UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-29709

HARLEYSVILLE SAVINGS FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)

Pennsylvania		23-3028464
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
271 Main Street, Harleysville, Pennsylvania		19438
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (215) 256-8828

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

Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value per share		The Nasdaq Stock Market, LLC

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 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 Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) 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 the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 (Do not check if a smaller reporting company)		Smaller reporting company þ

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

The aggregate market value of the 3,229,255 shares of the Registrant’s common stock held by non-affiliates (3,699,756) shares outstanding, less 470,501 shares held by affiliates), based upon the closing price of $13.90 for a share of common stock on March 31, 2010, as reported by the Nasdaq Stock Market, was approximately $44.9 million. Shares of common stock held by executive officers, directors and by each person who owns 5% or more of the outstanding common stock have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Number of shares of common stock outstanding as of December 3, 2010: 3,699,756

Set forth below are the documents incorporated by reference and the part of the Form 10-K into which the document is incorporated:

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders for the year ended September 30, 2010 are incorporated by reference into Part II, Item 9 and Part III, Items 10-14 of this Form 10-K.

 

 

HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			27
Item 1B. Unresolved Staff Comments			27
Item 2. Properties			28
Item 3. Legal Proceedings			28
Item 4. [Reserved]			28
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			29
Item 6. Selected Financial Data			30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			38
Item 8. Financial Statements and Supplementary Data			41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			69
Item 9A. Controls and Procedures			69
Item 9B. Other Information			70
PART III
Item 10. Directors, Executive Officers and Corporate Governance			71
Item 11. Executive Compensation			71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			71
Item 13. Certain Relationships and Related Transactions, and Director Independence			72
Item 14. Principal Accounting Fees and Services			72
PART IV
Item 15. Exhibits and Financial Statement Schedules			73
SIGNATURES			74
EX 23-1
EX-31.1
EX-31.1
EX-32

Forward-Looking Statements

     This Annual Report on Form 10-K contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations hereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Harleysville Savings Financial Corporation and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumption, many of which are difficult to predict and generally are beyond the control of Harleysville Savings Financial Corporation and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. 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: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Harleysville Savings Financial Corporation is or will be doing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Harleysville Savings Financial Corporation will be engaged. Harleysville Savings Financial Corporation undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

     As used in this report, unless the context otherwise requires, the terms “we,” “us,” or the “Company” refer to Harleysville Savings Financial Corporation, a Pennsylvania corporation, and the term the “Bank” refers to Harleysville Savings Bank, a Pennsylvania chartered savings bank and wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

PART I

Item 1. Business.

General

     Harleysville Savings Financial Corporation is a Pennsylvania corporation headquartered in Harleysville, Pennsylvania. The Company became the bank holding company for Harleysville Savings Bank in connection with the holding company reorganization of the Bank in February 2000 (the “Reorganization”). In August 1987, the Bank’s predecessor, Harleysville Savings Association, converted to the stock form of organization. The Bank, whose predecessor was originally incorporated in 1915, converted from a Pennsylvania chartered, permanent reserve fund savings association to a Pennsylvania chartered stock savings bank in June 1991. The Bank operates from six full-service offices located in Montgomery County and one office located in Bucks County, Pennsylvania. The Bank’s primary market area includes Montgomery County, which has the third largest population and the second highest per capita income in the Commonwealth of Pennsylvania, and, to a lesser extent, Bucks County. As of September 30, 2010, the

Company had $857.1 million of total assets, $528.1 million of deposits and $53.4 million of stockholders’ equity. The Company’s stockholders’ equity constituted 6.22% of total assets as of September 30, 2010.

     The Bank’s primary business consists of attracting deposits from the general public and business customers through a variety of deposit programs and investing such deposits principally in first mortgage loans secured by residential properties in the Bank’s primary market area. The Bank also originates a variety of consumer loans, predominately home equity loans and lines of credit also secured by residential properties in the Bank’s primary lending area. The Bank is also engaged in the general commercial banking business, and provides a full range of commercial loans and commercial real estate loans to customers in the Bank’s primary market area. The Bank serves its customers through its full-service branch network as well as through remote ATM locations, the internet and telephone banking.

     Deposits with the Bank are insured to the maximum extent provided by law through the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to examination and comprehensive regulation by the FDIC and the Pennsylvania Department of Banking (“Department”). It is also a member of the Federal Home Loan Bank of Pittsburgh (“FHLB of Pittsburgh” or “FHLB”), which is one of the 12 regional banks comprising the Federal Home Loan Bank System (“FHLB System”). The Bank is also subject to regulations of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) governing reserves required to be maintained against deposits and certain other matters.

     The Company’s principal executive offices are located at 271 Main Street, Harleysville, Pennsylvania 19438 and its telephone number is (215) 256-8828.

Competition

     The Company faces significant competition in attracting deposits. Its most direct competition for deposits has historically come from commercial banks and other savings institutions located in its market area. The Company faces additional significant competition for investors’ funds from other financial intermediaries. The Company competes for deposits principally by offering depositors a variety of deposit programs, convenient branch locations, hours and other services. The Company does not rely upon any individual group or entity for a material portion of its deposits.

     The Company’s competition for real estate loans comes principally from mortgage banking companies, other savings institutions, commercial banks and credit unions. The Bank competes for loan originations primarily through the interest rates and loan fees it charges, the efficiency and quality of services it provides borrowers, referrals from real estate brokers and builders, and the variety of its products. Factors which affect competition include the general and local economic conditions, current interest rate levels and volatility in the mortgage markets.

     The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) eliminated many of the distinctions between commercial banks and savings institutions and holding companies and allowed bank holding companies to acquire savings institutions. FIRREA has generally resulted in an increase in the competition encountered by savings institutions and has resulted in a decrease in both the number of savings institutions and the aggregate size of the savings industry.

Lending Activities

     Loan Portfolio Composition. The Company’s loan portfolio is predominantly comprised of loans secured by first mortgages on single-family residential properties. As of September 30, 2010, first mortgage

loans on residential properties, including loans on single-family, multi-family residential properties, construction loans and lot loans on such properties, amounted to $344.6 million or 66.6% of the Company’s total loan portfolio. Loans on the Company’s residential properties are primarily long-term and are conventional (i.e., not insured or guaranteed by a federal agency).

     As of September 30, 2010, loans secured by commercial real estate and commercial business loans comprised $75.5 and $4.3 million or 14.6% and 0.8% of the total loan portfolio, respectively. Home equity lines, including installment home equity loans and home equity lines of credit comprised $90.6 million or 17.5% of the total loan portfolio. Consumer loans, including automobile loans, loans on savings accounts and education loans, constituted $2.0 million or 0.5% of the total loan portfolio as of September 30, 2010.

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

		As of September 30,
		2010								2009								2008								2007								2006
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Real estate loans:
Residential
Single-family		$	336,081				65.0	%		$	343,155				68.2	%		$	333,885				68.9	%		$	302,420				71.3	%		$	283,745				72.2	%
Multi-family			1,807				0.3				1,997				0.4				2,392				0.5				2,589				0.6				2,933				0.7
Construction			4,752				0.9				2,912				0.6				8,346				1.7				6,093				1.4				6,987				1.8
Lot loans			1,986				0.4				1,141				0.2				1,167				0.2				483				0.1				626				0.2
Home equity			90,511				17.5				92,343				18.4				92,254				19.1				95,453				22.5				95,865				24.4
Commercial real estate			75,450				14.6				54,341				10.8				37,799				7.8				12,869				3.0				922				0.2
Total real estate loans			510,587				98.7	%			495,889				98.6	%			475,843				98.2	%			419,907				99.0	%			391,078				99.5	%
Non-real estate loans:
Commercial business loans			4,327				0.8				4,982				1.0				6,584				1.4				2,440				0.6				—				0.0
Consumer non-real estate loans			1,980				0.5				2,242				0.4				1,955				0.4				1,881				0.4				1,815				0.5
Total consumer loans			6,307				1.3	%			7,224				1.4	%			8,539				1.8	%			4,321				1.0	%			1,815				0.5	%
Total loans receivable			516,894				100.0	%			503,113				100.0	%			484,382				100.0	%			424,228				100.0	%			392,893				100.0	%
Less:
Loans in process			(3,426	)							(1,873	)							(5,108	)							(2,794	)							(4,941	)
Deferred loan fees			(871	)							(755	)							(428	)							(448	)							(546	)
Allowance for loan losses			(2,504	)							(2,094	)							(1,988	)							(1,933	)							(1,956	)
Total loans receivable net		$	510,093							$	498,391							$	476,858							$	419,053							$	385,450

     Contractual Maturities. The following table sets forth scheduled contractual maturities of the loan and mortgage-backed securities portfolio of the Company as of September 30, 2010 by categories of loans and securities. The principal balance of the loan is set forth in the period in which it is scheduled to mature. This table does not reflect loans in process or unamortized premiums, discounts and fees.

		Principal Balance				Principal Repayments Contractually Due in Year(s) Ended September 30,
		at September 30,												2013-												2025-and
		2010				2011				2012				2015				2016-2019				2020-2024				Thereafter
		(In Thousands)
Residential real estate loans:
Single-family		$	336,081			$	5,040			$	5,376			$	18,145			$	41,330			$	59,138			$	207,052
Multi-family			1,807				27				29				98				222				318				1,113
Construction			4,752				71				76				257				585				836				2,927
Lot loans			1,986				107				117				401				900				461				—
Mortgage-backed Securities			131,628				1,974				2,238				7,371				16,585				23,298				80,162
Home equity lines of credit			9,511				8,786				9,330				17,301				41,485				13,609				—
Commercial real estate			75,450				2,717				2,943				10,339				23,922				35,529				—
Commercial business loans			4,327				156				61				402				37				433				3,238
Consumer and other loans			1,980				244				261				906				446				123				—
Total(1)		$	648,522			$	19,122			$	20,431			$	55,220			$	125,512			$	133,745			$	294,492

     Contractual principal maturities of loans do not necessarily reflect the actual term of the Company’s loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates substantially exceed rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans substantially exceed current mortgage loan rates.

     Interest rates charged by the Company on loans are affected principally by the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters. The interest rates charged by the Company are competitive with those of other local financial institutions.

     Origination, Purchase and Sale of Loans. Although the Company has general authority to originate, purchase and sell loans secured by real estate located throughout the United States, the Company’s lending activities are focused in its assessment area of Montgomery County, Pennsylvania and surrounding suburban counties.

     The Company accepts loan applications through its branch network, and also accepts mortgage applications from mortgage brokers who are approved by the Board of Directors to do business with the Company. The Company generally does not engage in the purchase of whole loans. The Company did engage in the acquisition of participations of commercial loans on a limited basis during fiscal years ended September 30, 2010 and 2009.

     On occasion, we have sold participation interests in loans originated by us to other institutions. When we have sold participation interests, we generally have sold them to mitigate our risks in certain situations. During the year ended September 30, 2010, we sold no loans.

     The Company’s total loan originations decreased by $17.8 million or 11.7% in fiscal 2010 and increased by $9.4 million or 6.6% in fiscal 2009. Of the $135.2 million and $153.0 million of total loans originated in fiscal 2010 and 2009, respectively, $56.0 million and $66.0 million were originated to fund single-family residential properties, $8.3 million and $12.7 million were loans originated to fund multi-family and construction properties and $66.2 million and $68.0 million were to fund commercial real estate and home equity lines of credits which are secured by real estate. The Company’s total real estate loan originations in fiscal 2010 decreased by $16.4 million or 11.2% from the prior year. The non-real estate loans originated totaled $4.9 million and $6.4 million in 2010 and 2009, respectively. Management intends to continue to emphasize origination of consumer loans which may have adjustable rates, and generally have shorter terms than residential real estate loans.

     The following table shows total loans originated, sold and repaid during the periods indicated.

		Year Ended September 30,
		2010				2009
		(In Thousands)
Real estate loan originations:
Residential:
Single-family		$	55,744			$	65,740
Multi-family			—				—
Construction			8,268				12,685
Lot loans			—				—
Home equity			35,098				38,217
Commercial real estate			31,076				29,966
Commercial business loans			4,327				5,508
Consumer non-real estate loans (1)			671				916
Total loan originations			135,184				153,032
Purchases of mortgage-backed securities			14,986				—
Total loan originations, and purchases			150,170				153,032
Principal loan and mortgage-backed securities repayments			168,848				180,999
Sales of loans and mortgage-backed securities			—				1,905
Total principal repayments and sales			168,848				182,904
Net increase in loans and mortgage-backed securities		$	(18,678	)		$	(29,872	)

     Loan Underwriting Policies. Each loan application received by the Company is underwritten to the standards of the Company’s written underwriting policies as adopted by the Company’s Board of Directors. The Company’s Board of Directors has granted loan approval authority to several officers and employees of the Company, provided that the loan meets the guidelines set out in its written underwriting policies. Individual approval authority of $500,000 has been granted to the Company’s Chief Executive Officer, the Company’s Chief Operating and Financial Officer, and the Company’s Chief Lending Officer. Joint approval authority of $1.0 million has been granted to a combination of at least two of the above named individuals. Individual lending authority of $250,000 has been granted to the Bank’s Vice President/Loan Administration Manager, the Vice President/Loan Customer Service Manager and to the Bank’s Consumer Loan and Residential Mortgage Underwriter, employed by the Company. Additional consumer loan lending authority of $50,000 has been granted to several delegated underwriters, employed by the Bank. Loans with policy

exceptions require approval by the next highest approval authority. Loans over $1.0 million must be approved by the Company’s Senior Loan Committee or the Board of Directors.

     In the exercise of any loan approval authority, the officers of the Company will take into account the risk associated with the extension of credit to a single borrower, borrowing entity, or affiliation. The Company has an aggregate loans to one borrower limit of 15% of the Company’s unimpaired capital and unimpaired surplus in accordance with federal regulations. At September 30, 2010, the largest aggregate amount of loans outstanding to any borrower, including related entities, was $3.7 million, which did not exceed the Company’s loan to one borrower limitation.

     Single Family Residential Real Estate Lending. The Company is permitted to lend up to 97% of the appraised value or sales price of the security property for a residential real estate loan, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the security property. The Company will generally lend up to 95% of the lesser of the appraised value or the sale price for the purchase of single-family, owner-occupied dwellings which conform to the secondary market underwriting standards. Refinancings are limited to 90% or less. Loans over $417,000 and other non-conforming loans, secured by 1-4 residential, owner-occupied dwellings, are limited to 90% of the lesser of the purchase price or appraised value. The purchase of non-owner occupied, 1-4 unit dwellings may be financed to 80% of the lower of the appraisal or sale price; a refinance is limited to 80% of the appraised value if the borrower’s FICO score is 680 or higher.

     All appraisals and other property valuations are performed by independent fee appraisers approved by the Company’s Senior Loan Committee. On all amortizing real estate loans, the Company requires borrowers to obtain title insurance, insuring the Company has a valid first lien on the mortgaged real estate. Borrowers must also obtain and maintain a hazard insurance policy prior to closing and, when the real estate is located in a flood hazard area designated by the Federal Emergency Management Agency, a flood insurance policy is required. Generally, borrowers advance funds on a monthly basis together with payment of principal and interest into a mortgage escrow account from which the Company makes disbursements for items such as real estate taxes and insurance premiums as they fall due.

     The Company presently originates fixed-rate loans on single-family residential properties pursuant to underwriting standards consistent with secondary market guidelines, and which may or may not be sold into the secondary mortgage market as conditions warrant. Adjustable rate mortgages (“ARMs”), as well as non-conforming and jumbo fixed-rate loans in amounts up to $2.0 million, are held in the portfolio. It is the Company’s policy to originate both fixed-rate loans and ARMs for terms up to 30 years. As of September 30, 2010, $340.8 million or 65.9% and $346.0 million or 68.8% of the Company’s total loan portfolio consisted of single-family (including construction loans) residential loans, respectively. As of September 30, 2010, approximately $330.8 million or 96.5% of the Company’s total mortgage loans consisted of fixed-rate, single-family residential mortgage loans. As of such date, $11.8 million or 3.5% of the total mortgage loan portfolio consisted of adjustable-rate single-family residential mortgage loans. Most of the Company’s residential mortgage loans include “due on sale” clauses.

     During the years ended September 30, 2010 and 2009, the Company originated $417,000 and $2.1 million of ARM mortgages, respectively. ARMs represented 0.3% and 1.4% of the Company’s total mortgage loan portfolio originations in fiscal 2010 and 2009, respectively. The ARM mortgages offered by the Company are originated with initial adjustment periods varying from one to 10 years, and provide for initial rates of interest below the rates which would prevail were the index used for repricing applied initially. The Company expects to emphasize the origination of ARMs as market conditions permit, in order to reduce the impact of rising interest rates in the market place. Such loans, however, may not adjust as rapidly as changes in the Company’s cost of funds.

     Multi-family Residential Real Estate Lending. The Company originates mortgage loans secured by multifamily dwelling units. At September 30, 2010, $1.8 million, or 0.3% of our total loan portfolio consisted of loans secured by multifamily residential real estate. The majority of our multifamily residential real estate loans are secured by apartment buildings located in the Bank’s local market area. The interest rates for our multifamily residential real estate loans generally adjust at five- to ten-year intervals, with the rate to be negotiated at the end of such term or to automatically convert to a floating interest rate. These loans generally have a five-year term with an amortization period of no more than twenty years. At September 30, 2010, we had no multifamily residential real estate loans that were delinquent in excess of 30 days.

     Construction Loans. The Company offers fixed-rate and adjustable-rate construction loans on residential properties. Residential construction loans are originated for individuals who are building their primary residence as well as to selected local builders for construction of single-family dwellings. As of September 30, 2010, $4.8 million or 0.9% of the total loans consisted of construction loans.

     Construction loans to homeowners are usually made in connection with the permanent financing on the property. The permanent loans have amortizing terms up to 30 years, following the initial construction phase during which time the borrower pays interest on the funds advanced. These loans are reclassified as permanent mortgage loans when the residences securing the loans are completed. The Company will make construction/permanent loans up to a maximum of 90% of the fair market value of the completed project. The rate on the loan during construction is the same rate as the Company will charge on the permanent loan on the completed project. Advances are made on a percentage of completion basis with the Company’s receipt of a satisfactory inspection report of the project.

     Historically, the Company has been active in on-your-lot home construction lending and intends to continue to emphasize such lending. Although construction lending is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate, the Company historically has not experienced any significant problems.

     The Company also offers mortgage loans on undeveloped single lots held for residential construction. These loans are generally fixed-rate loans with terms not exceeding 15 years; they are not a significant part of the Company’s lending activities. Additionally, the Bank has not been active in residential subdivision lending and has no acquisition/development loans in the portfolio.

     Home Equity. Home equity loans and lines of credit continue to be a popular product and represented $90.6 million or 17.5% of the loan portfolio at September 30, 2010. After taking into account first mortgage balances, the Company will lend up to 80% of the value of owner-occupied property on fixed rate terms up to 15 years. This amount may be raised to 100% when considering other factors, such as excellent credit history and income stability. At September 30, 2010, the Company had outstanding 2,837 home equity loans of which 1,107 were installment equity loans and 1,730 were line of credit loans. As of such date, the Company had an outstanding balance on line of credit loans of approximately $54.4 million and there was approximately $52.9 million of unused credit available on such loans.

     Commercial Real Estate Loans. The Company originates mortgage loans for the acquisition and refinancing of commercial real estate properties. At September 30, 2010, $75.5 million, or 14.6% of the Bank’s total loan portfolio consisted of loans secured by commercial real estate properties, owner occupied commercial real estate loans and non-owner occupied commercial real estate loans. The majority of our commercial real estate loans are secured by office buildings, manufacturing facilities, distribution/warehouse facilities, and retail centers, which are generally located in our local market area. The interest rates for our commercial real estate loans generally adjust at one- to five-year intervals, and are typically renegotiated at

the end of such period or automatically converted to a floating interest rate. The loans generally have a five-year term with an amortization period of no greater than twenty five years. At September 30, 2010, the largest such loan had a balance of $3.1 million.

     The Company generally requires appraisals of the properties securing commercial real estate loans. Appraisals are performed by an independent appraiser designated by the Company and all appraisals are reviewed by management. The Company considers the quality and location of the real estate, the credit of the borrower, the cash flow of the project and the quality of management involved with the property when making decisions on commercial real estate loans.

     Loan-to-value ratios on our commercial real estate loans are generally limited to 80% of the appraised value of the secured property. As part of the criteria for underwriting commercial real estate loans, we generally impose a debt service coverage ratio (the ratio of net operating income before payment of debt service compared to debt service) of not less than 1.2-to-1. It is also our general practice to obtain personal guarantees from the principals of our corporate borrowers on commercial real estate loans.

     Loans secured by commercial real estate typically have higher balances and are more difficult to evaluate and monitor and, therefore, involve a greater degree of credit risk than other types of loans. If the estimate of value proves to be inaccurate, the property may not provide us with full repayment in the event of default and foreclosure. Because payments on these loans are often dependent on the successful development, operation, and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by limiting the maximum loan-to-value ratio and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Company also generally obtains loan guarantees from financially capable parties based on a review of personal financial statements.

     Commercial Business Loans. Our commercial business loans amounted to $4.3 million or 0.8% of the total loan portfolio at September 30, 2010. The Company originates business loans typically for small to mid-sized businesses in our market area and may be for working capital, equipment financing, inventory financing, or accounts receivable financing. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may go up to 10 years. Our commercial business loans generally are secured by equipment, machinery or other corporate assets. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to all commercial business loans.

     Commercial lending generally involves greater credit risk than residential mortgage or consumer lending, and involves risks that are different from those associated with commercial real estate lending. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may represent an insufficient source of repayment because equipment and other business assets may, among other things, be obsolete or of limited use. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors), while liquidation of collateral is considered a secondary source of repayment.

     Our commercial lenders actively solicit commercial business loans in our market area. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans. Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The

collateral securing other loans, such as inventory or equipment, may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

     Consumer Non-Real Estate Loans. The Company actively originates consumer loans to provide a wider range of financial services to its customers and to improve the interest rate sensitivity of its interest-earning assets. Originations of consumer loans as a percent of total loan originations amounted to .5% and 0.6% during fiscal 2010 and 2009, respectively. The shorter-term and normally higher interest rates on such loans help the Company to maintain a profitable spread between its average loan yield and its cost of funds. The Company’s consumer loan department offers vehicle loans, personal loans and personal lines of credit. Loans secured by deposit accounts at the Company are also made to depositors in an amount up to 90% of their account balances with terms of up to 15 years.

     Consumer loans generally involve more risk of collectibility than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. As continued payments are dependent on the borrower’s continuing financial stability, these loans may be more likely to be adversely affected by job loss, divorce, personal bankruptcy or by adverse economic conditions.

     Loan Fee and Servicing Income. The Company receives fees both for the origination of loans and for making commitments to originate and purchase residential and commercial mortgage loans. The Company also receives servicing fees with respect to residential mortgage loans it has sold. It also receives loan fees related to existing loans, including late charges, and credit life insurance commissions. Loan origination and commitment fees and discounts are a volatile source of income, varying with the volume and type of loans and commitments made and purchased and with competitive and economic conditions.

     Loans fees generated on origination of loans under accounting principles generally accepted in the United States of America are deferred along with direct origination costs. Deferred loan fees, net and discounts on mortgage loans purchased are amortized to income as a yield adjustment over the estimated remaining terms of such loans using the interest method.

     As of September 30, 2010, the Company was servicing $1.8 million of loans for others, which related to loans sold by the Company to the Federal Home Loan Bank (“FHLB”), in the amount $1.8 million, respectively. The Company receives a servicing fee of 0.25% on such loans.

     Non-performing Loans and Real Estate Owned. When a borrower fails to make a required loan payment, the Company attempts to cure the default by contacting the borrower; generally, after a payment is more than 15 days past due, at which time a late charge is assessed. Defaults are cured promptly in most cases. If the delinquency on a mortgage loan exceeds 60 days and is not cured through the Company’s normal collection procedures, or an acceptable arrangement is not worked out with the borrower, the Company will institute measures to remedy the default. This may include commencing a foreclosure action or, in special circumstances, accepting from the borrower a voluntary deed of the secured property in lieu of foreclosure with respect to mortgage loans and equity loans, or title and possession of collateral in the case of other consumer loans. Substantial delays may occur in instituting and completing residential foreclosure proceedings due to the extensive procedures and time periods required to be complied with under Pennsylvania law.

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

The Company had $2,138,000 of non-accrual loans at September 30, 2010 and $335,000 of non-accrual loans at September 30, 2009.

     If foreclosure is effected, the property is sold at a public auction in which the Company may participate as a bidder. If the Company is the successful bidder, the acquired real estate property is then included in the Company’s real estate owned (“REO”) account until it is sold. When property is acquired, it is recorded at the market value at the date of acquisition less estimated cost to sell and any write-down resulting is charged to the allowance for loan losses. Interest accrual, if any, ceases on the date of acquisition and all costs incurred in maintaining the property from that date forward are expended. Costs incurred for the improvement or development of such property are capitalized. The Company is permitted under Department regulations to finance sales of real estate owned by “loans to facilitate,” which may involve more favorable interest rates and terms than generally would be granted under the Company’s underwriting guidelines.

     Foreclosed Real Estate. Real estate acquired through, or in lieu of, loan foreclosures are carried at the fair value of the property, based on an appraisal less cost to sell. Costs relating to the development and improvement of the property are capitalized, and those relating to holding the property are charged to expense. The Company had 1 properties in other real estate owned with balances totaling $186,000 at September 30, 2010 compared to four properties with balances totaling $747,000 as of September 30, 2009. All of the real estate owned properties at September 30, 2010 are residential properties located within the Bank’s primary lending area.

     The following table sets forth information regarding non-accrual loans, loans which are 90 days or more delinquent but on which the Company is accruing interest, troubled debt restructurings, and other real estate owned held by the Company at the dates indicated. The Company continues to accrue interest on loans which are 90 days or more overdue where management believes that such interest is collectible.

		As of September 30,
		2010				2009				2008				2007				2006
		(Dollars in Thousands)
Residential real estate loans:
Non-accrual loans		$	1,716			$	335			$	244			$	—			$	—
Accruing loans 90 days overdue			147				1,446				192				—				—
Troubled debt restructurings			—				—				—				—				—
Total			1,863				1,781				436				—				—
Commercial loans:
Non-accrual loans			312				—				—				—				—
Accruing loans 90 days overdue			—				—				815				—				—
Troubled debt restructurings			—				—				—				—				—
Total			312								815				—				—
Consumer loans:
Non-accrual loans			110				—				—				—				—
Accruing loans 90 days overdue			—				119				7				28				18
Troubled debt restructurings			—				—				—				—				—
Total			110				119				7				28				18
Total non-performing loans:
Non-accrual loans			2,138				335				244				—				—
Accruing loans 90 days overdue			147				1,565				1,014				28				18
Troubled debt restructurings			—				—				—				—				—
Total		$	2,285			$	1,900			$	1,258			$	28			$	18
Total non-performing loans to total loans			.28	%			.38	%			.26	%			n/m	*			n/m	*
Total real estate owned, net of related reserves		$	186			$	747				—				—				—
Total non-performing loans and other real estate owned to total assets			.30	%			.32	%			.15	%			n/m	*			n/m	*

     Management establishes reserves for losses on delinquent loans when it determines that losses are probable. The Company has recorded a provision for loan losses totaling $600,000 in fiscal 2010 and $400,000 in fiscal 2009, due to the increase in unemployment trends and decline in property values reflecting instability in the economy. Although management believes that it uses the best information available to make determinations with respect to loan loss reserves, future adjustments to reserves may be necessary if economic conditions differ substantially from the assumptions used in making the initial determinations.

     Residential mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real estate loans generally involve more risk of collectibility because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish specific reserves for losses on delinquent consumer loans and commercial loans when it determines that losses are probable. In addition, consumer loans are charged against reserves if they are more than 120 days delinquent unless a satisfactory repayment schedule is arranged.

     The following table summarizes activity in the Company’s allowance for loan losses during the periods indicated.

		Year Ended September 30,
		2010				2009				2008				2007				2006
		(Dollars In Thousands)
Total loans outstanding at end of period		$	516,894			$	503,113			$	484,382			$	424,228			$	392,893
Average loans outstanding			510,004				493,748				454,305				408,561				383,237
Allowance for loan losses, beginning of year		$	2,094			$	1,988			$	1,933			$	1,956			$	1,968
Provision for loan losses			600				400				85				—				—
Charge-offs:
Single family			—				—				—				—				—
Commercial real estate and multi family residential			(147	)			(288	)			—				—				—
Construction			—				—				—				—				—
Commercial business			—				—				—				—				—
Home equity			—				—				(13	)			(1	)			—
Consumer non-real estate			(52	)			(33	)			(27	)			(35	)			(20	)
Total charge-offs			(199	)			(321	)			(40	)			(36	)			(20	)
Recoveries of loans previously charged off			9				27				10				13				8
Allowance for loan losses, end of year		$	2,504			$	2,094			$	1,988			$	1,933			$	1,956
Allowance for loan losses as a percent non-performing loans			109.58	%			110.21	%			158.03	%			6,903.57	%			10,866.67	%
Ratio of net charge-offs during the period to average loans outstanding during the period			0.04	%			0.06	%			0.01	%			0.01	%			0.00	%

     The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.

		As of September 30,
		2010								2009								2008								2007								2006
						Loan								Loan								Loan								Loan								Loan
						Category								Category								Category								Category								Category
		Amount				as a %				Amount				as a %				Amount				as a %				Amount				as a %				Amount				as a %
		of				of total				of				of total				of				of total				of				of total				of				of total
		Allowance				Loans				Allowance				Loans				Allowance				Loans				Allowance				Loans				Allowance				Loans
		(Dollars in Thousands)
Single-family residential		$	798				65.0	%		$	808				68.2	%		$	422				68.9	%		$	303				71.3	%		$	286				72.2	%
Multi-family residential			18				0.3				20				0.4				24				0.5				5				0.6				6				0.7
Construction			7				0.9				4				0.6				13				1.7				9				1.4				10				1.8
Lot loans			5				0.4				3				0.2				3				0.2				1				0.1				2				0.2
Home equity			405				17.5				357				18.4				202				19.1				240				22.5				242				24.4
Commercial real estate			906				14.6				542				9.7				396				7.8				207				3.0				43				0.2
Commercial business loans			4				0.8				104				2.1				188				1.4				24				0.6				—				—
Consumer non-real estate loans			22				0.5				21				0.4				20				0.4				17				0.5				16				0.5
Unallocated			339				—				235				—				720				—				1,126				—				1,351				—
Total loans receivable		$	2,504				100.0	%		$	2,094				100.0	%		$	1,988				100.0	%		$	1,932				100.0	%		$	1,956				100.0	%

     The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

Investment Activities

     The Company’s investment portfolio consists primarily of United States government agency mortgage-backed securities and debt obligations of United States government agencies. The other investments include tax-exempt municipal obligations, money market mutual funds, and stock of the FHLB of Pittsburgh.

     As of September 30, 2010, the Company had $131.6 million of mortgage-backed securities, invested in FHLMC, Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) backed securities or collaterized mortgage obligations (“CMOs”). FHLMC securities are guaranteed by the FHLMC, GNMA securities by the Federal Housing Administration and FNMA securities by the FNMA, which are instrumentalities of the United States government, and, pursuant to federal regulations, are deemed to be part of the Company’s loan portfolio.

     The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios and our investments in FHLB stock at the dates indicated.

		September 30,
		2010								2009								2008
		Amortized				Fair				Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value				Cost				Value
		(In thousands)
Mortgage-backed securities and collateralized mortgage obligations (CMO’s)		$	131,604			$	138,539			$	163,215			$	169,995			$	214,691			$	212,572
U.S. Government Sponsored Enterprises
(“GSE”) Agency Notes			108,807				109,530				82,602				82,857				54,314				54,076
Municipal securities			16,462				17,188				22,592				23,317				24,940				24,897
Equity securities			355				343				355				311				842				842
U.S. Government Money Market funds			20,261				20,261				6,417				6,417				12				12
FHLB stock			16,096				16,096				16,096				16,096				16,574				16,574
Total investment and mortgage-backed securities and FHLB stock		$	293,585			$	301,957			$	291,277			$	298,993			$	311,373			$	308,973

     The following table sets forth the amount of investment and mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2010. No tax-exempt yields have been adjusted to a tax-equivalent basis.

		Amounts at September 30, 2010 Which Mature in
										Over One								Over
										Year								Five
						Weighted				Through				Weighted				Through				Weighted				Over				Weighted
		One year				Average				Five				Average				Ten				Average				Ten				Average
		Or less				Yield				Years				Yield				Years				Yield				Years				Yield
		(Dollars in Thousands)
Bonds and other Debt securities:
Mortgage-backed securities and CMO’s		$	194				3.97	%		$	13,434				4.26	%		$	32,743				4.59	%		$	85,233				4.52	%
U.S. Government Agency Notes			14,986				0.43	%			13,000				1.63	%			22,000				2.83	%			58,820				3.11	%
Municipal securities			1,447				5.43	%			1,275				4.92	%			1,325				5.24	%			12,416				4.79	%
Total		$	16,627				0.91	%		$	27,709				3.06	%		$	56,068				3.91	%		$	156,469				4.04	%

     The Company’s investment strategy is set and reviewed periodically by the entire Board of Directors.

Sources of Funds

     General. Deposits are the primary source of the Company’s funds for use in lending and for other general business purposes. In addition to deposits, the Company obtains funds from loan payments and prepayments, FHLB advances and other borrowings, and, to a lesser extent, sales of loans. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general market interest rates and economic conditions.

     Deposits. The Company has a number of different programs designed to attract both short-term and long-term deposits from the general public by providing an assortment of accounts and rates consistent with FDIC regulations. These programs include passbook and club savings accounts, NOW and regular checking accounts, money market deposit accounts, retirement accounts, certificates of deposit ranging in terms from 90 days to 60 months and jumbo certificates of deposit in denominations of $100,000 or more. The interest rates on the Company’s various accounts are determined weekly by the Interest Rate Risk Management Officer based on reports prepared by members of senior management. The Company attempts to control the flow of deposits by pricing its accounts to remain competitive with other financial institutions in its market area.

     The Company’s deposits are obtained primarily from residents of Montgomery and Bucks Counties; the Company does not utilize brokered deposits. The principal methods used by the Company to attract deposit accounts include local advertising, offering a wide variety of services and accounts, competitive interest rates and convenient office locations. The Company also is a member of the “STAR” ATM network.

     The following table shows the distribution of, and certain other information relating to, the Company’s deposits by type as of the dates indicated.

		As of September 30,
		2010								2009
		Amount				Percent of Deposits				Amount				Percent of Deposits
						(Dollars in Thousands)
Passbook and club accounts		$	3,739				0.7	%		$	2,940				0.6	%
NOW and interest-bearing checking accounts			53,897				10.2				46,100				9.9
Non-interest-bearing checking accounts			17,014				3.2				12,364				2.6
Money market demand accounts			133,540				25.3				76,055				16.3
Certificates of deposit:
3 month			971				0.2				1,212				0.3
6 month			3,182				0.6				2,600				0.6
7 month			24,942				4.7				39,214				8.4
9 month			9,006				1.7				11,323				2.4
12 month			34,742				6.6				71,419				15.3
15 month			5,513				1.0				4,102				0.9
17 month			4,816				0.9				6,965				1.5
18 month			4,245				0.8				14,113				3.0
20 month			28,479				5.4				22,913				4.9
24 month			7,576				1.4				4,929				1.1
27 month			—				0.0				19				0.0
36 month			46,507				8.8				41,429				8.9
48 month			48,448				9.2				24,377				5.2
60 month			29,239				5.5				18,979				4.1
Other			100				0.0				100				0.0
Retirement accounts:
Money market deposit accounts			2,540				0.5				1,377				0.3
Certificates of deposit			69,604				13.3				64,071				13.7
Total deposits		$	528,100				100.0	%		$	466,601				100.0	%

     The large variety of deposit accounts offered by the Company has increased the Company’s ability to retain deposits and has allowed it to be competitive in obtaining new funds, although the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles such as government and corporate securities and non-deposit products) still exists. The new types of accounts; however, have been more costly than traditional accounts during periods of high interest rates. In addition, the Company has become more vulnerable to short-term fluctuations in deposit flows as customers have become more rate-conscious and willing to move funds into higher yielding accounts. The ability of the Company to attract and retain deposits and the Company’s cost of funds have been, and will continue to be, significantly affected by money market conditions.

     The following table presents certain information concerning the Company’s deposit accounts as of September 30, 2010 and the scheduled quarterly maturities of its certificates of deposit.

						Percentage of				Weighted Average
		Amount				Total Deposits				Nominal Rate
		(Dollars in Thousands)
Passbook and club accounts		$	3,739				0.7	%			0.81	%
NOW and interest-bearing checking accounts			53,897				10.2				0.13
Non-interest-bearing checking accounts			17,015				3.2				0.00
Money market deposits accounts(1)			136,079				25.8				0.52
Total		$	210,730				39.9	%			0.38	%
Certificate accounts maturing by quarter:
December 31, 2010		$	34,614				6.6	%			1.09	%
March 31, 2011			42,527				8.1				1.01
June 30, 2011			33,654				6.4				1.96
September 30, 2011			47,459				9.0				2.73
December 31, 2011			28,364				5.4				2.59
March 31, 2012			12,459				2.4				2.20
June 30, 2012			10,622				2.0				2.47
September 30, 2012			5,921				1.1				3.15
December 31, 2012			7,887				1.5				3.33
March 31, 2013			11,329				2.1				3.23
June 30, 2013			8,320				1.6				3.17
September 30, 2013			7,642				1.4				2.91
Thereafter			66,572				12.5				3.00
Total certificate accounts(1)			317,370				60.1				2.31
Total deposits		$	528,100				100.0	%			1.54	%

     Management of the Company expects, based on historical experience and its pricing policies, to retain a significant portion of the $158.3 million of certificates of deposit which mature during the 12 months ending September 30, 2011.

     The following table sets forth the net deposit flows of the Company during the periods indicated.

		Year Ended September 30,
		2010				2009
		(In Thousands)
Increase (decrease) before interest credited		$	53,598			$	30,793
Interest credited			7,901				10,295
Net deposit increase		$	61,499			$	41,088

     The following table presents by various interest rate categories the amounts of certificate accounts as of the dates indicated and the amounts of certificate accounts as of September 30, 2010 which mature during the periods indicated.

		As of				Amounts at September 30, 2010 Maturing
		September 30,				One Year
		2010				or Less				Two Years				Three Years				Thereafter
		(In Thousands)
Certificate accounts:
0.01% to 2.00%		$	145,296			$	115,032			$	28,411			$	716			$	1,137
2.01% to 4.00%			161,329				38,743				26,298				33,089				63,199
4.01% to 6.00%			10,745				4,479				2,657				1,373				2,236
Total certificate accounts(1)		$	317,370			$	158,254			$	57,366			$	35,178			$	66,572

     The following table sets forth the maturity of our certificates of deposit of $100,000 or more at September 30, 2010, by time remaining to maturity.

At September 30, 2010
						Weighted
						Average
Quarter Ending:		Amount				Rate
		(Dollars in Thousands)
December 31, 2010		$	4,929				1.06	%
March 31, 2011			7,021				0.93
June 30, 2011			5,163				1.87
September 30, 2011			8,117				2.82
After September 30, 2011			34,054				2.90
Total certificates of deposit with balances of $100,000 or more		$	59,284				2.41	%

     Borrowings. The Bank obtains advances from the FHLB of Pittsburgh upon the security of its capital stock in the FHLB of Pittsburgh and a portion of its first mortgages. See “Regulation - Regulation of the Bank — Federal Home Loan Bank System.” At September 30, 2010, the Bank had advances with maturities of one year or less totaling $16.0 million at an interest rate of 4.37% and FHLB advances with maturities of 13 months to 10 years totaling $206.1 million at interest-rates ranging from 3.01% to 5.29%. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. In addition, there are four long-term advances from other financial institutions that are secured by investment and mortgage-backed securities totaling $50 million at interest-rates ranging from 4.37% to 5.99% .

     Depending on the program, limitations on the amount of advances are based on either a fixed percentage of assets or the FHLB of Pittsburgh’s assessment of the Bank’s creditworthiness. FHLB advances are generally available to meet seasonal and other withdrawals of deposit accounts, to purchase mortgage-backed securities, investment securities and to expand lending.

     The following table sets forth certain information regarding the borrowings of the Company as of the dates indicated.

		September 30,
		2010								2009
						Weighted								Weighted
						Average								Average
		Balance				Rate				Balance				Rate
						(Dollars In Thousands)
Advances		$	272,047				4.33	%		$	309,046				4.31	%

     The following table sets forth certain information concerning the short-term borrowings of the Company for the periods indicated.

		Year Ended September 30,
		2010				2009
		(In Thousands)
Advances :
Average balance outstanding		$	1,225			$	13,341
Maximum amount outstanding at any month-end during the period		$	10,000			$	37,800
Weighted average interest rate during the period			0.71	%			0.70	%

Employees

     The Company had 83 full-time employees and 42 part-time employees as of September 30, 2010. None of these employees is represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel.

Regulation

     The references to laws and regulations which are applicable to the Company and the Bank set forth below and elsewhere herein are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.

Regulation of the Company

     General. The Company is a registered bank holding company pursuant to the Bank Holding Company Act (“BHCA”) and, as such, is subject to regulation and supervision by the Federal Reserve Board and the Department. The Company is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve Board and the Department.

     BHCA Activities and Other Limitations. The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. The BHCA also generally prohibits a bank holding company from acquiring any bank located outside of the state in which the existing bank subsidiaries of the bank holding company are located unless specifically authorized by applicable state law. No approval under the BHCA is required, however, for a bank holding company already lawfully owning or controlling more than 50% of the voting shares of a bank to acquire additional shares of such bank.

     The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank (or engaged in related activities as described below) and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The BHCA permits a bank holding company to elect to be considered a financial holding company (“FHC”). A bank holding company that makes an FHC election is permitted to engage in activities that are financial in nature or incidental to such financial activities. The BHCA lists certain activities that are considered financial in nature and permits the Federal Reserve Board to expand that list to include other activities that are complementary to the activities on the preapproved list. The preapproved activities include (1) securities underwriting, dealing and market making; (2) insurance underwriting; (3) merchant banking; and (4) insurance company portfolio investments. The Company has not made the FHC election.

     The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. The Federal Reserve Board also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not closely related to banking and a proper incident thereto. However, under the BHCA certain of these activities are permissible for a bank holding company that becomes an FHC.

     Limitations on Transactions with Affiliates. Transactions between savings banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank is any company or entity which controls, is controlled by or is under common control with the savings bank. In a holding company context, the parent holding company of a savings bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A (i) limits the extent to which the savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings bank to an affiliate.

     In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and a greater than 10% stockholder of a savings bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings bank to all

insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

     Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve Board capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and, with certain exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Single-family residential first mortgage loans which are not past-due (90 days or more) or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.

     In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at least 4.0% to 5.0% or more, depending on their overall condition.

     Financial Support of Affiliated Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy. Section 18 of the Federal Deposit Insurance Act (“FDIA”) describes the circumstances under which a Federal banking agency would be protected from a claim by an affiliate or a controlling shareholder of an insured depository institution seeking the return of assets of such an affiliate or controlling shareholder. Under that provision, a claim would not be permitted if (1) the insured depository institution was under a written Federal directive to raise capital, (2) the institution was undercapitalized, and (3) the subject Federal banking agency followed the procedures set forth in Section 5(g) of the BHCA.

     Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 generally established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which

generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the period during which certain types of lawsuits can be brought against a company or its insiders.

Regulation of the Bank

     General. The Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. There are periodic examinations by the Department and the FDIC to test the Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the Congress could have a material adverse impact on the Bank and its operations.

     Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965, as amended (the “Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rulemaking power and administrative discretion to the Department so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

     One of the purposes of the Banking Code is to provide savings banks with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in Pennsylvania, with the prior approval of the Department.

     The Department generally examines each savings bank not less frequently than once every two years. Although the Department may accept the examinations and reports of the FDIC in lieu of the Department’s examination, the present practice is for the Department to conduct individual examinations. The Department may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any trustee, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Department has ordered the activity to be terminated, to show cause at a hearing before the Department why such person should not be removed.

     Interstate Acquisitions. The Interstate Banking Act allows federal regulators to approve mergers between adequately capitalized banks from different states regardless of whether the transaction is prohibited under any state law, unless one of the banks’ home states has enacted a law expressly prohibiting out-of-state mergers before June 1997. This act also allows a state to permit out-of-state banks to establish and operate new branches in this state. The Commonwealth of Pennsylvania has not “opted out” of this interstate merger provision. Therefore, the federal provision permitting interstate acquisitions applies to banks chartered in Pennsylvania. Pennsylvania law, however, retained the requirement that an acquisition of a Pennsylvania institution by a Pennsylvania or a non-Pennsylvania-based holding company must be approved by the Banking Department. The Interstate Act also allows a state to permit out-of-state banks to establish and operate new branches in this state. Pennsylvania law permits an out of state banking institution to establish a branch office in Pennsylvania only if the laws of the state where that institution is located would permit an institution chartered under the laws of Pennsylvania to establish and maintain a branch in such other state on substantially the same terms and conditions.

     FDIC Insurance Premiums. The deposits of the Bank are insured by the Deposit Insurance Fund, which is administered by the FDIC. The recently enacted financial institution reform legislation permanently increased deposit insurance on most accounts to $250,000. In addition, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the FDIC has implemented two temporary programs to provide deposit insurance for the full amount of most noninterest bearing transaction deposit accounts through the end of 2013 and to guarantee certain unsecured debt of financial institutions and their holding companies through December 2012. For noninterest bearing transaction deposit accounts, including accounts swept from a noninterest bearing transaction account into a noninterest bearing savings deposit account, a 10 basis point annual rate surcharge is applied to deposit amounts in excess of $250,000. Financial institutions were permitted to opt out of either or both of these programs. The Bank does not participate in either of these programs.

     In February 2009 the FDIC adopted a final regulation that provided for the replenishment of the Deposit Insurance Fund over a period of seven years. The restoration plan changed the FDIC’s base assessment rates and the risk-based assessment system. The risk-based premium system provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based upon supervisory and capital evaluations. The assessment rate for an individual institution is determined according to a formula based on a weighted average of the institution’s individual CAMELS component ratings plus either six financial ratios or, in the case of an institution with assets of $10.0 billion or more, the average ratings of its long-term debt. Well-capitalized institutions (generally those with CAMELS composite ratings of 1 or 2) are grouped in Risk Category I and their initial base assessment rate for deposit insurance is set at an annual rate of between 12 and 16 basis points. The initial base assessment rate for institutions in Risk Categories II, III and IV is set at annual rates of 22, 32 and 45 basis points, respectively. These initial base assessment rates are adjusted to determine an institution’s final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. The adjustments include higher premiums for institutions that rely significantly on excessive amounts of brokered deposits, including CDARS, higher premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances and adding financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for all institutions for their unsecured debt. Final assessment rates range from seven to 77.5 basis points.

     In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund. The assessment rate for the third quarter of fiscal 2010 was .0026% of insured deposits and is adjusted quarterly. These assessments will continue until the Financing Corporation bonds mature in 2019.

     Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. At September 30, 2010, the Bank’s regulatory capital exceeded all of its capital requirements.

     On May 22, 2009, the FDIC announced a five basis point special assessment on each insured depository institution’s assets minus its Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution will not exceed ten basis points times the institution’s domestic deposit assessment base for the second quarter 2009 risk-based assessment. The FDIC collected the Bank’s special assessment amounting to $382,000 on September 30, 2009. The special assessment was fully expensed by the Company in the second quarter of 2009.

     On November 12, 2009, the FDIC adopted regulations that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012, along with their quarterly risk-based assessment for the third quarter of 2009. The Bank’s prepayment totaled $3,100,000. Unlike a special assessment, this prepayment did not immediately affect the Bank’s earnings. The Bank will book the prepaid assessment as a non-earning asset and record the actual risk-based premium payments at the end of each quarter over 36 months.

     Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks which, like the Bank, are not members of the Federal Reserve System. The FDIC’s capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC’s regulation, highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill, and certain purchased mortgage servicing rights and purchased credit and relationships.

     The FDIC also requires that savings banks meet a risk-based capital standard. The risk-based capital standard for savings banks requires the maintenance of total capital which is defined as Tier I capital and supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item.

     The components of Tier I capital are equivalent to those discussed above under the 3% leverage standard. The components of supplementary (Tier 2) capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan losses. Allowance for loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At September 30, 2010, the Bank met each of its capital requirements.

     Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies (including the FDIC) have adopted substantially similar regulations to implement Section 38 of the FDIA. Under the regulations, a savings bank shall be deemed to be (i) “well capitalized” if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”, (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized” if it has a total risk-based ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which the FDIC may reclassify a well capitalized savings bank as adequately capitalized and may

require an adequately capitalized savings bank or an undercapitalized savings bank to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized savings bank as critically undercapitalized). At September 30, 2010, the Bank was in the “well capitalized” category.

     The Bank is also subject to more stringent Department capital guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC.

     Loans-to-One Borrower Limitation. With certain limited exceptions, a Pennsylvania chartered savings bank may lend to a single or related group of borrowers in an amount equal to 15% of its capital account.

     Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.