What changed in this filing

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Item 1. Business

2009-09-24 compared with 2008-09-26 · 575 added, 549 removed, 151 unchanged (88% of the section changed)

24 unchanged sentences

Baltimore County and Anne Arundel County to be our primary market area.

The economy of our market area reflects a diverse cross-section of employment sectors.

According to published statistics in 2000, the economies of Baltimore City and Baltimore

primarily geared toward the service, trade, government, financial services and manufacturing sectors.

The economy of Anne Arundel County is also geared

toward those sectors.

The economy of our market area reflects a diverse cross-section of employment

The economies of Baltimore City, Baltimore County and Anne Arundel County are primarily geared toward the service, trade, government, financial

services and manufacturing sectors.

However, because of the Fort Meade Installation and the state government in Annapolis, Anne Arundel County has a stronger concentration of government employees.

Additionally, Baltimore and Anne Arundel Counties reported a

higher level of construction employment than Baltimore City, reflecting the level of growth in those counties.

According to the United States Census Bureau, the population of Baltimore City, Baltimore County and Anne Arundel County in 2007 was

estimated to be approximately 637,000, 789,000 and 512,000, respectively.

The economy of our market area is strongest in suburban Anne Arundel County, which has experienced higher growth rates in population and households while maintaining low

unemployment rates.

Additionally, Baltimore and Anne Arundel Counties

reported a higher level of construction employment than Baltimore City, reflecting the level of growth in those counties.

According to the United States Census Bureau, the population of Baltimore City, Baltimore County and Anne Arundel County in

2008 was estimated to be approximately 637,000, 786,000 and 513,000, respectively.

The economy of our market area is strongest in suburban Anne Arundel County, which has experienced higher growth rates in population and households while maintaining

low unemployment rates.

Baltimore City, on the other hand, has seen its population and households decrease, which is reflective of the urban shift to suburban markets for job opportunities.

Baltimore City also has a higher concentration of blue collar

workers, lower per capita income levels and a higher level of unemployment than the state or national averages.

Baltimore City also has a higher concentration of blue

collar workers, lower per capita income levels and a higher level of unemployment than the state or national averages.

We face significant competition for the attraction of deposits and origination of loans.

direct competition for deposits has historically come from the several financial institutions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance

We also face competition for investors funds from money market funds, mutual funds and other corporate and government securities.

At June 30, 2007, which is the most recent date for which data is available from the Federal

Deposit Insurance Corporation, we held approximately 0.22% of the deposits in the Baltimore-Towson, Maryland Metropolitan Statistical Area, which was the 55 th largest market share out of the 84 financial institutions with offices in this metropolitan statistical area.

In addition, banks owned by large bank holding companies such as Bank of America Corporation, Wachovia Corporation, SunTrust

and M&T Bank Corporation also operate in our market area.

These institutions are much larger than us and, therefore, have significantly greater resources that allow them to offer a wider variety of products and services.

Our competition for loans comes primarily from financial institutions in our market area, and, to a lesser extent, from other financial service

providers such as mortgage companies and mortgage brokers.

Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market such as insurance companies, securities companies and

specialty finance companies.

We expect competition to increase in the future as a result of legislative, regulatory and technological

changes and the continuing trend of consolidation in the financial services industry.

Technological advances, for example, have lowered the barriers to market entry, allowed banks to expand their geographic reach by providing services over the

Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks.

Changes in federal law permit affiliation among banks, securities firms and insurance companies, which

promotes a competitive environment in the financial services industry.

Our most direct competition for deposits has

historically come from the several financial institutions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies.

We also face competition for

investors funds from money market funds, mutual funds and other corporate and government securities.

At June 30, 2008, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held

approximately 0.29% of the deposits in the Baltimore-Towson, Maryland Metropolitan Statistical Area, which was the 41 st largest market share out of the 78 financial institutions with offices in this metropolitan statistical area.

In addition, banks

owned by large bank holding companies such as Bank of America Corporation, Wachovia Corporation, M&T Bank Corporation, PNC Financial Services Group, Inc., BB&T Corporation and Sun Trust Banks, Inc.

also operate in our market area.

institutions are much larger than us and, therefore, have significantly greater resources that allow them to offer a wider variety of products and services.

Our competition for loans comes primarily from financial institutions in our market area, and, to a lesser extent, from other financial service providers such as mortgage companies and mortgage brokers.

for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market such as insurance companies, securities companies and specialty finance companies.

We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of

consolidation in the financial services industry.

Technological advances, for example, have lowered the barriers to market entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for

non-depository institutions to offer products and services that traditionally have been provided by banks.

Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in

the financial services industry.

Competition for deposits and the origination of loans could limit our future growth.

Lending Activities

Our loan portfolio consists primarily of one- to four-family residential real

estate loans.

To a much lesser extent, our loan portfolio includes mobile home loans, construction loans, multi-family, commercial real estate loans, and consumer loans.

Bay-Vanguard Federal historically originated and currently originates loans

only for investment purposes.

At June 30, 2008, Bay-Vanguard Federal had no loans that were held for sale.

One- to Four-Family

Residential Real Estate Loans .

Our loan portfolio consists primarily of one- to four-family residential real estate loans.

To a much lesser

extent, our loan portfolio includes mobile home loans, construction loans, multi-family, commercial real estate loans, and consumer loans.

Bay-Vanguard Federal historically originated and currently originates loans only for investment purposes.

June 30, 2009, Bay-Vanguard Federal had no loans that were held for sale.

One- to Four-Family Residential Real Estate

Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes in our market area.

We only offer fixed- and adjustable- rate mortgage loans

and primarily with terms of 15, 20 or 30 years.

We only offer fixed- and adjustable- rate mortgage loans primarily with terms of

15, 20 or 30 years.

We offer adjustable-rate mortgage loans with interest rates and payments that adjust annually or every three years.

Interest rates and payments on our adjustable-rate loans generally are adjusted to a

rate equal to a percentage above the one year U.S.

Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal to a percentage

above the one year U.S.

Treasury index.

The maximum amount by which the interest rate may be increased or decreased is generally 200 basis points per adjustment period and the lifetime interest rate cap is generally 600

basis points over the initial interest rate of the loan.

The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of

interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans.

The relative amount of fixed- and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for

substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan.

Therefore, average loan maturity is a function of, among other factors, the level

of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

generally make loans with loan-to-value ratios that do not exceed 80%;

however, we may make loans with a loan-to-value ratio up to 97% when secured by first liens on owner-occupied one- to four-family residences.

Loans with loan-to-value ratios in

excess of 80% generally require private mortgage insurance or additional collateral.

We require all properties securing mortgage loans to be appraised by a board-approved independent licensed appraiser.

We also require title insurance on all first

mortgage loans.

The maximum amount by which the interest rate may be increased or decreased is generally 200

basis points per adjustment period and the lifetime interest rate cap is generally 600 basis points over the initial interest rate of the loan.

The loan fees

charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest

rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans.

The relative amount of fixed- and adjustable-rate mortgage loans that can be originated at any time is largely

determined by the demand for each in a competitive environment.

While one- to four-family residential real estate loans are normally

originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan.

Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

We generally make loans with loan-to-value ratios that do not exceed 80%;

however, we may make loans with a loan-to-value ratio up to 97% when secured by

first liens on owner-occupied one- to four-family residences.

Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral.

We require all properties securing mortgage loans to be appraised

by a board-approved independent licensed appraiser.

We also require title insurance on all first mortgage loans.

Borrowers must obtain hazard insurance and flood insurance for loans on property located in a flood zone before closing the loan.

We originate second mortgage loans on one- to four-family residential real estate properties under the same underwriting criteria utilized for our originations of one- to four-family real estate loans.

We make second mortgage loans with a

maximum loan-to-value ratio of 80% of the appraised value of the property, less the outstanding balance of the first mortgage.

originate home equity loans and lines of credit.

Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal .

We originate second mortgage loans on one- to four-family residential real estate properties under the same underwriting criteria utilized

for our originations of one- to four-family real estate loans.

We make second mortgage loans with a maximum loan-to-value ratio of 80% of the appraised value of the property, less the outstanding balance of the first mortgage.

We also originate home equity loans and lines of credit.

Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate

as reported in The Wall Street Journal .

Home equity loans are fixed-rate loans.

generally offer home equity loans and lines of credit with a maximum loan-to-value ratio of 80% of the appraised value of the property, less the then outstanding balance on the first mortgage.

A home equity line of credit may be drawn down by the

borrower for an initial period of ten years from the date of the loan agreement.

After the initial draw period, the line of credit is reviewed and may, at our sole discretion, be renewed for another ten-year period.

If the line is not renewed, the

amount outstanding must be repaid over the remaining fifteen-year term.

We will generally offer home equity loans and lines of credit with a maximum loan-to-value ratio of 80% of the appraised value of the property, less the then

outstanding balance on the first mortgage.

A home equity line of credit may be drawn down by the borrower for an initial period of ten years from the date of the loan agreement.

After the initial draw period, the line of credit is reviewed and may,

at our sole discretion, be renewed for another ten-year period.

If the line is not renewed, the amount outstanding must be repaid over the remaining fifteen-year term.

Mobile Home Loans.

We originate mobile home loans

directly and purchase mobile home loans from Forward National, the successor of Forward Financial Company, and Mainland Financial, which specialize in mobile home lending.

At June 30, 2008, 14.0% of our mobile home portfolio was originated by

us directly and 75.4% and 10.6% was purchased from Forward National and Mainland Financial, respectively.

Our mobile home loans, which are made primarily to borrowers in Maryland and Pennsylvania, have terms of up to 25 years and fixed interest

We originate mobile home loans directly and purchase mobile home loans from Forward National and Mainland Financial, which specialize in mobile home lending.

At June 30, 2009,

13.6% of our mobile home portfolio was originated by us directly and 70.4% and 16.0% was purchased from Forward National and Mainland Financial, respectively.

Our mobile home loans, which are made primarily to borrowers in Maryland and Pennsylvania,

have terms of up to 25 years and fixed interest rates.

We generally will finance up to a maximum of 90% of the value of the mobile home.

We require that the borrower obtain hazard insurance.

At June 30, 2008, we had 349 mobile homes loans, the average size of which was approximately $33,800.

At June 30, 2009, we had 340 mobile home loans, the

average size of which was approximately $34,000.

In April 2000, we began purchasing mobile home loans from Forward National.

Forward National assembles credit applications from third

parties and provides such applications for our underwriting review.

National assembles credit applications from third parties and provides such applications for our underwriting review.

We then have the opportunity to accept or reject the loan contemplated by each credit application.

If we agree to purchase a loan, we must notify Forward National of the minimum

rate of interest we will accept on the loan.

If we agree to purchase a loan,

we must notify Forward National of the minimum rate of interest we will accept on the loan.

Forward National will then seek to originate the loan with the third party at an interest rate exceeding the interest rate agreed to by us.

Once Forward National provides us with the original executed

loan, we then purchase the loan from Forward National.

National provides us with the original executed loan, we then purchase the loan from Forward National.

Forward National assigns to us its right, title and interest in the loan, its collateral and all payments under the loan.

While we service the mobile home loans we purchase from Forward National, subject to our direction, Forward National handles all delinquencies and

collections on the loans at its expense.

Forward National is advanced funds equal to the amount by which the interest rate on a loan we ultimately purchase exceeds the interest rate we prescribed to Forward National.

Forward National is then

required to place half of that amount in a deposit account with us.

While we service the mobile home loans we purchase from Forward National, subject to our direction,

Forward National handles all delinquencies and collections on the loans at its expense.

Forward National is advanced funds equal to the amount by which the interest rate on a loan we ultimately purchase exceeds the interest rate we prescribed to

Forward National.

Forward National is then required to place half of that amount in a deposit account with us.

This amount is recorded as a deposit on our financial statements.

Additionally, the entire amount

we compensate Forward National is recorded as prepaid dealer interest, which is included in the loan balance and amortized in the same manner as deferred

loan origination fees.

If a loan amortizes fully and the borrower pays as agreed, Forward National receives all of the funds related to that loan in the deposit account.

However, if the mobile home is repossessed or prepaid, the amount of interest

on such loan that otherwise would have been paid by the borrower and that has been previously advanced to Forward National by us is returned to us by Forward National.

The deposit account is used to fund (1) any costs of collections incurred on

the loans we purchased from Forward National and (2) losses related to repossessions of these mobile home units.

Any debits to this account are recorded as a deposit withdrawal on our financial statements.

Forward National has no right to make

withdrawals from the deposit account.

Thus, we may accrue excess balances and apply them against any future charges we incur related to Forward National collections and repossessions.

In February 2007, we began purchasing mobile home loans from Mainland Financial under the same terms and conditions as our agreement with Forward

National with the exception of how delinquencies are handled.

Additionally, the entire amount we compensate Forward National is

recorded as prepaid dealer interest, which is included in the loan balance and amortized in the same manner as deferred loan origination fees.

If a loan amortizes fully and the borrower pays as agreed, Forward National receives all of the funds

related to that loan in the deposit account.

However, if the mobile home is repossessed or prepaid, the amount of interest on such loan that otherwise would have been paid by the borrower and that has been previously advanced to Forward National by

us is returned to us by Forward National.

The deposit account is used to fund (1) any costs of collections incurred on the loans we purchased from Forward National and (2) losses related to repossessions of these mobile home units.

debits to this account are recorded as a deposit withdrawal on our financial statements.

Forward National has no right to make withdrawals from the deposit account.

Thus, we may accrue excess balances and apply them against any future charges we

incur related to Forward National collections and repossessions.

In February 2007, we began purchasing mobile home loans from Mainland

Financial under the same terms and conditions as our agreement with Forward National with the exception of how delinquencies are handled.

Delinquencies and collections are handled by us at our expense with the assistance of Mainland Financial.

However, the deposit account is used to fund losses related to repossessions of

these mobile home units.

The following table presents the activity and dollar amounts available to fund losses related to repossessions in

the Forward National and Mainland Financial deposit account during the periods indicated.

However, the deposit account is used to fund losses related to repossessions of these mobile home units.

The following table presents the

activity and dollar amounts available to fund losses related to repossessions in the Forward National and Mainland Financial deposit accounts during the periods indicated.

Year Ended June 30,

1 unchanged sentence

Deposit account balance, beginning of period

Losses on repossessions and fees and expenses on collections absorbed by Forward National

Losses on repossessions and fees and expenses on collections absorbed by Forward National or Mainland Financial

Deposits due to new loans

14 unchanged sentences

At June 30, 2009, the

largest residential construction loan commitment was for $1.2 million, all of which was outstanding.

At June 30, 2008, this loan was classified as substandard and was on non-accrual status.

The loan was for the construction of four town homes

in Baltimore City.

These were speculative properties that the borrowers intended to sell upon completion.

The borrowers have not been able to sell the properties due to the deterioration of the real estate market in the Baltimore Metropolitan area.

Two of the town homes are completed and rented.

The remaining two properties are substantially complete and will be rented upon completion.

Each of the two borrowers will refinance two of the properties with the Bank.

The interest rates on the loans

will adjust annually after an initial two-year fixed rate period and have 25-year amortizations.

Rental income will not cover the monthly payment on the loans.

Thus, the borrowers will make up the difference out of their personal cash flows.

loan to value on the loans will be approximately 75%, based on current valuations.

At June 30, 2008, the largest commercial

construction loan commitment was for $1.8 million, $1.4 million of which was outstanding.

largest residential construction loan commitment was for $525,000, of which $475,000 was outstanding.

This loan was performing according to its terms at June 30, 2009.

We also originate land loans primarily to individuals to acquire land upon which they intend to build a

Land loans are offered with a five-year term based on an amortization term of 15 years.

A balloon payment for the principal plus any accrued interest is due at the end of the five-year period.

Additionally, we offer fixed-rate

fully-amortized land loans with terms of 15 years.

Land loans generally can be made with a maximum loan-to-value ratio of 75%.

At June 30, 2009, the largest commercial construction loan commitment was for $1.8 million, $1.6 million of which was outstanding.

This loan was

performing according to its terms at June 30, 2009.

Multi-Family and Commercial Real Estate Loans .

We offer fixed rate and adjustable-rate mortgage loans secured by multi-family and commercial real estate.

Our multi-family and commercial real estate loans are generally

secured by condominiums, apartment buildings and mixed-use properties with residential units, as well as retail space.

We intend to grow this segment of our loan portfolio.

We offer fixed rate and

adjustable-rate mortgage loans secured by multi-family and commercial real estate.

Our multi-family and commercial real estate loans are generally secured by condominiums, apartment buildings and mixed-use properties with residential units, as well

as retail space.

We originate multi-family and commercial real estate loans for terms up to 25 years.

Interest rates and payments on our adjustable-rate loans adjust

every three, five or seven years after an initial three-, five- or seven- year period to a rate typically equal to 3-3.5% above the three-, five- or seven-year constant maturity Treasury index.

There are no adjustment period or lifetime interest

Interest rates and payments on our

adjustable-rate loans adjust every three, five or seven years after an initial three-, five- or seven- year period to a rate typically equal to 3-3.5% above the three-, five- or seven-year constant maturity Treasury index.

There are no adjustment

period or lifetime interest rate caps.

Loan amounts generally do not exceed 75% of the appraised value.

We require all properties securing multi-family and commercial real estate loans to be appraised by a board-approved independent licensed appraiser.

Multi-family and

commercial real estate loans also are generally supported by personal guarantees.

We require all properties securing multi-family and commercial real estate loans to be appraised by a board-approved independent licensed

Multi-family and commercial real estate loans also are generally supported by personal guarantees.

At June 30, 2009, the largest multi-family and commercial real estate loan was a $1.9 million loan.

This loan is secured by a restaurant located in Baltimore,

Maryland and was performing according to its terms at June 30, 2008.

This loan is secured by a

waterfront restaurant building in Baltimore, Maryland and was performing according to its terms at June 30, 2009.

We also originate

loans secured by undeveloped and developed land.

Land loans are offered with a five-year term based on an amortization term of 15 years.

A balloon payment for the principal plus any accrued interest is due at the end of the five-year period.

Additionally, we offer fixed-rate fully-amortized land loans with terms of 15 years.

Land loans generally can be made with a maximum loan-to-value ratio of 75%.

Loans secured by undeveloped land or improved lots generally involve greater risks than

residential mortgage lending because land loans are more difficult to evaluate.

If the estimate of value proves to be inaccurate, in the event of default and foreclosure, we may be confronted with a property the value which is insufficient to assure

full repayment.

Other Consumer Loans .

Our consumer loans

are primarily loans secured by passbook or certificate accounts, automobile and boat loans and secured personal loans.

The procedures for underwriting consumer loans include an assessment of the applicants payment history on other debts and

ability to meet existing obligations and payments on the proposed loan.

Although the applicants creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the

proposed loan amount.

Our consumer loans are primarily loans secured by passbook or certificate

accounts, automobile and boat loans and secured personal loans.

The procedures for underwriting consumer loans include an assessment of the applicants payment history on other debts and ability to meet existing obligations and payments on the

proposed loan.

Although the applicants creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Loan Underwriting Risks.

While we anticipate that adjustable-rate loans will better offset the adverse

effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults.

marketability of the underlying property also may be adversely affected in a high interest rate environment.

In addition, although adjustable-rate mortgage loans help make our loan portfolio more responsive to changes in interest rates, the extent

of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Mobile home lending generally entails

greater risk than traditional residential mortgage lending.

Loans secured by mobile homes involve more credit risk than mortgage loans because of the type and nature of the collateral, which depreciates over time, and because mobile home borrowers,

on average, tend to have lower incomes than our residential mortgage borrowers.

In many cases, any repossessed collateral for a defaulted mobile home loan will not provide an adequate source of repayment of the outstanding loan balance because of

depreciation or improper repair and maintenance of the underlying security.

While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest

rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults.

The marketability of the underlying

property also may be adversely affected in a high interest rate environment.

In addition, although adjustable-rate mortgage loans help make our loan portfolio more responsive to changes in interest rates, the extent of this interest sensitivity is

limited by the annual and lifetime interest rate adjustment limits.

Mobile home lending generally entails greater risk than traditional

residential mortgage lending.

Loans secured by mobile homes involve more credit risk than mortgage loans because of the type and nature of the collateral, which depreciates over time, and because mobile home borrowers, on average, tend to have lower

incomes than our residential mortgage borrowers.

In many cases, any repossessed collateral for a defaulted mobile home loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation or improper repair

and maintenance of the underlying security.

Our arrangement with Forward National and Mainland Financial substantially mitigates the risks normally associated with mobile home lending.

However, if Forward National or

Mainland Financial ceases doing business or terminates their arrangement with us, we would likely need to hire additional staff to service our mobile home loan portfolio.

However, if Forward National or Mainland Financial ceases doing

business or terminates their arrangement with us, we would likely need to hire additional staff to service our mobile home loan portfolio.

Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate.

Risk of loss on a construction loan depends largely upon the

accuracy of the initial estimate of the propertys value at completion of construction and the estimated cost (including interest) of construction.

Risk of loss on a construction loan depends largely upon the accuracy of the initial

estimate of the propertys value at completion of construction and the estimated cost (including interest) of construction.

During the construction phase, a number of factors could result in delays and cost overruns.

the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building.

If the estimate of value proves to be inaccurate, we may be confronted, at

or before the maturity of the loan, with a building having a value that is insufficient to assure full repayment.

If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to

recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

In addition, we make loans to home builders who, at the time of loan origination, have not yet secured an end buyer for the

home under construction.

These loans typically carry higher

risks than those associated with traditional construction loans.

These increased risks arise because of the risk that there will be inadequate demand to

ensure the sale of the property within an acceptable time.

As a result, in addition to the risks associated with traditional construction loans, speculative construction loans carry the added risk that the builder will have to pay the property taxes

and other carrying costs of the property until an end buyer is found.

Loans secured by multi-family and commercial real estate generally

have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans.

Of primary concern in multi-family and commercial real estate lending is the borrowers creditworthiness and the feasibility and

cash flow potential of the project.

Payments on loans secured by income properties often depend on the successful operation and management of the properties.

As a result, repayment of such loans may be subject to adverse conditions in the real

estate market or the economy to a greater extent than residential real estate loans.

To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial

real estate loans.

In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of the property, the borrowers expertise, credit history and profitability and the value of the

underlying property.

In addition, with respect to commercial real estate rental properties, we will also consider the term of the lease and the credit quality of the tenants.

We have generally required that the properties securing these real estate

loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.2x.

Consumer loans may

entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are secured by assets that depreciate rapidly.

In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate

source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower.

In addition, consumer loan collections depend on the borrowers continuing financial

stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may

limit the amount that can be recovered on such loans.

If the estimate of

construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building.

If the estimate of value proves to be inaccurate, we may be confronted, at or before the

maturity of the loan, with a building having a value that is insufficient to assure full repayment.

If we are forced to foreclose on a building before or at completion due to a default, there can be no

assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

In addition, we make loans to home builders who, at the time of loan origination, have not yet secured an end buyer for the home under construction.

These loans typically carry higher risks than those associated with traditional construction loans.

These increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time.

As a result, in addition to the risks associated with traditional construction loans, speculative

construction loans carry the added risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found.

Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans.

Of primary concern in multi-family

and commercial real estate lending is the borrowers creditworthiness and the feasibility and cash flow potential of the project.

Payments on loans secured by income properties often depend on the successful operation and management of the

As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than residential real estate loans.

To monitor cash flows on income properties, we require borrowers

and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans.

In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of

the property, the borrowers expertise, credit history and profitability and the value of the underlying property.

In addition, with respect to commercial real estate rental properties, we will also consider the term of the lease and the credit

quality of the tenants.

We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.2x.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are secured by assets that

depreciate rapidly.

In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection

efforts against the borrower.

In addition, consumer loan collections depend on the borrowers continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Loan Originations, Purchases and Sales .

Loan originations come

from a number of sources.

The primary sources of loan originations include existing customers, our in-house loan originators, advertising, referrals from customers and personal contacts by our staff.

We currently utilize local mortgage brokers to

assist with loan originations.

We generally retain all of the loans that we originate for our portfolio;

however, we will sell participation interests to local financial institutions, primarily on the portion of loans that exceed our borrowing

In fiscal 2008, we sold $890,000 participation interests.

We did not sell participation interests in fiscal 2007.

2000, we have purchased mobile home loans from Forward National.

Since February 2007, we have purchased mobile homes from Mainland Financial.

We underwrite these loans.

Forward National and Mainland Financial then close the loans and immediately

assign them to us.

We purchased $660,000 and $884,000 of mobile home loans from Forward National in fiscal 2008 and fiscal 2007, respectively.

We purchased $869,000 and $128,000 of mobile home loans from Mainland Financial in fiscal 2008 and 2007.

From time to time, we purchase participation interests, primarily commercial real estate loans.

At June 30, 2008 and 2007, we had

approximately $7.1 million and $6.0 million of purchased participation loans, respectively.

We perform our own underwriting analysis on each of our participation interests before purchasing such loans and therefore believe there is no greater risk

of default on these obligations.

However, in a purchased participation loan, we do not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and

instituting foreclosure proceedings.

Loan originations come from a number of sources.

The primary sources of loan originations

include existing customers, our in-house loan originators, advertising, referrals from customers and personal contacts by our staff.

We currently utilize local mortgage brokers to assist with loan originations.

We generally retain all of the loans

that we originate for our portfolio;

however, we will sell participation interests to local financial institutions, primarily on the portion of loans that exceed our legal lending limit.

We sold $3.3 million and $890,000 of participation interests

in fiscal 2009 and fiscal 2008, respectively.

From time to time, we purchase participation interests, primarily commercial real estate

At June 30, 2009 and 2008, we had approximately $6.2 million and $7.1 million of purchased participation loans, respectively.

We perform our own underwriting analysis on each of our participation interests before purchasing such loans

and therefore believe there is no greater risk of default on these obligations.

However, in a purchased participation loan, we do not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring

delinquencies, pursuing collections and instituting foreclosure proceedings.

We are permitted to review all of the documentation relating to any loan in which we participate, including any annual financial statements provided by a borrower.

Additionally, we receive periodic updates on the

loan from the lead lender.

Additionally, we receive periodic updates on the loan from the lead lender.

In addition to purchasing participation interests, we

purchased $283,000 and $660,000 of mobile home loans from Forward National in fiscal 2009 and fiscal 2008, respectively.

We purchased $530,000 and $869,000 of mobile home loans from Mainland Financial in fiscal 2009 and fiscal 2008, respectively.

performed the underwriting on these mobile home loans.

Loan Approval Procedures and Authority .

In our lending activities, we follow written,

We follow written,

non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management.

Loans up to $500,000 require the approval of two of five members of an employee loan committee, consisting of the

President and Chief Executive Officer, the Chairman and Chief Financial Officer and three Senior Vice Presidents.

Loans up to $750,000 require the approval of three of the members of the employee loan committee.

All extensions of credit that exceed

$750,000 in the aggregate require the approval of either the Executive Committee of the board of directors or the full board of directors.

and Chief Executive Officer, the Chairman and Chief Financial Officer and three Senior Vice Presidents.

Loans up to $750,000 require the approval of three of

the members of the employee loan committee.

All extensions of credit that exceed $750,000 in the aggregate require the approval of either the Executive Committee of the board of directors or the full board of directors.

Loans to One Borrower .

The maximum amount that we may lend to one borrower and the

borrowers related entities is limited by regulation to generally 15% of our unimpaired capital and surplus.

The maximum amount that we may lend to one borrower and the borrowers related entities is

limited by regulation to generally 15% of our unimpaired capital and surplus.

At June 30, 2009, our regulatory limit on loans to one borrower was $1.4 million.

At that date, our largest lending relationship

was a $1.9 million loan secured by a restaurant in Baltimore, Maryland originated in 2006.

At that date, our largest lending relationship was a $1.9 million loan secured by a

waterfront restaurant building in Baltimore, Maryland originated in 2006.

At the time of origination, this loan did not exceed our legal lending limit.

That loan was performing according to its original terms at June 30, 2009.

The limit on loans to one borrower decreased by $600,000 from the

June 30, 2007 limit due primarily to intangible assets acquired in the purchase of our Pasadena branch.

The reduced limit applies to new loan originations made after August 2007.

Loan Commitments .

We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain

We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the

occurrence of certain events.

Commitments to originate mortgage loans are legally binding agreements to lend to our customers and generally expire in 60 days.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S.

Treasury obligations, securities of

various federal agencies and municipal governments, deposits at the Federal Home Loan Bank of Atlanta and certificates of deposit of federally insured institutions.

Within certain regulatory limits, we also may invest a portion of our assets in

mutual funds.

obligations, securities of various federal agencies and municipal governments, deposits at the Federal Home Loan Bank of Atlanta and certificates of deposit of federally insured institutions.

Within certain regulatory limits, we also may invest a

portion of our assets in mutual funds.

We also are required to maintain an investment in Federal Home Loan Bank of Atlanta stock.

While we have the authority under applicable law to invest in derivative securities, our investment policy does not permit this investment.

had no investments in derivative securities at June 30, 2008.

At June 30, 2008, our investment portfolio totaled $18.6 million

and consisted primarily of U.S.

Treasury obligations and federal agency securities, mortgage-backed securities issued primarily by Fannie Mae, Freddie Mac and Ginnie Mae, and a mutual fund that invests in adjustable-rate mortgages.

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an

alternate source of low-risk investments when demand for loans is weak and to generate a favorable return.

Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy.

directors is also responsible for the implementation of the investment policy and monitoring our investment performance.

Individual investment transactions, portfolio composition and performance are reviewed and ratified by our board of directors

While we have the authority under applicable law to invest in derivative securities, our investment policy does not

permit this investment.

We had no investments in derivative securities at June 30, 2009.

At June 30, 2009, our investment

portfolio totaled $13.8 million and consisted primarily of U.S.

Treasury obligations and federal agency securities, mortgage-backed securities issued primarily by Fannie Mae, Freddie Mac and Ginnie Mae, and a mutual fund that invests in

adjustable-rate mortgages.

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest

rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return.

Our board of directors has the overall responsibility for the investment portfolio, including approval of

our investment policy.

The board of directors is also responsible for the implementation of the investment policy and monitoring our investment performance.

Individual investment transactions, portfolio composition and performance are reviewed and

ratified by our board of directors monthly.

Deposit Activities and Other Sources of Funds

Deposits and loan repayments are the major sources of our funds for lending and other investment purposes.

Loan repayments are a relatively stable source of funds, while deposit inflows

and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Loan repayments

are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions.

Deposit Accounts .

Substantially all of our depositors are residents of the State of Maryland.

Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including checking accounts,

NOW and money market accounts, passbook and savings accounts and certificates of deposit.

Deposits are attracted from within our market area through the offering of a broad selection of

deposit instruments, including checking accounts, NOW and money market accounts, passbook and savings accounts and certificates of deposit.

Additionally, our customers may use any M&T Bank ATM without a surcharge.

At June 30, 2008, core deposits, which consist of savings, NOW and money

market accounts, comprised 55.5% of our deposits.

At June 30, 2009, core

deposits, which consist of savings, NOW and money market accounts, comprised 49.0% of our deposits.

We do not utilize brokered funds.

Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.

In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns.

We generally review our deposit

mix and pricing monthly.

Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on

deposit and the interest rate, among other factors.

In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer

preferences and concerns.

We generally review our deposit mix and pricing monthly.

We use our money market account as a primary source of liquidity.

Consequently, when we require additional liquidity we will offer the highest rates in our market area.

When we do not require liquidity, our money market

account rates are competitive.

With regard to other deposit products, our current strategy is to offer competitive rates, and even higher rates on checking accounts, but not to be the market leader in every type and maturity.

We utilize advances from the Federal Home Loan Bank of Atlanta to supplement our supply of lendable funds and to meet

deposit withdrawal requirements.

Consequently, when we require additional liquidity we will offer the highest rates in our market

When we do not require liquidity, our money market account rates are competitive.

With regard to other deposit products, our current strategy is to offer competitive rates, and even higher rates on checking accounts, but not to be the market

leader in every type and maturity.

We utilize advances from the Federal Home Loan Bank of Atlanta to

supplement our supply of lendable funds and to meet deposit withdrawal requirements.

The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions.

As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to

apply for advances on the security of such stock and certain of

our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards

related to creditworthiness have been met.

Under its current credit policies, the Federal Home Loan Bank generally limits advances to 25% of a members assets and short-term borrowings of less than one year may not exceed 10% of the

institutions assets.

The Federal Home Loan Bank determines specific lines of credit for each member institution.

At June 30, 2008, we had the ability to borrow an additional $32.5 million from the Federal Home Loan Bank of Atlanta.

As a member, we are required to own capital stock

in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided

certain standards related to creditworthiness have been met.

Advances are made under several different programs, each having its own interest rate and range of maturities.

Depending on the program, limitations on the amount of advances are based

either on a fixed percentage of an institutions net worth or on the Federal Home Loan Banks assessment of the institutions creditworthiness.

At June 30, 2009, we had the ability to borrow an additional $40.0 million from the

Federal Home Loan Bank of Atlanta.

Additionally, at June 30, 2009, the Bank had a $2.0 million unsecured demand line of credit facility with M&T Bank, which had no outstanding balance.

As of June 30, 2008, we had 35 full-time employees and three part-time employees, none of whom is

represented by a collective bargaining unit.

As of June 30, 2009, we had 34

full-time employees and two part-time employees, none of whom is represented by a collective bargaining unit.

We believe our relationship with our employees is good.

BV Financials only direct subsidiary is Bay-Vanguard Federal.

Bay-Vanguard Federal has one subsidiary.

Housing Recovery Corporation holds real estate and other assets acquired through foreclosure or repossession by Bay-Vanguard Federal.

Bay-Vanguard Federal has one subsidiary, Housing Recovery Corporation.

Housing Recovery Corporation holds real estate and other assets acquired through

foreclosure or repossession by Bay-Vanguard Federal.

Regulation and Supervision

As a federal mutual holding company, Bay-Vanguard, M.H.C.

is required by federal law to report to, and otherwise comply with the rules and regulations

of, the Office of Thrift Supervision.

BV Financial, Inc.

as a federally chartered corporation, is also subject to reporting to and regulation by the Office of Thrift Supervision.

Bay-Vanguard Federal is subject to extensive regulation, examination

and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer.

Bay-Vanguard Federal is a member of the Federal Home Loan Bank System and, with respect to

deposit insurance, of the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation.

Bay-Vanguard Federal must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its

activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions.

The Office of Thrift Supervision and/or the Federal

Deposit Insurance Corporation conduct periodic examinations to test Bay-Vanguard Federals safety and soundness and compliance with various regulatory requirements.

This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors.

The regulatory

structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of

adequate loan loss reserves for regulatory purposes.

Any change in such regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on

Bay-Vanguard, M.H.C., BV Financial, Inc., Bay-Vanguard Federal and their operations.

As a federal mutual holding company,

Bay-Vanguard, M.H.C.

is required by federal law to report to, and otherwise comply with the rules and regulations of, the Office of Thrift Supervision.

BV Financial, as a federally chartered corporation, is also subject to reporting to and

regulation by the Office of Thrift Supervision.

Bay-Vanguard Federal, as an insured federal savings association, is subject to extensive

regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer.

Bay-Vanguard Federal is a member of the Federal Home Loan Bank

System and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation.

Bay-Vanguard Federal must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance

Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions.

The Office of Thrift

Supervision and/or the Federal Deposit Insurance Corporation conduct periodic examinations to test Bay-Vanguard Federals safety and soundness and compliance with various regulatory requirements.

This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the

protection of the insurance fund and depositors.

The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with

respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Any change in such regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance

Corporation or Congress, could have a material adverse impact on Bay-Vanguard, M.H.C., BV Financial, Bay-Vanguard Federal and their operations.

Certain regulatory requirements applicable to Bay-Vanguard Federal and to Bay-Vanguard, M.H.C.

are referred to below or elsewhere herein.

The description of

statutory provisions and regulations applicable to savings institutions and their holding companies set forth below and elsewhere in this document does not purport to be a complete description of such statutes and regulations and their effects on

Bay-Vanguard Federal and Bay-Vanguard, M.H.C.

referred to below or elsewhere herein.

The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth below and elsewhere in this document does not purport to be a complete

description of such statutes and regulations and their effects on Bay-Vanguard Federal and Bay-Vanguard, M.H.C.

and is qualified in its entirety by reference to the actual statutes and regulations.

3 unchanged sentences

As such, Bay-Vanguard, M.H.C.

is registered with the Office of Thrift Supervision and is

subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements.

is registered with the Office of Thrift Supervision and is subject to Office of Thrift Supervision regulations,

examinations, supervision and reporting requirements.

In addition, the Office of Thrift Supervision has enforcement authority over Bay-Vanguard, M.H.C.

and its non-savings institution

subsidiaries.

Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Activities Restrictions Applicable to Mutual Holding Companies .

Pursuant to federal law and Office of Thrift Supervision

regulations, a mutual holding company such as Bay-Vanguard, M.H.C., with appropriate OTS approvals, may engage in the following activities:

and its non-savings institution subsidiaries.

Among other things, this authority permits the OTS

to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Restrictions Applicable to Mutual Holding Companies .

Pursuant to federal law and Office of Thrift Supervision regulations, a mutual holding company such as Bay-Vanguard, M.H.C., with appropriate OTS approvals, may engage in the

following activities:

(1) investing in the stock of a savings association;

(2) acquiring a mutual association through the

merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company;

(3) merging with or acquiring another holding company, one of whose subsidiaries is a

savings association;

(4) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share

their home offices;

(5) furnishing or performing management services for a savings association subsidiary of such company;

(2) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings

association subsidiary of such holding company;

(3) merging with or acquiring another holding company, one of whose subsidiaries is a savings association;

(4) investing in a corporation, the capital stock of which is available for purchase

by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices;

(5) furnishing or performing management services for a savings association subsidiary of

such company;

(6) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company;

(7) holding or managing properties used or occupied by a savings association subsidiary of such company properties used or occupied by a savings association subsidiary of such company;

(7) holding or managing properties used or occupied by a savings association subsidiary of such company properties used

or occupied by a savings association subsidiary of such company;

(8) acting as trustee under deeds of trust;

(9) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of The Association Holding Company Act, unless the Office of Thrift Supervision,

by regulation, prohibits or limits any such activity for savings and loan holding companies;

or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987;

(10) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Office of Thrift Supervision.

The Gramm-Leach Bliley Act of 1999 was designed to modernize the regulation of the financial services industry by expanding the ability of bank holding

companies to affiliate with other types of financial services companies such as insurance companies and investment banking companies.

The legislation also expanded the activities permitted for mutual savings and loan holding companies to also

include any activity permitted a financial holding company under the legislation, including a broad array of insurance and securities activities.

Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from, directly or indirectly or through one or more subsidiaries, acquiring more than 5% of the voting stock of

another savings institution, or holding company thereof, without prior written approval of the Office of Thrift Supervision from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings

(9) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding

companies under Section 4(c) of The Bank Holding Company Act, unless the Office of Thrift Supervision, by regulation, prohibits or limits any such activity for savings and loan holding companies;

or (B) in which multiple savings and loan

holding companies were authorized (by regulation) to directly engage on March 5, 1987;

and (10) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings

and loan holding company is approved by the Office of Thrift Supervision.

The Gramm-Leach Bliley Act of 1999 was designed to modernize the

regulation of the financial services industry by expanding the ability of bank holding companies to affiliate with other types of financial services companies such as insurance companies and investment banking companies.

The legislation also

expanded the activities permitted for mutual savings and loan holding companies to also include any activity permitted a financial holding company under the legislation, including a broad array of insurance and securities activities.

Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from, directly or indirectly or

through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings institution, or holding company thereof, without prior written approval of the Office of Thrift Supervision from acquiring or retaining, with certain

exceptions, more than 5% of a non-subsidiary holding company or savings association.

A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law;

or acquiring or retaining control of a depository institution that is not

insured by the Federal Deposit Insurance Corporation.

In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources and future prospects of the

company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except:

acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation.

In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must

consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding

company controlling savings institutions in more than one state, except:

(1) the approval of interstate supervisory acquisitions by savings and loan holding companies;

and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit

such acquisitions.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test set forth in federal law, the holding company must register with the Federal Reserve Board as a bank holding company within one year

of the savings institutions failure to so qualify.

Although savings and loan holding companies are not currently subject to regulatory capital requirements

or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below.

Bay-Vanguard Federal must notify the Office of Thrift

Supervision 30 days before declaring any dividend.

In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation

of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Stock Holding

Company Subsidiary Regulation .

The Office of Thrift Supervision has adopted regulations governing the two-tier mutual holding company form of organization and mid-tier stock holding companies that are controlled by mutual holding

Under these rules, the stock holding company subsidiary holds all the shares of the mutual holding companys savings association subsidiary and issues the majority of its own shares to the mutual holding company parent.

the stock holding company subsidiary is permitted to engage in activities that are permitted for its mutual holding company parent subject to the same terms and conditions.

Finally, Office of Thrift Supervision regulations maintain that the stock

holding company subsidiary must be federally chartered for supervisory reasons.

and (2) the acquisition of a

savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.

The states vary in the

extent to which they permit interstate savings and loan holding company acquisitions.

If the savings institution subsidiary of a savings

and loan holding company fails to meet the qualified thrift lender test set forth in federal law, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institutions failure to

Although savings and loan holding companies are not currently subject to regulatory capital requirements or specific

restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below.

Bay-Vanguard Federal must notify the Office of Thrift Supervision 30

days before declaring any dividend and comply with the additional restrictions described below.

In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision

and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Stock Holding Company Subsidiary Regulation .

The Office of Thrift Supervision has adopted regulations governing the two-tier mutual holding company form of organization and mid-tier stock holding

companies, such as BV Financial, that are controlled by mutual holding companies.

Under these rules, the stock holding company subsidiary holds all the shares of the mutual holding companys savings association subsidiary and issues the

majority of its own shares to the mutual holding company parent.

In addition, the stock holding company subsidiary is permitted to engage in activities that are permitted for its mutual holding company parent subject to the same terms and

Finally, Office of Thrift Supervision regulations maintain that the stock holding company subsidiary must be federally chartered for supervisory reasons.

Waivers of Dividends.

Office of Thrift Supervision regulations require mutual holding companies to notify the agency if they propose to waive receipt of dividends from their stock subsidiary.

of Thrift Supervision reviews dividend waiver notices on a case-by-case basis and, in general, does not object to a waiver if:

(1) the waiver would not be detrimental to the safe and sound operation of the savings association;

mutual holding companys board of directors determines that their waiver is consistent with such directors fiduciary duties to the mutual holding companys members.

Bay-Vanguard, M.H.C.

anticipates waiving dividends, if any are paid.

Conversion of Bay-Vanguard, M.H.C.

1 unchanged sentence

Office of Thrift Supervision regulations permit Bay-Vanguard, M.H.C.

to convert from the mutual form of organization to the capital stock form of organization.

convert from the mutual form of organization to the capital stock form of organization.

There can be no assurance when, if ever, a conversion transaction will occur.

a conversion transaction, a new holding company would be formed as the successor to BV Financial, Inc., Bay-Vanguard, M.H.C.s corporate existence would end, and certain depositors of Bay-Vanguard Federal would receive the right to subscribe

for additional shares of the new holding company.

In a conversion transaction, each share of common stock held by stockholders other than Bay-Vanguard, M.H.C.

would be automatically converted into a number of shares of common stock of the new

holding company based on an exchange ratio determined at the time of conversion that ensures that stockholders other than Bay-Vanguard, M.H.C.

own the same percentage of common stock in the new holding company as they owned in BV Financial, Inc.

immediately before conversion.

The total number of shares held by stockholders other than Bay-Vanguard, M.H.C.

after a conversion transaction would be increased by any purchases by such stockholders in the stock offering conducted as part of the

conversion transaction.

In a conversion transaction, a new holding company would be formed as the successor

to BV Financial, Bay-Vanguard, M.H.C.s corporate existence would end, and certain depositors of Bay-Vanguard Federal would receive the right to subscribe for additional shares of the new holding company.

In a conversion transaction, each share

of common stock held by stockholders other than Bay-Vanguard, M.H.C.

would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio determined at the time of conversion that ensures

that stockholders other than Bay-Vanguard, M.H.C.

own the same percentage of common stock in the new holding company as they owned in BV Financial immediately before conversion.

The total number of shares held by stockholders other than

Bay-Vanguard, M.H.C.

after a conversion transaction would be increased by any purchases by such stockholders in the stock offering conducted as part of the conversion transaction.

Acquisition of Bay-Vanguard, M.H.C.

Under the Federal Change in Control Act, a notice must be

submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire control of a savings and loan holding company or savings institution.

Under certain circumstances, a change

of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Office of Thrift Supervision has found that the acquisition will not result in a change

of control of Bay-Vanguard, M.H.C.

Under the Change in Control Act, the Office of Thrift Supervision 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 anti-trust effects of the acquisition.

Under the Federal Change in Control Act, a notice must be submitted to the Office of Thrift Supervision

if any person (including a company), or group acting in concert, seeks to acquire direct or indirect control of a savings and loan holding company or savings institution.

Under certain circumstances, a change of control may occur, and

prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Office of Thrift Supervision has found that the acquisition will not result in a change of control of

Bay-Vanguard, M.H.C.

the acquirer and the anti-trust effects of the acquisition.

Any company that acquires control would then be subject to regulation as a savings and loan holding company.

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Business Activities .

The activities of

federal savings associations are governed by federal law and regulations.

These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage.

In particular, certain lending authority for federal

savings institutions, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institutions capital or assets.

Capital Requirements .

The Office of Thrift Supervision capital regulations require savings institutions to meet three minimum

capital standards:

The activities of federal savings associations are governed by federal law and regulations.

These laws and

regulations delineate the nature and extent of the activities in which federal savings institutions may engage.

In particular, certain lending authority for federal savings institutions, e.g., commercial, non-residential real property loans and

consumer loans, is limited to a specified percentage of the institutions capital or assets.

Requirements .

The Office of Thrift Supervision capital regulations require savings institutions to meet three minimum capital standards:

a 1.5% tangible capital to total assets ratio;

a 4% Tier 1 capital to total assets leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system);

a 4% Tier 1 capital to total assets leverage ratio

(3% for institutions receiving the highest rating on the CAMELS examination rating system);

and an 8% risk-based capital ratio.

addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the

risk-based capital standard itself, a 4% Tier 1 risk-based capital standard.

The Office of Thrift Supervision regulations also require that, in meeting the tangible,

leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal

that are not permissible for a national bank.

The risk-based capital standard for savings institutions 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

activities, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the

type of asset.

Core (Tier 1) capital is generally 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 (Tier 2 capital) currently include cumulative preferred stock, long-term perpetual

preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses, limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on

available-for-sale equity securities with readily determinable fair market values.

In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible

capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard.

The Office of Thrift Supervision

regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national

The risk-based capital standard for savings institutions 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 activities, recourse obligations,

residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset.

Core (Tier 1) capital

is generally 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 (Tier 2) capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities,

subordinated debt and intermediate preferred stock, the allowance for loan and lease losses, limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of 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.

The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that

an institutions capital level is or may become inadequate in light of the particular circumstances.

Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institutions capital level is or may become inadequate in light of the particular

circumstances.

At June 30, 2009, Bay-Vanguard Federal met each of its capital requirements.

The following table presents Bay-Vanguard Federals capital position at June 30, 2008.

The following table presents Bay-Vanguard

Federals capital position at June 30, 2009.

(Dollars in thousands)

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assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be

undercapitalized. A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be significantly

undercapitalized and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be critically undercapitalized. Subject to a narrow exception, the Office of Thrift Supervision is

required to appoint a receiver or conservator within specified time frames for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the Office of Thrift

Supervision within 45 days of the date a savings institution is deemed to have received notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Compliance with the plan

must be guaranteed by any parent holding company in an amount of up to the lesser of 5% of the savings associations total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital

In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions

and expansion.

The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Significantly

undercapitalized institutions are subject to additional mandatory and discretionary restrictions.

Insurance of Deposit

Deposits of Bay-Vanguard Federal are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation.

Insurance premiums are based on a number of

factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund.

The Federal Deposit Insurance Corporation has the ability

to adjust the insurance funds reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year.

The FDIC has adopted regulations that set assessment rates that took effect

at the beginning of 2007 and continued in 2008.

The current assessment rates for most banks vary between five cents and seven cents for every $100 of deposits.

A change in insurance premiums could have an adverse effect on the operating expenses and

results of operations of Bay-Vanguard Federal.

We cannot predict what insurance assessment rates will be in the future.

Assessment credits have been provided to institutions that paid high premiums in the past.

Bay-Vanguard Federal paid $19,000 in

FDIC insurance premiums for the year ended June 30, 2008.

Insurance of deposits may be terminated by the Federal Deposit Insurance

Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal

Deposit Insurance Corporation.

We do not know of any practice, condition or violation that might lead to termination of our deposit insurance.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.

undercapitalized. A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a

leverage ratio that is less than 3% is considered to be significantly undercapitalized and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be critically

undercapitalized. Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is critically undercapitalized. The regulation

also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings institution is deemed to have received notice that it is undercapitalized, significantly

undercapitalized or critically undercapitalized. Compliance with the plan must be guaranteed by any parent holding company in an amount of up to the lesser of 5% of the savings associations total assets when it was deemed to

be undercapitalized or the amount necessary to achieve compliance with applicable capital regulations.

In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited

to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion.

The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital

directive and the replacement of senior executive officers and directors.

Significantly undercapitalized institutions are subject to additional mandatory and discretionary restrictions.

Insurance of Deposit Accounts.

Deposits of Bay-Vanguard Federal are insured up to applicable limits by the Deposit Insurance Fund of the

Federal Deposit Insurance Corporation.

Under the Federal Deposit Insurance Corporations risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels

and certain other factors, with less risky institutions paying lower assessments.

An institutions assessment rate depends upon the category to which it is assigned, with less risky institutions paying lower assessments.

For 2008, assessments

ranged from five to forty-three basis points of an institutions deposit assessment base.

Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the Federal Deposit Insurance

Corporation, pursuant to a Restoration Plan to replenish the fund, adopted an across the board seven basis point increase in the assessment range for the first quarter of 2009.

The Federal Deposit Insurance Corporation adopted further refinements to

its risk-based assessment that were effective April 1, 2009 and effectively make the range seven to seventy-seven and one half basis points.

On May 22, 2009, the Federal Deposit Insurance Corporation issued a final rule that will impose a

special five basis points assessment on each institutions assets minus Tier 1 capital as of June 30, 2009, which would be payable to the Federal Deposit Insurance Corporation on September 30, 2009.

If after June 30, 2009, the

reserve ratio of the Deposit Insurance Fund falls to a level that the Board of the Federal Deposit Insurance Corporation (the Board) believes would adversely affect public confidence or to a level close to or below zero, the Board may

impose an additional special assessment of up to five basis points on each institutions assets minus Tier 1 capital for the third and fourth quarters of 2009 as deemed necessary.

The cost of the special five basis points assessment to

Bay-Vanguard Federal based on assets minus Tier 1 capital as of June 30, 2009 was $75,200.

No institution may pay a dividend if in default of the federal deposit insurance assessment.

Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until

December 31, 2013.

Thereafter, regular deposit accounts will be insured up to a maximum of $100,000 and self-directed retirement accounts up to a maximum of $250,000.

In addition, the Federal Deposit Insurance Corporation adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing

transaction accounts would receive unlimited insurance coverage until December 31, 2009 and certain senior unsecured debt issued by institutions and their holding companies would be guaranteed by the Federal Deposit Insurance Corporation

through June 30, 2012 and in certain conditions through December 31, 2012.

Bay-Vanguard Federal made the business decision to participate in the unlimited noninterest bearing transaction account coverage and Bay-Vanguard Federal, BV

Financial and Bay-Vanguard M.H.C.

opted not to participate in the unsecured debt guarantee program.

Federal law also provides for the

possibility that the Federal Deposit Insurance Corporation may pay dividends to insured institutions once the Deposit Insurance fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds

issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.

That payment is established quarterly and during the fiscal year ending June 30, 2009 averaged 1.08 basis points of assessable deposits.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments.

A significant increase in insurance premiums

would likely have an adverse effect on the operating expenses and results of operations of Bay-Vanguard Federal.

Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound

practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision.

The management

of Bay-Vanguard Federal does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Loans to One Borrower .

Federal law provides that savings institutions are generally subject to the limits on loans to one borrower

applicable to national banks.

Subject to certain exceptions, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus.

An additional amount may be

lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

Federal law requires savings institutions to meet a qualified thrift lender test.

Under the test, a savings association is required to either qualify as a domestic building and loan association under the Internal

Revenue Code or maintain at least 65% of its portfolio assets (total assets less:

Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks.

Subject to certain exceptions, a savings institution may

not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus.

An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified

readily-marketable collateral.

Federal law requires savings institutions to meet a qualified thrift lender

Under the test, a savings association is required to either qualify as a domestic building and loan association under the Internal Revenue Code or maintain at least 65% of its portfolio assets (total assets less:

(1) specified liquid assets up to 20% of total assets;

(2) intangibles, including goodwill;

and (3) the value of property used to conduct

business) in certain qualified thrift investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

Recent legislation has expanded

the extent to which education loans, credit card loans and small business loans may be considered qualified thrift investments.

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter.

As of June 30, 2008, Bay-Vanguard Federal maintained 78.5% of its

portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

Limitation on Capital

Distributions .

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.

If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Bay-Vanguard Federal, it is a subsidiary of a holding company.

In the event Bay-Vanguard Federals capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, Bay-Vanguard Federals ability to make capital distributions

could be restricted.

In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such

distribution would constitute an unsafe or unsound practice.

and (3) the value of property used to conduct business) in certain qualified thrift investments (primarily residential mortgages

and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be

considered qualified thrift investments.

A savings institution that fails the qualified thrift lender test is subject to

certain operating restrictions and may be required to convert to a bank charter.

As of June 30, 2009, Bay-Vanguard Federal maintained 74.0% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender

Limitation on Capital Distributions .

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.

If an application is not required, the institution must still provide prior

notice to the Office of Thrift Supervision of the capital distribution if, like Bay-Vanguard Federal, it is a subsidiary of a holding company.

In the event Bay-Vanguard Federals capital fell below its regulatory requirements or the Office of

Thrift Supervision notified it that it was in need of increased supervision, Bay-Vanguard Federals ability to make capital distributions could be restricted.

In addition, the Office of Thrift Supervision could prohibit a proposed capital

distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice.

Standards for Safety and Soundness .

The federal banking

agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness.

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.

Office of Thrift Supervision determines that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the

Transactions with Related Parties .

Bay-Vanguard Federals authority to engage in transactions with

affiliates (e.g., any entity that controls or is under common control with an institution, including Bay-Vanguard, M.H.C.

and its non-savings institution subsidiaries) is limited by federal law.

The aggregate amount of covered

transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution.

The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institutions capital and

The federal banking agencies have adopted Interagency Guidelines prescribing Standards for

Safety and Soundness in various areas such as internal controls and information systems, internal audit, loan documentation and credit underwriting, interest rate exposure, asset growth and quality, earnings and

compensation, fees and benefits.

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.

If the Office of Thrift Supervision determines that a savings association fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may

require the institution to submit an acceptable plan to achieve compliance with the standard.

Transactions with Related

Bay-Vanguard Federals authority to engage in transactions with affiliates (e.g., any entity that controls or is under common control with an institution, including Bay-Vanguard, M.H.C.

and its non-savings

institution subsidiaries) is limited by federal law.

The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution.

The aggregate amount of covered transactions

with all affiliates is limited to 20% of the savings institutions capital and surplus.

Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law.

The purchase of low quality assets from affiliates is generally prohibited.

The transactions with affiliates

must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.

In addition, savings institutions are prohibited from lending to

any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

Bay-Vanguard Federal may make loans to its executive officers and directors in compliance with federal banking laws.

Under such laws, Bay-Vanguard

Federals authority to extend credit to executive officers, directors and 10% shareholders (insiders), as well as entities such persons control, is limited.

The law limits both the individual and aggregate amount of loans

Bay-Vanguard Federal may make to insiders based, in part, on Bay-Vanguard Federals capital position and requires certain board approval procedures to be followed.

Such loans are required to be made on terms substantially the same as those

offered to unaffiliated individuals and not involve more than the normal risk of repayment.

There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not

give preference to insiders over other employees.

The purchase of low

quality assets from affiliates is generally prohibited.

The transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with

non-affiliated companies.

In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any

affiliate other than a subsidiary.

Bay-Vanguard Federal may make loans to its executive officers and directors in compliance with federal

banking laws.

Under such laws, Bay-Vanguard Federals authority to extend credit to executive officers, directors and 10% shareholders (insiders), as well as entities such persons control, is limited.

The law limits both the

individual and aggregate amount of loans Bay-Vanguard Federal may make to insiders based, in part, on Bay-Vanguard Federals capital position and requires certain board approval procedures to be followed.

Such loans are required to be made on

terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment.

There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all

employees of the institution and does not give preference to insiders over other employees.

Loans to executive officers are subject to additional restrictions as to type and amount.

Enforcement .

The Office of Thrift Supervision has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties,

including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.

Formal enforcement action may range from the issuance of a

capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance.

Civil penalties cover a wide range of violations and can amount to $25,000 per

day, or even $1 million per day in especially egregious cases.

The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a

particular savings institution.

The Office of Thrift Supervision has primary enforcement responsibility over savings institutions and has the authority

to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an

insured institution.

Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance.

Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases.

The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of

Thrift Supervision that enforcement action to be taken with respect to a particular savings institution.

If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances.

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Assessments .

Savings institutions are required to pay assessments to the Office of Thrift Supervision to fund the

agencys operations.

The general assessments, paid on a semi-annual basis, are computed based upon the savings institutions (including consolidated subsidiaries) total asset size, condition and complexity of portfolio.

The OTS assessments

paid by Bay-Vanguard Federal for the fiscal year ended June 30, 2008 totaled $50,000.

Savings institutions are

required to pay assessments to the Office of Thrift Supervision to fund the agencys operations.

The general assessments, paid on a semi-annual basis, are computed based upon the savings institutions (including consolidated subsidiaries)

total asset size, condition and complexity of portfolio.

The OTS assessments paid by Bay-Vanguard Federal for the fiscal year ended June 30, 2009 totaled $53,000.

Federal Home Loan Bank System

Bay-Vanguard Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.

The Federal Home Loan Bank

provides a central credit facility primarily for member institutions.

Bay-Vanguard Federal, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank.

Bay-Vanguard Federal was

in compliance with this requirement with an investment in Federal Home Loan Bank stock at June 30, 2008 of $654,000.

The Federal Home

Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs.

These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay

to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members.

If dividends were reduced, or interest on

future Federal Home Loan Bank advances increased, Bay-Vanguard Federals net interest income would likely also be reduced.

The Federal Home Loan Bank provides a central credit facility primarily for member

institutions.

Bay-Vanguard Federal, as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank.

Bay-Vanguard Federal was in compliance with this requirement with an

investment in Federal Home Loan Bank stock at June 30, 2009 of $631,000.

This stock is carried at a cost of $100 per share.

Due to concerns about the capital strength of the Federal Home Loan Bank of Atlanta and the entire Federal Home Loan

Bank system, there has been industry discussion about impairment issues on Federal Home Loan Bank stock.

If the Federal Home Loan Bank stock were deemed to be impaired, the write-down for the Bank could be significant.

However, due to the nature of

the Federal Home Loan Bank system and the heavy dependence of community banks on the Federal Home Loan Bank, it is believed that any determination about the valuation of Federal Home Loan Bank stock needs to be accomplished at the national level so

that the entire community banking system is not disrupted.

The Federal Home Loan Banks are required to provide funds for the resolution of

insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs.

These requirements, or the general financial condition of the Federal Home Loan Bank, could reduce the amount of dividends that the Federal Home Loan Banks

pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members.

If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, Bay-Vanguard

Federals net interest income would likely also be reduced.

The Federal Home Loan Bank of Atlanta changed its dividend declaration

and payment schedule in the fourth quarter of 2008 so a dividend can be declared and paid to members after net income is calculated for the preceding quarter.

No dividends were paid for the fourth quarter of 2008 and first quarter of 2009;

dividends were paid for the third quarter of 2008 and second quarter of 2009.

Federal Reserve System

The Federal Reserve Board

regulations require savings institutions to maintain non-interest earning 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;

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning 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 $44.4 million;

a 10% reserve ratio is applied above $44.4 million.

The first $9.3 million of otherwise

reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements.

The amounts are adjusted annually.

The first $10.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements.

are adjusted annually.

Bay-Vanguard Federal complies with the foregoing requirements.

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Federal Income Taxation

We report our income on a fiscal year basis using the accrual method of accounting.

The federal income tax laws

apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below.

The following discussion of tax matters is intended only as a summary and does not purport to be a

comprehensive description of the tax rules applicable to us.

Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 2004.

For its 2008 year, BV Financials maximum federal income tax

rate was 34.0%.

BV Financial and Bay-Vanguard Federal have entered into a tax allocation agreement.

Because BV Financial owns 100% of the

issued and outstanding capital stock of Bay-Vanguard Federal, BV Financial and Bay-Vanguard Federal are members of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group BV Financial is the common

parent corporation.

As a result of this affiliation, Bay-Vanguard Federal will be included in the filing of a consolidated federal income tax return with BV Financial and the parties have agreed to compensate each other for their individual share of

the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.

report our income on a fiscal year basis using the accrual method of accounting.

The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed

The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us.

Our federal income tax returns have been either audited or closed under the

statute of limitations through tax year 2004.

For its 2009 year, BV Financials maximum federal income tax rate was 34.0%.

Financial and Bay-Vanguard Federal have entered into a tax allocation agreement.

Because BV Financial owns 100% of the issued and outstanding capital stock of Bay-Vanguard Federal, BV Financial and Bay-Vanguard Federal are members of an affiliated

group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group BV Financial is the common parent corporation.

As a result of this affiliation, Bay-Vanguard Federal will be included in the filing of a consolidated

federal income tax return with BV Financial and the parties have agreed to compensate each other for their individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income

Bad Debt Reserves.

For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain

favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve.

A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property

improved or to be improved, under the percentage of taxable income method or the experience method.

The reserve for nonqualifying loans was computed using the experience method.

Federal legislation enacted in 1996 repealed the reserve method of

accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves.

Approximately $1.2

million of our accumulated bad debt reserves would not be recaptured into taxable income unless Bay-Vanguard Federal makes a non-dividend distribution to BV Financial as described below.

For fiscal years beginning before June 30, 1996, thrift

institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad

debt reserve.

A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method.

reserve for nonqualifying loans was computed using the experience method.

Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and

require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves.

Approximately $1.2 million of our accumulated bad debt reserves would not be recaptured into taxable income unless Bay-Vanguard

Federal makes a non-dividend distribution to BV Financial as described below.

Distributions.

If Bay-Vanguard Federal makes non-dividend distributions to BV Financial, the distributions will be considered

to have been made from Bay-Vanguard Federals unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the non-dividend distributions, and then from Bay-Vanguard

Federals supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Bay-Vanguard Federals taxable income.

Non-dividend distributions include distributions in excess of Bay-Vanguard Federals current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial

or complete liquidation.

Dividends paid out of Bay-Vanguard Federals current or accumulated earnings and profits will not be so included in Bay-Vanguard Federals taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by

the tax attributable to the income, is equal to the amount of the distribution.

Therefore, if Bay-Vanguard Federal makes a non-dividend distribution to BV Financial, approximately one and one-half times the amount of the distribution not in excess

of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate.

Bay-Vanguard Federal does not intend to pay dividends that would result in a recapture of any portion of

its bad debt reserves.

If Bay-Vanguard

Federal makes non-dividend distributions to BV Financial, the distributions will be considered to have been made from Bay-Vanguard Federals unrecaptured tax bad debt reserves, including the balance of its reserves as of

December 31, 1987, to the extent of the non-dividend distributions, and then from Bay-Vanguard Federals supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed,

but not more than the amount of those reserves, will be included in Bay-Vanguard Federals taxable income.

Non-dividend distributions include distributions in excess of Bay-Vanguard Federals current and accumulated earnings and profits,

as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation.

Dividends paid out of Bay-Vanguard Federals current or accumulated earnings and profits will not be so

included in Bay-Vanguard Federals taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount

that, when reduced by the tax attributable to the income, is equal to the amount of the distribution.

Therefore, if Bay-Vanguard Federal makes a non-dividend distribution to BV Financial, approximately one and one-half times the amount of the

distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate.

Bay-Vanguard Federal does not intend to pay dividends that would result in a

recapture of any portion of its bad debt reserves.

State Taxation

For fiscal 2008 BV Financial was subject to Marylands Corporation Business Tax at the rate of 7.0% on its taxable income, before net operating loss deductions and special deductions for federal income tax purposes.

The rate will

increase to 8.25% for fiscal 2009.

For fiscal 2009 BV Financial was subject to Marylands Corporation Business Tax at the rate of 8.25% on its taxable income, before net operating loss deductions and special deductions for federal income tax

The rate will remain the same for fiscal 2010.

BV Financial and Bay-Vanguard, M.H.C.

are required to file Maryland income tax returns because they are doing business in Maryland.

For this purpose, taxable income generally means federal taxable

income subject to certain adjustments (including addition of interest income on state and municipal obligations).

For this purpose, taxable income generally means

federal taxable income subject to certain adjustments (including addition of interest income on state and municipal obligations).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business