BV Financial, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is included herein beginning on page F-1. 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A(T). CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Internal Controls Over Financial Reporting Management’s annual report on internal control over financial reporting is incorporated herein by reference to the Company’s audited Consolidated Financial Statements in this Annual Report on Form 10-K. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. (c) Changes to Internal Control Over Financial Reporting There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 44 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors For information concerning the directors of the Company, the information contained under the section captioned “Items to be Voted on by Stockholders—Item 1—Election of Directors” in BV Financial’s Proxy Statement for the 2008 Annual Meeting of Stockholders (“Proxy Statement”) is incorporated by reference. Executive Officers The Board of Directors annually elects the executive officers of BV Financial, Bay-Vanguard, M.H.C. and Bay-Vanguard Federal Savings Bank, who serve at the Board’s discretion. Our executive officers are: Name Position Edmund T. Leonard Chairman and Chief Financial Officer of BV Financial, Bay-Vanguard, M.H.C. and Bay-Vanguard Federal Savings Bank Carolyn M. Mroz President and Chief Executive Officer of BV Financial, Bay-Vanguard, M.H.C. and Bay-Vanguard Federal Savings Bank Daniel J. Gallagher, Jr. Senior Vice President of Bay-Vanguard Federal Savings Bank Jeffrey S. Collier Senior Vice President of Bay-Vanguard Federal Savings Bank Michele J. Kelly Senior Vice President of Bay-Vanguard Federal Savings Bank Below is information regarding our executive officers who are not also directors. Unless otherwise stated, the individual has held their current occupation for the last five years. The age indicated is as of June 30, 2008. Michele J. Kelly is a senior vice president of Bay-Vanguard Federal Savings Bank. Ms. Kelly was vice president of Vanguard Federal Savings and Loan Association before its merger with Bay Federal Savings and Loan Association in April 1996. Age 61. Jeffrey S. Collier is senior vice president of Bay-Vanguard Federal Savings Bank. Mr. Collier joined Bay-Vanguard Federal Savings Bank in February 2006. Mr. Collier was vice president of lending for seven years at Harford Bank before his employment by Bay-Vanguard Federal Savings Bank. Age 46. Compliance with Section 16(a) of the Exchange Act Reference is made to the cover page of this report and to the section captioned “Other Information Relating to Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for information regarding compliance with Section 16(a) of the Exchange Act. Disclosure of Code of Ethics and Business Conduct The Company has adopted a Code of Ethics, which is available to stockholders, without charge, upon written request to Robert R. Kern, Jr., Corporate Secretary, BV Financial, Inc., 7114 North Point Road, Baltimore, Maryland 21219. 45 Corporate Governance For information regarding the audit committee and its composition and the audit committee financial expert, the section captioned “Corporate Governance and Board Matters—Committees of the Board of Directors—Audit Committee” in the Company’s Proxy Statement is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the sections captioned “Executive Compensation” and “Corporate Governance and Board Matters—Director Compensation” in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. (c) Changes in Control Management of BV Financial knows of no arrangements, including any pledge by any person of securities of BV Financial, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Equity Compensation Plan Information The following table provides information as of June 30, 2008 for compensation plans under which equity securities may be issued. 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 111,456 $ 8.94 18,149 Equity compensation plans not approved by security holders — — — Total 111,456 $ 8.94 18,149 46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers—Transactions with Related Persons” in the Proxy Statement. Corporate Governance Information regarding director independence is incorporated herein by reference to the section captioned “Corporate Governance and Board Matters —Director Independence.” ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated herein by reference to the section captioned “Audit-Related Matters—Audit and Other Fees” and “Audit-Related Matters—Pre-Approval of Services by the Independent Auditor” in the Proxy Statement. PART IV ITEM 15. EXHIBITS 3.1 Charter of BV Financial, Inc. ( 1) 3.2 Bylaws of BV Financial, Inc. ( 1) 4.0 Specimen Stock Certificate of BV Financial, Inc. ( 1) 10.1 Employment Agreement between Bay-Vanguard Federal Savings Bank and Edmund T. Leonard (2) 10.2 Employment Agreement between BV Financial, Inc. and Edmund T. Leonard (2) 10.3 Employment Agreement between Bay-Vanguard Federal Savings Bank and Carolyn M. Mroz (2) 10.4 Employment Agreement between BV Financial, Inc. and Carolyn M. Mroz (2) 10.5 Employment Agreement between Bay-Vanguard Federal Savings Bank and Daniel J. Gallagher, Jr. (2) 10.6 Form of Bay-Vanguard Federal Savings Bank Employee Stock Ownership Plan and Trust (1) 10.7 Form of ESOP Loan Commitment Letter and ESOP Loan Documents (1) 10.8 Form of Bay-Vanguard Federal Savings Bank Change in Control Severance Compensation Plan (1) 10.9 Bay-Vanguard Federal Savings Bank Employees’ Savings and Profit-Sharing Plan (1) 10.10 Form of Bay-Vanguard Federal Savings Bank Executive Supplemental Retirement Plan (1) 10.11 Form of Bay-Vanguard Federal Savings Bank Supplemental Executive Retirement Plan (1) 10.12 Form of Bay-Vanguard Federal Savings Bank Directors’ Supplemental Retirement Plan (1) 10.13 BV Financial, Inc. 2005 Equity Incentive Plan (3) 21.0 Subsidiaries of the Registrant 23.0 Consent of Beard Miller Company LLP 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.0 Section 1350 Certification (1) Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on September 17, 2004, Registration No. 333-119083. (2) Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB, filed on May 13, 2005. (3) Incorporated herein by reference from Appendix C of the Proxy Statement for the 2005 Annual Meeting of Stockholders, filed on October 4, 2005. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BV Financial, Inc. Date: September 23, 2008 By: /s/ Carolyn M. Mroz Carolyn M. Mroz President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Name Title Date /s/ Carolyn M. Mroz Carolyn M. Mroz President, Chief Executive Officer and Director (principal executive officer) September 23, 2008 /s/ Edmund T. Leonard Edmund T. Leonard Chairman of the Board and Chief Financial Officer (principal accounting and financial officer) September 23, 2008 /s/ Michael J. Birmingham III Michael J. Birmingham III Director September 23, 2008 /s/ Frank W. Dingle Frank W. Dingle Director September 23, 2008 /s/ Daniel J. Gallagher, Jr. Daniel J. Gallagher, Jr. Director September 23, 2008 /s/ Robert R. Kern, Jr. Robert R. Kern, Jr. Director September 23, 2008 /s/ Brian K. McHale Brian K. McHale Director September 23, 2008 48 /s/ Anthony J. Narutowicz Anthony J. Narutowicz Director September 23, 2008 /s/ Jerry S. Sopher Jerry S. Sopher Director September 23, 2008 /s/ Catherine M. Staszak Catherine M. Staszak Director September 23, 2008 49 Management’s Report on Internal Control Over Financial Reporting The management of BV Financial, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of BV Financial, Inc.’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of BV Financial, Inc.’s internal control over financial reporting as of June 30, 2008, utilizing the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that BV Financial, Inc.’s internal control over financial reporting as of June 30, 2008 is effective. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of BV Financial, Inc.; and (3) unauthorized acquisitions, use, or disposition of BV Financial, Inc.’s assets that could have a material affect on BV Financial, Inc.’s financial statements are prevented or timely detected. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include an attestation report of BV Financial, Inc.’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by BV Financial, Inc.’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit BV Financial, Inc. to provide only management’s report in this annual report. F-1 R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM To the Board of Directors and Stockholders BV Financial, Inc. Baltimore, Maryland We have audited the accompanying consolidated statements of financial condition of BV Financial, Inc. and subsidiaries as of June 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 audits 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 audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BV Financial, Inc. and subsidiaries as of June 30, 2008 and 2007 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company adopted EITF 06-4 effective July 1, 2007 and changed its method of accounting for postretirement benefits associated with split dollar life insurance. Beard Miller Company LLP Baltimore, Maryland September 17, 2008 F-2 BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF F INANCIAL C ONDITION June 30, 2008 2007 (Dollars In Thousands Except Per Share Amounts) A SSETS Cash $ 1,753 $ 1,547 Federal funds sold 6,529 3,810 Cash and Cash Equivalents 8,282 5,357 Interest bearing time deposits in other banks 580 199 Securities available for sale 8,838 3,300 Securities held to maturity, fair value 2008 $9,661; 2007 $2,601 9,788 2,656 Loans receivable, net of allowance for loan losses 2008 $709; 2007 $402 124,843 116,051 Premises and equipment, net 3,117 2,404 Federal Home Loan Bank of Atlanta stock, at cost 654 848 Investment in life insurance 2,054 1,978 Accrued interest receivable 670 538 Goodwill 3,940 — Other intangible assets, net 390 — Other assets 869 679 Total Assets $ 164,025 $ 134,010 L IABILITIES AND S TOCKHOLDERS ’ E QUITY L IABILITIES Non-interest bearing deposits $ 6,040 $ 3,571 Interest bearing deposits 130,992 94,921 Total Deposits 137,032 98,492 Federal Home Loan Bank advances 7,500 13,500 Official checks 657 1,779 Advance payments by borrowers for taxes and insurance 1,187 1,139 Other liabilities 1,304 882 Total Liabilities 147,680 115,792 S TOCKHOLDERS ’ E QUITY Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding — — Common stock, $0.01 par value; 9,000,000 shares authorized; 2,645,000 shares issued; 2,381,258 and 2,541,859 shares outstanding as of June 30, 2008 and June 30, 2007, respectively 26 26 Paid-in capital 11,123 11,083 Unearned employee stock ownership plan shares (756 ) (825 ) Treasury stock, at cost; 263,742 shares and 103,141 shares as of June 30, 2008 and June 30, 2007, respectively (2,140 ) (878 ) Retained earnings 8,129 8,866 Accumulated other comprehensive loss (37 ) (54 ) Total Stockholders’ Equity 16,345 18,218 Total Liabilities and Stockholders’ Equity $ 164,025 $ 134,010 See notes to consolidated financial statements. F-3 BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF O PERATIONS Years Ended June 30, 2008 2007 (In Thousands Except Per Share Amounts) I NTEREST I NCOME Loans, including fees $ 7,533 $ 7,064 Investment securities - taxable 612 361 Other 698 213 Total Interest Income 8,843 7,638 I NTEREST E XPENSE Deposits 4,674 3,646 Federal Home Loan Bank Advances 467 643 Total Interest Expense 5,141 4,289 Net Interest Income 3,702 3,349 P ROVISION FOR L OAN L OSSES 328 5 Net Interest Income after Provision for Loan Losses 3,374 3,344 N ON -I NTEREST I NCOME Service fees on deposits 119 120 Service fees on loans 31 29 Income from investment in life insurance 76 89 Other income 81 50 Total Non-Interest Income 307 288 N ON -I NTEREST E XPENSES Compensation and related expenses 2,250 2,035 Occupancy 257 174 Data processing 375 288 Advertising 115 104 Professional fees 213 242 Equipment 175 142 Impairment write-down of investment securities 274 — Amortization of intangible assets 112 — Loss on sale of securities available for sale 19 — Other 475 490 Total Non-Interest Expenses 4,265 3,475 Income (Loss) before Income Taxes (584 ) 157 P ROVISION (B ENEFIT ) FOR I NCOME T AXES (254 ) 66 Net Income (Loss) $ (330 ) $ 91 Basic Earnings (Loss) Per Share $ (0.14 ) $ 0.04 Diluted Earnings (Loss) Per Share $ (0.14 ) $ 0.04 Dividends Declared Per Share $ 0.20 $ 0.15 See notes to consolidated financial statements. F-4 BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF S TOCKHOLDERS ’ E QUITY Years Ended June 30, 2008 and 2007 Common Stock Paid-In Capital Unearned Employee Stock Ownership Plan Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total (Dollars in Thousands) B ALANCE - J UNE 30, 2006 $ 26 $ 10,994 $ (894 ) $ (418 ) $ 8,938 $ (66 ) $ 18,580 Comprehensive income: Net income — — — — 91 — 91 Unrealized holding gains (net of tax of $7) — — — — — 12 12 Total Comprehensive Income — — — — — — 103 Compensation expense under stock-based compensation plan — 98 — 81 — — 179 Compensation expense under Employee Stock Ownership Plan — (9 ) 69 — — — 60 Cash dividends declared — — — — (163 ) — (163 ) Purchase of treasury stock (60,213 shares) — — — (541 ) — — (541 ) B ALANCE - J UNE 30, 2007 26 11,083 (825 ) (878 ) 8,866 (54 ) 18,218 Adoption of EITF 06-4 split-dollar life insurance (see Note 1) — — — — (221 ) — (221 ) Comprehensive loss: Net loss — — — — (330 ) — (330 ) Unrealized holding gains (net of tax of $11 and reclassification adjustment for securities losses recognized of $293) — — — — — 17 17 Total Comprehensive Loss — — — — — — (313 ) Compensation expense under stock-based compensation plan — 59 — 77 — — 136 Compensation expense under Employee Stock Ownership Plan — (19 ) 69 — — — 50 Cash dividends declared — — — — (186 ) — (186 ) Purchase of treasury stock (175,981 shares) — — — (1,339 ) — — (1,339 ) B ALANCE - J UNE 30, 2008 $ 26 $ 11,123 $ (756 ) $ (2,140 ) $ 8,129 $ (37 ) $ 16,345 See notes to consolidated financial statements. F-5 BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF C ASH F LOWS Years Ended June 30, 2008 2007 (In Thousands) C ASH F LOWS FROM O PERATING A CTIVITIES Net income (loss) $ (330 ) $ 91 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net amortization of discounts and premiums 13 5 Provision for loan losses 328 5 Impairment write-down of investment securities 274 — Loss on sale of securities available for sale 19 — Amortization of deferred loan fees/costs (128 ) (114 ) Provision for depreciation 166 151 Amortization of intangible assets 112 — Deferred tax benefit (190 ) (159 ) Increase in cash surrender value of life insurance (76 ) (89 ) Stock-based compensation expense 186 239 Decrease (increase) in other assets (604 ) 53 Increase in other liabilities 201 141 Net Cash Provided by (Used in) Operating Activities (29 ) 323 C ASH F LOWS FROM I NVESTING A CTIVITIES Net decrease (increase) in interest bearing deposits (381 ) 6,164 Purchases of securities available for sale (6,138 ) (140 ) Purchases of securities held to maturity (11,222 ) — Proceeds from maturity of securities available for sale — 1,000 Proceeds from maturity of securities held to maturity 3,500 500 Proceeds from sale of securities available for sale 250 — Principal collected on mortgage backed securities 663 158 Net increase in loans (9,034 ) (2,929 ) Purchase of premises and equipment (879 ) (70 ) Purchase of Federal Home Loan Bank stock (368 ) — Proceeds from the sale of Federal Home Loan Bank stock 562 91 Net cash received in branch acquisition 46,913 — Net Cash Provided by Investing Activities 23,866 4,774 C ASH F LOWS FROM F INANCING A CTIVITIES Decrease in official checks (1,122 ) (2,143 ) Net increase (decrease) in deposits (12,313 ) 1,397 Increase (decrease) in advance payments by borrowers for taxes and insurance 48 (6 ) Advances from Federal Home Loan Bank 7,500 7,000 Repayment of advances from Federal Home Loan Bank (13,500 ) (8,000 ) Purchase of stock for treasury (1,339 ) (541 ) Cash dividends paid (186 ) (163 ) Net Cash Used in Financing Activities (20,912 ) (2,456 ) Net Increase in Cash and Cash Equivalents 2,925 2,641 C ASH A ND C ASH E QUIVALENTS - B EGINNING 5,357 2,716 C ASH A ND C ASH E QUIVALENTS - E NDING $ 8,282 $ 5,357 S UPPLEMENTARY C ASH F LOWS I NFORMATION Interest paid $ 5,139 $ 4,287 Income taxes paid $ 63 $ 130 Net loans transferred to foreclosed real estate/repossessed assets $ 42 $ 7 See notes to consolidated financial statements. F-6 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES Business BV Financial, Inc. (the “Company”) was organized as a federally chartered corporation at the direction of Bay-Vanguard Federal Savings Bank (the “Bank” or “Bay-Vanguard Federal”) in January 2005 to become the mid-tier stock holding company for Bay-Vanguard Federal upon the completion of its reorganization into the mutual holding company form of organization. Pursuant to the Plan of Reorganization, the Bank converted to stock form with all of its stock owned by the Company and organized Bay-Vanguard, M.H.C. (the “M.H.C.”) as a federally chartered mutual holding company that owned 55% of the common stock of the Company. At June 30, 2008 the M.H.C. owned 61.1% of the common stock of the Company. As part of the reorganization, the Company sold 1,190,250 shares of its common stock at a price of $10.00 per share to members of the Bank in a subscription offering raising approximately $11.0 million in net proceeds. Bay-Vanguard Federal is headquartered in Baltimore, Maryland and is a community-oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public using such funds to originate one-to four-family real estate, mobile home, construction, multi-family, commercial real estate and consumer loans. The Bank’s savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. Bay-Vanguard Federal is a member of the Federal Home Loan Bank System. The Bank has a wholly-owned subsidiary, Housing Recovery Corporation (“HRC”). HRC’s primary business is holding real estate and other assets acquired by the Bank through foreclosure or repossession. Principles of Consolidation The consolidated financial statements include the accounts of the Company, the Bank and its wholly-owned subsidiary, HRC. All intercompany balances and transactions have been eliminated in consolidation. Basis of Financial Statement Presentation and Significant Estimates The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the assessment of other than temporary impairment of investment securities, intangible asset impairment and the valuation of deferred tax assets. Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located within the Baltimore Metropolitan Area. The Company does not have any significant concentrations to any one industry or customer. F-7 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Securities The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires investments in securities to be classified in one of three categories: held to maturity, trading or available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost (including amortization of premium or accretion of discount). As the Company does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities are required to be recognized as increases or decreases in other comprehensive income or loss, net of taxes, and excluded from the determination of net income. Realized gains and losses on sales of securities are determined using the specific identification method and are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district Federal Home Loan Bank according to a predetermined formula. This restricted stock is carried at cost. Premises and Equipment Land is stated at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed based on the straight-line method over the useful lives of the respective assets. Expenditures for improvements are capitalized while costs for maintenance and repairs are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred. Foreclosed Assets Foreclosed real estate is composed of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and is included in other assets. Foreclosed assets initially are recorded at fair value, net of estimated selling costs, at the date of foreclosure, establishing a new cost basis. Foreclosed assets totaled $41,000 and $44,000 at June 30, 2008 and 2007, respectively. If the fair value is less than the related loan balance at the time of acquisition, a charge against the allowance for loan losses is recorded. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in foreclosed real estate expense. F-8 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Deferred Income Taxes Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence. Loans Receivable Loans receivable are stated at unpaid principal balances, less undisbursed portion of loans in process, deferred loan origination fees and costs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment to the yield (interest income) of the related loans. The Company is amortizing these amounts over the contractual life of the loan using the interest method. For purchased loans, the related premium or discount is recognized over the contractual life of the purchased loan and is included as part of interest income. The accrual of interest is generally discontinued when the contractual payment of principal or interest has 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. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of 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. Cash payments on impaired loans are recorded in the same manner as payments on non-accrual loans. Allowance for Loan Losses The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. F-9 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Allowance for Loan Losses (Continued) The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. A loan is considered past due or delinquent when a contractual payment is not paid in the month that it is due. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for multi-family, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer, mobile home, and residential real estate loans for impairment disclosures, unless they are subject to a restructuring agreement. Investment in Life Insurance Investment in life insurance is reflected at the net cash surrender value to the Company. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets, consisting of core deposit intangibles, represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged on its own or in combination with a related contract, asset or liability. Core deposit intangibles are amortized on an accelerated basis over a 7-year period and goodwill is evaluated on an annual basis to determine impairment, if any. Any impairment of goodwill would be recorded against income in the period of impairment. Statement of Cash Flows Cash and cash equivalents in the statements of cash flows include cash and federal funds sold. F-10 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Off-Balance Sheet Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the statement of financial condition when they are funded. Comprehensive Income (Loss) Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income or loss. Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the stockholders’ equity section of the statement of financial condition, such items, along with net income or loss, are components of comprehensive income or loss. F-11 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Earnings Per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the appropriate period. Unearned shares under the Bay-Vanguard Federal Savings Bank Employee Stock Ownership Plan (“ESOP”) are not included in outstanding shares. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding as adjusted for the dilutive effect of stock options and unvested stock awards based on the “treasury stock” method. As of June 30, 2008 and 2007, the Company had 21,265 and 29,733 shares of unvested restricted stock, respectively, and 111,456 shares and 111,456 shares of unexercised stock options, respectively, none of which were dilutive. Information related to the calculation of earnings (loss) per share is summarized as follows: Years Ended June 30, 2008 2007 Basic Diluted Basic Diluted In Thousands, Except Per Share Data Net income (loss) $ (330 ) $ (330 ) $ 91 $ 91 Weighted average common shares outstanding 2,370 2,370 2,422 2,422 Dilutive securities: Restricted stock — — — — Stock options — — — — Adjusted weighted average shares 2,370 2,370 2,422 2,422 Per share amount $ (0.14 ) $ (0.14 ) $ 0.04 $ 0.04 Stock Based Compensation The Company accounts for stock based compensation in accordance with SFAS 123(R). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the required service period in the statement of income at fair value. F-12 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Employee Stock Ownership Plan The Company accounts for the ESOP in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-6. The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated statement of financial condition as a reduction of stockholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to paid-in capital. Dividends on unallocated ESOP shares are reflected as a reduction of debt. Reclassifications Certain prior year amounts have been reclassified to conform with the current year’s presentation. Such reclassifications had no effect on net income. Recent Accounting Pronouncements In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company adopted the provisions of FIN 48 in the fiscal year ended June 30, 2008 and determined that upon adoption, it had no impact on its financial statements. In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (R) “Business Combinations” (“SFAS No. 141 (R)”). This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations completed beginning July 1, 2009. In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008 and is not expected to have a significant impact on the Company’s financial statements. F-13 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14, “ Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. SAB 110 was effective January 1, 2008 and did not have a significant impact on the Company’s financial statements. In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective beginning July 1, 2008 and did not have a significant impact on the Company’s financial statements. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, of the adoption of FSP 157-2 on its financial statements. In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The Company adopted this EITF effective July 1, 2007 and recorded a cumulative effect adjustment of $(221,000). See related Note 17. F-14 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 - S UMMARY OF A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company July 1, 2008. The Company has elected to account for the Shay AMF Ultra Short Mortgage mutual fund it holds at fair value and there was no impairment recognized with this adoption as the investment had been written down to fair value at June 30, 2008. Future gains and losses will be reflected through earnings. In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. Adoption is not expected to have a significant impact on the Company’s financial statements. In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements. In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements. F-15 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 - S ECURITIES Securities at June 30, 2008 and 2007 consisted of the following: June 30, 2008 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available for Sale Marketable equity securities $ 2,547 $ — $ — $ 2,547 U.S. Government and federal agencies securities 5,000 — 53 4,947 Mortgage-backed securities 1,351 7 14 1,344 $ 8,898 $ 7 $ 67 $ 8,838 June 30, 2007 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available for Sale Marketable equity securities $ 2,945 $ — $ 86 $ 2,859 Mortgage-backed securities 443 — 2 441 $ 3,388 $ — $ 88 $ 3,300 F-16 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 - S ECURITIES (C ONTINUED ) June 30, 2008 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held to Maturity U.S. Government and federal agencies securities $ 2,000 $ 13 $ — $ 2,013 Mortgage-backed securities 7,788 6 146 7,648 $ 9,788 $ 19 $ 146 $ 9,661 June 30, 2007 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held to Maturity U.S. Government and federal agencies securities $ 2,500 $ — $ 57 $ 2,443 Mortgage-backed securities 156 2 — 158 $ 2,656 $ 2 $ 57 $ 2,601 Proceeds from marketable equity securities sold during the year ended June 30, 2008 were $250,000 resulting in gross losses of $19,000. Additionally, an impairment loss of $274,000 was recognized during the year ended June 30, 2008 on the Company’s Shay AMF Ultra Short Mortgage mutual fund as it became evident that the impairment was not temporary. No securities were sold during the year ended June 30, 2007. F-17 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 - S ECURITIES (C ONTINUED ) The amortized cost and fair value of securities as of June 30, 2008, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Maturing: Due after one year through five years $ 4,000 $ 3,976 $ 2,000 $ 2,013 Due after five years through ten years 1,000 971 — — No contractual maturity: Mortgage-backed securities 1,351 1,344 7,788 7,648 Marketable equity securities 2,547 2,547 — — $ 8,898 $ 8,838 $ 9,788 $ 9,661 All mortgage-backed securities are Freddie Mac, Fannie Mae or Ginnie Mae backed securities. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or until maturity. In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts. During the quarter ended June 30, 2008, the Company identified the Shay AMF Ultra Short Mortgage mutual find it holds as being an other-than-temporarily impaired asset and realized an impairment loss of $274,000 on these securities. Below is a schedule of securities with unrealized losses as of June 30, 2008 and 2007. These unrealized losses are the result of changes in market conditions and interest rates from those existing at the time of purchase of the securities and, as to mortgage-backed securities, actual and estimated prepayment speeds. These factors along with the fact the Company has both the intent and the ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, substantiates, in management’s opinion, that these unrealized losses are considered temporary. At June 30, 2008 Continuous Unrealized Losses for More Than 12 Months Continuous Unrealized Losses for Less Than 12 Months Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) U.S. Government and federal agencies securities: AFS – four securities $ — $ — $ 4,946 $ 53 Mortgage-backed securities: HTM – five securities — — 6,167 146 AFS – one security — — 981 14 $ — $ — $ 12,094 $ 213 F-18 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 - S ECURITIES (C ONTINUED ) At June 30, 2007 Continuous Unrealized Losses for More Than 12 Months Continuous Unrealized Losses for Less Than 12 Months Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) U.S. Government and federal agencies securities: HTM – three securities $ 2,443 $ 57 $ — $ — Mortgage-backed securities AFS – two securities 375 2 — — Marketable equity securities - one security 2,859 86 — — $ 5,677 $ 145 $ — $ — N OTE 3 - L OANS R ECEIVABLE Loans receivable at June 30, 2008 and 2007 consisted of the following: 2008 2007 (In Thousands) Real estate loans: Secured by one-to-four family residences $ 90,494 $ 86,485 Secured by other properties 13,572 11,421 Construction loans 11,125 10,729 Mobile home loans 11,810 10,981 Consumer loans 380 226 Share loans 444 586 Commercial loans 244 108 128,069 120,536 Loans in process (2,533 ) (4,107 ) Deferred loan origination costs, net 16 24 Allowance for loan losses (709 ) (402 ) Total loans receivable – net $ 124,843 $ 116,051 Residential lending payment experience is generally dependent to some extent on economic and market conditions in the Bank’s lending area. Multi-family, commercial real estate and construction loan repayments are generally dependent on the operations of the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy. F-19 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 3 - L OANS R ECEIVABLE (C ONTINUED ) Substantially all of the Bank’s loans receivable are mortgage loans secured by residential, multi-family and commercial real estate properties located in the State of Maryland. Loans are extended only after evaluation by management of customers’ creditworthiness and other relevant factors on a case-by-case basis. The Bank generally does not lend more than 90% of the appraised value of a property and usually requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 80%. In some instances, the Bank lent up to 90% of the appraised value of a property through a combination of first and second mortgages without requiring private mortgage insurance. The Bank originates and purchases mobile home loans to owner occupied borrowers up to a maximum of 90% of the value of the mobile home. In addition, the Bank generally obtains personal guarantees of repayment from borrowers and/or others for construction, commercial and multifamily residential loans and disburses the proceeds of construction and similar loans only as work progresses on the related projects. The following is a summary of the allowance for loan losses for the years ended June 30, 2008 and 2007: 2008 2007 (In Thousands) Balance at beginning of the year $ 402 $ 410 Provision for loan losses 328 5 Loans charged-off (21 ) (13 ) Recovery of loans charged-off — — Balance at end of year $ 709 $ 402 The Bank had three impaired loans as defined by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” totaling $2,582,000 and allowances for loan losses relating to these impaired loans of $286,000 at June 30, 2008. The average balance in the impaired loans totaled $1,084,000 and the Bank did not recognize any interest income on impaired loans for the year ended June 30, 2008. The Bank had no impaired loans at June 30, 2007. Non-accrual loans totaled approximately $2.6 million and $152,000 at June 30, 2008 and 2007, respectively. The Bank did not have any loan balances past due 90 days or more and still accruing interest at June 30, 2008 or 2007. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are limited to commitments to originate loans and unused lines of credit and involve to varying degrees elements of credit risk in excess of the amount recognized in the statement of financial position. The Bank’s exposure to credit loss from non-performance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. F-20 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 3 - L OANS R ECEIVABLE (C ONTINUED ) The Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Financial Instruments Whose Contract Amounts Represent Credit Risk Contract Amount at June 30, 2008 2007 (In Thousands) Loan commitments $ 2,849 $ 2,409 Unused lines of credit 2,313 2,080 Mortgage loan commitments of $1.97 million not reflected in the accompanying consolidated financial statements at June 30, 2008 are for fixed rate mortgages with interest rates ranging from 5.25% to 7.50%. There were consumer loan commitments of $881,000 at June 30, 2008 with interest rates ranging from 8.90% to 12.25%. Mortgage loan commitments of $1.4 million not reflected in the accompanying consolidated financial statements at June 30, 2007 are for fixed rate mortgages with interest rates ranging from 7.00% to 7.75%. There were consumer loan commitments of $1.0 million at June 30, 2007 with interest rates ranging from 9.00% to 12.75%. Loan commitments expire 60 days from the date of the commitment. N OTE 4 - P REMISES AND E QUIPMENT Premises and equipment at June 30, 2008 and 2007 are summarized by major classification as follows: 2008 2007 Useful Life in Years (In Thousands) Land $ 1,055 $ 1,083 — Buildings 1,585 1,302 15 – 40 Leasehold improvements 37 283 5 – 10 Furniture, fixtures, and equipment 861 775 3 – 10 Construction in progress 784 — 4,322 3,443 Accumulated depreciation (1,205 ) (1,039 ) $ 3,117 $ 2,404 Depreciation expense for the years ended June 30, 2008 and 2007 was $166,000 and $151,000, respectively. F-21 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 5 - I NVESTMENT IN F EDERAL H OME L OAN B ANK OF A TLANTA S TOCK The Bank is required to maintain an investment in the stock of the Federal Home Loan Bank of Atlanta (the “FHLB”) in an amount equal to at least 0.20% of the Bank’s total assets plus 4.50% of its outstanding advances from the FHLB. Purchases and sales of stock are made directly with the FHLB at par value. N OTE 6 - G OODWILL , O THER I NTANGIBLE A SSETS AND B RANCH A CQUISITION On August 24, 2007, the Bank acquired a branch office in Pasadena, Maryland from Greater Atlantic Bank. The Bank paid a premium on the net liabilities, primarily on deposits of $51.5 million assumed at closing. The premium was comprised of goodwill totaling $3.9 million and identifiable intangibles (core deposit intangible) totaling $502,000. The goodwill is deductible for tax purposes. The activity in goodwill and acquired intangible assets related to branch purchases is as follows: Year Ended June 30, 2008 Goodwill Core Deposit Intangible (In Thousands) Gross carrying amount at beginning of year $ — $ — Acquired during the year 3,940 502 Amortization — (112 ) Net carrying amount $ 3,940 $ 390 Under the provisions of SFAS No. 142, goodwill is not amortized but will be subjected to an annual assessment for impairment. The acquired intangible assets, apart from goodwill, will be amortized over their remaining estimated lives. At June 30, 2008, future estimated annual amortization expense is as follows (in thousands): Year ending June 30: 2009 $ 110 2010 92 2011 74 2012 56 2013 38 2014 20 Total $ 390 F-22 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 7 - D EPOSITS Deposits are composed of the following: June 30, 2008 2007 (In Thousands) Non-interest bearing accounts $ 6,040 $ 3,571 NOW and money market accounts 53,520 32,978 Savings accounts 16,454 18,924 Certificates of deposit 61,018 43,019 $ 137,032 $ 98,492 Interest expense on deposits for the years ended June 30, 2008 and 2007 is as follows: 2008 2007 (In Thousands) NOW and money market accounts $ 1,469 $ 1,182 Savings accounts 311 432 Certificates of deposit 2,894 2,032 $ 4,674 $ 3,646 At June 30, 2008 and 2007, the Bank had outstanding $18.9 million and $15.6 million in certificates of deposit in excess of $100,000, respectively. Deposits in excess of $100,000 may not be insured by the FDIC. At June 30, 2008 and 2007, the Bank had no certificates of deposit in excess of $250,000 outstanding. IRA deposits in excess of $250,000 may not be insured by the FDIC. At June 30, 2008, scheduled maturities of certificates of deposit are as follows (in thousands): Year ending June 30: 2009 $ 35,750 2010 9,040 2011 13,496 2012 1,579 2013 1,153 $ 61,018 F-23 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 8 – B ORROWINGS At June 30, 2008 and 2007, the Bank has an agreement under a blanket floating lien with the FHLB providing the Bank a line of credit of $40.0 million. At June 30, 2008, the Bank had outstanding advances of $7.5 million at a weighted rate of 4.68% consisting of a $2.5 million principal reducing advance at a fixed rate of 4.64% scheduled to mature in August 2010 and a $5.0 million fixed rate advance at a fixed rate of 4.75% scheduled to mature in September 2010. At June 30, 2007, the Bank had outstanding advances of $13.5 million at a weighted rate of 4.95%. The Bank is required to maintain as collateral for its FHLB advances qualified mortgage loans in an amount equal to 125% of the outstanding advances. Additionally at June 30, 2008, the Bank had a $2.0 million unsecured demand line of credit facility with M&T Bank which had no outstanding balance. At June 30, 2008, scheduled repayments and maturities of outstanding advances are as follows (in thousands): Year ending June 30: 2009 $ 1,000 2010 1,500 2011 5,000 Total $ 7,500 N OTE 9 – P ROFIT S HARING AND D EFERRED C OMPENSATION A GREEMENTS The Bank has a profit-sharing plan and a 401(k) plan for all eligible employees. Contributions to the plans are discretionary by the Board of Directors. Expenses for the years ended June 30, 2008 and June 30, 2007 were $-0- and $24,000 for the profit-sharing plan and $28,000 and $22,000 for the 401(k) plan, respectively. The Company has deferred compensation agreements with two of its executive officers. Under each executive officer’s agreement, the deferred compensation will be paid from the proceeds in excess of cash value of life insurance policies. The cost of the insurance is charged to operations as incurred. The amount of an executive officer’s benefit is determined pursuant to the accrual of two accounts: (i) a pre-retirement account and (ii) an index retirement benefit account. The pre-retirement account is a liability reserve account of the Bank and, prior to the executive officer’s termination of service or retirement is increased or decreased each calendar year by the aggregate annual after-tax income from specified life insurance policies purchased or deemed purchased by the Bank reduced by an “opportunity cost,” which is calculated by taking into account the Bank’s after-tax cost of funds. The index retirement benefit account for any calendar year is equal to the excess of the annual earnings (if any) of the insurance policies for that year over the “opportunity cost” for that year. The directors entered into a supplemental retirement plan. The directors are 100% vested in a pre-retirement account at the effective date of the plan. The balance at the effective date of the plan was $10,000 for each director. The index retirement benefit for each director each year is equal to the excess of the index over the cost of funds divided by a factor equal to 1.20 minus the marginal tax rate. The index is the aggregate annual after-tax income from life insurance contracts. At retirement, the directors are entitled to the balance of the pre-retirement account in 120 monthly installments. F-24 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 9 – P ROFIT S HARING AND D EFERRED C OMPENSATION A GREEMENTS (C ONTINUED ) The accrued liabilities for the aforementioned plans were $725,000 and $573,000 for the executive plans and $180,000 and $165,000 for the directors’ plans at June 30, 2008 and 2007, respectively. The Company recognized compensation expense related to these plans in the amount of $167,000 and $150,000 during the years ended June 30, 2008 and 2007, respectively. In addition the Company recognized a liability of $221,000 through beginning retained earnings related to the postretirement benefits covered by endorsement split-dollar life arrangements effective July 1, 2007 with the adoption of EITF 06-4. The Company recognized compensation expense related to the split-dollar benefit in the amount of $30,000 during the year ended June 30, 2008. The Company recognized the increase in the cash surrender value of the insurance policies as income from investment in life insurance in the amount of $76,000 and $89,000 during the years ended June 30, 2008 and 2007, respectively. N OTE 10 – C OMMON S TOCK AND E MPLOYEE S TOCK O WNERSHIP P LAN In 2005, the Bank reorganized from a federally chartered mutual savings bank to a federally chartered stock savings bank. Simultaneously, the Bank formed a new holding company, BV Financial, Inc. Also simultaneously, a mutual holding company was formed, Bay-Vanguard, M.H.C. In connection with the reorganization, the Company issued 2,645,000 shares of its common stock. A majority of that stock (1,454,750 shares) was issued to Bay Vanguard, M.H.C. The remainder was sold and issued to depositors of the Bank and the ESOP. At the same time as the reorganization and conversion, the Bank established the ESOP for its employees. On January 12, 2005, the ESOP acquired 103,684 shares of the Company’s common stock in the conversion with funds provided by a loan from the Company. Accordingly, $1,036,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP in 15 equal annual installments through 2020 and bears interest at the rate of five and one quarter percent (5.25%). Shares are released to participants proportionately as the loan is repaid. The Bank will recognize compensation expense as shares are committed for release from collateral at their current market price. Dividends on allocated shares are recorded as a reduction of retained earnings and dividends on unallocated shares are recorded as a reduction of debt. The Company recognized $50,000 and $60,000 of compensation expense for the years ended June 30, 2008 and June 30, 2007, respectively. The ESOP holds the common stock in a trust for allocation among participating employees. 3,169 shares were allocated and 6,912 were released to participants during the year ended June 30, 2008. 5,125 shares were allocated and 6,912 were released to participants during the year ended June 30, 2007. The unearned ESOP shares totaled 76,036 at June 30, 2008. The fair value of the unearned shares at June 30, 2008 was $418,000. All employees of the Bank who attain the age of 21 and complete one year of service with the Bank will be eligible to participate in the ESOP. Each participant’s vested interest under the ESOP is determined according to the following schedule: 1 year – 20%, 2 years – 40%, 3 years 60%, 4 years – 80%, 5 years – 100%. For vesting purposes, a year of service means any plan year in which an employee completes at least 1,000 hours of service (whether before or after the ESOP’s January 12, 2005 effective date). Vesting accelerates to 100% upon; (1) termination of the Plan or upon the permanent and complete discontinuance of contributions by the Bank, (2) termination of service on or after the participant’s normal or postponed retirement date, (3) a change in control, or (4) termination of service by reason of death or disability. F-25 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 11 – E QUITY I NCENTIVE P LAN On November 8, 2005, stockholders approved the BV Financial, Inc. 2005 Equity Compensation Plan that enabled the Company to grant up to 181,447 stock options and restricted stock awards to employees and directors. On November 14, 2005, the Company granted stock options covering 111,456 shares of common stock to certain employees and directors of the Company, of which 43,466 and 22,286 were exercisable at June 30, 2008 and June 30, 2007, respectively. The options were granted at the then fair market value of the stock of $8.94, vest over five years and expire ten years from the date of grant. Stock options had no intrinsic value at June 30, 2008. The Company recognized $59,000 and $98,000 of expense relating to the granting of stock options during the years ended June 30, 2008 and 2007, respectively. There has been no activity in the stock options to date. On November 14, 2005, the Company granted 44,577 shares of restricted stock to certain employees and directors of the Company. The Company purchased shares in the open market during 2006 to fund this plan. The awards vest over a five-year period and, therefore, the cost of such awards is accrued ratably over a five-year period as compensation expense. The Company recognized $77,000 and $81,000 of expense relating to the grant of shares of restricted stock during the years ended June 30, 2008 and 2007, respectively. Shares vesting were 8,468 and 8,915 for the years ended June 30, 2008 and 2007, respectively. Unvested shares were 21,265 at June 30, 2008. As of June 30, 2008, there was $260,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. The remaining cost is expected to be recognized over a weighted-average period of 2.4 years. N OTE 12 – R EGULATORY M ATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) and risk-weighted assets (as defined), and of Tier I capital (as defined) to adjusted total assets (as defined). Management believes, as of June 30, 2008 and 2007 that the Bank met all capital adequacy requirements to which it was subject. As of June 30, 2008, the most recent notification from the Office of Thrift Supervision has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category. F-26 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 12 – R EGULATORY M ATTERS (C ONTINUED ) The following table presents the Bank’s capital position based on the financial statements: Actual For Capital Adequacy Purposes To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of June 30, 2008: Tangible (to adjusted total assets) $ 8,869 5.55 % $ ³ 2,397 1.5 % N/A N/A Tier 1 capital (to risk-weighted assets) 8,869 9.62 N/A N/A $ 5,532 ³ 6.0 % Core (to adjusted total assets) 8,869 5.55 ³ 6,389 ³ 4.0 7,990 ³ 5.0 Total (to risk-weighted assets) 9,578 10.39 ³ 7,373 ³ 8.0 9,218 ³ 10.0 As of June 30, 2007: Tangible (to adjusted total assets) $ 13,514 10.08 % $ ³ 2,010 1.5 % N/A N/A Tier 1 capital (to risk-weighted assets) 13,514 16.47 N/A N/A $ 4,923 ³ 6.0 % Core (to adjusted total assets) 13,514 10.08 ³ 5,361 ³ 4.0 6,701 ³ 5.0 Total (to risk-weighted assets) 13,916 16.96 ³ 6,564 ³ 8.0 8,205 ³ 10.0 The following table provides a reconciliation of total stockholders’ equity per the consolidated financial statements to capital amounts reflected in the above table: 2008 2007 (In Thousands) Total equity $ 16,345 $ 18,218 Adjustments to regulatory capital: Accumulated other comprehensive loss 37 54 Intangible assets (goodwill, core deposit intangible, software) (4,359 ) (49 ) Equity of BV Financial, Inc. (3,154 ) (4,709 ) Tangible, Tier 1 and Core Capital 8,869 13,514 Allowance for loan losses 709 402 Total Capital $ 9,578 $ 13,916 F-27 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 12 – R EGULATORY M ATTERS (C ONTINUED ) The Bank was allowed a special bad debt deduction at various percentages of otherwise taxable income for various years through December 1, 1987. If the amounts which qualified as deductions for federal income tax purposes prior to December 31, 1987 are later used for purposes other than to absorb loan losses, including distributions in liquidations, they will be subject to federal and state income tax at the then current corporate rate. Retained earnings at June 30, 2008 and 2007 include $1,201,000, for which no provision for income tax has been provided. The unrecorded deferred income tax liability on the above amount was approximately $464,000. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. Bay-Vanguard Federal Savings Bank met the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations. The Board of Directors of Bay-Vanguard, M.H.C. determines whether Bay-Vanguard, M.H.C. will waive or receive dividends declared by the Company each time the Company declares a dividend, which is expected to be on a quarterly basis. Bay-Vanguard, M.H.C. may elect to receive dividends and utilize such funds to pay general corporate expenses. The Office of Thrift Supervision (the “OTS”) has indicated that (i) Bay-Vanguard, M.H.C. shall provide the OTS annually with written notice of its intent to waive its dividends prior to the proposed date of the dividend, and the OTS shall have the authority to approve or deny any dividend waiver request; and (ii) if a waiver is granted, dividends waived by Bay-Vanguard, M.H.C. will be excluded from the Company’s capital accounts for purposes of calculating dividend payments to minority shareholders. Through June 30, 2008, Bay-Vanguard, M.H.C. waived the right to receive its portion of the cash dividends paid which totaled $509,000 on a cumulative basis. The Federal Reserve Board regulations require savings institutions to maintain non-interest earnings reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $43.9 million; a 10% reserve ratio is applied above $43.9 million. The first $8.5 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. Bay-Vanguard Federal Savings Bank had no reserve requirement at June 30, 2008 and June 30, 2007. F-28 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 13 – I NCOME T AXES The income tax provision consists of the following for the years ended June 30, 2008 and 2007: 2008 2007 (In Thousands) Current expense (benefit): Federal $ (44 ) $ 182 State (20 ) 43 (64 ) 225 Deferred benefit: Federal (138 ) (131 ) State (52 ) (28 ) (190 ) (159 ) $ (254 ) $ 66 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 2008 and 2007 are presented below: 2008 2007 (In Thousands) Deferred tax assets: Deferred compensation $ 357 $ 285 Allowance for loan losses 280 149 Unrealized losses on available for sale securities 23 34 Stock-based compensation 54 76 Core deposit intangible 31 — Impairment loss on investment securities 115 — Other 54 42 Total Deferred Tax Assets 914 586 Deferred tax liabilities: Federal Home Loan Bank of Atlanta stock dividends 19 19 Accrual basis books to cash basis tax return 31 37 Depreciation 74 14 Goodwill 95 — Total Deferred Tax Liabilities 219 70 Net Deferred Tax Assets $ 695 $ 516 F-29 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 13 – I NCOME T AXES (C ONTINUED ) The amount computed by applying the statutory federal income tax rate to income before income taxes is different than the taxes provided for the following reasons: Years Ended June 30, 2008 2007 Amount Percent of Pretax Income Amount Percent of Pretax Income (Dollars In Thousands) Statutory federal income tax rate $ (198 ) (34.0 )% $ 53 34.0 % State tax, net of federal income tax benefit (49 ) (8.3 ) 11 6.9 Non-deductible stock-based compensation 13 2.2 22 13.8 Income from investment in life insurance (26 ) (4.4 ) (30 ) (19.2 ) Other 6 1.0 10 6.6 $ (254 ) (43.5 )% $ 66 42.1 % N OTE 14 – R ELATED P ARTY T RANSACTIONS The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, officers, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following table presents a summary of the activity of loans receivable from related parties. Year Ended June 30, 2008 (In Thousands) Balance, beginning $ 1,002 Reclass from employee to officer loans 198 Advances 131 Repayments (203 ) Balance, ending $ 1,128 The Bank had leased one of its office buildings from a relative of an officer of the Bank. The Bank had executed a new lease on August 4, 2004 with an initial term of five years, with two five year renewal options. Rent expense for the years ended June 30, 2008 and 2007 was $22,000 and $22,000, respectively. The annual rent was payable in equal monthly installments. The Bank entered into an agreement to purchase this office building and settlement occurred on June 24, 2008 with a purchase price of $750,000. The lease agreement terminated upon the purchase of the building. (The building is reflected in construction in progress at June 30, 2008 as it will be undergoing significant renovation). F-30 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 14 – R ELATED P ARTY T RANSACTIONS (C ONTINUED ) Gallagher Evelius & Jones LLP, of which one of the Bank’s directors is a partner, has performed legal services for Bay-Vanguard Federal. Bay-Vanguard Federal paid a total of $60,000 and $60,000 in legal fees to Gallagher Evelius & Jones LLP for fiscal 2008 and fiscal 2007, respectively. N OTE 15 – L EASING A RRANGEMENTS The Bank assumed a non-cancelable operating lease, whose current term expires in August 2013, with the Pasadena branch acquisition. The lease contains an option which enables the Bank to renew the lease for an additional 5-year period. In addition to minimum rentals, the lease has escalation clauses based upon price indices and includes provisions for additional payments to cover real estate taxes and common area maintenance. At June 30, 2008, the total minimum rental commitment under this lease is outlined below (in thousands): Year ending June 30: 2009 $ 64 2010 65 2011 67 2012 69 2013 71 2014 12 Total $ 348 Rent expense for the years ended June 30, 2008 and 2007 was $85,000 and $22,000, respectively, including the related party expense disclosed in Note 14. N OTE 16 – C OMMITMENTS AND C ONTINGENCIES Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s consolidated financial position or results of operations. N OTE 17 – S UBSEQUENT E VENT The Bank terminated its executive and director split-dollar life insurance retirement death benefit and recognized income of $221,000 in the quarter ended September 30, 2008. N OTE 18 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS The estimated fair values of the Bank’s financial instruments are summarized below. The fair values are estimates derived primarily from present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values. F-31 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 18 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS (C ONTINUED ) The following methods and assumptions were used by the Bank in estimating the fair values of financial instruments: Cash and Cash Equivalents and Interest Bearing Deposits in Other Banks The carrying amounts of cash and equivalents and interest bearing deposits in other banks approximate fair value. Investment Securities Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying amount of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. Loans Receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such certificates to a schedule of aggregated expected monthly maturities on these deposits. Advances from Federal Home Loan Bank The fair value of borrowings is estimated using discounted cash flow analyses, based on rates currently available to the Bank for borrowings with similar terms and remaining maturities. Accrued Interest Receivable and Payable The carrying amounts of accrued interest receivable and payable approximate fair value. Off-Balance Sheet Credit Related Instruments Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments were not significant at June 30, 2008 or 2007. F-32 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 18 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS (C ONTINUED ) The following table summarizes the carrying amounts and fair values of financial instruments at June 30, 2008 and 2007: 2008 2007 Carrying Amount Fair Value Carrying Amount Fair Value (In Thousands) Financial assets: Cash and cash equivalents $ 8,282 $ 8,282 $ 5,357 $ 5,357 Interest bearing time deposits in other banks 580 580 199 199 Securities available for sale 8,838 8,838 3,300 3,300 Securities held to maturity 9,788 9,661 2,656 2,601 Loans receivable, net 124,843 127,001 116,051 110,344 Federal Home Loan Bank of Atlanta stock 654 654 848 848 Accrued interest receivable 670 670 538 538 Financial liabilities: Deposits, including accrued interest payable 137,032 137,561 98,492 98,862 Advances from Federal Home Loan Bank 7,500 7,633 13,500 13,335 Off-balance sheet commitments — — — — N OTE 19 – C ONDENSED F INANCIAL I NFORMATION (P ARENT C OMPANY O NLY ) Information as to the financial position of BV Financial, Inc. and its results of operations and cash flows as of and for the years ended June 30, 2008 and 2007 are summarized below. June 30, 2008 2007 (In Thousands) Statements of Financial Condition Assets Cash $ 2,215 $ 3,828 Employee stock ownership plan loan 810 864 Investment in subsidiary 13,191 13,509 Other assets 129 21 Total assets $ 16,345 $ 18,222 Liabilities and Stockholders’ Equity Other liabilities $ — $ 4 Total stockholders’ equity 16,345 18,218 Total liabilities and stockholders’ equity $ 16,345 $ 18,222 F-33 BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 19 – C ONDENSED F INANCIAL I NFORMATION (P ARENT C OMPANY O NLY ) (C ONTINUED ) Years Ended June 30, 2008 2007 (In Thousands) Statements of Operations Interest income $ 45 $ 48 Non-interest expense (64 ) (78 ) Loss before income tax benefit (19 ) (30 ) Income tax benefit 9 9 Loss before equity in net income (loss) of subsidiary (10 ) (21 ) Equity in net income (loss) of subsidiary (320 ) 112 Net income (loss) $ (330 ) $ 91 Years Ended June 30, 2008 2007 (In Thousands) Statements of Cash Flows Net income (loss) $ (330 ) $ 91 Adjustments to reconcile net income (loss ) to net cash from operating activities: Equity in net loss (income) of subsidiary 320 (112 ) Increase in other assets (108 ) (10 ) Increase (decrease) in other liabilities (4 ) 3 Net cash used in operating activities (122 ) (28 ) Cash Flows from Investing Activities Capital contributed to subsidiary (20 ) (15 ) Principal collected on ESOP loan 54 51 Net cash provided by investing activities 34 36 Cash Flows from Financing Activities Cash dividend paid, including dividends on unallocated ESOP shares (186 ) (163 ) Treasury stock purchased (1,339 ) (541 ) Net cash used in financing activities (1,525 ) (704 ) Decrease in cash and cash equivalents (1,613 ) (696 ) Cash and cash equivalents at beginning of period 3,828 4,524 Cash and cash equivalents at end of period $ 2,215 $ 3,828 F-34