credit, net		—		—
Net, other		41		(67	)
Net loan activity		792		2,295
Total loans at end of period	$	37,515	$	36,723

Loan Approval Procedures and Authority. The aggregate amount of loans that Versailles Savings is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Versailles Savings’ unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral”). At June 30, 2011, based on the 15% limitation, Versailles Savings’ loans-to-one-borrower limit was approximately $1.4 million. On the same date, Versailles Savings had no borrowers with outstanding balances in excess of this amount. At June 30, 2011, our largest loan to one borrower totaled $597,000 and was secured by a mortgage on farmland in our primary market area. At June 30, 2011, this loan was performing in accordance with its terms. At June 30, 2011, our largest lending relationship with a single or related group of borrowers totaled $728,000, and was performing in accordance with its terms.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our Board of Directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.

Under our loan policy, the individual processing an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an officer for approval. An officer then reviews these materials and verifies that the requested loan meets our underwriting guidelines described below.

Our president and senior lending officers have approval authority of up to $150,000 for residential mortgage loans, secured commercial loans and secured consumer loans. Our senior lending

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officers have approval authority of up to $50,000 for unsecured commercial and consumer loans. An aggregate credit commitment of up to $250,000 may be approved by the president and the senior lending officers. Loans above these amounts require approval by the Loan Committee or the Board of Directors.

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

Delinquencies and Non-Performing Assets

Delinquency Procedures. When a borrower fails to make a required monthly loan payment by the due date, a late notice is generated stating the payment and late charges due. Our policies provide that borrowers that become 20 days or more delinquent are contacted by mail and at 30 days we send an additional letter and place a phone call to determine the reason for nonpayment and to discuss future payments. If repayment is not possible or doubtful, the loan will be brought to the Board of Directors for possible foreclosure. Once the Board of Directors declares a loan due and payable, a certified letter is sent to the borrower explaining that the entire balance of the loan is due and payable. The borrower is permitted 30 additional days to submit payment. If the loan is made current, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. If the borrower does not respond, we will initiate foreclosure proceedings.

When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Subsequent decreases in the value of the property are charged to operations through the creation of a valuation allowance. After acquisition, all costs in maintaining the property are expensed as incurred. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

Delinquent Loans. The following table sets forth our loan delinquencies, by type and amount at the dates indicated. At June 30, 2011, one loan totaling $70,000 reported as nonaccrual and one loan totaling $488,000 reported as troubled debt restructuring were both current and are not included in the table below.

	At June 30,
	2011						2010
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due
	(In thousands)
Real estate loans:
One- to four-family	$	49	$	93	$	—	$	144	$	90	$	—
Multi-family		—		—		—		—		—		—
Non-residential real estate		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Total real estate loans		49		93		—		144		90		—

Commercial loans		—		—		—		—		—		—
Consumer loans		4		—		—		25		—		—
Total	$	53	$	93	$	—	$	169	$	90	$	—

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by our regulators to be of lesser quality, as “substandard,”

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“doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable incurred losses. General allowances represent loss allowances which have been established to cover probable incurred losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies a problem asset as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Ohio Division of Financial Institutions and our federal regulators and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

On the basis of this review of our assets, our classified and special mention assets at the dates indicated were as follows:

	At June 30,
	2011		2010
	(In thousands)

Special mention assets	$	70	$	—
Substandard assets		—		250
Doubtful assets		—		—
Loss assets		—		—
Total classified assets	$	70	$	250

The decrease in loans classified as substandard between June 30, 2011 and 2010 was due to the sale of real estate owned of $160,000 and the transfer of a $90,000 loan from substandard to special mention, net of repayment of $20,000, resulting in a current balance of $70,000. Total classified assets at June 30, 2011 does not include any real estate owned. Total classified assets at June 30, 2010 included $160,000 of real estate owned.

Non-Performing Assets. We cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Funds received on nonaccrual loans generally are applied against principal. Generally, loans are restored to accrual status when the

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obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At June 30, 2011, we had one non-residential real estate loan with a balance of $488,000 classified as a troubled debt restructuring. This loan has a loan-to-value ratio of 47%, bears interest at a market rate, and at June 30, 2011 was performing in accordance with its terms. Our one non-accrual loan with a balance of $70,000 was also performing in accordance with its terms at June 30, 2011. At June 30, 2011, there were no properties classified as real estate owned.

	At June 30,
	2011			2010
	(Dollars in thousands)
Non-Accrual:
Real estate loans:
One- to four-family	$	70		$	90
Multi-family		—			—
Non-residential		—			—
Construction		—			—
Total real estate loans		70			90
Commercial loans		—			—
Consumer loans		—			—
Total nonaccrual loans	$	70		$	90

Accruing loans past due 90 days or more:
Real estate loans:
One- to four-family	$	—		$	—
Multi-family		—			—
Non-residential		—			—
Construction		—			—
Total real estate loans		—			—
Commercial loans		—			—
Consumer loans		—			—
Total accruing loans past due 90 days or more		—			—
Total of non-accrual and 90 days or more past due loans	$	70		$	90

Other nonperforming assets (1)		—			160
Total nonperforming assets	$	70		$	250

Total nonperforming loans to total loans		0.18	%		0.24	%
Total nonperforming assets to total assets		0.16	%		0.55	%

______________________________

(1)

Consists of other real estate owned.

There were no other loans that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

For the year ended June 30, 2011 and the year ended June 30, 2010, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $800 and $2,000, respectively.

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Allowance for Loan Losses

Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (i) specific allowances for identified problem loans; and (ii) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include: the strength of the customer’s personal or business cash flows; the availability of other sources of repayment; the amount due or past due; the type and value of collateral; the strength of our collateral position; the estimated cost to sell the collateral; and the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as substandard to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectibility of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

In addition, as an integral part of their examination process, the Ohio Division of Financial Institutions and the FDIC periodically review our allowance for loan losses, and they may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

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Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.

	At June 30,
	2011			2010
	(Dollars in thousands)

Allowance at beginning of period	$	191		$	264
Provision for loan losses		30			20
Charge offs:
Real estate loans
One- to four-family		—			14
Multi-family		—			79
Non-residential real estate		—			—
Construction		—			—
Commercial		—			—
Consumer		—			—
Total charge-offs	$	—		$	93

Recoveries:
Real estate loans
One- to four-family		—			—
Multi-family		—			—
Non-residential real estate		—			—
Construction		—			—
Commercial		—			—
Consumer		—			—
Total recoveries	$	—		$	—
Net charge-offs (recoveries)	$	—		$	93

Allowance at end of period	$	221		$	191

Allowance to nonperforming loans		316.85	%		211.59	%
Allowance to total loans outstanding at the end of the period		0.59	%		0.52	%
Net charge-offs (recoveries) to average loans outstanding during the period		0.00	%		0.26	%

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Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the general allowance to absorb losses in other categories.

	At June 30,
	2011								2010
	Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	186		84.16	%		73.87	%	$	143		74.87	%		74.76	%
Multi-family		—		0.17			0.63			1		0.52			0.51
Non-residential real estate		25		11.31			20.36			38		19.90			19.68
Construction		1		0.45			1.07			1		0.52			0.47
Total real estate loans		212		95.92	%		95.93	%		183		95.81	%		95.42	%
Commercial loans		2		0.91			1.29			2		1.05			1.28
Consumer loans		3		1.36			2.78			6		3.14			3.30
Unallocated		4		1.81			—			—		—			—
Total allowance for loan losses	$	221		100.00	%		100.00	%	$	191		100.00	%		100.00	%

At June 30, 2011, our allowance for loan losses represented 0.59% of total loans and 316.85% of nonperforming loans. The allowance for loan losses increased to $221,000 at June 30, 2011 from $191,000 at June 30, 2010, due to a provision for loan losses of $30,000.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Investment Activities

General. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help manage our interest rate risk, and to generate a favorable return on idle funds within the context of our interest rate and credit risk objectives.

Our Board of Directors is responsible for adopting our investment policy. The investment policy is reviewed annually by management and any changes to the policy are recommended to and subject to the approval of the Board of Directors. Authority to make investments under the approved investment policy guidelines is delegated to our President and Chief Executive Officer and our Chief Financial Officer (all investment decisions require the approval of both investment officers). All investment transactions are reviewed at regularly scheduled quarterly meetings of the Board of Directors.

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Our current investment policy permits investments in securities issued by the United States Government and its agencies or government sponsored entities. We also invest in residential mortgage-backed securities and, to a lesser extent, mutual funds that invest in residential mortgage-backed securities. Our investment policy also permits, with certain limitations, investments in bank-owned life insurance, collateralized mortgage obligations, asset-backed securities, real estate mortgage investment conduits, Ohio revenue bonds and municipal securities.

At June 30, 2011, we did not have an investment in the securities of any single non-government issuer that exceeded 10% of equity at that date other than our investment in a mortgage-backed securities mutual fund.

Our current investment policy does not permit investment in stripped mortgage-backed securities, complex securities and derivatives as defined in federal banking regulations and other high-risk securities. As of June 30, 2011, we held no asset-backed securities other than residential mortgage-backed securities. Our current policy does not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

At June 30, 2011, none of the collateral underlying our securities portfolio was considered subprime or Alt-A, and we did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae as of that date.

At June 30, 2011, the holding company had $1.2 million of the proceeds from the stock offering in a savings account at the Bank. Due to the current low interest rate environment, the Bank has deposited these proceeds in Federal Home Loan Bank overnight funds and intends to use the funds for lending activities and reduce Federal Home Loan Bank advances as they mature.

Securities Portfolio. At June 30, 2011, our U.S. Government and federal agency securities portfolio totalled $1.4 million, $699,000 of which was classified as available-for-sale. We maintain an available-for-sale securities portfolio, to the extent appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.

Residential Mortgage-Backed Securities. At June 30, 2011, our residential mortgage-backed securities portfolio had an amortized cost of $694,000, all of which was classified as held to maturity. Residential mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of residential mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Residential mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in residential mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Versailles Savings and Loan Company. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, a United States Government agency, and government sponsored entities, such as Fannie Mae and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors. Residential mortgage-backed securities are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium

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or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

AMF Short U.S. Government Fund. At June 30, 2011, our mutual fund portfolio totaled $699,000, all of which was classified as available-for-sale and all of which was invested in the AMF Short U.S. Government Fund, a fund that invests primarily in mortgage-related securities. At June 30, 2011, the fund had an unrealized gain of $5,000.

Restricted Equity Securities. We invest in the common stock of the Federal Home Loan Bank of Cincinnati. Stock of the Federal Home Loan Bank of Cincinnati is carried at cost and classified as restricted equity securities. We periodically evaluate these shares of common stock for impairment based on ultimate recovery of par value.

Securities Portfolio Composition. The following table sets forth the composition of our securities portfolio at the dates indicated.

	At June 30,
	2011				2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities available for sale:
U.S. Government agencies	$	—	$	—	$	—	$	—
Mortgage-backed securities		—		—		—		—
Total debt securities		—		—		—		—
Mutual fund (1)		694		699		694		708
Total available for sale		694		699		694		708

Securities held to maturity:
U.S. Government agencies	$	—	$	—	$	—	$	—
Mortgage-backed securities		694		730		903		946
Total held to maturity		694		730		903		946

Total	$	1,388	$	1,429	$	1,597	$	1,654

_________________________

(1) Consists of AMF Short US Government Fund

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Securities Portfolio Maturities and Yields. The following table sets forth the contractual maturities and weighted average yields of our securities portfolio at June 30, 2011. Mortgage-backed securities are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan prepayments.

	No Stated Maturity					One Year or Less				More than One Year to Five Years				More than Five Years to Ten Years				More than Ten Years					Total
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Securities available-for-sale:
U.S. Government agencies	$	—		—		$	—		—	$	—		—	$	—	$	—	$	—		—		$	—		—
Mortgage-backed securities		—		—			—		—		—		—		—		—		—		—			—		—
Total debt securities		—		—			—		—		—		—		—		—		—		—			—		—
Mutual fund (1)		694		1.88	%		—		—		—		—		—		—		—		—			694		1 88	%
Total available for sale		694		1.88	%		—		—		—		—		—		—		—		—			694		1.88	%

Securities held to maturity:
U.S. Government agencies	$	—		—		$	—		—	$	—		—	$	—	$	—	$	—		—		$	—		—
Mortgage-backed securities		—		—			—		—		—		—		—		—		694		3.33	%		694		3.33	%
Total held to maturity		—		—			—		—		—		—		—		—		694		3.33			694		3.33

Total	$	694		1.88	%		—											$	694		3.33	%	$	1,388		2.61	%
_________________________ (1) Consists of AMF Short US Government Fund

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Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Cincinnati advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from within our primary market area. We offer a selection of deposit accounts, including savings accounts and certificates of deposit. We currently do not offer NOW accounts, money market or demand accounts, but may do so in the future. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have not accepted brokered deposits in the past, although we have the authority to do so.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Versailles Savings in the community to attract and retain deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We often use promotional rates to meet asset/liability and market segment goals.

The variety of rates and terms on the deposit accounts we offer allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on our experience, we believe that statement savings may be somewhat more stable sources of deposits than certificates of deposits.

The following table sets forth the distribution of total deposits by account type, at the dates indicated.

	At June 30,
	2011					2010
	Amount		Percent			Amount		Percent
	(Dollars in thousands)

Savings accounts	$	8,970		33.88	%	$	8,145		31.40	%
Certificates of deposit		17,506		66.12	%		17,792		68.60	%
Total	$	26,476		100.00	%	$	25,937		100.00	%

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As of June 30, 2011, the aggregate amount of our outstanding certificate of deposit in amounts greater than $100,000 was approximately $2.9 million. The following table sets forth the maturity of these certificates as of June 30, 2011.

	Certificates of Deposit
	(In thousands)
Maturity Period:
Three months or less	$	958
Over three through six months		198
Over six through twelve months		756
Over twelve months		950
Total	$	2,863

The following table sets forth our time deposits classified by interest rate as of the dates indicated.

	At June 30,
	2011		2010
	(In thousands)

Interest Rate:
2% or less	$	15,250	$	10,211
2.01% - 3.00%		1,670		6,602
3.01% - 4.00%		303		418
4.01% - 5.00%		185		467
5.01% - 6.00%		98		94

Total	$	17,506	$	17,792

The following table sets forth the amount and maturities of our time deposits at June 30, 2011.

	At June 30, 2011
	Period to Maturity
	Less Than One Year		Over One Year to Two Years		Over Two Years to Three Years		Over Three Years		Total		Percentage of Total Certificate Accounts
	(Dollars in thousands)

Interest Rate:
2% or less	$	10,585	$	3,997	$	367	$	301	$	15,250		87.11	%
2.01% - 3.00%		331		566		586		187		1,670		9.54
3.01% - 4.00%		89		214		-		-		303		1.73
4.01% - 5.00%		185		-		-		-		185		1.06
5.01% - 6.00%		98		-		-		-		98		0.56

Total	$	11,288	$	4,777	$	953	$	488	$	17,506		100.00	%

Borrowings. We obtain advances from the Federal Home Loan Bank of Cincinnati upon the security of our capital stock in the Federal Home Loan Bank of Cincinnati and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its

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own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile.

From time to time during recent years, we have utilized short-term borrowings to fund loan demand. To a limited extent, we have also used borrowings where market conditions permit us to purchase securities of a similar duration in order to increase our net interest income by the amount of the spread between the asset yield and the borrowing cost. Finally, from time to time, including during the fiscal year ended June 30, 2011, we have obtained advances with longer terms for asset and liability management purposes.

Our borrowings currently consist primarily of advances from the Federal Home Loan Bank of Cincinnati. At June 30, 2011, we had access to additional Federal Home Loan Bank advances of up to $10.6 million. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the date and for the noted year.

	At or for the Year Ended June 30,
	2011			2010
	(Dollars in thousands)

Maximum amount at any month end:
FHLB advances	$	7,500		$	8,500
Average amount outstanding during the period:
FHLB advances		6,292			8,250
Weighted average interest rate during the period:
FHLB advances		3.41	%		4.66	%
Balance outstanding at end of period:
FHLB advances	$	6,000		$	7,500
Weighted average interest rate at end of period:
FHLB advances		3.01	%		4.26	%

Subsidiary and Other Activities

Versailles Financial Corporation has no subsidiaries other than Versailles Savings and Loan Company, and Versailles Savings and Loan Company has no subsidiaries.

Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At June 30, 2011, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

Expense and Tax Allocation

Versailles Savings and Loan Company has entered into an agreement with Versailles Financial Corporation to provide it with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Versailles Savings and Loan Company and Versailles Financial Corporation have entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.

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Personnel

As of June 30, 2011, we had seven full-time employees and one part-time employee. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.

SUPERVISION AND REGULATION

General

As a savings and loan holding company, Versailles Financial Corporation was required by federal law to report to, and otherwise comply with, the rules and regulations of, the Office of Thrift Supervision (the “OTS”) for the fiscal year ended June 30, 2011. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the powers and duties of the OTS with respect to savings and loan holding companies have been transferred to the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), effective July 21, 2011. Accordingly, we are now subject to the rules and regulations, as well as supervision, of the Federal Reserve Board.

Versailles Savings and Loan Company was subject to examination, regulation and supervision by the Ohio Division of Financial Institutions (the “DIF”), the OTS and the Federal Deposit Insurance Corporation (the “FDIC”) for the fiscal year ended June 30, 2011. As a result of the Dodd-Frank Act, the powers and duties of the OTS with respect to state-chartered savings and loan associations such as Versailles Savings were transferred to the FDIC, effective July 21, 2011. This regulation and supervision structure establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund, the banking system and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Versailles Savings is also a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the twelve regional banks in the Federal Home Loan Bank System. Versailles Savings is also currently regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against deposits and other matters. The DIF and the FDIC examine Versailles Savings and prepare reports for the consideration of its Board of Directors on any operating deficiencies. Versailles Savings’ relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Versailles Savings’ loan documents.

The transfer of the powers and duties of the OTS to the Federal Reserve Board and the FDIC pursuant to the Dodd-Frank Act and the extensive new regulations implementing the Act will significantly affect our business and operating results, and any future laws or regulations, whether enacted by Congress or implemented by the FDIC or the Federal Reserve Board, could have a material adverse impact on Versailles Financial Corporation and Versailles Savings.

Set forth below is a brief description of certain regulatory requirements applicable to Versailles Financial Corporation and Versailles Savings. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Versailles Financial Corporation and Versailles Savings.

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New Federal Legislation

As discussed above, the Dodd-Frank Act has, and will continue to, significantly change the bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated our current primary federal regulator, the OTS, and requires Versailles Savings to be regulated by the FDIC (the primary federal regulator for state-chartered non-member banks). The Dodd-Frank Act also authorizes the Federal Reserve Board to supervise and regulate all savings and loan holding companies, like Versailles Financial Corporation, in addition to bank holding companies that it currently regulates. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Bureau of Consumer Financial Protection has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Versailles Savings, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau of Consumer Financial Protection has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of, their prudential regulator rather than the Consumer Financial Protection Bureau.

The new legislation also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on the amount of the institutions deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. The legislation requires originators of securitized loans to retain a percentage of the risk related to transferred loans, establishes regulatory rate-setting for certain debit card interchange fees, and contains reforms on mortgage originations. The Dodd-Frank Act will also increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.

Many of the provisions of the Dodd-Frank Act have delayed effective dates or require various federal agencies to promulgate regulations over the next several years. It is therefore difficult to predict at this time what impact the Dodd-Frank Act will have on community-based institutions like Versailles Savings. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the

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new Bureau of Consumer Financial Protection and mutual holding company dividend waivers, may increase our operating and compliance costs and restrict our ability to pay dividends.

State Regulation

The Ohio Division of Financial Institutions is responsible for the regulation and supervision of Ohio savings institutions in accordance with the laws of the State of Ohio. Ohio law prescribes the permissible investments and activities of Ohio savings and loan associations, including the types of lending that such associations may engage in and the investments in real estate, subsidiaries, and corporate or government securities that such associations may make. The ability of Ohio associations to engage in these state-authorized investments or activities is subject to oversight and approval by the FDIC, if such investments or activities are not permissible for a federally chartered savings and loan association.

The Ohio Division of Financial Institutions also has approval authority over the payment of dividends and any mergers involving or acquisitions of control of Ohio savings institutions. The Ohio Division of Financial Institutions may initiate certain supervisory measures or formal enforcement actions against Ohio associations. Ultimately, if the grounds provided by law exist, the Ohio Division of Financial Institutions may place an Ohio association in conservatorship or receivership.

The Ohio Division of Financial Institutions conducts regular examinations of Versailles Savings and Loan Company approximately once every eighteen months. Such examinations are usually conducted jointly with our federal regulators. The Ohio Division of Financial Institutions imposes assessments on Ohio associations based on their asset size to cover the cost of supervision and examination.

Federal Banking Regulation

Capital Requirements. Federal regulations require savings and loan associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. At June 30, 2011, Versailles Savings’ capital exceeded all applicable requirements.

The risk-based capital standard for savings and loan associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the regulators, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings and loan association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings and loan association. In assessing capital adequacy, the regulators consider not only ratios, but

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also qualitative factors. The regulators have the authority to establish individual minimum capital requirements on a case-by-case basis.

At June 30, 2011, Versailles Savings’ capital exceeded all applicable requirements. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources.”

Loans to One Borrower. Generally, an Ohio savings and loan association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of June 30, 2011, Versailles Savings’ largest lending relationship with a single or related group of borrowers totalled $728,000, which represented 7.8% of unimpaired capital and surplus. Therefore, Versailles Savings was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As an Ohio savings and loan association, Versailles Savings must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Versailles Savings must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business. Versailles Savings also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

“Qualified thrift investments” includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans. Versailles Savings also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

A savings and loan association that fails the qualified thrift lender test must either convert to a commercial bank charter or operate under specified restrictions set forth in the Home Owners’ Loan Act. In addition, the Dodd-Frank Act made non-compliance with the QTL test subject to agency enforcement action for a violation of law. At June 30, 2011, Versailles Savings maintained approximately 85.3% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test.

Capital Distributions. Federal regulations govern capital distributions by a savings and loan association, which include cash dividends, stock repurchases and other transactions charged to the savings and loan association’s capital account. A savings and loan association must file an application for approval of a capital distribution if:

the total capital distributions for the applicable calendar year exceed the sum of the savings and loan association’s net income for that year to date plus the savings and loan association’s retained net income for the preceding two years;

the savings and loan association would not be at least adequately capitalized following the distribution;

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the distribution would violate any applicable statute, regulation, agreement or condition imposed by the association’s regulators; or

the savings and loan association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings and loan association that is a subsidiary of a holding company must still file a notice with its federal regulator at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.

A notice or application for a capital distribution may be disapproved if:

the savings and loan association would be undercapitalized following the distribution;

the proposed capital distribution raises safety and soundness concerns; or

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.

Liquidity. A savings and loan association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. We seek to maintain a ratio of liquid assets not subject to pledge as a percentage of deposits and borrowings of 10% or greater. At June 30, 2011, this ratio was 22.0%.

Community Reinvestment Act and Fair Lending Laws. All savings institutions have a responsibility under the Community Reinvestment Act and related to help meet the credit needs of their communities, including low- and moderate-income borrowers. A savings and loan association’s record of compliance with the Community Reinvestment Act is assessed in regulatory examinations. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings and loan association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by regulators and the Department of Justice. The Community Reinvestment Act requires all Federal Deposit Insurance-insured institutions to publicly disclose their rating. Versailles Savings and Loan Company received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A savings and loan association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Federal Reserve Board, as well as other federal regulations. An affiliate is generally a company that controls, is controlled by, or is under common control with an insured depository institution such as Versailles Savings. Versailles Financial Corporation is an affiliate of Versailles Savings. In general, transactions with affiliates must be on terms that are as favorable to the savings and loan association as comparable transactions with non-affiliates. In this regard, transaction between an insured depository institution and its affiliate are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of

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unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings and loan association. In addition, savings and loan associations are prohibited from lending to any affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Transactions with affiliates also must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Savings and loan associations are required to maintain detailed records of all transactions with affiliates.

Versailles Savings’ authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Versailles Savings’ capital.

In addition, extensions of credit in excess of certain limits must be approved by Versailles Savings’ Board of Directors. Versailles Savings is in compliance with these credit limitations.

Enforcement. The OTS previously had primary enforcement responsibility over federal savings and loan associations, including the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. The OTS’s enforcement authority as to state savings and loan associations has been transferred to the FDIC. Formal enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an

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acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan.

Prompt Corrective Action Regulations. Under prompt corrective action regulations, the FDIC is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized savings and loan associations. For this purpose, a savings and loan association is placed in one of the following five categories based on the association’s capital:

well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);

undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital or 8% total risk-based capital);

significantly undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total risk-based capital); and

critically undercapitalized (less than 2% tangible capital).

The FDIC or other regulators may increase the capital requirements at any time, and may impose additional capital requirements on an institution. Generally, a receiver or conservator for a savings and loan association that is “critically undercapitalized” must be appointed within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a savings and loan association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings and loan association required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the association’s assets at the time it was notified or deemed to be undercapitalized by regulator, or (ii) the amount necessary to restore the savings and loan association to adequately capitalized status. This guarantee remains in place until the association is notified that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings and loan association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The regulators may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At June 30, 2011, Versailles Savings met the criteria for being considered “well-capitalized.” See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources.”

Insurance of Deposit Accounts. Versailles Savings is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in Versailles Savings are insured by the FDIC’s Deposit Insurance Fund, generally up to a maximum of $250,000 per separately insured depositor, pursuant to changes made permanent by the Dodd-Frank Act. The Dodd-Frank Act also extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.

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The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. No institution may pay a dividend if in default of its deposit insurance assessment.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to a risk category based on supervisory evaluations, regulatory capital levels and other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by the FDIC, with less risky institutions paying lower assessments. Until recently, assessment rates ranged from seven to 77.5 basis points of assessable deposits.

On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changes the assessment base used for calculating deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift more of the burden for supporting the insurance fund to larger institutions, which are thought to have greater access to non-deposit funding.

As part of its plan to restore the Deposit Insurance Fund in the wake of a large number of bank failures following the recent financial crisis, the FDIC imposed a special assessment of five basis points for the second quarter of 2009. In addition, the FDIC required all insured institutions to prepay their quarterly assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. In calculating the required prepayment, the FDIC assumed a 5% annual growth in the assessment base and applied a three basis point increase in assessment rates effective January 1, 2011. Versailles Savings’ pre-payment of $92,562 was recorded as a prepaid expense at December 31, 2009 and is being amortized to expense over three years as it is applied to its actual deposit insurance assessments.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.

A material increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Versailles Savings. Management cannot predict what insurance assessment rates will be in the future.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. For the quarter ended June 30, 2011, the annualized FICO assessment rate equaled 0.0017 basis points for each $100 in domestic deposits maintained at an institution. The bonds issued by the FICO are due to mature in 2017 through 2019.

Insurance of deposits may be terminated by the FDIC upon a finding that an 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. We do not

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currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

Prohibitions Against Tying Arrangements. Savings and loan associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. Versailles Savings is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Cincinnati, Versailles Savings is required to acquire and hold shares of capital stock therein. As of June 30, 2011, Versailles Savings and Loan Company was in compliance with this requirement.

Other Regulations

Interest and other charges collected or contracted for by Versailles Savings are subject to state usury laws and federal laws concerning interest rates. Versailles Savings’ operations are also subject to federal laws applicable to credit transactions, such as the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

Truth in Savings Act; and

rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Versailles Savings also are subject to the:

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

The USA PATRIOT Act, which requires savings and loan associations operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. There can be no assurance as to the nature or scope of consumer protection rules that may be enacted by the Consumer Financial Protection Bureau or their effects on our business and operations.

Holding Company Regulation

General. Versailles Financial Corporation is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, Versailles Financial Corporation is a registered savings and loan holding company and is subject to federal regulations, examinations, supervision and reporting requirements. In addition, holding company regulators have enforcement authority over Versailles Financial Corporation and its non-savings institution subsidiaries. Among other things, this authority permits the regulators to restrict or prohibit activities that are determined to be a serious risk to Versailles Savings. Until recently, the OTS was the primary federal regulator for savings and loan holding companies. Under the Dodd-Frank Act, the powers and duties of the OTS relating to savings and loan holding companies and their subsidiaries, including rulemaking and supervision authority, were transferred to the Federal Reserve Board effective July 21, 2011.

Permissible Activities. Under present law, the business activities of Versailles Financial Corporation will be generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan

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holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior regulatory approval, and certain additional activities authorized by federal regulations.

Federal law prohibits a savings and loan holding company, including Versailles Financial Corporation, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted for a savings and loan holding company; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors must be considered by the regulators.

No acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state may be approved, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) 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.

Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital as is currently the case with bank holding companies. Instruments issued by May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies.

Source of Strength. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Dividends. Versailles Savings must notify its regulator thirty (30) days before declaring any dividend to Versailles Financial Corporation. The financial impact of a holding company on its subsidiary institution is a matter that is evaluated by regulators, who have the authority to order cessation of activities (including the payment of dividends) or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the subsidiary institution.

Federal Securities Laws

The shares of common stock issued in our stock offering is registered under the Securities Act of 1933 for the registration of the shares of common stock issued in our stock offering. Our common stock

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is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Under federal regulations, the shares of common stock must remain registered for a period of at least three years following completion of the conversion. Under regulations of the Securities and Exchange Commission, the minimum period is one year. Following the three year period, and pursuant to the rules of the Securities and Exchange Commission, Versailles Financial Corporation may determine to deregister the common stock provided there are less than 300 record holders as calculated under the rules and regulations of the Securities and Exchange Commission. Following the one year period, and if we have less than 300 record holders, we intend to request a waiver of the three year mandatory registration requirement. There can be no assurance that our request will be granted, as we are now subject to the regulation of the Federal Reserve Board, which does not have any precedent for granting such a request.

The registration under the Securities Act of 1933 of shares of common stock to be issued in the stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, is able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

TAXATION

Federal Taxation

General. Versailles Financial Corporation and Versailles Savings and Loan Company are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Versailles Financial Corporation and Versailles Savings and Loan Company.

Method of Accounting. For federal income tax purposes, Versailles Savings and Loan Company currently reports its income and expenses on the cash method of accounting and uses a tax year ending June 30th for filing its federal income tax return.

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Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At June 30, 2011, Versailles Savings and Loan Company had no net operating loss carryforward for federal income tax purposes.

Corporate Dividends-Received Deduction. Versailles Financial Corporation files a consolidated return with Versailles Savings and Loan Company. As such, dividends it receives from Versailles Savings and Loan Company will not be included as income to Versailles Financial Corporation. The corporate dividends-received deduction is 100%, or 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payer of the dividend.

Audit of Tax Returns. Versailles Savings and Loan Company’s federal income tax returns have not been audited in the most recent five-year period.

State Taxation

Versailles Savings and Loan Company is subject to Ohio taxation. In particular, Versailles Savings and Loan Company is subject to the Ohio corporation franchise tax, which is an excise tax imposed on corporations (including financial institutions) for the privilege of doing business in Ohio, owning capital or property in Ohio, holding a charter or certificate of compliance authorizing the corporation to do business in Ohio, or otherwise having nexus with Ohio during a calendar year. The franchise tax is based upon the net worth of Versailles Savings and Loan Company plus certain reserve adjustments and exemptions. For Ohio franchise tax purposes, savings institutions are currently taxed at a rate equal to 1.3% of taxable net worth. Versailles Savings and Loan Company is not currently under audit with respect to its Ohio franchise tax returns.

ITEM 1A.

Risk Factors

Not required, as the Registrant is a smaller reporting company.

ITEM 1B.

Unresolved Staff Comments

None.

ITEM 2.

Properties

We conduct business out of our 2,875 square foot main office located at 27 East Main Street, Versailles, Ohio. We have owned the property since 1955, and, as of June 30, 2011, the net book value of our home office was $7,600. In addition, in January 2010, we acquired a 5-acre plot of land on the outskirts of Versailles, Ohio for $150,000. We intend to construct a new home office on this site which will allow us to offer expanded services and more convenient access for customers. At June 30, 2011, the net book value of this property was $226,000, which includes a site survey and architectural and engineering services for the project as well as our initial investment in the land. On August 11, 2011, we broke ground on the construction of our new home office on this site. We expect construction of our new home office to be completed during the second quarter of 2012.

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ITEM 3.

Legal Proceedings

From time to time, we are involved as plaintiff or defendant in various legal proceedings arising in the ordinary course of business. At June 30, 2011, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

ITEM 4.

Reserved and Removed

PART II

ITEM 5.

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

Market. Our common stock is traded on the Over-the-Counter Bulletin Board under the symbol “VERF.” The approximate number of holders of record of Versailles Financial Corporation common stock as of August 31, 2011 was 237. Certain shares of Versailles Financial Corporation common stock are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

The following table sets forth the range of the high and low sales prices of the Company’s Common Stock for the prior eight calendar quarters and is based upon information provided by Over-the-Counter Bulletin Board. The high and low “bid” price, as required to be disclosed by Regulation S-K, is not available because, to date, either there were not two-sided quotes by market makers, which is the minimum required to calculate a priced bid and ask, or there was only one market maker with a two-sided quote.

	Prices of Common Stock
	High		Low
Quarter Ended
June 30, 2011	$	14.00	$	13.00
March 31, 2011		18.00		12.00
December 31, 2010		—		—
September 30, 2010		—		—

	Prices of Common Stock
	High		Low
Quarter Ended
June 30, 2010	$	—	$	—
March 31, 2010		—		—
December 31, 2009		n/a		n/a
September 30, 2009		n/a		n/a

Our common stock was not traded on the Over-the-Counter Bulletin Board until the completion of our mutual-to-stock conversion in January, 2010. In addition, for certain quarters there were no trades in our common stock.

Dividends. Versailles Financial Corporation can pay dividends on its common stock if, after giving effect to the distribution, it would be able to pay its indebtedness as the indebtedness comes due in the usual course of business and its total assets exceed the sum of its liabilities and the amount needed, if Versailles Financial Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any holders of capital stock who have a preference in the event of dissolution. The holders of common stock of Versailles Financial Corporation will be entitled to receive

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and share equally in dividends as may be declared by our Board of Directors out of funds legally available therefore. If Versailles Financial Corporation issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends. The Board of Directors has the authority to declare cash dividends on shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of cash dividends. In determining whether and in what amount to pay a cash dividend, the Board is expected to take into account a number of factors, including the following:

regulatory capital requirements;

our financial condition and results of operations;

tax considerations;

statutory and regulatory limitations; and

general economic conditions and forecasts.

Dividend payments by Versailles Financial Corporation are dependent primarily on dividends it receives from Versailles Savings and Loan Company, because Versailles Financial Corporation will have no source of income other than dividends from Versailles Savings and Loan Company, earnings from the investment of proceeds from the sale of shares of common stock retained by Versailles Financial Corporation, and interest payments with respect to Versailles Financial Corporation’s loan to the Employee Stock Ownership Plan. Federal law imposes limitations on dividends by Federal stock savings banks. See “Item 1 Business—Supervision and Regulation—Capital Distributions.”

Equity Compensation Plans. At June 30, 2011, there were no compensation plans under which equity securities of Versailles Financial Corporation were authorized for issuance other than the Employee Stock Ownership Plan. As of June 30, 2011, 1,710 shares had been allocated to participants under the Employee Stock Ownership Plan.

Issuer Repurchases. During the quarter ended June 30, 2011, we did not repurchase any shares of our common stock.

Sales of Unregistered Securities. During the quarter ended June 30, 2011, we did not offer or sell any unregistered securities.

ITEM 6.

Selected Financial Data

Not required, as the Registrant is a smaller reporting company.

ITEM 7.

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

This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our financial condition at June 30, 2011 and our results of operations for the years ended June 30, 2011 and 2010. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in this annual report.

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Overview

Versailles Savings and Loan Company, Versailles Financial Corporation’s subsidiary, has historically operated as a traditional thrift institution. A significant majority of our assets consist of long-term, one- to four-family fixed-rate residential mortgage loans and mortgage-backed securities, which we have funded primarily with deposit accounts and Federal Home Loan Bank of Cincinnati advances. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities (including securities issued by U.S. government agencies, a mortgage-backed securities mutual fund and residential mortgage-backed securities issued by government-sponsored entities) and other interest-earning assets, primarily interest-earning deposits at other financial institutions, and the interest paid on our interest-bearing liabilities, consisting primarily of savings accounts, certificates of deposit, and Federal Home Loan Bank of Cincinnati advances. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts and other income, gains or losses on the sale of available for sale securities and other-than-temporary impairment losses on securities. Non-interest expense currently consists primarily of salaries and employee benefits, occupancy and equipment expenses, data processing, legal, accounting and exam fees and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Other than our loans for the construction of one- to four-family properties, we do not offer “interest only” mortgage loans (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan) on one- to four-family residential properties. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his or her loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (generally defined as loans having less than full documentation).

All of our residential mortgage-backed securities have been issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae, all of which are U.S. government-sponsored entities. These agencies guarantee the payment of principal and interest on our residential mortgage-backed securities. We do not own any preferred stock issued by Fannie Mae or Freddie Mac. We also do not own any trust preferred securities.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on income or on the carrying value of certain assets, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the

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nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Commercial and non-residential real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Retirement Plans. Amounts reported for the pension obligation require management to use estimates that may be subject to significant change in the near term. These estimates are based on projection of the weighted average discount rate, rate of increase in future compensation levels, and weighted average expected long-term rate of return on pension assets.

Business Strategy

We have focused primarily on improving the execution of our community oriented retail banking strategy. Highlights of our current business strategy include the following:

Continue to Focus on Residential Lending. We have been and will continue to be primarily a one- to four-family residential mortgage lender for borrowers in our market area. As of June 30, 2011, $27.8 million, or 73.9%, of our total loan portfolio consisted of one- to four-family residential mortgage loans. Although we have historically retained in our portfolio all loans that we originate, we will consider in the future whether to hold our originated mortgage loans for investment or to sell the loans to investors, choosing the strategy that we believe is most advantageous to us from a profitability and risk management standpoint.

Increase Non-residential Real Estate Lending. While we will continue to emphasize one- to four-family residential mortgage loans, we also intend to continue to increase our originations of non-residential real estate loans in order to increase the yield of, and reduce the term of, our total loan portfolio. We originated $2.6 million of non-residential real estate during the year ended June 30, 2011. At June 30, 2011, $7.7 million, or 20.4%, of our total loan portfolio consisted of non-residential real estate loans.

Manage Interest Rate Risk While Maintaining or Enhancing to the Extent Practicable our Net Interest Margin. Subject to market conditions, we have sought to enhance net interest income by emphasizing controls on the cost of funds rather than attempting to maximize asset yields, as loans with high yields often involve greater credit risk or may be repaid during periods of decreasing market interest rates.

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Build a Larger Home Office Location and Provide Banking Relationships to a Larger Base of Customers. We were established in 1887 and have been operating continuously in Darke County since that time. Our share of FDIC-insured deposits in Darke County as of June 30, 2010 (the latest date for which such information is available) was 2.8%. We will seek to expand our customer base by building a new, larger home office in Versailles to replace our existing location, which will facilitate on-site parking, drive-through windows and ATMs. In this way, we can offer our products and services to the new base of customers, by using our recognized brand name and the goodwill developed over years of providing timely, efficient banking services.

Offer New Deposit Products. Over the course of the next several years, we anticipate expanding our menu of products to include money market deposit accounts and checking accounts. These products will provide a lower cost funding source and a new source of non-interest income.

Maintain Strong Asset Quality. We have emphasized maintaining strong asset quality by following conservative underwriting guidelines, sound loan administration, and focusing on loans secured by real estate located within our market area only. Our non-performing assets totaled $70,000 or 0.16% of total assets at June 30, 2011. Our total nonperforming loans to total loans ratio was 0.18% at June 30, 2011.

Comparison of Financial Condition at June 30, 2011 and June 30, 2010

General. Our total assets decreased $0.7 million, or 1.6%, to $44.5 million at June 30, 2011 from $45.2 million at June 30, 2010. The decrease was primarily due to a decrease in cash and cash equivalents of $0.8 million, or 16.4%, to $4.1 million at June 30, 2011 from $4.9 million at June 30, 2010.

Loans. An increase in net loans reflected continued demand for loans in our market area in a low interest rate environment. The largest growth in our loan portfolio during the year ended June 30, 2011 was in non-residential real estate, which increased $0.4 million, or 5.8%, to $7.7 million at June 30, 2011 from $7.3 million at June 30, 2010. Originations of $2.6 million during the year ended June 30, 2011 were offset by repayments of $2.2 million during that period. Non-residential real estate loans help us manage interest rate risk as these types of loans have a higher yield and shorter term than one- to four-family residential mortgage loans, but carry a greater credit risk since they are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. One- to four-family residential real estate loans increased $0.3 million, or 1.1%, to $27.8 million at June 30, 2011 from $27.5 million at June 30, 2010.

Investments. Investment securities decreased $0.2 million, or 13.5%, to $1.4 million at June 30, 2011 from $1.6 million at June 30, 2010, as satisfactory yields were not available in the current low interest rate environment. Net pay-downs in government sponsored mortgage-backed securities represented the $0.2 million decrease in investment securities. Interest-bearing time deposits with other banks decreased $0.2 million, or 39.9%, to $0.3 million at June 30, 2011 from $0.5 million at June 30, 2010.

Cash and Cash Equivalents. Cash and cash equivalents decreased $0.8 million, or 16.4%, to $4.1 million at June 30, 2011 from $4.9 million at June 30, 2010. The decrease in cash and cash equivalents was due to utilization of the funds to satisfy maturing Federal Home Loan Bank advances and to finance new lending.

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Premises and equipment. Fixed assets increased $84,000, or 48.4%, to $259,000 at June 30, 2011 from $175,000 at June 30, 2010. The Company finalized plans to build a new home office offering expanded services and more convenient access for customers. To implement the expanded services, the Company invested $8,000 in new computer equipment and incurred costs related to the new building of $76,000. Subsequent to June 30, 2011, the Company commenced construction on the new building, and expects to incur increased expenses related to the construction during the year ending June 30, 2012.

Other real estate owned. Other real estate owned decreased to $0 at June 30, 2011 from $160,000 at June 30, 2010. During the year, the properties in real estate owned were sold , resulting in a net loss of less than $1,000.

Deposits. Deposits increased $0.6 million, or 2.1%, to $26.5 million at June 30, 2011 from $25.9 million at June 30, 2010. The increase in deposits was due to an increase in regular savings to $9.0 million at June 30, 2011 from $8.1 million at June 30, 2010 offset by a decrease in certificates of deposits to $17.5 million at June 30, 2011 from $17.8 million at June 30, 2010. Some investors shifted funds to deposit products from equity-based investments, given the continued volatility in the stock markets during the year. The increase in deposits was used to fund new loans. We generally do not accept brokered deposits and no brokered deposits were accepted during the year ended June 30, 2011.

Borrowings. The outstanding balance of Federal Home Loan Bank of Cincinnati advances decreased $1.5 million, or 20%, to $6.0 million at June 30, 2011 from $7.5 million at June 30, 2010. During the year three advances matured and were repaid, two advances for $1.0 million each with interest rates of 5.79% and 6.27% and a $0.5 million advance with an interest rate of 5.93%. These repayments were partially offset by a new fixed rate term advance of $1.0 million with an interest rate of 1.14%, due October, 2014. Subsequent to June 30, 2011, the Company obtained another fixed rate term advance of $1.0 million with an interest rate of 1.02%, due July 2014.

In keeping with our efforts to manage our exposure to changes in interest rates, our borrowings from the Federal Home Loan Bank of Cincinnati at June 30, 2011 consisted of advances with laddered terms of up to six years.

Equity. Total equity increased to $11.0 million at June 30, 2011 from $10.6 million at June 30, 2010. The $0.4 million increase in equity resulted from the $0.2 million net income for the year and a $0.2 million reduction in the accumulated other comprehensive loss associated with the funded status of our pension plan due to gains in the pension plan’s assets.

Comparison of Operating Results for the Years Ended June 30, 2011 and June 30, 2010

General. Net income increased $45,000, or 27.4%, to $211,000 for the year ended June 30, 2011 from $166,000 for the year ended June 30, 2010. The increase primarily reflected an increase in net interest income, which was partially offset by an increase in noninterest expenses, provision for loan losses, and in federal income taxes.

Interest Income. Interest and dividend income remained unchanged at $2.05 million for the years ended June 30, 2011 and June 30, 2010. Average interest-earning assets increased $1.1 million, or 2.6%, to $42.4 million for the year ended June 30, 2011 from $41.3 million for the year ended June 30, 2010, offset by a decrease in the average yield on interest-earning assets to 4.84% for the year ended June 30, 2011 from 4.98% for the year ended June 30, 2010.

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Interest income on loans increased $26,000, or 1.3%, to $1.973 million for the year ended June 30, 2011 from $1.947 million and June 30, 2010. The increase in the average balance of loans to $37.2 million from $36.1 million was partially offset by lower average yields on such balances, to 5.30% in fiscal 2011 from 5.39% in fiscal 2010. The lower yields reflect the continued low interest rate environment.

Interest income on investment securities decreased to $42,000 for the year ended June 30, 2011 from $61,000 for the year ended June 30, 2010, reflecting a decrease in the average balance of such securities to $1.5 million in 2011 from $1.8 million in 2010, as well as a decrease in the average yield on available for sale securities to 2.30% from 3.17% and a decrease in the average yield on held to maturity securities to 3.38% from 3.69%.

Interest Expense. Interest expense decreased $235,000, or 31.0%, to $522,000 for the year ended June 30, 2011 from $757,000 for the year ended June 30, 2010. The decrease reflected a decrease in the average rate paid on deposits, including certificates of deposit and Federal Home Loan Bank borrowings, in 2011 compared to 2010, augmented by the decrease in the average balance of borrowings, which more than offset the increase in the average balance of savings deposits.

Interest expense on certificates of deposit decreased $67,000, or 18.4%, to $296,000 for the year ended June 30, 2011 from $363,000 for the year ended June 30, 2010. This was primarily due to a decrease in the average cost of such certificates to 1.68% in fiscal 2011 from 2.13% in fiscal 2010 which more than offset the increase in the average balance of such certificates to $17.6 million for the year ended June 30, 2011 from $17.1 million for the year ended June 30, 2010. The decrease in the average cost of our certificates of deposit is due to the low interest rate environment. New and renewed certificates of deposit are being issued at lower interest rates than the interest rates on maturing certificates.

Interest expense on borrowings, consisting of advances from the Federal Home Loan Bank of Cincinnati, decreased $169,000, or 44.2%, to $215,000 for the year ended June 30, 2011 from $384,000 for the year ended June 30, 2010. This was the result of an decrease in the average balances of such borrowings to $6.3 million for the year ended June 30, 2011, from $8.3 million for the year ended June 30, 2011 coupled with a decrease in the weighted average rate paid on such borrowings to 3.41% for the year ended June 30, 2011 from 4.66% for the year ended June 30, 2010.

Net Interest Income. Net interest income increased to $1.5 million for the year ended June 30, 2011 from $1.3 million for the year ended June 30, 2010. This reflected an increase in our interest rate spread to 3.22% from 2.67%, and an increase in the ratio of our average interest earning assets to average interest bearing liabilities to 131.24% from 125.64%. Our net interest margin increased to 3.60% from 3.14%.

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loans losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or economic conditions change. As such, this evaluation is inherently subjective as it requires estimates that are susceptible to significant revision. We

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assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as required in order to maintain the allowance at an adequate level.

We recorded a provision for loan losses of $30,000 for the year ended June 30, 2011 compared to $20,000 for the year ended June 30, 2010. The increase in 2011 compared to 2010 was due to continued high unemployment rates and economic uncertainty both locally and nationally. The allowance for loan losses was $221,000, or 0.59% of total loans, at June 30, 2011, compared to $191,000, or 0.52% of total loans at June 30, 2010. Total nonperforming loans were $70,000 at June 30, 2011, compared to $90,000 at June 30, 2010. We used the same methodology in assessing the allowances for both periods. To the best of our knowledge, we have recorded all probable incurred credit losses for the years ended June 30, 2011 and 2010.

Noninterest Income. Other income within the noninterest income category decreased to $7,000 for the year ended June 30, 2011 from $13,000 for the year ended June 30, 2010. The decrease in noninterest income was primarily attributable to the sale of real estate owned. During 2011, we recognized $1,400 in income from the operation of real estate owned compared to $7,800 in 2010.

Noninterest Expense. Noninterest expense increased $142,000, or 13.7%, to $1.18 million for the year ended June 30, 2011 from $1.04 million for the year ended June 30, 2010. The increase was partially due to increased salaries and employee benefits expense to $591,000 for the year ended June 30, 2011 from $515,000 for the year ended June 30, 2010. Compensation expense increased $20,000 as we experienced normal salary increases. Employee benefit expense increased as our more recent hires became eligible for pension benefits, causing pension expense to increase by $36,000. In addition, a full year of expense was recognized for the ESOP, compared to a half year of expense in the year ended June 30, 2010. Finally, health care benefit cost increased due to a full year of recently implemented regulations. As a result of expenses associated with compliance with the federal securities laws, our legal, accounting and examination expense increased $74,000, or 47.7%, to $229,000 for the year ended June 30, 2011 from $155,000 for the year ended June 30, 2010. Data processing fees increased $9,000 with the utilization of new software and services. With the sale of real estate owned in 2011, REO expense decreased $15,000 to $5,000 for the year ended June 30, 2011 from $20,000 for the year ended June 30, 2010, representing the main component of the decrease in other noninterest expense. In addition, our noninterest expense is likely to increase if we begin to offer deposit transaction accounts. Finally, occupancy and office costs are also expected to increase with our new larger home office under consideration.

Income Tax Expense. The provision for income taxes was $106,000 for the year ended June 30, 2011 compared to $83,000 for the year ended June 30, 2010, reflecting an increase in pretax income. Our effective tax rate was 33.52% for the year ended June 30, 2010 compared to 33.34% for the year ended June 30, 2010. The increase in our effective tax rate for 2011 was primarily attributable to the level of tax exempt interest income in comparison to pre-tax income.

Comprehensive Income. The components of other comprehensive income (loss) include unrealized holding gains and losses on available for sale securities, unrealized losses on defined benefit pension plan, the amortization of unrecognized net loss for the defined benefit pension plan, and the amortization of prior service cost for both the defined benefit pension plan and the supplemental retirement plans. Other comprehensive income increased due to an after-tax gain of $175,000 for the year ended June 30, 2011 compared to a loss of $(90,000) for the year ended June 30, 2010. The increase reflected the gain in value of the defined benefit pension plan, which had unrealized gains of $228,000 for the year ended June 30, 2011, compared to unrealized losses of $(184,000) for the year ended June 30,

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2010. The unrealized gain on the defined benefit pension plan was due to the fair value gains in plan assets for the year ended June 30, 2011 compared to year ended June 30, 2010.

Analysis of Net Interest Income

Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

						For the year ended June 30,
	At June 30, 2011					2011								2010
	Actual Balance		Yield/Cost			Average Balance			Interest and Dividends		Yield/Cost			Average Balance			Interest and Dividends		Yield/Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	37,515		5.24	%	$	37,246		$	1,973		5.30	%	$	36,107		$	1,947		5.39	%
Investment securities available for sale		699		1.88	%		703			16		2.30	%		776			24		3.17	%
Investment securities held to maturity		694		3.33	%		770			26		3.38	%		993			37		3.69	%
FHLB stock		397		4.50	%		397			17		4.37	%		392			18		4.59	%
Other interest-earning assets		3,722		0.34	%		3,233			15		0.47	%		3,007			27		0.90	%
Total interest-earning assets		43,027		4.72	%		42,349			2,047		4.84	%		41,275			2,053		4.98	%

Noninterest-earning assets		1,479					1,851								2,042
Total assets	$	44,506				$	44,200							$	43,317

Liabilities and equity:
Interest-bearing liabilities:
Savings deposits	$	8,970		0.15	%	$	8,343		$	11		0.14	%	$	7,509		$	10		0.13	%
Certificates of deposit		17,506		1.58	%		17,627			296		1.68	%		17,081			363		2.13	%
Total interest-bearing deposits		26,476		1.05	%		25,970			307		1.19	%		24,590			373		1.52	%

FHLB advances		6,000		3.01	%		6,292			215		3.41	%		8,250			384		4.66	%
Total interest-bearing liabilities		32,476		1.40	%		32,262			522		1.62	%		32,840			757		2.31	%

Other noninterest-bearing liabilities		1,040					1,223								1,427
ESOP repurchase obligation		22					13								-

Total shareholders’ equity		10,968					10,702								9,050
Total liabilities and equity	$	44,506				$	44,200							$	43,317

Net interest income	$	1,525							$	1,525							$	1,296
Interest rate spread												3.22	%							2.67	%
Net interest margin												3.60	%							3.14	%
Average interest-earning assets to average interest-bearing liabilities							131.24	%							125.64	%

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Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

2011 Compared to 2010	Volume			Rate			Net
	(In thousands)
Interest income:
Loans receivable	$	61		$	(35	)	$	26
Investment securities available for sale		(2	)		(6	)		(8	)
Investment securities held to maturity		(8	)		(3	)		(11	)
FHLB stock		0			(1	)		(1	)
Other interest-earning assets		2			(14	)		(12	)
Total		53			(59	)		(6	)

Interest expense:
Savings deposits		1			0			1
Certificates of deposit		11			(78	)		(67	)
FHLB advances		(79	)		(90	)		(169	)
Total		(67	)		(168	)		(235	)
Increase in net interest income	$	120		$	109		$	229

Management of Market Risk

Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our Board of Directors is responsible for the review and oversight of our asset/liability strategies. The Asset/Liability Committee of the Board of Directors meets quarterly and is charged with developing an asset/liability management plan. Our Board of Directors has also established an Asset/Liability Management Committee consisting of senior management. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

Among the techniques we are currently using to manage interest rate risk are: (i) maintaining a portfolio of adjustable-rate one- to four-family residential loans; (ii) increasing our origination of non-residential real estate loans as they generally reprice more quickly than residential mortgage loans; (iii) reducing the interest rate sensitivity of our liabilities by using fixed-rate certificates of deposit and fixed-rate Federal Home Loan Bank advances with laddered terms; and (iv) maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities.

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While these strategies have helped us to manage our interest rate exposure, they do pose risks. For example, the annual interest rate caps and prepayment options embedded in adjustable-rate one- to four-family residential loans, which allow for early repayment at the borrower’s discretion, may result in prepayment before the loan reaches the fully indexed rate. Conversely, in a falling interest rate environment, borrowers may refinance to fixed rate loans to lock in the then lower rates. In addition, multi-family and non-residential real estate lending generally presents higher credit risks than residential one- to four-family lending.

An important measure of interest rate risk is the amount by which the net present value of an institution’s cash flow from assets, liabilities and off balance sheet items changes in the event of a range of assumed changes in market interest rates. We have utilized a net portfolio value (“NPV”) model to provide an analysis of estimated changes in our NPV under the assumed instantaneous changes in the United States treasury yield curve. The financial model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of the NPV. Set forth below is an analysis of the changes to the economic value of our equity that would occur to our NPV as of June 30, 2011 in the event of designated changes in the United States treasury yield curve. At June 30, 2011, the economic value of our equity exposure related to these hypothetical changes in market interest rates was within the current guidelines we have established.

			Net Portfolio Value (Dollars in thousands)								NPV as % of PV of Assets
Change in Rates			$ Amount		$ Change			% Change			NPV Ratio			Change
	+300	bp		8,725		(2,786	)		(24	%)		19.88	%		(438	) bp
	+200	bp		9,803		(1,707	)		(15	%)		21.68	%		(257	) bp
	+100	bp		10,782		(729	)		(6	%)		23.21	%		(104	) bp
	+50	bp		11,188		(323	)		(3	%)		23.81	%		(45	) bp
	0	bp		11,511		—			—			24.26	%		—
	-50	bp		11,731		221			2	%		24.54	%		29	bp
	-100	bp		12,003		493			4	%		24.93	%		67	bp

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. The table also assumes that the credit risk of the underlying assets does not change with changes in interest rates. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results.

Our policies do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

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Liquidity and Capital Resources

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. We also utilize Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

Our cash flows are comprised of three primary classifications: (i) cash flows provided by operating activities, (ii) cash flows provided by investing activities, and (iii) cash flows provided by financing activities. Net cash flows from operating activities were $525,000 for the year ended June 30, 2011 and $134,000 for the year ended June 30, 2010. The increase was primarily the result of changes in the composition of other assets and other liabilities. Net cash from investing activities consisted primarily of disbursements for loan originations and fixed asset purchases, offset by principal collections on loans, proceeds from maturation of securities and proceeds from the sale of real estate owned. Net cash flows from investing activities were $(0.4 million) for the year ended June 30, 2011 and $(1.9 million) for the year ended June 30, 2010. Net cash flows from financing activities were $(1.0 million) for the year ended June 30, 2011 and $4.1 million for the year ended June 30, 2010. The changes in net cash flows provided by financing activities for 2011 were primarily due to the increase in deposits and net decrease in advances from the Federal Home Loan Bank of Cincinnati. For the year ended June 30, 2010, net cash provided by financing activities consisted of activity in deposits and the net proceeds from our stock offering in January 2010.

Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At June 30, 2011 and June 30, 2010, cash and short-term investments totaled $4.1 million and $4.9 million, respectively. We may also utilize the sale of securities available-for-sale, federal funds purchased, Federal Home Loan Bank of Cincinnati advances and other borrowings as sources of funds.

At June 30, 2011 and June 30, 2010, we had outstanding commitments to originate loans of $161,000 and $436,000, respectively, and unfunded commitments under lines of credit and standby letters of credit of $0 and $7,500, respectively. We anticipate that we will have sufficient funds available to meet our current loan commitments. Loan commitments have, in recent periods, been funded through liquidity and normal deposit flows. Certificates of deposit scheduled to mature in one year or less from June 30, 2011 totaled $11.3 million. Management believes, based on past experience, a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core deposits and capital, we consider our liquidity and capital resources sufficient to meet our outstanding short-term and long-term needs.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government and agency obligations and residential mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At June 30, 2011, we had $6.0 million in outstanding advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $10.6 million.

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We are subject to various regulatory capital requirements. At June 30, 2011, we were in compliance with all applicable capital requirements. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements” and Note 13 of the Notes to our Consolidated Financial Statements. The following table sets forth our capital ratios and the regulatory requirements at the dates indicated.

	Actual					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2011:
Total capital (to risk-weighted assets)	$	9,905		38.1	%	$	2,602		10.0	%
Tier I (core) capital (to risk-weighted assets)		9,685		37.2			1,561		6.0
Tier I (core) capital (to adjusted total assets)		9,685		21.8			2,225		5.0
Tangible capital (to adjusted total assets)		9,685		21.8					N/A

June 30, 2010:
Total capital (to risk-weighted assets)		9,570		35.5	%	$	2,694		10.0	%
Tier I (core) capital (to risk-weighted assets)		9,380		34.8			1,616		6.0
Tier I (core) capital (to adjusted total assets)		9,380		20.6			2,280		5.0
Tangible capital (to adjusted total assets)		9,380		20.6					N/A

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see Note 11 of the Notes to our Financial Statements.

For fiscal year 2011 and 2010, we did not engage in any off-balance-sheet transactions other than loan origination commitments in the normal course of our lending activities.

Recently Issued but not yet Effective Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-02 to Receivables (ASC 310), A Creditors’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. This ASU provides guidance and clarification in evaluating whether a restructuring constitutes a troubled debt restructuring, including a creditor’s evaluation of whether it has granted a concession, and also whether the debtor is experiencing financial difficulties. Further, this ASU states that a restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider in an attempt to protect as much of its investment as possible. The amendments in this update are effective for the first interim or annual reporting period beginning on or after June 15, 2011 and are to be applied retrospectively to the beginning of the annual period of adoption. Management is currently reviewing the guidance to determine the impact, if any, to the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 to Fair Value Measurement (ASC 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements is U.S. GAAP

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and IFRSs. This ASU changes the wording used to describe many of the requirements in U.S. generally accepted accounting principles (GAAP) for measuring fair value and for disclosing information about fair value measurements. The amendments in this update include clarifying the Board’s intent about the application of existing fair value measurement and disclosure requirements, and changing particular principles or requirements for measuring fair value for disclosing information about fair value measurement. The amendments in this update are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early adoption is not permitted. The adoption of the disclosure provisions of the ASU is not expected to have a material impact on the Company’s consolidated financial statements.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

Not required, as the Company is a smaller reporting company.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF

VERSAILLES FINANCIAL CORPORATION

Report of Independent Registered Public Accounting Firm	54

Consolidated Balance Sheets at June 30, 2011 and 2010	55

Consolidated Statements of Income for the years ended June 30, 2011 and 2010	56

Consolidated Statements of Comprehensive Income for the years ended June 30, 2011 and 2010	57

Consolidated Statements of Changes in Shareholders’ Equity for the years ended June 30, 2011 and 2010	58

Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010	60

Notes to Consolidated Financial Statements	62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Versailles Financial Corporation

Versailles, Ohio

We have audited the accompanying consolidated balance sheets of Versailles Financial Corporation as of June 30, 2011 and 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versailles Financial Corporation as of June 30, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with U. S. generally accepted accounting principles.

	/s/ Crowe Horwath LLP
	Crowe Horwath LLP

Columbus, Ohio

September 28, 2011

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

June 30, 2011 and June 30, 2010

ITEM 8.

Financial Statements and Supplementary Data

	2011			2010
ASSETS
Cash and cash equivalents due from financial
institutions	$	2,371,401		$	1,672,815
Overnight deposits		1,700,000			3,200,000
Total cash and cash equivalents		4,071,401			4,872,815
Interest-bearing time deposits in other financial
institutions		292,000			486,000
Securities, available-for-sale		699,297			707,569
Securities held to maturity (fair value of $729,604 at
June 30, 2011 and $946,110 at June 30, 2010)		693,918			903,485
Federal Home Loan Bank stock		397,500			397,500
Loans, net of allowance of $220,817 and $190,817		37,514,804			36,722,899
Other real estate owned		-			160,000
Premises and equipment, net		259,116			174,645
Accrued interest receivable		122,997			134,889
Other assets		454,526			655,513
Total assets	$	44,505,559		$	45,215,315

LIABILITIES
Savings accounts	$	8,970,233		$	8,144,648
Certificates of deposit		17,505,499			17,792,043
Total deposits		26,475,732			25,936,691
Federal Home Loan Bank advances		6,000,000			7,500,000
Other liabilities		1,039,362			1,194,307

Common stock in ESOP subject to repurchase
obligation		22,230			-

SHAREHOLDERS’ EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding		-			-
Common stock, $.01 par value, 10,000,000 shares
authorized, 427,504 shares issued		4,275			4,275
Additional paid-in capital		3,794,894			3,813,656
Retained earnings		8,165,438			7,954,578
Treasury stock, 35,460 shares, at cost		(354,600	)		(354,600	)
Unearned employee stock ownership plan shares		(316,350	)		(333,450	)
Accumulated other comprehensive loss		(325,422	)		(500,142	)
Total shareholders’ equity		10,968,235			10,584,317

Total liabilities and shareholders’ equity	$	44,505,559		$	45,215,315

See accompanying notes to financial statements.

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended June 30, 2011 and 2010

	2011			2010
Interest and dividend income
Loans, including fees	$	1,972,913		$	1,947,002
Securities available for sale		15,975			24,116
Securities held to maturity		25,992			36,614
FHLB dividends		17,387			18,004
Deposits with banks		15,111			27,153
Total interest and dividend income		2,047,378			2,052,889

Interest expense
Deposits		307,789			372,990
Federal Home Loan Bank advances		214,681			384,410
Total interest expense		522,470			757,400

Net interest income		1,524,908			1,295,489

Provision for loan losses		30,000			20,000

Net interest income after provision for loan losses		1,494,908			1,275,489

Noninterest income
Other income		6,897			12,963
Gain (loss) on sale of other real estate owned		(764	)		-
Gain (loss) on sale/disposal premises and equipment		(1,687	)		-
Total noninterest income		4,446			12,963

Noninterest expense
Salaries and employee benefits		591,328			514,537
Occupancy and equipment		34,756			37,551
Directors’ fees		60,000			62,900
Data processing		73,659			64,632
Franchise taxes		91,508			84,584
Legal, accounting and exam fees		229,458			155,308
Federal deposit insurance		21,600			24,732
Other		79,885			95,870
Total noninterest expense		1,182,194			1,040,114

Income before income taxes		317,160			248,338
Income tax expense		106,300			82,791

Net income	$	210,860		$	165,547

Earnings per common share	$	0.53		$	0.18

See accompanying notes to financial statements.

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended June 30, 2011 and 2010

	2011			2010

Net income	$	210,860		$	165,547

Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities		(8,272	)		10,255
Reclassification adjustments for gains (losses)
later recognized in income		-			-
Net unrealized gains (losses) on
available for sale securities		(8,272	)		10,255
Tax effect		2,812			(3,487	)
Net of tax amount		(5,460	)		6,768

Unrealized gains (losses) on defined benefit pension plan		228,215			(184,403	)
Amortization of unrecognized net loss for defined
benefit pension plan		30,845			24,220
Amortization of prior service cost for defined
benefit pension plan		2,898			2,898
Amortization of prior service cost for supplemental
retirement plan		11,042			11,042
Net unrealized gains (losses) on defined benefit
pension and supplemental retirement plans		273,000			(146,243	)
Tax effect		(92,820	)		49,723
Net of tax amount		180,180			(96,520	)

Other comprehensive income (loss)		174,720			(89,752	)

Comprehensive income	$	385,580		$	75,795

See accompanying notes to financial statements.

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended June 30, 2011 and 2010

													Accumulated
			Additional							Unearned			Other
	Common		Paid-In		Retained		Treasury			ESOP			Comprehensive
	Stock		Capital		Earnings		Stock			Shares			Income (Loss)			Total

Balance at July 1, 2009	$	-	$	-	$	7,789,031	$	-		$	-		$	(410,390	)	$	7,378,641

Comprehensive income:
Net income for the year ended June 30, 2010		-		-		165,547		-			-			-			165,547

Change in net unrealized gain (loss)
on securities available for sale,
net of tax effects of $3,487		-		-		-		-			-			6,768			6,768

Change in net unrealized loss of defined
benefit pension plan, net of amortization
for unrealized losses and prior service cost
of $27,118 and tax effects of $53,477		-		-		-		-			-			(103,808	)		(103,808	)

Amortization of prior service cost for
supplemental retirement plan, net of
tax effects of $(3,754)		-		-		-		-			-			7,288			7,288
Total comprehensive income																	75,795

Sale of 427,504 shares of $.01 par common
stock, net of conversion costs of $811,709
including 35,460 shares purchased for the
supplemental retirement and deferred
compensation plans and held in a rabbi trust		4,275		3,813,656		-		(354,600	)		-			-			3,463,331

34,200 shares purchased under employee
stock ownership plan		-		-		-		-			(342,000	)		-			(342,000	)

Commitment to release 855 employee
stock ownership plan shares		-		-		-		-			8,550			-			8,550

Balance at June 30, 2010	$	4,275	$	3,813,656	$	7,954,578	$	(354,600	)	$	(333,450	)	$	(500,142	)	$	10,584,317

(Continued)

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended June 30, 2011 and 2010

														Accumulated
			Additional								Unearned			Other
	Common		Paid-In			Retained		Treasury			ESOP			Comprehensive
	Stock		Capital			Earnings		Stock			Shares			Income (Loss)			Total

Balance, July 1, 2010	$	4,275	$	3,813,656		$	7,954,578	$	(354,600	)	$	(333,450	)	$	(500,142	)	$	10,584,317

Comprehensive income

Net income for the period ended June 30, 2011		-		-			210,860		-			-			-			210,860

Change in net unrealized gain (loss)
on securities available for sale,
net of tax effects of $2,812		-		-			-		-			-			(5,460	)		(5,460	)

Change in net unrealized loss of defined
benefit pension plan, plus amortization
for unrealized losses and prior service cost
of $33,743 and tax effects of $(89,066)		-		-			-		-			-			172,892			172,892

Amortization of prior service cost for
supplemental retirement plan, net of
tax effects of $(3,754)		-		-			-		-			-			7,288			7,288
Total comprehensive income																		385,580

Commitment to release 1,710 employee stock
ownership plan shares at fair value		-		3,468			-		-			17,100			-			20,568

Transfer of 1,710 allocated ESOP common shares
subject to repurchase obligation at fair value		-		(17,100	)		-		-			-			-			(17,100	)

Change in fair value of 1,710 allocated ESOP
common shares subject to repurchase obligation		-		(5,130	)		-		-			-			-			(5,130	)

Balance, June 30, 2011	$	4,275	$	3,794,894		$	8,165,438	$	(354,600	)	$	(316,350	)	$	(325,422	)	$	10,968,235

See accompanying notes to financial statements.

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended June 30, 2011 and 2010

	2011			2010
Cash flows from operating activities
Net income	$	210,860		$	165,547
Adjustments to reconcile net income to
net cash provided from operating activities
Provision for loan losses		30,000			20,000
Depreciation on premises and equipment		9,103			7,640
Net premium accretion on
securities and interest bearing time deposits		261			231
Loss on sale or disposal of premises and equipment		1,687			208
Loss on sale of other real estate owned		764			-
Compensation expense related to ESOP shares		20,568			8,550
Deferred taxes		(56,916	)		(6,997	)
Change in:
Deferred loan costs		11,029			7,120
Accrued interest receivable		11,892			(4,039	)
Other assets		167,896			(142,685	)
Other liabilities		118,055			78,301
Net cash from operating activities		525,199			133,876

Cash flow from investing activities
Maturities of interest bearing time deposits		194,000			338,000
Maturities, repayments and calls of securities available for sale		-			200,000
Maturities, repayments and calls of securities held to maturity		209,307			220,584
Loan originations and payments, net		(832,934	)		(2,481,653	)
Proceeds from sale of other real estate owned		159,236			-
Purchase of FHLB stock		-			(8,300	)
Proceeds from disposal of premises and equipment		365			-
Property and equipment purchases		(95,628	)		(156,698	)
Net cash used in investing activities		(365,654	)		(1,888,067	)

Cash flow from financing activities
Net change in deposits		539,041			1,351,548
Proceeds from issuance of common stock,
net of conversion costs		-			3,108,731
Cash provided to ESOP		-			(342,000	)
Proceeds from FHLB advances		1,000,000			2,000,000
Repayments of FHLB advances		(2,500,000	)		(2,000,000	)
Net cash used in financing activities		(960,959	)		4,118,279

Net change in cash and cash equivalents		(801,414	)		2,364,088
Cash and cash equivalents, beginning of period		4,872,815			2,508,727

Cash and cash equivalents at end of period	$	4,071,401		$	4,872,815

(Continued)

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended June 30, 2011 and 2010

	2011		2010
Cash paid during the year for
Interest	$	541,689	$	771,046
Income taxes		8,850		171,655

Supplemental noncash disclosures:
Transfer from loans to real estate owned	$	-	$	160,000
Issuance of shares to Rabbi Trust to settle
Obligation under deferred compensation
and supplemental retirement plans		-		354,600

See accompanying notes to financial statements.

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying audited consolidated financial statements include the accounts of Versailles Financial Corporation (“Versailles”) and its wholly owned subsidiary, Versailles Savings and Loan Company (“Association”). Versailles and its subsidiary are collectively referred to as the (“Company”). All material intercompany transactions have been eliminated.

Nature of Operations: Versailles is a thrift holding company incorporated under the laws of the state of Maryland that owns all the outstanding shares of common stock of the Association. The Association is an Ohio chartered savings and loan company engaged primarily in the business of making residential mortgage loans and accepting passbook savings, statement savings and time deposits. Its operations are conducted through its only office located in Versailles, Ohio. Accordingly, all of its operations are reported in one segment, banking. The Company primarily grants one- to four-family residential loans to customers located in Darke and the western half of Shelby counties. This area is strongly influenced by agriculture, but there is also a substantial manufacturing base. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair values of certain financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash and due from financial institutions and overnight deposits. Net cash flows are reported for customer loan and deposit transactions and advances from the Federal Home Loan Bank with original maturities of 90 days or less.

Interest-bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions have original maturities of greater than 90 days and are carried at cost. Scheduled maturities of interest-bearing time deposits in other financial institutions were as follows.

Year ended June 30,	2012	$	194,000
	2013		-
	2014		98,000

		$	292,000

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premiums and discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Realized gains or losses are recorded on the trade date and determined based on the amortized cost of the security sold.

Management reviews securities at least quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In estimating other-than-temporary impairment, management evaluates: the length of time and extent the fair value has been less than cost, the expected cash flows of the security and the financial condition and near term prospects of the issuer. For securities that are considered to be other-than-temporarily impaired, management assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) Other-than-temporary impairment related to credit loss, which must be recognized in the income statement and 2) Other-than-temporary impairment related to other factors, which is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Federal Home Loan Bank (FHLB) Stock: The Association is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, plus net deferred loan costs less the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method over the contractual terms of the loan.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified in a manner representing a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restricting is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent eighteen months. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: 1-4 family real estate, multi-family real estate, construction real estate, nonresidential real estate, commercial and consumer.

1-4 Family real estate: 1-4 family mortgage loans represent loans to consumers for the purchase, refinance or improvement of a residence. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values may impact the severity of losses. Factors considered by management include unemployment levels, credit history and real estate values in the Association’s market area.

Multi-family real estate: Multi-family loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and property types. Management specifically considers real estate values, credit history and unemployment levels.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Construction real estate: Construction loans are subject to underwriting standards and processes similar to 1-4 family mortgage loans. Real estate market values at the time of origination directly affect the amount of credit extended. These values are determined from plans and estimates provided by the contractor. Inspections are monitored by management. Real estate market values at the time of origination directly affect the amount of credit extended and, in the event of default, subsequent changes in these values may impact the severity of losses. Factors considered by management include unemployment levels, credit history, knowledge of general contractor and real estate values in the Association’s market area.

Non-residential real estate: Non-residential loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the farm or business. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and property types. Management specifically considers real estate values, credit history, unemployment levels, crop prices and yields.

Commercial: Commercial credit is extended to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or other projects. The majority of these borrowers are customer’s doing business in the Association’s primary market area. These loans are generally underwritten individually and secured with the assets of the company and the personal guarantee of the business owners. Commercial business loans are made based primarily on the borrower’s ability to make repayment from the historical and projected cash flow of the borrower’s business and the underlying collateral provided by the borrower. Management specifically considers unemployment, credit history and the nature of the business.

Consumer Loans: Consumer loans are primarily comprised of secured loans including automobile loans, loans on deposit accounts, home improvement loans and to a lesser extent, unsecured personal loans. These loans are underwritten based on several factors including debt-to-income, type of collateral and loan to value, credit history and relationship with the borrower. Unemployment rates are specifically considered by management

Premises and Equipment: Premises and equipment are reported at cost less accumulated depreciation. Depreciation is computed on both the straight-line and accelerated methods over the estimated useful lives of the assets. Building and improvements have useful lives ranging from five to 39 years. Furniture and equipment have useful lives ranging from three to seven years. Depreciation expense for the years ended June 30, 2011 and 2010 was $9,103 and $7,640.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are charged to expense as incurred and improvements are capitalized.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Employee Stock Ownership Plan shares are considered outstanding for this calculation unless unearned. Versailles had no potential common shares issuable under stock options or other agreements for the periods presented.

The weighted average number of shares outstanding for basic earnings per common share was 395,014 and 393,732 for the years ended June 30, 2011 and 2010, respectively. On January 8, 2010, the Association converted from mutual to stock ownership with the concurrent formation of a holding company. Accordingly, earnings per share for year ended June 30, 2010, was computed based on net income of the Company from the closing of the stock offering through June 30, 2010.

The Company established a Rabbi Trust and participants in the Association’s deferred compensation and supplemental retirement plans could elect to use all or some of the amounts in their accounts to purchase shares in the Company’s mutual to stock conversion. These shares are held in the trust and the obligation under the deferred compensation and supplemental retirement plans will be settled with these shares. As such, the shares are carried as treasury stock in the consolidated balance sheet and the shares are considered outstanding for the purpose of calculating earnings per share.

Employee Stock Ownership Plan: The cost of shares issued to the Employee Stock Ownership Plan (“ESOP”), but not yet allocated to participants, is shown as a reduction of shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings. Dividends on unearned ESOP shares reduce debt and accrued interest. Participants may exercise a put option and require the Company to repurchase their ESOP shares upon termination. As a result, an amount of equity equal to the fair value of the allocated shares is reclassified out of shareholders’ equity. As of June 30, 2011 there were 1,710 allocated shares related to the ESOP plan. Compensation expense related to the plan was $20,568 and $8,550 for the fiscal years ended June 30, 2011 and 2010, respectively.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Retirement Plans: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.

Advertising Costs: Advertising costs are generally expensed as incurred. Advertising expense included in other noninterest expense totaled $11,000 and $8,736 for the years ending June 30, 2011 and 2010, respectively.

Income Taxes: Income tax expense is the total of the current year income due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the net of tax impact of unrealized gains and losses on securities available for sale and changes in the funded status of the defined benefit pension and supplemental retirement plans, which are also recognized as separate components of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad

markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Reclassifications: Some items in prior financial statements have been reclassified to conform to the current presentation.

Adoption of New Accounting Pronouncements: In December 2010, the Financial Accounting Standards Board (“FASB”) issued guidance within the Accounting Standards Update (“ASU”) 2010-20 Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period are required for the Company’s financial statements that include periods beginning on or after January 1, 2011. The adoption of this guidance added additional disclosures to Note 3 – Loans.

Effect of Newly Issued But Not Yet Effective Accounting Standards: In April 2011, FASB issued ASU No. 2011-02 to Receivables (ASC 310), A Creditors’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. This ASU provides guidance and clarification in evaluating whether a restructuring constitutes a troubled debt restructuring, including a creditor’s evaluation of whether it has granted a concession, and also whether the debtor is experiencing financial difficulties. Further, this ASU states that a restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider in an attempt to protect as much of its investment as possible. The amendments in this update are effective for the first interim or annual reporting period beginning on or after June 15, 2011 and are to be applied retrospectively to the beginning of the annual period of adoption. Management is currently reviewing the guidance to determine the impact, if any, to the Company’s consolidated financial statements.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In May 2011, the FASB issued ASU No. 2011-04 to Fair Value Measurement (ASC 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements is U.S. GAAP and IFRSs. This ASU changes the wording used to describe many of the requirements in U.S. generally accepted accounting principles (GAAP) for measuring fair value and for disclosing information about fair value measurements. The amendments in this update include clarifying the Board’s intent about the application of existing fair value measurement and disclosure requirements, and changing particular principles or requirements for measuring fair value for disclosing information about fair value measurement. The amendments in this update are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early adoption is not permitted. The adoption of the disclosure provisions of the ASU is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 2 - SECURITIES

The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows.

	2011
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

AMF Short US Government Fund	$	694,034	$	5,263	$	-	$	699,297

	2010
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

AMF Short US Government Fund	$	694,034	$	13,535	$	-	$	707,569

There were no sales of available-for-sale securities during the years ended June 30, 2011 or 2010.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 2 – SECURITIES (Continued)

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows.

	2011
			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
	Amount		Gains		Losses		Value
Government sponsored entities
residential mortgage-backed:
FHLMC	$	333,111	$	13,779	$	-	$	346,890
GNMA		91,135		3,162		-		94,297
FNMA		269,672		18,745		-		288,417

	$	693,918	$	35,686	$	-	$	729,604

	2010
			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
	Amount		Gains		Losses		Value
Government sponsored entities
residential mortgage-backed:
FHLMC	$	405,452	$	13,894	$	-	$	419,346
GNMA		100,754		2,758		-		103,512
FNMA		397,279		25,973		-		423,252

	$	903,485	$	42,625	$	-	$	946,110

The amortized cost and fair value of securities at year-end 2011 by contractual maturity were as follows. Securities not due at a single maturity date, primarily government sponsored entities mortgage-backed and mutual fund securities are shown separately.

	Available for sale				Held to maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Government sponsored entities
mortgage-backed	$	-	$	-	$	693,918	$	729,604
AMF Short US Government Fund		694,034		699,297		-		-

	$	694,034	$	699,297	$	693,918	$	729,604

There were no securities with unrealized losses as of June 30, 2011 and June 30, 2010.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 - LOANS

Loans at year-end were as follows:

	2011			2010

1-4 family real estate	$	27,844,602		$	27,555,970
Multi-family real estate		235,613			188,607
Construction real estate		402,686			171,391
Nonresidential real estate:
Business		2,571,517			2,308,904
Agricultural		5,104,184			4,945,303

Commercial loans		486,701			473,419
Consumer loans:
Loans on deposits		56,188			93,024
Consumer auto		390,499			434,039
Consumer other secured		238,161			233,149
Consumer unsecured		361,572			454,983
Total loans		37,691,723			36,858,789

Deferred loan costs		43,898			54,927
Allowance for loan losses		(220,817	)		(190,817	)

	$	37,514,804		$	36,722,899

Loans to principal officers, directors, and their affiliates during fiscal 2011 were as follows.

				2011

Beginning balance				$	217,318
Effect of changes in the composition
of related parties					142,150
Repayments					(164,817	)

Ending balance				$	194,651

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 – LOANS (Continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2011:

	1-4 Family		Multi-Family			Construction			Nonresidential
	Real		Real			Real			Real			Commercial			Consumer			Unallocated
	Estate		Estate			Estate			Estate			Loans			Loans			Balance		Total
Allowance for loan losses:
Beginning balance	$	142,657	$	976		$	887		$	37,555		$	2,451		$	6,291		$	-	$	190,817
Provision for loan losses		43,435		(599	)		(243	)		(12,993	)		(894	)		(2,942	)		4,236		30,000
Loans charged-off		-		-			-			-			-			-			-		-
Recoveries		-		-			-			-			-			-			-		-

Total ending allowance balance	$	186,092	$	377		$	644		$	24,562		$	1,557		$	3,349		$	4,236	$	220,817

Activity in the allowance for loan losses was as follows for the years ended June 30, 2011 and 2010.

	2011		2010
Allowance for loan losses:
Beginning balance, July 1	$	190,817	$	264,451
Provision for loan losses		30,000		20,000
Loans charged-off		-		(93,634	)
Recoveries		-		-
Ending balance, June 30	$	220,817	$	190,817

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 – LOANS (Continued)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2011:

	1-4 Family		Multi-Family		Construction		Nonresidential
	Real		Real		Real		Real		Consumer		Commercial		Unallocated
	Estate		Estate		Estate		Estate		Loans		Loans		Balance		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		186,092		377		644		24,562		1,557		3,349		4,236		220,817

Total ending allowance balance	$	186,092	$	377	$	644	$	24,562	$	1,557	$	3,349	$	4,236	$	220,817

Loans:
Individually evaluated for impairment	$	69,712	$	-	$	-	$	488,589	$	-	$	-	$	-	$	558,301
Collectively evaluated for impairment		27,862,001		237,409		403,562		7,237,251		1,064,170		490,058		-		37,294,451

Total ending loans balance	$	27,931,713	$	237,409	$	403,562	$	7,725,840	$	1,064,170	$	490,058	$	-	$	37,852,752

Included in recorded investment is $43,898 of deferred loan costs and $117,131 of accrued loan interest.

Individually impaired loans were as follows.


	2011		2010
End of period unpaid principal balance of loans
with no allocated allowance for loan losses	$	558,073	$	90,181
End of period unpaid principal balance of loans
with allocated allowance for loan losses		-		-

Total	$	558,073	$	90,181

Amount of the allowance for loan losses allocated	$	-	$	-

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 – LOANS (Continued)

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2011:

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
1-4 family real estate	$	69,691	$	69,712	$	-	$	83,063	$	5,130	$	5,130
Multi-family real estate		-		-		-		-		-		-
Construction real estate		-		-		-		-		-		-
Nonresidential real estate:
Business		488,382		488,589		-		40,716		22		-
Agricultural		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		-
Consumer loans:
Loans on deposits		-		-		-		-		-		-
Consumer auto		-		-		-		-		-		-
Consumer other secured		-		-		-		-		-		-
Consumer unsecured		-		-		-		-		-		-


With an allowance recorded:
1-4 family real estate		-		-		-		-		-		-
Multi-family real estate		-		-		-		-		-		-
Construction real estate		-		-		-		-		-		-
Nonresidential real estate:
Business		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		-
Consumer loans:
Loans on deposits		-		-		-		-		-		-
Consumer auto		-		-		-		-		-		-
Consumer other secured		-		-		-		-		-		-
Consumer unsecured		-		-		-		-		-		-

Total	$	558,073	$	558,301	$	-	$	123,779	$	5,152	$	5,130

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 – LOANS (Continued)

The following tables present information for loans individually evaluated for impairment for the years ended June 30, 2011 and 2010:

	2011		2010
Average of unpaid principal balance of impaired loans during the period	$	123,734	$	244,668
Interest income recognized during impairment		5,152		3,675
Cash-basis interest income recognized		5,130		3,675

The following tables present the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2011 and 2010.

					Loans Past Due Over
	Nonaccrual				90 Days Still Accruing
	2011		2010		2011		2010

1-4 family real estate	$	69,712	$	90,211	$	-	$	-
Multi-family real estate		-		-		-		-
Construction real estate		-		-		-		-
Nonresidential real estate:
Business		-		-		-		-
Agricultural		-		-		-		-
Commercial loans		-		-		-		-
Consumer loans:
Loans on deposits		-		-		-		-
Consumer auto		-		-		-		-
Consumer other secured		-		-		-		-
Consumer unsecured		-		-		-		-

Total	$	69,712	$	90,211	$	-	$	-

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 – LOANS (Continued)

The following table presents the aging of the recorded investment of past due loans as of June 30, 2011 by class of loans:

	30 - 59		60 - 89		Greater than
	Days		Days		90 Days		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total

1-4 family real estate	$	49,879	$	94,188	$	-	$	144,067	$	27,787,646	$	27,931,713
Multi-family real estate		-		-		-		-		237,409		237,409
Construction real estate		-		-		-		-		403,562		403,562
Nonresidential real estate:
Business		-		-		-		-		2,578,060		2,578,060
Agricultural		-		-		-		-		5,147,780		5,147,780
Commercial loans		-		-		-		-		490,058		490,058
Consumer loans:
Loans on deposits		-		-		-		-		58,852		58,852
Consumer auto		3,495		-		-		3,495		393,139		396,634
Consumer other secured		-		-		-		-		240,205		240,205
Consumer unsecured		1,096		-		-		1,096		367,383		368,479

Total	$	54,470	$	94,188	$	-	$	148,658	$	37,704,094	$	37,852,752

Troubled Debt Restructurings: The Company had one loan totaling $488,382 classified as troubled debt restructuring at June 30, 2011. Several loan accounts of a customer were consolidated into a single loan with a loan to value of forty-seven percent. There were no troubled debt restructurings and no customers with outstanding loans classified as troubled debt restructurings for the year ended June 30, 2010.

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 3 – LOANS (Continued)

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. One loan totaling $488,382 is a troubled debt restructuring and was classified as “pass” due to a loan to value ratio of 47.4% and the loan being current. As of June 30, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans at recorded investment is as follows:

			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated

1-4 Family real estate	$	-	$	69,712	$	-	$	-	$	27,862,001
Multi-Family real estate		237,409		-		-		-		-
Construction real estate		403,562		-		-		-		-
Nonresidential real estate:
Business		2,578,060		-		-		-		-
Agricultural		5,147,780		-		-		-		-
Commercial loans		490,058		-		-		-		-

Total	$	8,856,869	$	69,712	$	-	$	-	$	27,862,001

The Company does not make subprime loans.

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment of residential and consumer loans based on payment activity as of June 30, 2011:

	Consumer								Residential
	Loans on				Other
	Deposits		Auto		Secured		Unsecured		Multi-family		Construction

Performing	$	58,852	$	396,634	$	240,205	$	368,479	$	237,409		403,562
Nonperforming		-		-		-		-		-		-

Total	$	58,852	$	396,634	$	240,205	$	368,479	$	237,409	$	403,562

Included in recorded investment is $7,777 of deferred loan fees and $12,645 of accrued loan interest.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 4 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows.

	2011			2010

Land	$	153,328		$	153,328
Building and improvements		306,761			230,700
Furniture and equipment		168,474			156,590
Total		628,563			540,618
Accumulated depreciation		(369,447	)		(365,973	)

	$	259,116		$	174,645

NOTE 5 – ACCRUED INTEREST RECEIVABLE

Accrued interest receivable was as follows.

	2011		2010

Loans	$	117,131	$	125,270
Securities		2,660		3,741
Interest bearing deposits,
fed funds sold and other		3,206		5,878

	$	122,997	$	134,889

NOTE 6 - DEPOSITS

Deposits from principal officers, directors, and their affiliates at June 30, 2011 and 2010 were $785,285 and $463,398. The aggregate amount of certificates of deposit accounts with balances greater than $100,000 at year-end 2011 and 2010 was $2,862,611 and $2,333,004.

Interest expense on deposits was as follows.

	2011		2010

Savings	$	11,362	$	9,607
Time deposits		296,427		363,383

	$	307,789	$	372,990

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 6 – DEPOSITS (Continued)

Scheduled maturities of certificates of deposit were as follows.

Year ended June 30,	2012	$	11,288,570
	2013		4,776,704
	2014		952,347
	2015		487,878

		$	17,505,499

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES

Year-end advances from the Federal Home Loan Bank were as follows.

		2011		2010

1.14%	Fixed rate advance, due October 2014	$	1,000,000	$	-
2.00%	Fixed rate advance, due June 2012		1,000,000		1,000,000
2.89%	Fixed rate advance, due September 2014		1,000,000		1,000,000
3.36%	Fixed rate advance, due March 2017		1,000,000		1,000,000
5.93%	Convertible advance, next reprice date August 2010, due August 2010		-		500,000
6.27%	Convertible advance, next reprice date September 2010, due September 2010		-		1,000,000
5.79%	Convertible advance, next reprice date August 2010, due November 2010		-		1,000,000
4.39%	Putable advance, next call date
	August 2011, due November 2011		1,000,000		1,000,000
4.26%	Putable advance, next call date
	September 2011, due March 2014		1,000,000		1,000,000

		$	6,000,000	$	7,500,000

Fixed rate advances are payable at maturity and subject to prepayment penalties if paid off prior to maturity.

The interest rates on the convertible advances are fixed for a specified number of years, then convertible to a LIBOR-based adjustable rate at the option of the FHLB. If the FHLB does not convert the advance to a LIBOR floating rate on the initial option date, the advance will remain at the original fixed rate until final maturity or at the next option date. If the convertible option is exercised, the advance may be prepaid without penalty.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES (Continued)

Putable advances are fixed rate advances which may be called quarterly by the FHLB following an initial lockout period. If the advances are called, the Company must repay the advance. The

FHLB will offer replacement funding at the then prevailing rate of interest for an advance product then offered by the FHLB.

Required payments over the next five years and thereafter are:

Year ended June 30,	2012	$	2,000,000
	2013		-
	2014		1,000,000
	2015		2,000,000
	2016		-
	Thereafter		1,000,000

		$	6,000,000

Advances under the borrowing agreements are collateralized by a blanket pledge of the Company’s residential mortgage loan portfolio and FHLB stock. At June 30, 2011 and 2010, the Company had approximately $26,495,000 and $26,090,000 of qualifying first-mortgage loans and $236,000 and $189,000 of multi-family mortgage loans pledged, in addition to FHLB stock, as collateral for FHLB advances. At June 30, 2011, based on the Association’s current FHLB stock ownership, total assets and pledgable first-mortgage and multi-family mortgage loan portfolios, the Association had the ability to obtain borrowings up to an additional $10,621,000.

NOTE 8 - INCOME TAXES

Income tax expense was as follows.

	2011			2010

Current	$	163,216		$	89,788
Deferred		(56,916	)		(6,997	)

Total	$	106,300		$	82,791

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 8 - INCOME TAXES (Continued)

Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following.

	2011			2010

Federal statutory rate times financial statement income	$	107,834		$	84,435
Effect of:
Tax exempt interest income		(1,423	)		(1,496	)
Other, net		(111	)		(148	)
Total	$	106,300		$	82,791

Effective tax rate		33.52	%		33.34	%

Year-end deferred tax assets and liabilities were due to the following.

	2011			2010
Deferred tax assets
Allowance for loan losses	$	75,078		$	64,878
Accrued compensation		301,823			280,971
Impairment loss on securities		35,528			35,528
Pension		112,959			180,717
Total deferred tax asset		525,388			562,094

Deferred tax liabilities:
Deferred loan fees and costs		(14,925	)		(18,675	)
FHLB stock		(75,070	)		(75,070	)
Accrual to cash		(27,862	)		(23,395	)
Accumulated depreciation		(3,716	)		(5,235	)
Net unrealized gains on securities
available for sale		(1,790	)		(4,602	)
Total deferred tax liability		(123,363	)		(126,977	)

Net deferred tax asset	$	402,025		$	435,117

The Company has not recorded a deferred tax liability of approximately $265,000 related to approximately $778,000 of cumulative special bad debt deductions arising prior to December 31, 1987, the end of the Company’s base year for purposes of calculating the bad debt deduction. If the Company were liquidated or otherwise ceases to be a financial institution or if the tax laws were to change, this amount would be expensed.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 8 - INCOME TAXES (Continued)

At June 30, 2011 and 2010, the Company had no unrecognized tax benefits recorded. The Company does not expect the amount of unrecognized tax benefits to significantly change within the next twelve months. There were no penalties or interest related to income taxes recorded in the income statement for the years ended June 30, 2011 and 2010 and no amounts accrued for penalties and interest as of June 30, 2011 or June 30, 2010.

The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by the federal taxing authority for years prior to 2007. The tax years 2007-2010 remain open to examination by the U.S. taxing authority.

NOTE 9 - RETIREMENT PLANS

The Company has a funded noncontributory defined benefit pension plan that covers substantially all of its employees. The plan provides defined benefits based on years of service and final average salary. The Company uses June 30 as the measurement date for its pension plan.

Information about changes in obligations and plan assets of defined benefit pension plan follows:

	2011			2010
Change in benefit obligation:
Beginning benefit obligation	$	1,189,283		$	918,847
Service cost		72,957			44,063
Interest cost		57,657			52,242
Actuarial loss (gain)		(126,999	)		203,854
Benefits paid		(29,723	)		(29,723	)
Ending benefit obligation		1,163,175			1,189,283

Change in plan assets, at fair value:
Beginning plan assets		657,761			576,704
Actual return		144,946			57,911
Employer contribution		57,960			52,869
Benefits paid		(29,723	)		(29,723	)
Ending plan assets		830,944			657,761

Funded status at end of year (plan assets less
benefit obligations)	$	(332,231	)	$	(531,522	)

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 9 - RETIREMENT PLANS (Continued)

Amounts recognized in accumulated other comprehensive loss at June 30 consist of the following.

	2011		2010

Net actuarial loss	$	485,403	$	744,463
Prior service cost		7,404		10,302

	$	492,807	$	754,765

The accumulated benefit obligation was $851,221 and $850,998 at the measurement date of June 30, 2011 and June 30, 2010.

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income

The table below presents components of net periodic benefit cost and other amounts recognized in other comprehensive income using a measurement date of June 30 for 2011 and 2010.

	2011			2010

Service cost	$	72,957		$	44,063
Interest cost		57,657			52,242
Expected return on plan assets		(43,729	)		(38,461	)
Amortization of prior service cost		2,898			2,898
Amortization of net loss		30,845			24,220

Net periodic benefit cost	$	120,628		$	84,962

	2011			2010

Unrealized (gain) or loss during the period	$	(228,215	)	$	184,403
Amortization of net loss		(30,845	)		(24,220	)
Amortization of prior service cost		(2,898	)		(2,898	)
Total recognized in other
comprehensive income		(261,958	)		157,285

Net periodic benefit cost		120,628			84,962

Total recognized in net periodic benefit
cost and other comprehensive income	$	(141,330	)	$	242,247

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 9 - RETIREMENT PLANS (Continued)

The estimated net loss and prior service costs for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $18,927 and $2,898.

	2011			2010
Weighted-average assumptions used to
determine net cost
Discount rate on benefit obligation		4.91	%		5.78	%
Long-term expected rate of return on plan assets		6.50	%		6.50	%
Rate of compensation increase		4.00	%		4.00	%

Weighted-average assumptions used to
determine benefit obligation at year-end
Discount rate		5.67	%		4.91	%
Rate of compensation increase		4.00	%		4.00	%

There are no investments that are prohibited by the pension plan.

The Company’s pension plan asset allocation by asset class at year-end 2011 and 2010 are as follows:

	Percentage of Plan
	Assets at Year End
	2011			2010
Plan Assets
Mutual Funds:
S&P 500 growth		13.9	%		13.3	%
S&P 500 value		13.2			13.0
S&P Midcap 400 growth		8.3			7.3
S&P Midcap 400 value		7.5			7.3
S&P Smallcap 600 growth		2.1			1.8
S&P Smallcap 600 value		1.8			1.8
International equity funds		16.1			15.0
Emerging markets equity funds		7.2			6.8
U.S. core fixed income funds		5.9			0.0
U.S. corporate stock		0.2			0.2
Cash and cash equivalents		23.8			33.5

Total Plan Assets		100.0	%		100.0	%

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 9 - RETIREMENT PLANS (Continued)

The Company’s pension plan asset allocation at year-end 2011 and 2010, target allocation for 2012, and expected long-term rate of return by asset class are as follows:

				Percentage of Plan						Weighted-
	Target			Assets						Average Expected
	Allocation			at Year-end						Long-Term Rate
Asset Category	2012			2011			2010			of Return-2011

Investment funds		80	%		76	%		66	%		6.5	%
Cash and cash equivalents		20			24			34			4.0

The Pension Trustees work with an outside investment advisor to establish an appropriate asset allocation based upon stated objectives and risk tolerance. The outside investment advisor also assists in identifying, selecting and monitoring investments and investment managers within each asset class. The expectation for long-term rate of return on the plan assets is reviewed periodically by the Pension Trustees in consultation with the outside investment advisor. Factors considered in setting and adjusting this rate are historic and projected rates of return on the portfolio, an investment time horizon that exceeds five years and the Pension Trustees tolerance for risk which is deemed to be moderate.

The Company expects to contribute between $80,000-$85,000 to its pension plan in 2012.

Fair Value of Plan Assets: The Company used the following methods and significant assumptions to estimate the fair value of each type of plan asset:

Equity, Investment Funds and Other Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 9 - RETIREMENT PLANS (Continued)

The fair value of the plan assets at June 30, 2011, by asset category, is as follows:

	Fair Value Measurements at
	June 30, 2011 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Plan Assets
Mutual Funds:
S&P 500 growth	$	115,754	$	115,754	$	-	$	-
S&P 500 value		109,244		109,244		-		-
S&P Midcap 400 growth		68,900		68,900		-		-
S&P Midcap 400 value		62,580		62,580		-		-
S&P Smallcap 600 growth		17,045		17,045		-		-
S&P Smallcap 600 value		15,077		15,077		-		-
International equity funds		134,052		134,052		-		-
Emerging markets equity funds		59,833		59,833		-		-
U. S. core fixed income funds		49,222		49,222		-		-
U. S. corporate stock		1,710		1,710		-		-
Cash and cash equivalents		197,527		197,527		-		-

Total Plan Assets	$	830,944	$	830,944	$	-	$	-

The fair value of the plan assets at June 30, 2010, by asset category, is as follows:

	Fair Value Measurements at
	June 30, 2010 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Plan Assets
Mutual Funds:
S&P 500 growth	$	86,564	$	86,564	$	-	$	-
S&P 500 value		87,245		87,245		-		-
S&P Midcap 400 growth		47,742		47,742		-		-
S&P Midcap 400 value		47,762		47,762		-		-
S&P Smallcap 600 growth		12,071		12,071		-		-
S&P Smallcap 600 value		11,614		11,614		-		-
International equity funds		99,020		99,020		-		-
Emerging markets equity funds		44,523		44,523		-		-
U.S. corporate stock		1,473		1,473		-		-
Cash and cash equivalents		220,747		220,747		-		-

Total Plan Assets	$	657,761	$	657,761	$	-	$	-

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 9 - RETIREMENT PLANS (Continued)

The following pension benefit payments are expected, which reflect expected future service.

2012	$	29,729
2013		28,136
2014		26,491
2015		24,788
2016		23,045
2017-2021		407,384

Employee 401(k) and Profit Sharing Plan: The Company maintains a 401(k) and profit sharing plan for all eligible employees. To be eligible, an individual must have at least 1,000 hours of service. Eligible employees may contribute up to 15% of their compensation subject to a maximum statutory limitation. The Company provides a matching contribution on behalf of participants who make elective compensation deferrals, at the rate of 50% of the first 6% of the participant’s discretionary contribution. Employee contributions are always 100% vested. Employer matching contributions vest on a graduated basis at the rate of 20% per year in years two through six so that the employee is 100% vested after six years of service. The 2011 and 2010 expense related to this plan was $10,855 and $7,607 respectively.

Deferred Compensation and Supplemental Retirement Plan: The Board of Directors adopted a deferred compensation and supplemental retirement plan for directors and an executive officer of the Company during fiscal 1999. Upon adoption, each nonemployee director was credited with $1,494 for each year of service as a director and the employee director was credited with $5,103 for each year of prior service. The total liability for prior service upon adoption of the Plan was $143,541. The prior service cost is being amortized over the estimated future service period (13 years) on a straight-line basis. On each December 31 after 1998, each nonemployee director receives a credit to their account equal to 24% of the cash compensation that a participant earned during that calendar year. The employee director receives an annual credit of 8%. At the participant’s election, the participant’s account earns interest at the rate of the Company’s return on average equity for that year or at the rate the Company is paying on a certificate of deposit having a term of one year or less at January 1 of that year. Total expense related to the Plan was $38,972 and $36,547 for the years ended June 30, 2011 and 2010. The accrued supplemental retirement liability included in other liabilities was $243,530 at June 30, 2011 and $229,399 at June 30, 2010.

Distributions to participants during fiscal 2011 and 2010 were $13,799 and $13,485, respectively. Amounts recognized in accumulated other comprehensive loss before federal income taxes for prior service cost was $5,518 and $16,560 for June 30, 2011 and 2010, respectively. The amount of prior service cost for the supplemental retirement plan that will be amortized from accumulated other comprehensive income into supplemental retirement expense over the next fiscal year will be $5,518.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 9 - RETIREMENT PLANS (Continued)

Additionally, each participant may elect to defer up to 25% in base salary and up to 100% of director’s fees, bonuses or other cash compensation. Amounts in participant’s accounts are vested at all times. The accrued deferred compensation liability included in other liabilities was $276,570 at June 30, 2011 and $233,836 at June 30, 2010. Earnings on amounts deferred included in salaries and employee benefits totaled $7,185 and $4,938 for the years ended June 30, 2011 and 2010. Distributions to participants during fiscal 2011 and 2010 were $18,726 and $18,246, respectively. The Plan is unfunded and subject to the general claims of creditors.

In conjunction with the conversion to a stock company with concurrent formation of a holding company, (see Note 16), the Company allowed participants in the supplemental retirement and deferred compensation plans to use all or a portion of their funds in an one time election to purchase shares of the holding company at conversion.

The shares are held in a Rabbi Trust and the obligation under the plans will be settled with these shares. Participant stock held by the Rabbi Trust is classified in equity in a manner similar to the manner in which treasury stock is accounted for. Subsequent changes in the fair value of the stock are not recognized. The deferred compensation obligation is classified as an equity instrument and changes in the fair value of the amount owed to the participant are not recognized. These shares are considered outstanding for the purpose of both basic and diluted EPS. The participants elected to use $354,600 to purchase 35,460 shares of common stock.

NOTE 10 – EMPLOYEE STOCK OWNERSHIP PLAN

As part of the conversion to a stock company (see Note 16), the Company formed a leveraged ESOP. The plan has a December 31 year-end and the first allocation was December 31, 2010. The ESOP borrowed from the Company, totaling $342,000, to purchase 34,200 shares of stock at $10 per share. The Company may make discretionary contributions to the ESOP, as well as paying dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts. The shares in the plan are expected to be allocated over a twenty year period.

Participants receive the shares at the end of employment. A participant may require stock received to be repurchased unless the stock is traded on an established market.

Contributions to the ESOP during the year ended June 30, 2011 were $23,506. There were no contributions to the ESOP during the year ended June 30, 2010. ESOP expense was $20,568 and $8,550 for the year ended June 30, 2011 and 2010, respectively.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 10 – EMPLOYEE STOCK OWNERSHIP PLAN (Continued)

Shares held by the ESOP were as follows:

	2011		2010

Allocated		1,710		-
Committed to be released		855		855
Unearned		31,635		33,345

Total ESOP shares		34,200		34,200

Fair value of unearned shares	$	411,255	$	333,450

Fair value of allocated shares subject to
repurchase obligation	$	22,230	$	-

The Company expects to allocate 1,710 shares for the December 31, 2011 plan year.

NOTE 11 – COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES

Some financial instruments, such as loan commitments, credit lines and letters of credit are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

Commitments to make loans at current market rates at year-end were as follows.

	2011					2010
	Balance		Rate			Balance		Rate

1-4 family real estate – fixed rate	$	125,000		5.50	%	$	350,000		5.75	%
Multi-family real estate – variable rate		-		-			85,500		6.50
Nonresidential real estate - variable rate		35,920		4.00			-		-

Commitments to make loans are generally made for periods of 60 days or less. The loan commitments have maturities ranging up to 30 years.

At June 30, 2011 and 2010, the Company had unused lines of credit, at current market rates, of approximately $0 and $7,500, respectively.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 12 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values of investment securities available for sale are determined by obtaining market prices, if available, on nationally recognized securities exchanges (Level 1 inputs).

Assets and liabilities measured at fair value on a recurring basis are summarized below.

Fair Value Measurements

at June 30, 2011 Using

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Identical Assets

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

AMF Short US Government

Fund

699,297

Fair Value Measurements

at June 30, 2010 Using

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Identical Assets

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

AMF Short US Government

Fund

707,569

There were no assets or liabilities measured at fair value on a non-recurring basis at June 30, 2011 or June 30, 2010.

(Continued)

Table of Contents

VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 12 – FAIR VALUE (Continued)

The carrying amount and estimated fair values of financial instruments were as follows at year-end.

	June 30, 2011						June 30, 2010
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Financial assets:
Cash and cash equivalents	$	4,071,401		$	4,071,401		$	4,872,815		$	4,872,815
Interest bearing time deposits
in other financial institutions		292,000			292,000			486,000			486,000
Securities available for sale		699,297			699,297			707,569			707,569
Securities held to maturity		693,918			729,604			903,485			946,110
Net loans		37,514,804			39,809,000			36,722,899			39,161,000
FHLB stock		397,500			N/A			397,500			N/A
Accrued interest receivable		122,997			122,997			134,889			134,889

Financial liabilities:
Deposits		(26,475,732	)		(26,725,000	)		(25,936,691	)		(26,280,000	)
FHLB advances		(6,000,000	)		(6,210,000	)		(7,500,000	)		(7,903,000	)
Accrued interest payable		(52,775	)		(52,775	)		(71,994	)		(71,994	)

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing time deposits in other financial institutions, accrued interest receivable and payable, savings accounts and variable rate loans or deposits that reprice frequent and fully. Fair value of securities held to maturity are calculated on market prices of similar securities. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits and interest bearing deposits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of Federal Home Loan Bank advances is based upon current rates for similar financing. It was not practical to determine fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.

NOTE 13 - REGULATORY MATTERS

The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of June 30, 2011, the Association meets all capital adequacy requirements to which it is subject.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 13 - REGULATORY MATTERS (Continued)

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2011 and 2010, the most recent regulatory notifications categorized the Association as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

At year-end, the Association’s actual capital levels and minimum required levels were as follows.

											To Be
											Well Capitalized
						For					Under Prompt
						Capital					Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2011	(Dollars in thousands)
Total capital
(to risk-weighted assets)	$	9,905		38.1	%	$	2,082		8.0	%	$	2,602		10.0	%
Tier I (core) capital
(to risk-weighted assets)		9,685		37.2			1,041		4.0			1,561		6.0
Tier I (core) capital
(to adjusted total assets)		9,685		21.8			1,780		4.0			2,225		5.0
Tangible capital
(to adjusted total assets)		9,685		21.8			668		1.5			N/A

June 30, 2010
Total capital
(to risk-weighted assets)	$	9,570		35.5	%	$	2,155		8.0	%	$	2,694		10.0	%
Tier I (core) capital
(to risk-weighted assets)		9,380		34.8			1,078		4.0			1,616		6.0
Tier I (core) capital
(to adjusted total assets)		9,380		20.6			1,824		4.0			2,280		5.0
Tangible capital
(to adjusted total assets)		9,380		20.6			684		1.5			N/A

The Qualified Thrift Lender test requires at least 65% of assets be maintained in housing-related finance and other specified areas. If this test is not met, limits are placed on growth, branching, new investments and FHLB advances, or the Company must convert to a commercial bank charter. Management believes that this test is met.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 13 - REGULATORY MATTERS (Continued)

The Association converted from a mutual to a stock institution, and a “liquidation account” was established at $7,378,641, which was net worth reported in the conversion prospectus. The liquidation account represents a calculated amount for the purposes described below, and it does not represent actual funds included in the consolidated financial statements of the Company. Eligible depositors who have maintained their accounts, less annual reductions to the extent they have reduced their deposits, would receive a distribution from this account if the Company liquidated. Dividends may not reduce shareholders’ equity below the required liquidation account balance.

Regulatory capital levels reported above differ from the Association’s total capital, computed in accordance with accounting principles general accepted in the United States (GAAP), as follows (in thousands):

	2011		2010

Total capital, computed in accordance with GAAP	$	9,359	$	8,880
Accumulated other comprehensive loss		326		500
Tier I (tangible) capital		9,685		9,380
Allowance for loan losses		220		190

Total capital	$	9,905	$	9,570

NOTE 14 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

	2011			2010

Basic
Net income available to common shareholders	$	210,860		$	71,686

Weighted average common shares outstanding		427,504			427,504
Less: Average unearned ESOP shares		(32,490	)		(33,772	)

Average shares		395,014			393,732

Earnings per common share	$	.53		$	.18

Earnings per share for the year ended June 30, 2010 was computed on the net income of the Company from the closing of the stock offering on January 8, 2010 through June 30, 2010. The Company had no potential common shares issuable under stock options or other agreements for the periods ended June 30, 2011 or June 30, 2010.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax.

				Current
	Balance at			Period			Balance at
	June 30, 2010			Change			June 30, 2011

Unrealized gains (losses) on
securities available for sale	$	8,933		$	(5,460	)	$	3,473
Unrealized loss and unamortized
prior service cost on defined
benefit pension plan		(498,146	)		172,892			(325,254	)
Unamortized prior service cost
on supplemental retirement plan		(10,929	)		7,288			(3,641	)

Total	$	(500,142	)	$	174,720		$	(325,422	)

NOTE 16 – CONVERSION TO A STOCK COMPANY WITH CONCURRENT FORMATION OF HOLDING COMPANY

The Board of Directors of the Company adopted a Plan of Conversion on August 21, 2009 (the “Plan”) from a state chartered mutual savings association to a state chartered stock savings association which received regulatory and member approval. The conversion was accomplished through the amendment of the Company’s constitution and the sale of common stock in an amount equal to the market value of the Company. A subscription offering the shares of the Company’s common stock commenced on November 20, 2009. The closing of the stock offering occurred on January 8, 2010. A total of 427,504 shares of common stock were sold for $10 per share and the net proceeds from the sale were $3,463,331 after deducting the costs of conversion of $811,709.

Versailles retained 50% of the net proceeds from the sale of common shares. The remainder of the net proceeds was invested in the capital stock issued by the Association to Versailles because of the conversion.

At the time of the conversion, the Association established a liquidation account that was equal to its regulatory capital as of the latest practicable date before the conversion. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for the accounts then held.

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of Versailles Financial Corporation follows:

CONDENSED BALANCE SHEETS

June 30

	2011		2010
ASSETS
Cash and cash equivalents	$	1,252,347	$	1,347,434
Investment in banking subsidiary		9,358,903		8,880,476
Loan receivable from ESOP		329,365		342,000
Other assets		55,858		17,368

Total assets	$	10,996,473	$	10,587,278

LIABILITIES AND EQUITY
Accrued expenses and other liabilities	$	6,008	$	2,961
ESOP repurchase obligation		22,230		-
Shareholders’ equity		10,968,235		10,584,317

Total liabilities and shareholders’ equity	$	10,996,473	$	10,587,278

CONDENSED STATEMENTS OF INCOME

June 30

	2011			2010

Interest income	$	13,409		$	6,277
Other expense		122,987			41,803
Loss before income tax and
undistributed subsidiary income		(109,578	)		(35,526	)
Income tax benefit		37,300			12,100
Equity in undistributed subsidiary income		283,138			95,112

Net income	$	210,860		$	71,686

(Continued)

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VERSAILLES FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011 and 2010

NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

June 30

	2011			2010
Cash flows from operating activities
Net income	$	210,860		$	71,686
Adjustments:
Equity in undistributed subsidiary income		(283,138	)		(95,112	)
Change in other assets		(38,490	)		(17,368	)
Change in other liabilities		3,046			2,961
Net cash from operating activities		(107,722	)		(37,833	)

Cash flows from investing activities
Purchase of stock in Versailles Savings and Loan Company		-			(1,381,464	)
ESOP loan repayment		12,635			-
Loan to ESOP		-			(342,000	)
Net cash from investing activities		12,635			(1,723,464	)

Cash flows from financing activities
Proceeds from stock issue		-			3,108,731
Net cash from financing activities		-			3,108,731

Net change in cash and cash equivalents		(95,087	)		1,347,434

Beginning cash and cash equivalents		1,347,434			-

Ending cash and cash equivalents	$	1,252,347		$	1,347,434

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ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.

Controls and Procedures

Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Internal Control Over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, including the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2011, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework.” Based on such assessment, management believes that, as of June 30, 2011, the Company’s internal control over financial reporting is effective, based on those criteria. During the year ended June 30, 2011, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting because the attestation report is not required pursuant to the Dodd-Frank Act.

ITEM 9B.

Other Information

None.

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance

Versailles Financial Corporation has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics is available on our website at www.versaillessavingsbank.com. A copy of the Code of Ethics will be furnished without charge upon written request to the Secretary, Versailles Financial Corporation, 27 East Main Street, Versailles, Ohio 45380.

Information concerning directors and executive officers of Versailles Financial Corporation is incorporated herein by reference from the section captioned “Proposal I—Election of Directors” of our definitive Proxy Statement relating to our 2011 Annual Meeting of Shareholders (our “Proxy Statement”).

ITEM 11.

Executive Compensation

Information concerning executive compensation is incorporated herein by reference from the section captioned “Executive and Director Compensation” of our Proxy Statement.

ITEM 12.

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

Information concerning security ownership of certain owners and management is incorporated herein by reference from the section captioned and “Voting Securities and Principal Holders Thereof” of our Proxy Statement.

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

Information concerning relationships and transactions is incorporated herein by reference from the section captioned “Transactions with Certain Related Persons” of our Proxy Statement.

ITEM 14.

Principal Accountant Fees and Services

Information concerning principal accountant fees and services is incorporated herein by reference from the section captioned “Proposal II—Ratification of Appointment of Independent Registered Public Accounting Firm” of our Proxy Statement.

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PART IV

ITEM 15.

Exhibits and Financial Statement Schedules

3.1

Articles of Incorporation of Versailles Financial Corporation**

3.2

Bylaws of Versailles Financial Corporation**

Form of Common Stock Certificate of Versailles Financial Corporation*

10.1

Employee Stock Ownership Plan*

10.2

Versailles Savings and Loan Company Deferred Compensation Plan*

10.3

First Amendment to Versailles Savings and Loan Company Deferred Compensation Plan*

10.4

2005 Sub-Plan to Versailles Savings and Loan Company Deferred Compensation Plan*

10.5

First Amendment to 2005 Sub-Plan to Versailles Savings and Loan Company Deferred Compensation Plan*

10.6

Trust Agreement for Versailles Savings and Loan Company Deferred Compensation Plan and 2005 Sub-Plan to Versailles Savings and Loan Company Deferred Compensation Plan*

10.8

Employment Agreement by and between Versailles Savings and Loan Company and Douglas P. Ahlers***

10.9

Employment Agreement by and between Versailles Savings and Loan Company and Cheryl J. Leach***

Subsidiaries of Registrant*

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

______________________________

*	Incorporated by reference to the Registration Statement on Form S-1 of Versailles Financial Corporation (File No. 333-161968), filed with the Securities and Exchange Commission on September 17, 2009.

**	Incorporated by reference to the Registration Statement on Form S-1/A of Versailles Financial Corporation (File No. 333-161968), filed with the Securities and Exchange Commission on November 3, 2009.

***	Incorporated by reference to the Form 8-K of Versailles Financial Corporation (File No. 000-53870), filed with the Securities and Exchange Commission on January 11, 2010.

100

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SIGNATURES

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

	VERSAILLES FINANCIAL CORPORATION


Date: September 28, 2011	By:	/s/ Douglas P. Ahlers
		Douglas P. Ahlers
		President and Chief Executive Officer
		(Duly Authorized Representative)

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

Signatures	Title	Date
/s/ Douglas P. Ahlers	President, Chief Executive Officer and Director (Principal Executive Officer)	September 28, 2011
Douglas P. Ahlers

/s/ Cheryl J. Leach	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	September 28, 2011
Cheryl J. Leach

/s/ Edward L. Borchers	Director	September 28, 2011
Edward L. Borchers

/s/ Kevin J. Drees	Director	September 28, 2011
Kevin J. Drees

/s/ Thomas L. Guillozet	Director	September 28, 2011
Thomas L. Guillozet
/s/James C. Poeppelman	Director	September 28, 2011
James C. Poeppelman

101

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EXHIBIT INDEX

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Attached files

Versailles Financial Corp Reports

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