UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2012

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.)

10413 Kley Road, 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 x

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 x

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

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 x
(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 x

As of August 31, 2012, 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, 2011, was $3.2 million.

DOCUMENTS INCORPORATED BY REFERENCE:

Document		Part of Form 10-K
Proxy Statement for the 2012 Annual Meeting of Stockholders of the Registrant		Part III

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Versailles Financial Corporation

Annual Report on Form 10-K

For The Year Ended

June 30, 2012

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ITEM 1.	Business	1

ITEM 1A.	Risk Factors	36

ITEM 1B.	Unresolved Staff Comments	36

ITEM 2.	Properties	37

ITEM 3.	Legal Proceedings	37

ITEM 4.	Mine Safety Disclosures	37

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37

ITEM 6.	Selected Financial Data	39

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	50

ITEM 8.	Financial Statements and Supplementary Data	51

ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	102

ITEM 9A.	Controls and Procedures	102

ITEM 9B.	Other Information	103

ITEM 10.	Directors, Executive Officers and Corporate Governance	103

ITEM 11.	Executive Compensation	103

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	103

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	103

ITEM 14.	Principal Accountant Fees and Services	103

ITEM 15.	Exhibits and Financial Statement Schedules	104

Signatures		106

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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 or the fair value of financial instruments resulting from the current low market interest rate environment;

· the current drought conditions, which may increase the likelihood that our agricultural and farmland loan customers, as well as commercial loan customers whose businesses depend on or are related to agriculture, are unable to make payments on their loans, and which may reduce deposits from such customers as their revenues decrease and expenses increase;

· 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;

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

· changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, deposit assessments or premiums, 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;

· 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, including a lack of consumer confidence in financial institutions;

· 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 and costs associated with 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 10413 Kley Road, 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 $45.3 million, total loans of $35.5 million, total liabilities of $34.3 million, including total deposits of $27.8 million, and equity of $10.9 million as of June 30, 2012. At that date, 57.8% of our assets were one- to four-family residential mortgage loans, 16.6% were non-residential real estate loans, and 1.2% were mortgage-backed securities.

Versailles Savings and Loan Company’s executive and banking offices are located at 10413 Kley Road, Versailles, Ohio 45380. Our telephone number at this address is (937) 526-4515.

Our website addresses are www.versaillessavingsbank.com and www.versaillesfinancialcorp.com. Information on our websites 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

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Darke County are Whirlpool Corporation (manufacturer of home appliances), Midmark Corporation (manufacturer of health care products), Greenville Technology, Inc. (manufacturer of plastic products and 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 2012 was 6.8%, compared to 7.4% for the State of Ohio and 8.3% for the United States. The population of Darke County reflected net out-migration from 2000 to 2011, declining from approximately 53,300 to approximately 52,959. The median household income in Darke County increased from $39,307 in 2000 to $45,165 in 2011, or 14.9%, while the median household income in the State of Ohio increased by 8.6% from $41,499 to $45,090 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 2012, the unemployment rate in Shelby County was 7.1% compared to 6.8% for Darke County. Shelby County population has reflected some modest growth since 2000, increasing from 47,910 to 49,307, or 2.9%. Median household income increased at a similar pace as Darke County, increasing 9.2% from $44,507 to $48,607.

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,
	2012					2011
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	26,154		73.25	%	$	27,845		73.87	%
Multi-family	290			0.81	%	235			0.63	%
Construction(2)	—			—		403			1.07	%
Non-residential real estate(1)	7,507			21.03	%	7,676			20.36	%
Total real estate loans	33,951			95.09	%	36,159			95.93	%

Commercial loans	499			1.40	%	487			1.29	%
Consumer loans	1,253			3.51	%	1,046			2.78	%
Total loans	$	35,703		100.00	%	$	37,692		100.00	%

Net deferred loan fees	41			0.12	%	44			0.12	%
Allowance for losses	(255		)	0.72	%	(221		)	0.59	%
Loans, net	$	35,489				$	37,515

(1) Includes $4.9 million secured by farmland for the year ended June 30, 2012 and $5.1 million for the year ended June 30, 2011.

(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, 2012, 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 2.3% 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, 2012. 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,
2013	$	1,586	4.78	%	$	26	6.23	%	$	733	5.27	%	$	—	—	%
2014 and 2015	2,972		4.80		20		6.77		1,205		5.31		—		—
2016 and 2017	3,069		4.83		19		6.95		1,187		5.27		—		—
2018 to 2022	7,358		4.82		61		6.96		2,204		5.25		—		—
2023 to 2032	9,373		4.92		86		6.57		1,956		5.48		—		—
2032 and beyond	1,796		4.92		78		6.50		222		6.29		—		—

Total	$	26,154	4.86	%	$	290	6.64	%	$	7,507	5.36	%	$	—	—	%

	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,
2013	$	425	7.49	%	$	116	6.09	%	$	2,886	5.37	%
2014 and 2015	430		6.41		233		6.06		4,860		5.14
2016 and 2017	229		6.33		127		5.72		4,631		5.05
2018 to 2022	116		5.78		23		5.85		9,762		4.94
2023 to 2032	53		5.10		—		—		11,468		5.03
2032 and beyond	—		—		—		—		2,096		5.13

Total	$	1,253	6.65	%	$	499	5.97	%	$	35,703	5.06	%

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The following table sets forth our fixed and adjustable-rate loans at June 30, 2012 that are contractually due after June 30, 2013. Loans are presented net of loans in process.

	Due After June 30, 2013
	Fixed		Adjustable		Total
	(In thousands)
Real Estate:
One- to four-family	$	19,533	$	5,035	$	24,568
Multi-family	182		82		264
Construction	—		—		—
Non-residential / commercial real estate	5,644		1,130		6,774
Total real estate loans	25,359		6,247		31,606

Commercial	383		—		383
Consumer loans	828		—		828

Total loans	$	26,570	$	6,247	$	32,817

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, 2012, $26.1 million, or 73.3% 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 $76,000 and our largest outstanding one- to four-family residential loan had a principal balance of $469,000. 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, 2012, we had $12.4 million of fixed-rate residential loans maturing in 10 years or less, $7.3 million of fixed-rate residential loans maturing between 10 and 20 years and $1.1 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, 2012, $5.3 million, or 20.3% 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, 2012, we had one one- to four-family residential mortgage loan totaling $58,000 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, 2012, 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, 2012, we had $7.5 million in non-residential real estate loans, representing 21.0% of our total loan portfolio, a decrease of $0.2 million, or 2.2%, over non-residential loans of $7.7 million, representing 20.4% of our total loan portfolio, at June 30, 2011. 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	2012		2011
	(In thousands)

Office	$	827	$	805
Industrial	538		562
Retail	1,025		1,017
Farm/Agriculture	4,939		5,104
Mixed use	77		79
Other Improved Real Estate	101		109
Total	$	7,507	$	7,676

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, 2012, our largest non-residential real estate loan totaled $583,000 and was secured by a mortgage on farmland in our primary market area. At June 30, 2012, this loan was performing in

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accordance with its terms. At June 30, 2012, $1.3 million, or 16.9%, 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, 2012, 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, 2012, we had $290,000 of multi-family loans, representing 0.8% 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, 2012, Versailles Savings had $499,000 of commercial business loans outstanding, representing 1.4% 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, 2012, our largest commercial business loan relationship was a $85,000 loan to a tool and die machine shop secured by a UCC financing statement on a Bridgeport machine and limited personal guarantees by two individuals. At June 30, 2012, this loan was performing in accordance with its terms.

Consumer Lending. To date, our consumer lending has been limited. At June 30, 2012, Versailles Savings had $1.3 million of consumer loans outstanding, representing 3.5% 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, 2012, we had $447,000 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, 2012, 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,
	2012			2011
	(In thousands)

Total loans at beginning of period	$	37,515		$	36,723

Loans originated:
Real estate loans:
One- to four-family	5,907			8,584
Multi-family	114			86
Construction	2,198			1,104
Non-residential	990			2,607
Total real estate loans	9,209			12,381
Commercial loans	289			313
Consumer loans	1,220			1,492
Total loans originated	10,718			14,186

Deduct:
Principal repayments	12,706			13,353
Loan sales	—			—
Home equity lines of credit, net	—			—
Net, other	38			41
Net loan activity	(2,026		)	792
Total loans at end of period	$	35,489		$	37,515

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, 2012, 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, 2012, our largest loan to one borrower totaled $583,000 and was secured by a mortgage on farmland in our primary market area. At June 30, 2012, this loan was performing in accordance with its terms. At June 30, 2012, our largest lending relationship with a single or related group of borrowers totaled $625,000, 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, 2012, no loans were reported as nonaccrual and two loans totaling $548,000 reported as troubled debt restructuring were both current and are not included in the table below.

	At June 30,
	2012						2011
	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	$	36	$	58	$	—	$	49	$	93	$	—
Multi-family	—		—		—		—		—		—
Non-residential real estate	—		—		—		—		—		—
Construction	—		—		—		—		—		—
Total real estate loans	36		58		—		49		93		—

Commercial loans	—		—		—		—		—		—
Consumer loans	—		—		—		4		—		—
Total	$	36	$	58	$	—	$	53	$	93	$	—

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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,” “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,
	2012		2011
	(In thousands)

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

The decrease in loans classified as special mention between June 30, 2012 and 2011 was due to the troubled debt restructuring of one loan of $70, net of repayment of $4, resulting in a current balance of $66 and is performing in accordance with their terms. Total classified assets at June 30, 2012 and June 30, 2011 does not include any 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

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loans generally are applied against principal. Generally, loans are restored to accrual status when the 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, 2012, we had one non-residential real estate loan totaling $481,000 classified as troubled debt restructuring. This loan has a loan-to-value ratio of 47%, bears interest at a market rate, and at June 30, 2012 was performing in accordance with their terms. In addition, at June 30, 2012, we had one one- to four-family residential real estate loan totaling $67,000 classified as troubled debt restructuring. This loan has a loan-to-value ratio of 46%, bears interest at a market rate, and at June 30, 2012 was performing in accordance with their terms. At June 30, 2012, there were no properties classified as non-accrual or as real estate owned.

	At June 30,
	2012			2011
	(Dollars in thousands)
Non-Accrual:
Real estate loans:
One- to four-family	$	—		$	70
Multi-family	—			—
Non-residential	—			—
Construction	—			—
Total real estate loans				70
Commercial loans	—			—
Consumer loans	—			—
Total nonaccrual loans	$	—		$	70

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

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

Total nonperforming loans to total loans	—		%	0.18		%
Total nonperforming assets to total assets	—		%	0.16		%

(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.

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For the year ended June 30, 2012 and the year ended June 30, 2011, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $0 and $800, respectively.

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,
	2012			2011
	(Dollars in thousands)

Allowance at beginning of period	$	221		$	191
Provision for loan losses	48			30
Charge offs:
Real estate loans
One- to four-family	14			—
Multi-family	—			—
Non-residential real estate	—			—
Construction	—			—
Commercial	—			—
Consumer	—			—
Total charge-offs	$	14		$	—

Recoveries:
Real estate loans
One- to four-family	—			—
Multi-family	—			—
Non-residential real estate	—			—
Construction	—			—
Commercial	—			—
Consumer	—			—
Total recoveries	$	—		$	—
Net charge-offs (recoveries)	$	14		$	—

Allowance at end of period	$	255		$	221

Allowance to nonperforming loans	—		%	316.85		%
Allowance to total loans outstanding at the end of the period	0.72		%	0.59		%
Net charge-offs (recoveries) to average loans outstanding during the period	0.04		%	—		%

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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,
	2012						2011
	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	$	227	89.02	%	73.25	%	$	186	84.16	%	73.87	%
Multi-family	—		—		0.81		—		—		0.63
Non-residential real estate	14		5.49		21.03		25		11.31		20.36
Construction	—		—		—		1		0.45		1.07
Total real estate loans	241		94.51	%	95.09	%	212		95.92	%	95.93	%
Commercial loans	2		0.78		1.40		2		0.91		1.29
Consumer loans	4		1.57		3.51		3		1.36		2.78
Unallocated	8		3.14		—		4		1.81		—
Total allowance for loan losses	$	255	100.00	%	100.00	%	$	221	100.00	%	100.00	%

At June 30, 2012, our allowance for loan losses represented 0.72% of total loans and 0.00% of nonperforming loans. The allowance for loan losses increased to $255,000 at June 30, 2012 from $221,000 at June 30, 2011, due to a provision for loan losses of $48,000, offset by charge-offs of $14,000.

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, 2012, we did not have an investment in the securities of any single non-government issuer that exceeded 10% of equity at that date.

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, 2012, 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, 2012, 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, 2012, the holding company had $1.0 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, 2012, our U.S. Government and federal agency securities portfolio totalled $1.2 million, $697,000 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, 2012, our residential mortgage-backed securities portfolio had an amortized cost of $544,000, 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 or accretion of any discount relating to such interests, thereby affecting the net yield on our securities.

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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, 2012, our mutual fund portfolio totaled $697,000, 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, 2012, the fund had an unrealized gain of $3,000.

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,
	2012				2011
	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		697		694		699
Total available for sale	694		697		694		699

Securities held to maturity:
U.S. Government agencies	$	—	$	—	$	—	$	—
Mortgage-backed securities	544		577		694		730
Total held to maturity	544		577		694		730

Total	$	1,238	$	1,274	$	1,388	$	1,429

(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, 2012. 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		2.13		—		—		—		—		—		—		—		—		694		2.13
Total available for sale	$	694	2.13	%	$	—	—	%	$	—	—	%	$	—	—	%	$	—	—	%	$	694	2.13	%

Securities held to maturity:
U.S. Government agencies	$	—	—	%	$	—	—	%	$	—	—	%	$	—	—		$	—	—	%	$	—	—	%
Mortgage-backed securities	—		—		—		—		—		—		183		4.50	%	361		2.33		544		3.06
Total held to maturity	—		—		—		—		—		—		183		4.50		361		2.33		544		3.06

Total	$	694	2.13	%	$	—	—	%	$	—	—	%	$	183	4.50	%	$	361	2.33	%	$	1,238	2.54	%

(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,
	2012				2011
	Amount		Percent		Amount		Percent
	(Dollars in thousands)

Savings/checking accounts	$	10,226	36.75	%	$	8,970	33.88	%
Certificates of deposit	17,600		63.25	%	17,506		66.12	%
Total	$	27,826	100.00	%	$	26,476	100.00	%

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As of June 30, 2012, the aggregate amount of our outstanding certificate of deposit in amounts greater than $100,000 was approximately $3.5 million. The following table sets forth the maturity of these certificates as of June 30, 2012.

	Certificates of Deposit
	(In thousands)
Maturity Period:
Three months or less	$	632
Over three through six months	—
Over six through twelve months	1,291
Over twelve months	1,531
Total	$	3,454

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

	At June 30,
	2012		2011
	(In thousands)

Interest Rate:
1% or less	$	7,724	$	5,124
1.01% - 2.00%	7,928		10,126
2.01% - 3.00%	1,735		1,670
3.01% - 4.00%	213		303
4.01% - 6.00%	—		283

Total	$	17,600	$	17,506

The following table sets forth the amount and maturities of our time deposits at June 30, 2012.

	At June 30, 2012
	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:
1% or less	$	3,628	$	3,557	$	507	$	32	$	7,724	43.88	%
1.01% - 2.00%	4,860		2,281		409		378		7,928		45.05
2.01% - 3.00%	567		585		187		396		1,735		9.86
3.01% - 4.00%	213		—		—		—		213		1.21
4.01% - 6.00%	—		—		—		—		—		—

Total	$	9,268	$	6,423	$	1,103	$	806	$	17,600	100.00	%

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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 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, 2012, 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, 2012, we had access to additional Federal Home Loan Bank advances of up to $11.4 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,
	2012			2011
	(Dollars in thousands)

Maximum amount at any month end:
FHLB advances	$	7,000		$	7,500
Average amount outstanding during the period:
FHLB advances	6,250			6,292
Weighted average interest rate during the period:
FHLB advances	2.63		%	3.41		%
Balance outstanding at end of period:
FHLB advances	$	5,000		$	6,000
Weighted average interest rate at end of period:
FHLB advances	2.53		%	3.01		%

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.

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.

Personnel

As of June 30, 2012, we had 8 full-time employees and one seasonal part-time employee. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.

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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 Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) for the fiscal year ended June 30, 2012.

Versailles Savings and Loan Company was subject to examination, regulation and supervision by the Ohio Division of Financial Institutions (the “DIF”) and the Federal Deposit Insurance Corporation (the “FDIC”) for the fiscal year ended June 30, 2012. 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.

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.

New Federal Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) is significantly changing the current bank regulatory structure and affecting the lending, investment, trading and operating activities of financial institutions and their holding companies. Effective July 21, 2011, the Dodd-Frank Act eliminated the Office of Thrift Supervision, the former primary federal regulator of Versailles Financial Corporation and Versailles Savings and Loan Company, and required Versailles Savings and Loan Company to be regulated by the FDIC (the primary federal regulator for state non-member banks). The Dodd-Frank Act also authorized 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 regulates. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital are restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. 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

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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 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 such as Versailles Financial Corporation, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau 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 be examined by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increased 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, 2012. The Dodd-Frank Act increased 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 authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation required that originators of securitized loans retain a percentage of risk for transferred loans, directed the Federal Reserve Board to regulate the pricing of certain debit and interchange fees and contained a number of reforms related to mortgage origination.

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 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.

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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 banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.

The risk-based capital standard for savings banks 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%, 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 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 bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the purchaser’s recourse against the savings bank. In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

The federal banking regulators have recently issued proposed rules that, if adopted, will significantly increase regulatory capital requirements. Among other things, the proposed rules would introduce a new minimum common equity tier 1 capital ratio of 4.5% of risk-weighted assets be at least 4.5% and increase the minimum tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets. There would also be a new “capital conservation buffer” that would require an institution to hold an additional 2.5% of common equity tier 1 capital to risk-based assets in order to avoid restriction on dividends and executive compensation. The proposed rules would also impose stricter capital deduction requirements and revise the current risk-weighting categories. The new requirements would be phased in over a period of several years if the proposed rules are finalized and adopted.

At June 30, 2012, Versailles Savings’ capital exceeded all applicable requirements. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources.”

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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, 2012, Versailles Savings’ largest lending relationship with a single or related group of borrowers totalled $625,000, which represented 6.6% 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, 2012, Versailles Savings maintained approximately 85.2% 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 with the FDIC 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;

· 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.

Regardless of whether an application is otherwise required, every savings and loan association that is a subsidiary of a holding company must still file a notice with the Federal Reserve Board at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.

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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, 2012, this ratio was 30.9%.

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 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.

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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 FDIC has federal enforcement responsibility over state 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. 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 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. The FDIC is required to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital. A savings institution that has total risk-based capital of less than 8% or a leverage ratio or a Tier 1 risk-based capital ratio that generally is less than 4% is considered to be undercapitalized. A savings institution that has total risk-based capital less than 6%, a Tier 1 core risk-based capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly

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undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”

Generally, the FDIC is required to appoint a receiver or conservator for a savings institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings institution required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings institution’s assets at the time it was notified or deemed to be undercapitalized, or the amount necessary to restore the savings institution to adequately capitalized status. This guarantee remains in place until the savings institution has been notified that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the FDIC has the authority to require payment and collect payment under the guarantee. Various restrictions, such as on capital distributions and growth, also apply to “undercapitalized” institutions. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

The recently proposed rules discussed under “—Capital Requirements” that would increase regulatory capital requirements would, if adopted, adjust the prompt corrective action categories accordingly.

At June 30, 2012, 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. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. Also, under the Dodd-Frank Act, noninterest-bearing checking accounts have unlimited deposit insurance through December 31, 2012.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.

In February 2011, the FDIC published a final rule under the Dodd-Frank Act to reform the deposit insurance assessment system. The rule redefined the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the new rule, assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. The proposed rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45 basis points. Deposit assessments were prepaid in December 2009 for the fourth quarter of 2009 and for calendar years 2010 through 2012. Estimated assessments were based on certain assumptions specified by the FDIC, including a 5% annual growth rate. Prepaid assessments are to be applied against actual assessments until the prepaid assessments are exhausted. Unused prepayments will be returned to the institutions on June 30, 2013. We recorded the prepayment of assessments as a prepaid expense, which is being amortized to expense over three years. Our prepayments amount was $92,562.

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

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Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2012, the annualized Financing Corporation assessment was equal to 0.66 basis points of total assets less tangible capital.

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 and the FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Versailles Savings and Loan Company. Management cannot predict what assessment rates will be in the future.

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 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, 2012, 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;

· Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

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· 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;

· 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.

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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 of the Federal Reserve Board. In addition, the Federal Reserve Board has 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.

Permissible Activities. Under present law, the business activities of Versailles Financial Corporation are 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. The Dodd-Frank Act added the requirement that, in order for a savins and loan holding company to use the financial holding company authority, it must meet the qualitative criteria necessary for a bank holding company to engage in such activities. A multiple savings and loan 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.

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Capital. Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements. However, the Dodd-Frank Act requires the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured depository subsidiaries. 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, which would exclude instruments such as trust preferred securities and cumulative preferred stock. Instruments issued before May 19, 2010 are grandfathered for companies of consolidated assets of $15 billion or less. Holding companies that were not regulated by the Federal Reserve Board as of May 19, 2010 receive a five year phase-in from the July 21, 2010 date of enactment of the Dodd-Frank Act. The recently proposed rules discussed under “—Federal Banking Regulation—Capital Requirements” that would increase regulatory capital requirements would, if adopted, apply regulatory capital requirements to savings and loan holding companies as required by the Dodd-Frank Act.

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. The Federal Reserve Board has issued policy guidance regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Federal Reserve Board guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary institution becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of Versailles Financial Corporation to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions. As noted under “—Federal Banking Regulation—Capital Distributions,” Versailles Savings is required to file a notice with the Federal Reserve Board prior to paying a dividend to Versailles Financial Corporation.

Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

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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 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.

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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.

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, 2012, 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.

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ITEM 2. Properties

Until recently, we conducted 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, 2012, the net book value of this property was $7,000. Subsequent to June 30, 2012, we listed this property with a realtor in August 2012. On May 21, 2012, we opened our new 5,300 square foot home office at 10413 Kley Road, Versailles, Ohio. At June 30, 2012, the net book value of this property was $1.4 million.

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, 2012, 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. Mine Safety Disclosures

Not applicable.

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, 2012 was 232. 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. For certain quarters there were no trades in our common stock.

	Prices of Common Stock
	High		Low
Quarter Ended
June 30, 2012	$	12.50	$	12.50
March 31, 2012	—		—
December 31, 2011	12.55		10.20
September 30, 2011	13.20		12.55

	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	—		—

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Dividends. Versailles Financial Corporation can pay dividends on its common stock if, after giving effect to the distribution, (1) it would be able to pay its indebtedness as the indebtedness comes due in the usual course of business, (2) its total assets exceed the sum of its liabilities and (3) 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 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. To date, the Board has not determined to declare or pay 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. The following table sets forth information about the shares of Voting Stock authorized for issuance under equity compensation plans as of June 30, 2012.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	—	—	59,850
Equity compensation plans not approved by security holders	—	—	—
Total

In addition, as of June 30, 2012, 3,420 shares had been allocated to participants under the Employee Stock Ownership Plan.

Issuer Repurchases. During the quarter ended June 30, 2012, we did not repurchase any shares of our common stock.

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Sales of Unregistered Securities. During the quarter ended June 30, 2012, 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, 2012 and our results of operations for the years ended June 30, 2012 and 2011. 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.

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).

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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 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, 2012, $26.2 million, or 73.3%, of our total loan portfolio consisted of one- to four-family residential mortgage loans. Although we have historically retained

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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 $1.0 million of non-residential real estate during the year ended June 30, 2012. At June 30, 2012, $7.5 million, or 21.0%, 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.

· 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, 2011 (the latest date for which such information is available) was 2.8%. We will seek to expand our customer base by offering additional services, such as drive-through windows and ATMS, at our new, larger home office in Versailles. 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. We have expanded 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 $0 at June 30, 2012. .

Comparison of Financial Condition at June 30, 2012 and June 30, 2011

General. Our total assets increased $0.8 million, or 1.7%, to $45.3 million at June 30, 2012 from $44.5 million at June 30, 2011. The increase was due to a cash inflow from deposits and loan repayments which exceeded cash outflow for repayment of a maturing FHLB advance and investment in fixed assets for our new office facility. Cash and cash equivalents increased $0.8 million, or 21.4%, to $4.9 million at June 30, 2012 from $4.1 million at June 30, 2011. Interest bearing time deposits in other financial institutions increased $0.5 million, or 185.3%, to $0.8 million at June 30, 2012 from $0.3 million at June 30, 2011. Fixed assets increased $1.2 million, or 497.8%, to $1.5 million at June 30, 2012 from $0.3 million at June 30, 2011. Deposits increased $1.3 million, or 5.1%, to $27.8 million at June 30, 2012 from $26.5 million at June 30, 2011. Loans decreased $2.0 million, or 5.4%, to $35.5 million at June 30, 2012 from $37.5 million at June 30, 2011. FHLB advances decreased $1.0 million, or 16.7%, to $5.0 million at June 30, 2012 from $6.0 million at June 30, 2011.

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Loans. A decrease in net loans reflected diminished demand for loans in our market area coupled with accelerated prepayments by existing customers. The largest reduction in our loan portfolio during the year ended June 30, 2012 was in one- to four-family residential real estate, which decreased $1.6 million, or 5.8%, to $26.2 million at June 30, 2012 from $27.8 million at June 30, 2011. Originations of $5.9 million during the year ended June 30, 2012 were offset by repayments of $7.5 million during that period. Construction real estate loans decreased $0.4 million, or 100.0%, to $0.0 million at June 30, 2012 from $0.4 million at June 30, 2011.

Investments. Investment securities decreased $152,000, or 10.9%, to $1.2 million at June 30, 2012 from $1.4 million at June 30, 2011, 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 increased $0.5 million, or 185.3%, to $0.8 million at June 30, 2012 from $0.3 million at June 30, 2011.

Cash and Cash Equivalents. Cash and cash equivalents increased $0.8 million, or 21.4%, to $4.9 million at June 30, 2012 from $4.1 million at June 30, 2011. The increase in cash and cash equivalents was due to cash inflow from deposits and loan repayments which exceeded cash outflow for loans being generated, repayment of a maturing FHLB advance and investment in fixed assets for our new office facility.

Premises and equipment. Fixed assets increased $1.2 million, or 497.8%, to $1.5 million at June 30, 2012 from $0.3 million at June 30, 2011. We constructed a new larger home office, which opened for business on May 21, 2012, and implemented expanded services for the year ended June 30, 2012. We expect to incur increased expenses related to the operation of the new larger facility and expanded services commencing in the year ended June 30, 2012 and thereafter.

Deposits. Deposits increased $1.3 million, or 5.1%, to $27.8 million at June 30, 2012 from $26.5 million at June 30, 2011. The increase in deposits was due to an increase in regular savings to $10.2 million at June 30, 2012 from $9.0 million at June 30, 2011 coupled with an increase in certificates of deposits to $17.6 million at June 30, 2012 from $17.5 million at June 30, 2011. 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 primarily used for repayment of a maturing FHLB advance. We generally do not accept brokered deposits and no brokered deposits were accepted during the year ended June 30, 2012.

Borrowings. The outstanding balance of Federal Home Loan Bank of Cincinnati advances decreased $1.0 million, or 16.7%, to $5.0 million at June 30, 2012 from $6.0 million at June 30, 2011. During the year two advances matured and were repaid, the advances were $1.0 million each with interest rates of 4.39% and 2.00%. These repayments were partially offset by a new 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, 2012 consisted of advances with laddered terms of up to five years.

Equity. Total equity decreased $57,000, or 0.5%, to $10.9 million at June 30, 2012 from $11.0 million at June 30, 2011. The $57,000 decrease in equity resulted from the $156,000 in net income for the year offset by the $214,000 increase in the accumulated other comprehensive loss primarily associated with the funded status of our pension plan. Our benefits obligations increased due to increase in actuarial loss.

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Comparison of Operating Results for the Years Ended June 30, 2012 and June 30, 2011

General. Net income decreased $55,000, or 26.2%, to $156,000 for the year ended June 30, 2012 from $211,000 for the year ended June 30, 2011. The decrease reflected a $36,000 decrease in net interest income, additional provision for loan losses of $18,500, and an increase in noninterest expense of $27,700, offset by a reduction in income tax expense of $27,200.

Interest Income. Interest and dividend income decreased $130,000, or 6.3%, to $1.9 million at June 30, 2012 from $2.0 million at June 30, 2011. Average interest-earning assets increased $813,000, or 1.9%, to $43.2 million for the year ended June 30, 2012 from $42.4 million for the year ended June 30, 2011, offset by a decrease in the average yield on interest-earning assets to 4.44% for the year ended June 30, 2012 from 4.84% for the year ended June 30, 2011.

Interest income on loans decreased $116,000, or 5.9%, to $1.9 million for the year ended June 30, 2012 from $2.0 million at June 30, 2011. The decrease in the average balance of loans to $36.3 million from $37.2 million was coupled with lower average yields on such balances, to 5.12% in fiscal 2012 from 5.30% in fiscal 2011. The lower yields reflect the continued low interest rate environment.

Interest income on investment securities decreased to $32,000 for the year ended June 30, 2012 from $42,000 for the year ended June 30, 2011, reflecting a decrease in the average balance of such securities to $1.3 million in 2012 from $1.5 million in 2011, as well as a decrease in the average yield on available for sale securities to 1.93% from 2.30% and a decrease in the average yield on held to maturity securities to 3.09% from 3.38%.

Interest Expense. Interest expense decreased $93,000, or 17.8%, to $429,000 for the year ended June 30, 2012 from $522,000 for the year ended June 30, 2011. The decrease reflected a 35 basis point decrease in the average rate paid on deposits, including certificates of deposit and Federal Home Loan Bank borrowings, to 1.27% for the year ended June 30, 2012 from 1.62% for the year ended June 30, 2011, 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 $44,000, or 14.9%, to $252,000 for the year ended June 30, 2012 from $296,000 for the year ended June 30, 2011. This was primarily due to a decrease in the average cost of such certificates to 1.41% in fiscal 2012 from 1.68% in fiscal 2011 which more than offset the increase in the average balance of such certificates to $17.9 million for the year ended June 30, 2012 from $17.6 million for the year ended June 30, 2011. 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 $51,000, or 23.7%, to $164,000 for the year ended June 30, 2012 from $215,000 for the year ended June 30, 2011. The average balance of such borrowings remained unchanged at $6.3 million for the years ended June 30, 2012 and 2011. The decrease in interest expense was the result of a decrease in the weighted average rate paid on such borrowings to 2.63% for the year ended June 30, 2012 from 3.41% for the year ended June 30, 2011.

Net Interest Income. Net interest income decreased $36,000, or 2.4%, for the year ended June 30, 2012 from the year ended June 30, 2011. This reflected a decrease in our interest rate spread to 3.17%

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from 3.22%, and a decrease in the ratio of our average interest earning assets to average interest bearing liabilities to 128.17% from 131.24%. Our net interest margin decreased to 3.45% from 3.60%.

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 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 $48,500 for the year ended June 30, 2012 compared to $30,000 for the year ended June 30, 2011. The increase in 2012 compared to 2011 was due to continued high unemployment rates and economic uncertainty both locally and nationally. The allowance for loan losses was $255,000, or 0.72% of total loans, at June 30, 2012, compared to $221,000, or 0.59% of total loans at June 30, 2011. Total nonperforming loans were $0 at June 30, 2012, compared to $70,000 at June 30, 2011. 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, 2012 and 2011.

Noninterest Income. Our noninterest income decreased to $5,000 for the year ended June 30, 2012 from $7,000 for the year ended June 30, 2011. The decrease in noninterest income was primarily attributable no real estate owned during 2012. During 2011, we recognized $1,400 in income from the operation of real estate owned. Service fees on savings accounts decreased to $1,200 for the year ended June 30, 2012 from $1,700 for the year ended June 30, 2011.

Noninterest Expense. Noninterest expense increased $28,000, or 2.3%, to $1.210 million for the year ended June 30, 2012 from $1.182 million for the year ended June 30, 2011. Salaries and employee benefits expense decreased $20,000, or 3.4% to $571,000 at June 30, 2012 from $591,000 at June 30, 2011. Specifically, pension expense decreased $20,000 for the year ended June 30, 2012 based on an actuarial analysis of the pension assets and benefit obligation for the period. Occupancy and equipment costs decreased $5,000, or 12.8%, to $30,000 at June 30, 2012 from $35,000 at June 30, 2011 due to fewer repairs on fully depreciated older equipment as it was replaced with new equipment that was capitalized and will be depreciated over its useful life. As a result of expenses associated with compliance with the federal securities laws, our legal, accounting and examination expense increased $24,000, or 10.5%, to $253,000 for the year ended June 30, 2012 from $229,000 for the year ended June 30, 2011. Data processing fees increased $18,000, or 25.2%, to $92,000 for the year ended June 30, 2012 from $74,000 for the year ended June 30, 2011 with the implementation of new products and services, including checking accounts, debit cards, automatic teller machines and night depository services, during the year ended June 30, 2012. Franchise taxes increased $12,000, or 13.5%, to $104,000 for the year ended June 30, 2012 from $92,000 for the year ended June 30, 2011 due to an increase in the net worth of the bank for the calendar year ended December 31, 2011.

Income Tax Expense. The provision for income taxes was $79,000 for the year ended June 30, 2012 compared to $106,000 for the year ended June 30, 2011, reflecting a decrease in pretax income. Our effective tax rate was 33.69% for the year ended June 30, 2012 compared to 33.52% for the year ended

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June 30, 2011. The increase in our effective tax rate for 2012 was primarily attributable to the level of tax exempt interest income in comparison to pre-tax income.

Comprehensive Income (Loss). 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 loss increased due to an after-tax loss of $(214,000) for the year ended June 30, 2012 compared to a gain of $175,000 for the year ended June 30, 2011. The increase in other comprehensive loss primarily reflected the loss in value of the defined benefit pension plan, which had unrealized losses of $(349,000) for the year ended June 30, 2012, compared to unrealized gains of $228,000 for the year ended June 30, 2011.

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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, 2012				2012							2011
	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	$	35,489	5.06	%	$	36,259		$	1,857	5.12	%	$	37,246		$	1,973	5.30	%
Investment securities available for sale	697		2.13	%	699			13		1.93	%	703			16		2.30	%
Investment securities held to maturity	544		3.06	%	609			19		3.09	%	770			26		3.38	%
FHLB stock	397		4.25	%	397			17		4.20	%	397			17		4.37	%
Other interest-earning assets	4,571		0.28	%	5,198			12		0.23	%	3,233			15		0.47	%
Total interest-earning assets	41,698		4.46	%	43,162			1,918		4.44	%	42,349			2,047		4.84	%

Noninterest-earning assets	3,562				2,629							1,851
Total assets	$	45,260			$	45,791						$	44,200

Liabilities and equity:
Interest-bearing liabilities:
Savings/checking deposits	$	10,226	0.13	%	$	9,564		$	13	0.14	%	$	8,343		$	11	0.14	%
Certificates of deposit	17,600		1.24	%	17,858			252		1.41	%	17,627			296		1.68	%
Total interest-bearing deposits	27,826		0.83	%	27,422			265		0.97	%	25,970			307		1.19	%

FHLB advances	5,000		2.53	%	6,250			164		2.63	%	6,292			215		3.41	%
Total interest-bearing liabilities	32,826		1.09	%	33,672			429		1.27	%	32,262			522		1.62	%

Other noninterest-bearing liabilities	1,482				1,045							1,223
ESOP repurchase obligation	41				30							13

Total shareholders’ equity	10,911				11,044							10,702
Total liabilities and equity	$	45,260			$	45,791						$	44,200

Net interest income	$	1,489						$	1,489						$	1,525
Interest rate spread										3.17	%						3.22	%
Net interest margin										3.45	%						3.60	%
Average interest-earning assets to average interest-bearing liabilities					128.17		%					131.24		%

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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.

2012 Compared to 2011

	Volume			Rate			Net
	(In thousands)
Interest income:
Loans receivable	$	(52	)	$	(64	)	$	(116	)
Investment securities available for sale	—			(3		)	(3		)
Investment securities held to maturity	(5		)	(2		)	(7		)
FHLB stock	—			—			—
Other interest-earning assets	7			(10		)	(3		)
Total	(50		)	(79		)	(129		)

Interest expense:
Savings/checking deposits	2			—			2
Certificates of deposit	3			(47		)	(44		)
FHLB advances	(1		)	(50		)	(51		)
Total	4			(97		)	(93		)
Decrease in net interest income	$	(54	)	$	18		$	(36	)

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, 2012 in the event of designated changes in the United States treasury yield curve. At June 30, 2012, the economic value of our equity exposure related to these hypothetical changes in market interest rates was within the current guidelines we have established.

Change in		Net Portfolio Value (Dollars in thousands)					NPV as % of PV of Assets
Rates		$ Amount	$ Change		% Change		NPV Ratio		Change
+300	bp	7,804	(1,629	)	(17	)%	18.68	%	(180	) bp
+200	bp	8,334	(1,099	)	(12	)%	19.04	%	(144	) bp
+100	bp	8,912	(521	)	(6	)%	19.73	%	(75	) bp

0	bp	9,433	—		—		20.48	%	—

-100	bp	9,767	334		4	%	21.08	%	60	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 $240,000 for the year ended June 30, 2012 and $525,000 for the year ended June 30, 2011. 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 $281,000 for the year ended June 30, 2012 and $(366,000) for the year ended June 30, 2011. Net cash flows from financing activities were $350,000 for the year ended June 30, 2012 and $(961,000) for the year ended June 30, 2011. The changes in net cash flows provided by financing activities for 2012 were primarily due to the increase in deposits and net decrease in advances from the Federal Home Loan Bank of Cincinnati. 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.

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, 2012 and June 30, 2011, cash and short-term investments totaled $4.9 million and $4.1 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, 2012 and June 30, 2011, we had outstanding commitments to originate loans of $492,000 and $161,000, respectively, and unfunded commitments under lines of credit and standby letters of credit of $0 and $0, 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, 2012 totaled $9.3 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, 2012, we had $5.0 million in outstanding advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $11.4 million.

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We are subject to various regulatory capital requirements. At June 30, 2012, 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, 2012:
Total capital (to risk-weighted assets)	$	10,217	38.2	%	$	2,677	10.0	%
Tier I (core) capital (to risk-weighted assets)	9,961		37.2		1,606		6.0
Tier I (core) capital (to adjusted total assets)	9,961		22.1		2,253		5.0
Tangible capital (to adjusted total assets)	9,961		22.1				N/A

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

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 2012 and 2011, we did not engage in any off-balance-sheet transactions other than loan origination commitments in the normal course of our lending activities.

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.

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ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF

VERSAILLES FINANCIAL CORPORATION

Report of Independent Registered Public Accounting Firm	52

Consolidated Balance Sheets at June 30, 2012 and 2011	53

Consolidated Statements of Income for the years ended June 30, 2012 and 2011	54

Consolidated Statements of Comprehensive Income for the years ended June 30, 2012 and 2011	55

Consolidated Statements of Changes in Shareholders’ Equity for the years ended June 30, 2012 and 2011	56

Consolidated Statements of Cash Flows for the years ended June 30, 2012 and 2011	58

Notes to Consolidated Financial Statements	59

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	Crowe Horwath LLP
	Independent Member Crowe Horwath International

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Versailles Financial Corporation

Versailles, Ohio

We have audited the accompanying balance sheets of Versailles Financial Corporation as of June 30, 2012 and 2011, 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 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2012 and 2011, 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

Cleveland, Ohio

September 28, 2012

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

June 30, 2012 and June 30, 2011

	2012			2011
ASSETS
Cash and cash equivalents due from financial institutions	$	2,241,915		$	2,371,401
Overnight deposits	2,700,000			1,700,000
Total cash and cash equivalents	4,941,915			4,071,401
Interest-bearing time deposits in other financial institutions	833,000			292,000
Securities, available-for-sale	697,042			699,297
Securities held to maturity (fair value of $576,957 at June 30, 2012 and $729,604 at June 30, 2011)	544,025			693,918
Federal Home Loan Bank stock	397,500			397,500
Loans, net of allowance of $255,432 and $220,817	35,489,351			37,514,804
Premises and equipment, net	1,548,882			259,116
Accrued interest receivable	92,679			122,997
Other assets	715,517			454,526

Total assets	$	45,259,911		$	44,505,559

LIABILITIES
Savings and checking accounts	$	10,225,442		$	8,970,233
Certificates of deposit	17,600,303			17,505,499
Total deposits	27,825,745			26,475,732
Federal Home Loan Bank advances	5,000,000			6,000,000
Other liabilities	1,482,269			1,039,362

Common stock in ESOP subject to repurchase obligation	41,313			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	3,778,470			3,794,894
Retained earnings	8,321,153			8,165,438
Treasury stock, 35,460 shares, at cost	(354,600		)	(354,600		)
Unearned employee stock ownership plan shares	(299,250		)	(316,350		)
Accumulated other comprehensive loss	(539,464		)	(325,422		)
Total shareholders’ equity	10,910,584			10,968,235

Total liabilities and shareholders’ equity	$	45,259,911		$	44,505,559

See accompanying notes to financial statements.

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VERSAILLES FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended June 30, 2012 and 2011

	2012		2011
Interest and dividend income
Loans, including fees	$	1,857,060	$	1,972,913
Securities available for sale	13,364		15,975
Securities held to maturity	18,823		25,992
FHLB dividends	16,681		17,387
Deposits with banks	11,881		15,111
Total interest and dividend income	1,917,809		2,047,378

Interest expense
Deposits	264,858		307,789
Federal Home Loan Bank advances	164,366		214,681
Total interest expense	429,224

Versailles Financial Corp 10-K