BV Financial, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is included herein beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A(T). CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Internal Controls Over Financial Reporting Management’s annual report on internal control over financial reporting is incorporated herein by reference to the Company’s audited Consolidated Financial Statements in this Annual Report on Form 10-K. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. (c) Changes to Internal Control Over Financial Reporting There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 45 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors For information concerning the directors of the Company, the information contained under the section captioned “Items to be Voted on by Stockholders—Item 1—Election of Directors” in BV Financial’s Proxy Statement for the 2009 Annual Meeting of Stockholders (“Proxy Statement”) is incorporated by reference. Executive Officers The Board of Directors annually elects the executive officers of BV Financial, Bay-Vanguard, M.H.C. and Bay-Vanguard Federal, who serve at the Board’s discretion. Our executive officers are: Name Position Edmund T. Leonard Chairman and Chief Financial Officer of BV Financial, Bay-Vanguard, M.H.C. and Bay-Vanguard Federal Carolyn M. Mroz President and Chief Executive Officer of BV Financial, Bay-Vanguard, M.H.C. and Bay-Vanguard Federal Daniel J. Gallagher, Jr. Senior Vice President of Bay-Vanguard Federal Jeffrey S. Collier Senior Vice President of Bay-Vanguard Federal Michele J. Kelly Senior Vice President of Bay-Vanguard Federal Below is information regarding our executive officers who are not also directors. Unless otherwise stated, the individual has held their current occupation for the last five years. The age indicated is as of June 30, 2009. Michele J. Kelly is a senior vice president of Bay-Vanguard Federal. Ms. Kelly was vice president of Vanguard Federal Savings and Loan Association before its merger with Bay Federal Savings and Loan Association in April 1996. Age 62. Jeffrey S. Collier is senior vice president of Bay-Vanguard Federal. Mr. Collier joined Bay-Vanguard Federal in February 2006. Mr. Collier was vice president of lending for seven years at Harford Bank before his employment by Bay-Vanguard Federal. Age 47. Compliance with Section 16(a) of the Exchange Act Reference is made to the cover page of this report and to the section captioned “Other Information Relating to Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for information regarding compliance with Section 16(a) of the Exchange Act. Disclosure of Code of Ethics and Business Conduct The Company has adopted a Code of Ethics, which is available to stockholders, without charge, upon written request to Robert R. Kern, Jr., Corporate Secretary, BV Financial, Inc., 7114 North Point Road, Baltimore, Maryland 21219. 46 Table of Contents Corporate Governance For information regarding the audit committee and its composition and the audit committee financial expert, the section captioned “Corporate Governance and Board Matters—Committees of the Board of Directors—Audit Committee” in the Company’s Proxy Statement is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the sections captioned “Executive Compensation” and “Corporate Governance and Board Matters—Director Compensation” in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. (c) Changes in Control Management of BV Financial knows of no arrangements, including any pledge by any person of securities of BV Financial, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Equity Compensation Plan Information The following table provides information as of June 30, 2009 for compensation plans under which equity securities may be issued. Plan category Number of Securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 111,456 $ 8.94 18,149 Equity compensation plans not approved by security holders — — — Total 111,456 $ 8.94 18,149 47 Table of Contents ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers—Transactions with Related Persons” in the Proxy Statement. Corporate Governance Information regarding director independence is incorporated herein by reference to the section captioned “Corporate Governance and Board Matters—Director Independence.” ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated herein by reference to the section captioned “Audit-Related Matters—Audit and Other Fees” and “Audit-Related Matters—Pre-Approval of Services by the Independent Auditor” in the Proxy Statement. 48 Table of Contents PART IV ITEM 15. EXHIBITS 3.1 Charter of BV Financial, Inc. (1) 3.2 Bylaws of BV Financial, Inc. (1) 4.0 Specimen Stock Certificate of BV Financial, Inc. (1) 10.1 Amended and Restated Employment Agreement between Bay-Vanguard Federal Savings Bank and Edmund T. Leonard (2) 10.2 Amended and Restated Employment Agreement between BV Financial, Inc. and Edmund T. Leonard (2) 10.3 Amended and Restated Employment Agreement between Bay-Vanguard Federal Savings Bank and Carolyn M. Mroz (2) 10.4 Amended and Restated Employment Agreement between BV Financial, Inc. and Carolyn M. Mroz (2) 10.5 Amended and Restated Employment Agreement between Bay-Vanguard Federal Savings Bank and Daniel J. Gallagher, Jr. (2) 10.6 Form of Bay-Vanguard Federal Savings Bank Employee Stock Ownership Plan and Trust (1) 10.7 Form of ESOP Loan Commitment Letter and ESOP Loan Documents (1) 10.8 Amended and Restated Bay-Vanguard Federal Savings Bank Change in Control Severance Compensation Plan (2) 10.9 Bay-Vanguard Federal Savings Bank Employees’ Savings and Profit-Sharing Plan (1) 10.10 Form of Bay-Vanguard Federal Savings Bank Executive Supplemental Retirement Plan (1) 10.11 Amended and Restated Bay-Vanguard Federal Savings Bank Supplemental Executive Retirement Plan (2) 10.12 Form of Bay-Vanguard Federal Savings Bank Directors’ Supplemental Retirement Plan (1) 10.13 BV Financial, Inc. 2005 Equity Incentive Plan (3) 21.0 Subsidiaries of the Registrant 23.0 Consent of Beard Miller Company LLP 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.0 Section 1350 Certification (1) Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on September 17, 2004, Registration No. 333-119083. (2) Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-Q, filed on May 13, 2009. (3) Incorporated herein by reference from Appendix C of the Proxy Statement for the 2005 Annual Meeting of Stockholders, filed on October 4, 2005. 49 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BV Financial, Inc. Date: September 24 , 2009 By: /s/ Carolyn M. Mroz Carolyn M. Mroz President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Name Title Date /s/ Carolyn M. Mroz Carolyn M. Mroz President, Chief Executive Officer and Director (principal executive officer) September 24, 2009 /s/ Edmund T. Leonard Edmund T. Leonard Chairman of the Board and Chief Financial Officer (principal accounting and financial officer) September 24, 2009 /s/ Michael J. Birmingham III Michael J. Birmingham III Director September 24, 2009 /s/ Frank W. Dingle Frank W. Dingle Director September 24, 2009 /s/ Daniel J. Gallagher, Jr. Daniel J. Gallagher, Jr. Director September 24, 2009 /s/ Robert R. Kern, Jr. Robert R. Kern, Jr. Director September 24, 2009 /s/ Brian K. McHale Brian K. McHale Director September 24, 2009 50 Table of Contents /s/ Anthony J. Narutowicz Anthony J. Narutowicz Director September 24, 2009 /s/ Jerry S. Sopher Jerry S. Sopher Director September 24, 2009 /s/ Catherine M. Staszak Catherine M. Staszak Director September 24, 2009 51 Table of Contents Management’s Report on Internal Control Over Financial Reporting The management of BV Financial, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of BV Financial, Inc.’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of BV Financial, Inc.’s internal control over financial reporting as of June 30, 2009, utilizing the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that BV Financial, Inc.’s internal control over financial reporting as of June 30, 2009 is effective. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of BV Financial, Inc.; and (3) unauthorized acquisitions, use, or disposition of BV Financial, Inc.’s assets that could have a material affect on BV Financial, Inc.’s financial statements are prevented or timely detected. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include an attestation report of BV Financial, Inc.’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by BV Financial, Inc.’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit BV Financial, Inc. to provide only management’s report in this annual report. F-1 Table of Contents R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM To the Board of Directors and Stockholders BV Financial, Inc. Baltimore, Maryland We have audited the accompanying consolidated statements of financial condition of BV Financial, Inc. and subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BV Financial, Inc. and subsidiaries as of June 30, 2009 and 2008 and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2009 in conformity with accounting principles generally accepted in the United States of America. Beard Miller Company LLP Baltimore, Maryland September 18, 2009 F-2 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF F INANCIAL C ONDITION June 30, 2009 2008 (Dollars In Thousands Except Per Share Amounts) A SSETS Cash $ 3,154 $ 1,753 Federal funds sold 8,086 6,529 Cash and Cash Equivalents 11,240 8,282 Interest bearing time deposits in other banks 124 580 Securities trading 1,076 — Securities available for sale 1,179 8,838 Securities held to maturity, fair value 2009 $11,689; 2008 $9,661 11,537 9,788 Loans receivable, net of allowance for loan losses 2009 $855; 2008 $709 119,235 124,843 Foreclosed real estate and repossessed assets 661 42 Premises and equipment, net 3,083 3,117 Federal Home Loan Bank of Atlanta stock, at cost 631 654 Investment in life insurance 2,098 2,054 Accrued interest receivable 592 670 Goodwill — 3,940 Other intangible assets, net 280 390 Deferred tax assets, net 2,372 — Other assets 445 827 Total Assets $ 154,553 $ 164,025 L IABILITIES AND S TOCKHOLDERS ’ E QUITY L IABILITIES Non-interest bearing deposits $ 6,041 $ 6,040 Interest bearing deposits 131,575 130,992 Total Deposits 137,616 137,032 Federal Home Loan Bank advances — 7,500 Official checks 883 657 Advance payments by borrowers for taxes and insurance 1,125 1,187 Other liabilities 1,280 1,304 Total Liabilities 140,904 147,680 S TOCKHOLDERS ’ E QUITY Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding — — Common stock, $0.01 par value; 9,000,000 shares authorized; 2,645,000 shares issued; 2,407,631 and 2,408,806 shares outstanding as of June 30, 2009 and June 30, 2008, respectively 26 26 Paid-in capital 11,117 11,123 Unearned employee stock ownership plan shares (687 ) (756 ) Treasury stock, at cost; 237,369 shares and 236,194 shares as of June 30, 2009 and June 30, 2008, respectively (2,068 ) (2,140 ) Retained earnings 5,241 8,129 Accumulated other comprehensive gain (loss) 20 (37 ) Total Stockholders’ Equity 13,649 16,345 Total Liabilities and Stockholders’ Equity $ 154,553 $ 164,025 See notes to consolidated financial statements. F-3 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF O PERATIONS Years Ended June 30, 2009 2008 (In Thousands Except Per Share Amounts) I NTEREST I NCOME Loans, including fees $ 7,819 $ 7,533 Investment securities - taxable 648 612 Other 21 698 Total Interest Income 8,488 8,843 I NTEREST E XPENSE Deposits 3,732 4,674 Federal Home Loan Bank Advances 634 467 Total Interest Expense 4,366 5,141 Net Interest Income 4,122 3,702 P ROVISION FOR L OAN L OSSES 729 328 Net Interest Income after Provision for Loan Losses 3,393 3,374 N ON -I NTEREST I NCOME Service fees on deposits 121 119 Service fees on loans 35 31 Income from investment in life insurance 76 76 Loss on securities trading (471 ) — Loss on sale of securities available for sale — (19 ) Termination of split-dollar life insurance liability 240 — Other income 93 81 Total Non-Interest Income 94 288 N ON -I NTEREST E XPENSES Compensation and related expenses 2,225 2,250 Occupancy 267 257 Data processing 373 375 Advertising 110 115 Professional fees 277 213 Equipment 148 175 Impairment write-down of investment securities — 274 Amortization of intangible assets 110 112 Goodwill impairment 3,940 — FDIC insurance premiums 235 19 Other 497 456 Total Non-Interest Expenses 8,182 4,246 Loss before Income Tax Benefit (4,695 ) (584 ) B ENEFIT FOR I NCOME T AXES (1,978 ) (254 ) Net Loss $ (2,717 ) $ (330 ) Basic Loss Per Share $ (1.17 ) $ (0.14 ) Diluted Loss Per Share $ (1.17 ) $ (0.14 ) Dividends Declared Per Share $ 0.20 $ 0.20 See notes to consolidated financial statements. F-4 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF S TOCKHOLDERS ’ E QUITY Years Ended June 30, 2009 and 2008 Common Stock Paid-In Capital Unearned Employee Stock Ownership Plan Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total (Dollars in Thousands) B ALANCE - J UNE 30, 2007 $ 26 $ 11,083 $ (825 ) $ (878 ) $ 8,866 $ (54 ) $ 18,218 Adoption of EITF 06-4 split-dollar life insurance (see Note 1) — — — — (221 ) — (221 ) Comprehensive loss: Net loss — — — — (330 ) — (330 ) Unrealized holding gains (net of tax of $11 and reclassification adjustment for securities losses recognized of $293) — — — — — 17 17 Total Comprehensive Loss — — — — — — (313 ) Compensation expense under stock-based compensation plan — 59 — 77 — — 136 Compensation expense under Employee Stock Ownership Plan — (19 ) 69 — — 50 Cash dividends declared — — — — (186 ) — (186 ) Purchase of treasury stock (175,981 shares) — — — (1,339 ) — — (1,339 ) B ALANCE - J UNE 30, 2008 26 11,123 (756 ) (2,140 ) 8,129 (37 ) 16,345 Comprehensive loss: Net loss — — — — (2,717 ) — (2,717 ) Unrealized holding gains (net of tax of $38) — — — — — 57 57 Total Comprehensive Loss — — — — — — (2,660 ) Compensation expense under stock-based compensation plan — 35 — 77 — — 112 Compensation expense under Employee Stock Ownership Plan — (41 ) 69 — — 28 Cash dividends declared — — — — (171 ) — (171 ) Purchase of treasury stock (1,175 shares) — — — (5 ) — — (5 ) B ALANCE - J UNE 30, 2009 $ 26 $ 11,117 $ (687 ) $ (2,068 ) $ 5,241 $ 20 $ 13,649 See notes to consolidated financial statements. F-5 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES C ONSOLIDATED S TATEMENTS OF C ASH F LOWS Years Ended June 30, 2009 2008 (In Thousands) C ASH F LOWS FROM O PERATING A CTIVITIES Net loss $ (2,717 ) $ (330 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net amortization of discounts and premiums 62 13 Provision for loan losses 729 328 Impairment write-down of investment securities — 274 Loss on sale of securities available for sale — 19 Net change in securities trading 1,471 — Amortization of deferred loan fees/costs (177 ) (128 ) Provision for depreciation 149 166 Amortization of intangible assets 110 112 Deferred tax benefit (1,735 ) (190 ) Increase in cash surrender value of life insurance (44 ) (76 ) Stock-based compensation expense 140 186 Termination of split-dollar life insurance liability (240 ) — Goodwill impairment 3,940 — Decrease (increase) in other assets 143 (604 ) Increase in other liabilities 216 201 Net Cash Provided by (Used in) Operating Activities 2,047 (29 ) C ASH F LOWS FROM I NVESTING A CTIVITIES Net decrease (increase) in interest bearing deposits in other banks 456 (381 ) Purchases of securities available for sale — (6,138 ) Purchases of securities held to maturity (6,000 ) (11,222 ) Proceeds from maturities and calls of securities available for sale 5,000 — Proceeds from maturities and calls of securities held to maturity 2,000 3,500 Proceeds from sale of securities available for sale — 250 Principal collected on mortgage backed securities 2,392 663 Net decrease (increase) in loans 4,083 (9,034 ) Purchase of premises and equipment (115 ) (879 ) Purchase of Federal Home Loan Bank stock (270 ) (368 ) Proceeds from the sale of Federal Home Loan Bank stock 293 562 Net cash received in branch acquisition — 46,913 Net Cash Provided by Investing Activities 7,839 23,866 C ASH F LOWS FROM F INANCING A CTIVITIES Increase (decrease) in official checks 226 (1,122 ) Net increase (decrease) in deposits 584 (12,313 ) Increase (decrease) in advance payments by borrowers for taxes and insurance (62 ) 48 Advances from Federal Home Loan Bank 8,500 7,500 Repayment of advances from Federal Home Loan Bank (16,000 ) (13,500 ) Purchase of stock for treasury (5 ) (1,339 ) Cash dividends paid (171 ) (186 ) Net Cash Used in Financing Activities (6,928 ) (20,912 ) Net Increase in Cash and Cash Equivalents 2,958 2,925 C ASH AND C ASH E QUIVALENTS - B EGINNING 8,282 5,357 C ASH AND C ASH E QUIVALENTS - E NDING $ 11,240 $ 8,282 S UPPLEMENTARY C ASH F LOWS I NFORMATION Interest paid $ 4,366 $ 5,139 Income taxes paid $ 138 $ 63 Net loans transferred to foreclosed real estate and repossessed assets $ 619 $ 42 See notes to consolidated financial statements. F-6 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES Business BV Financial, Inc. (the “Company”) was organized as a federally chartered corporation at the direction of Bay-Vanguard Federal Savings Bank (the “Bank” or “Bay-Vanguard Federal”) in January 2005 to become the mid-tier stock holding company for Bay-Vanguard Federal upon the completion of its reorganization into the mutual holding company form of organization. Pursuant to the Plan of Reorganization, the Bank converted to stock form with all of its stock owned by the Company and organized Bay-Vanguard, M.H.C. (the “M.H.C.”) as a federally chartered mutual holding company that owned 55% of the common stock of the Company. At June 30, 2009 and 2008 the M.H.C. owned 60.9% and 61.1%, respectively of the common stock of the Company. As part of the reorganization, the Company sold 1,190,250 shares of its common stock at a price of $10.00 per share to members of the Bank in a subscription offering raising approximately $11.0 million in net proceeds. Bay-Vanguard Federal is headquartered in Baltimore, Maryland and is a community-oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public using such funds to originate one-to four-family real estate, mobile home, construction, multi-family, commercial real estate and consumer loans. The Bank’s savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. Bay-Vanguard Federal is a member of the Federal Home Loan Bank System. The Bank has a wholly-owned subsidiary, Housing Recovery Corporation (“HRC”). HRC’s primary business is holding real estate and other assets acquired by the Bank through foreclosure or repossession. Principles of Consolidation The consolidated financial statements include the accounts of the Company, the Bank and its wholly-owned subsidiary, HRC. All intercompany balances and transactions have been eliminated in consolidation. Basis of Financial Statement Presentation and Significant Estimates The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the assessment of other than temporary impairment of investment securities, intangible asset impairment and the valuation of deferred tax assets. Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located within the Baltimore Metropolitan Area. The Company does not have any significant concentrations to any one industry or customer. F-7 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Securities The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires investments in securities to be classified in one of three categories: held to maturity, trading or available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost (including amortization of premium or accretion of discount). The Company does not regularly engage in security trading; however, beginning on July 1, 2008, the Company elected to account for the AMF Ultra Short Mortgage mutual fund it holds under SFAS 159 which meant the investment was reclassified as securities trading from available-for-sale and carried at fair value with future gains and losses reflected through earnings. During the year ended June 30, 2009, the Company recorded a $471,000 loss on securities trading in the income statement. Net unrealized gains and losses for debt securities classified as available-for-sale are required to be recognized as increases or decreases in other comprehensive income or loss, net of taxes, and excluded from the determination of net income. Realized gains and losses on sales of securities are determined using the specific identification method and are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Company does not intend to sell the security and will hold the security until the specified maturity or repricing date. Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district Federal Home Loan Bank (“FHLB”) according to a predetermined formula. This restricted stock is carried at cost. In December 2008, FHLB of Atlanta announced it would suspend the repurchase of excess capital stock from its members due to deterioration in its financial condition. As a result, the Bank may hold more FHLB stock than would have been previously required. Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others . Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the bank as compared to the capital stock amount for the bank and the length of time this situation has persisted, (2) commitments by the bank to make payments required by law or regulation and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the bank. Management believes no impairment charge is necessary related to the FHLB restricted stock as of June 30, 2009. The Bank held $631,000 of FHLB restricted stock at June 30, 2009. This stock is carried at a cost of $100 per share. During 2008, the FHLB announced that it would suspend paying dividends and repurchasing excess capital stock from its members due to deterioration in its financial condition. Due to concerns about the capital strength of the Atlanta FHLB and the entire FHLB system, there has been industry discussion about impairment issues on FHLB stock. However, due to the nature of the FHLB system and the heavy dependence of community banks on the FHLB, it is believed that any determination about the valuation of FHLB stock needs to be accomplished at the national level so that the entire community banking system is not disrupted. If FHLB stock were deemed to be impaired, the write-down for the Bank could be significant. F-8 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Premises and Equipment Land is stated at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed based on the straight-line method over the useful lives of the respective assets. Expenditures for improvements are capitalized while costs for maintenance and repairs are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred. Foreclosed Assets Foreclosed real estate is composed of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and is included in other assets. Foreclosed assets initially are recorded at fair value, net of estimated selling costs, at the date of foreclosure, establishing a new cost basis. Foreclosed assets totaled $661,000 and $42,000 at June 30, 2009 and 2008, respectively. If the fair value is less than the related loan balance at the time of acquisition, a charge against the allowance for loan losses is recorded. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in foreclosed real estate expense. Deferred Income Taxes Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence. Loans Receivable Loans receivable are stated at unpaid principal balances, less undisbursed portion of loans in process, deferred loan origination fees and costs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment to the yield (interest income) of the related loans. The Company is amortizing these amounts over the contractual life of the loan using the interest method. For purchased loans, the related premium or discount is recognized over the contractual life of the purchased loan and is included as part of interest income. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Cash payments on impaired loans are recorded in the same manner as payments on non-accrual loans. F-9 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Allowance for Loan Losses The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. A loan is considered past due or delinquent when a contractual payment is not paid in the month that it is due. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for multi-family, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer, mobile home, and residential real estate loans for impairment disclosures, unless they are subject to a restructuring agreement. F-10 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Investment in Life Insurance Investment in life insurance is reflected at the net cash surrender value to the Company. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Intangible assets, consisting of core deposit intangibles, represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged on its own or in combination with a related contract, asset or liability. Core deposit intangibles are amortized on an accelerated basis over a 7-year period and goodwill is evaluated on an annual basis to determine impairment, if any. Any impairment of goodwill would be recorded against income in the period of impairment. Goodwill impairment was tested at May 31, 2009 at the Company or reporting unit level. A valuation analysis identified impairment, and as a result, the Company recorded an impairment charge of $3.9 million, which eliminated all goodwill at the Company. The goodwill impairment charge did not affect the Company’s regulatory capital or cash flow. Statement of Cash Flows Cash and cash equivalents in the statements of cash flows include cash and federal funds sold. Federal funds are generally purchased and sold for one-day periods. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Off-Balance Sheet Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the statement of financial condition when they are funded. Comprehensive Income (Loss) Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income or loss. Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the stockholders’ equity section of the statement of financial condition, such items, along with net income or loss, are components of comprehensive income or loss. F-11 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Earnings Per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the appropriate period. Unearned shares under the Bay-Vanguard Federal Savings Bank Employee Stock Ownership Plan (“ESOP”) are not included in outstanding shares. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding as adjusted for the dilutive effect of stock options and unvested stock awards based on the “treasury stock” method. As of June 30, 2009 and 2008, the Company had 21,265 and 29,733 shares of unvested restricted stock, respectively, and 111,456 and 111,456 shares of unexercised stock options, respectively, none of which were dilutive. Information related to the calculation of earnings (loss) per share is summarized as follows: Years Ended June 30, 2009 2008 Basic Diluted Basic Diluted In Thousands, Except Per Share Data Net loss $ (2,717 ) $ (2,717 ) $ (330 ) $ (330 ) Weighted average common shares outstanding 2,313 2,313 2,370 2,370 Dilutive securities: Restricted stock — — — — Stock options — — — — Adjusted weighted average shares 2,313 2,313 2,370 2,370 Per share amount $ (1.17 ) $ (1.17 ) $ (0.14 ) $ (0.14 ) Stock Based Compensation The Company accounts for stock based compensation in accordance with SFAS 123(R). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the required service period in the statement of operations at fair value. F-12 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Employee Stock Ownership Plan The Company accounts for the ESOP in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-6. The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated statement of financial condition as a reduction of stockholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to paid-in capital. Dividends on unallocated ESOP shares are reflected as a reduction of debt. Reclassifications Certain prior year amounts have been reclassified to conform with the current year’s presentation. Such reclassifications had no effect on net income. Subsequent Events The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2009, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through September 18, 2009, the date these financial statements were issued. On September 17, 2009, the Company filed a Form 8-K with the Securities and Exchange Commission announcing that it plans to deregister its common stock and suspend its reporting obligations under the Securities Exchange Act of 1934 by filing a Form 15 with the Securities and Exchange Commission on September 25, 2009. Recent Accounting Pronouncements In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (R) “Business Combinations” (“SFAS No. 141 (R)”). This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations completed beginning July 1, 2009. In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008 and is not expected to have a significant impact on the Company’s financial statements. F-13 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The Company adopted this EITF effective July 1, 2007 and recorded a cumulative effect adjustment of $(221,000). The Bank terminated its executive and director split-dollar life insurance retirement death benefit and recognized income of $240,000 in the quarter ended September 30, 2008. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company July 1, 2008. The Company has elected to account for the AMF Ultra Short Mortgage mutual fund it holds at fair value and there was no impairment recognized with this adoption as the investment had been written down to fair value at June 30, 2008. Losses, both realized and unrealized, were $471,000 for the year ended June 30, 2009 and are reflected in the Company’s net loss. In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. Adoption did not have a significant impact on the Company’s financial statements. In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements. F-14 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Adoption is not expected to have a material impact on our financial position and results of operations. In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The implementation of this standard did not have a material impact on our financial position and results of operations. In September 2008, the FASB ratified the Emerging Issues Task Force (EITF) Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The implementation of this standard did not have a material impact on our financial position and results of operations. In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently evaluating the potential impact that this potential change would have on its financial statements, and it will continue to monitor the development of the potential implementation of IFRS. In November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-6, “Equity Method Investment Accounting Considerations.” EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements. F-15 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, “Accounting for Defensive Intangible Assets.” EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. This new pronouncement will impact the Company’s accounting for any defensive intangible assets acquired in a business combination completed beginning July 1, 2009. In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ended after December 15, 2009. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements. In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FASB Statement 157, Fair Value Measurements , defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly. FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157. This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The adoption of this standard did not have a material impact on our financial position or results of operations. F-16 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price. In instances when a determination is made that an other-then-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . The adoption of this standard did not have a material impact on our financial position or results of operations. In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The adoption of this standard did not have a material impact on our financial position or results of operations. F-17 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 1 – S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (C ONTINUED ) Recent Accounting Pronouncements (Continued) In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events, which establishes general standards of and accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This FASB was effective for interim and annual periods ending after June 15, 2009. The Company has complied with the requirements of FASB 165. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities , or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51 , or FIN 46(R), to require an enterprise to determine whether it’s variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations. In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations. F-18 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 – S ECURITIES Securities at June 30, 2009 and 2008 consisted of the following: June 30, 2009 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available for Sale Mortgage-backed securities $ 1,146 $ 33 $ — $ 1,179 June 30, 2008 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available for Sale Marketable equity securities $ 2,547 $ — $ — $ 2,547 U.S. Government and federal agencies securities 5,000 — 53 4,947 Mortgage-backed securities 1,351 7 14 1,344 $ 8,898 $ 7 $ 67 $ 8,838 Beginning on July 1, 2008, the Company elected to account for the AMF Ultra Short Mortgage mutual fund it holds under SFAS 159 which meant the investment was reclassified as securities trading from available for sale and carried at fair value with future gains and losses reflected through earnings. The AMF Ultra Short Mortgage mutual fund had balances of $1,076,000 and $2,547,000 at June 30, 2009 and 2008, respectively. Proceeds from trading securities sold during the year ended June 30, 2009 were $1,000,000 resulting in gross losses of $17,000. Additionally, net losses of $454,000 for adjustments to fair value on the Company’s AMF Ultra Short Mortgage mutual fund were recognized for the year ended June 30, 2009. Proceeds from marketable equity securities sold during the year ended June 30, 2008 were $250,000 resulting in gross losses of $19,000. Additionally, an impairment loss of $274,000 was recognized during the year ended June 30, 2008 on the Company’s AMF Ultra Short Mortgage mutual fund as it became evident that the impairment was not temporary. F-19 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 – S ECURITIES (C ONTINUED ) June 30, 2009 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held to Maturity U.S. Government and federal agencies securities $ 4,052 $ 27 $ — $ 4,079 Mortgage-backed securities 7,485 137 12 7,610 $ 11,537 $ 164 $ 12 $ 11,689 June 30, 2008 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held to Maturity U.S. Government and federal agencies securities $ 2,000 $ 13 $ — $ 2,013 Mortgage-backed securities 7,788 6 146 7,648 $ 9,788 $ 19 $ 146 $ 9,661 The amortized cost and fair value of securities as of June 30, 2009, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Maturing: Due in one year or less $ — $ — $ 1,000 $ 1,006 Due after one year through five years — — 3,052 3,073 Due after five years through ten years — — — — Mortgage-backed securities 1,146 1,179 7,485 7,610 $ 1,146 $ 1,179 $ 11,537 $ 11,689 All mortgage-backed securities are Freddie Mac, Fannie Mae or Ginnie Mae backed securities. F-20 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 2 – S ECURITIES (C ONTINUED ) Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or until maturity. In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts. During the year ended June 30, 2009, the Company did not identify any other-than-temporarily impaired assets. During the year ended June 30, 2008, the Company identified the AMF Ultra Short Mortgage mutual fund it holds as being an other-than-temporarily impaired asset and realized an impairment loss of $274,000 on these securities. SFAS No. 159 was effective for the Company July 1, 2008. The Company elected to account for the AMF Ultra Short Mortgage mutual fund it holds at fair value and recognized a trading securities loss of $471,000 during the year ended June 30, 2009. Below is a schedule of securities with unrealized losses as of June 30, 2009 and 2008. These unrealized losses are the result of changes in market conditions and interest rates from those existing at the time of purchase of the securities and, as to mortgage-backed securities, actual and estimated prepayment speeds. These factors along with the fact the Company has both the intent and the ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, substantiates, in management’s opinion, that these unrealized losses are considered temporary. At June 30, 2009 Continuous Unrealized Losses for More Than 12 Months Continuous Unrealized Losses for Less Than 12 Months Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) U.S. Government and federal agencies securities: AFS – no securities $ — $ — $ — $ — Mortgage-backed securities: HTM – one security — — 985 12 AFS – no securities — — — — $ — $ — $ 985 $ 12 At June 30, 2008 Continuous Unrealized Losses for More Than 12 Months Continuous Unrealized Losses for Less Than 12 Months Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) U.S. Government and federal agencies securities: AFS – four securities $ — $ — $ 4,946 $ 53 Mortgage-backed securities: HTM – five securities — — 6,167 146 AFS – one security — — 981 14 $ — $ — $ 12,094 $ 213 F-21 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 3 – L OANS R ECEIVABLE Loans receivable at June 30, 2009 and 2008 consisted of the following: 2009 2008 (In Thousands) Real estate loans: Secured by one-to-four family residences $ 86,589 $ 90,494 Secured by other properties 16,614 13,572 Construction loans 6,797 11,125 Mobile home loans 11,471 11,810 Consumer loans 387 380 Share loans 501 444 Commercial loans 909 244 123,268 128,069 Loans in process (3,178 ) (2,533 ) Deferred loan origination costs, net — 16 Allowance for loan losses (855 ) (709 ) Total loans receivable – net $ 119,235 $ 124,843 F-22 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 3 – L OANS R ECEIVABLE (C ONTINUED ) Residential lending payment experience is generally dependent to some extent on economic and market conditions in the Bank’s lending area. Multi-family, commercial real estate and construction loan repayments are generally dependent on the operations of the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy. Substantially all of the Bank’s loans receivable are mortgage loans secured by residential, multi-family and commercial real estate properties located in the State of Maryland. Loans are extended only after evaluation by management of customers’ creditworthiness and other relevant factors on a case-by-case basis. The Bank generally does not lend more than 90% of the appraised value of a property and usually requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 80%. In some instances, the Bank lent up to 90% of the appraised value of a property through a combination of first and second mortgages without requiring private mortgage insurance. The Bank originates and purchases mobile home loans to owner occupied borrowers up to a maximum of 90% of the value of the mobile home. In addition, the Bank generally obtains personal guarantees of repayment from borrowers and/or others for construction, commercial and multi-family residential loans and disburses the proceeds of construction and similar loans only as work progresses on the related projects. The following is a summary of the allowance for loan losses for the years ended June 30, 2009 and 2008: 2009 2008 (In Thousands) Balance at beginning of the year $ 709 $ 402 Provision for loan losses 729 328 Loans charged-off (583 ) (21 ) Recovery of loans charged-off — — Balance at end of year $ 855 $ 709 The Bank had two impaired loans as defined by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” totaling $642,000 and allowances for loan losses relating to these impaired loans of $32,000 at June 30, 2009. The Bank had three impaired loans as defined by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” totaling $2,582,000 and allowances for loan losses relating to these impaired loans of $286,000 at June 30, 2008. The average balance in the impaired loans totaled $321,000 and $1,084,000 for the years ended June 30, 2009 and 2008, respectively. The Bank did not recognize any interest income on impaired loans for the years ended June 30, 2009 and 2008. Non-accrual loans totaled approximately $651,000 and $2.6 million at June 30, 2009 and 2008, respectively. The Bank had $270,000 and $-0- of loan balances past due 90 days or more and still accruing interest at June 30, 2009 or 2008, respectively. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are limited to commitments to originate loans and unused lines of credit and involve to varying degrees elements of credit risk in excess of the amount recognized in the statement of financial position. F-23 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 3 – L OANS R ECEIVABLE (C ONTINUED ) The Bank’s exposure to credit loss from non-performance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Financial Instruments Whose Contract Amounts Represent Credit Risk Contract Amount at June 30, 2009 2008 (In Thousands) Loan commitments $ 471 $ 2,849 Unused lines of credit 2,158 2,313 Mortgage loan commitments of $210,000 not reflected in the accompanying consolidated financial statements at June 30, 2009 are for a fixed rate mortgage with interest rate of 5.50%. There were consumer loan commitments of $261,000 at June 30, 2009 with interest rates ranging from 11.90% to 14.50%. Mortgage loan commitments of $1.97 million not reflected in the accompanying consolidated financial statements at June 30, 2008 are for fixed rate mortgages with interest rates ranging from 5.25% to 7.50%. There were consumer loan commitments of $881,000 at June 30, 2008 with interest rates ranging from 8.90% to 12.25%. Loan commitments expire 60 days from the date of the commitment. N OTE 4 – P REMISES AND E QUIPMENT Premises and equipment at June 30, 2009 and 2008 are summarized by major classification as follows: 2009 2008 Useful Life in Years (In Thousands) Land $ 1,055 $ 1,055 — Buildings 1,588 1,585 15 – 40 Leasehold improvements 44 37 5 – 10 Furniture, fixtures, and equipment 890 861 3 – 10 Construction in progress 860 784 4,437 4,322 Accumulated depreciation (1,354 ) (1,205 ) $ 3,083 $ 3,117 Depreciation expense for the years ended June 30, 2009 and 2008 was $149,000 and $166,000, respectively. F-24 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 5 – I NVESTMENT IN F EDERAL H OME L OAN B ANK OF A TLANTA S TOCK The Bank is required to maintain an investment in the stock of the Federal Home Loan Bank of Atlanta (the “FHLB”) in an amount equal to at least 0.20% of the Bank’s total assets plus 4.50% of its outstanding advances from the FHLB. Purchases and sales of stock are made directly with the FHLB at par value. N OTE 6 – G OODWILL , O THER I NTANGIBLE A SSETS AND B RANCH A CQUISITION On August 24, 2007, the Bank acquired a branch office in Pasadena, Maryland from Greater Atlantic Bank. The Bank paid a premium on the net liabilities, primarily on deposits of $51.5 million assumed at closing. The premium was comprised of goodwill totaling $3.9 million and identifiable intangibles (core deposit intangible) totaling $502,000. The goodwill is deductible for tax purposes. The activity in goodwill and acquired intangible assets related to branch purchases is as follows: Year Ended June 30, 2009 Year Ended June 30, 2008 Goodwill Core Deposit Intangible Goodwill Core Deposit Intangible (In Thousands) Gross carrying amount at beginning of year $ 3,940 $ 390 $ — $ — Acquired during the year — — 3,940 502 Impairment (3,940 ) — — — Amortization — (110 ) — (112 ) Net carrying amount $ — $ 280 $ 3,940 $ 390 Under the provisions of SFAS No. 142, goodwill is not amortized but will be subjected to an annual assessment for impairment. The acquired intangible assets, apart from goodwill, will be amortized over their remaining estimated lives and assessed annually for impairment. Goodwill impairment was tested at May 31, 2009 at the Company or reporting unit level. A valuation analysis identified impairment, and as a result, the Company recorded an impairment charge of $3.9 million, which eliminated all goodwill at the Company. The goodwill impairment charge did not affect the Company’s regulatory capital or cash flow. At June 30, 2009, future estimated annual amortization expense is as follows (in thousands): Year ending June 30: 2010 $ 92 2011 74 2012 56 2013 38 2014 20 Total $ 280 F-25 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 7 – D EPOSITS Deposits are composed of the following: June 30, 2009 2008 (In Thousands) Non-interest bearing accounts $ 6,041 $ 6,040 NOW and money market accounts 50,896 53,520 Savings accounts 16,604 16,454 Certificates of deposit 64,075 61,018 $ 137,616 $ 137,032 Interest expense on deposits for the years ended June 30, 2009 and 2008 is as follows: 2009 2008 (In Thousands) NOW and money market accounts $ 980 $ 1,469 Savings accounts 201 311 Certificates of deposit 2,551 2,894 $ 3,732 $ 4,674 At June 30, 2009 and 2008, the Bank had outstanding $23.4 million and $18.9 million in certificates of deposit in excess of $100,000, respectively. Deposits in excess of $100,000 may not be insured by the FDIC. At June 30, 2009, the Bank had four certificates of deposits in excess of $250,000 outstanding. At June 30, 2008, the Bank had no certificates of deposit in excess of $250,000 outstanding. IRA deposits in excess of $250,000 may not be insured by the FDIC. At June 30, 2009, scheduled maturities of certificates of deposit are as follows (in thousands): Year ending June 30: 2010 $ 38,748 2011 17,878 2012 1,940 2013 1,321 2014 4,188 $ 64,075 F-26 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 8 – B ORROWINGS At June 30, 2009 and 2008, the Bank has an agreement under a blanket floating lien with the FHLB providing the Bank a line of credit of $40.0 million. At June 30, 2009, the Bank had no outstanding advances. During the year ended June 30, 2009, the Bank prepaid $6.5 million in advances and incurred $279,000 in prepayment penalties. At June 30, 2008, the Bank had outstanding advances of $7.5 million at a weighted rate of 4.68% consisting of a $2.5 million principal reducing advance at a fixed rate of 4.64% scheduled to mature in August 2010 and a $5.0 million fixed rate advance at a fixed rate of 4.75% scheduled to mature in September 2010. The Bank is required to maintain as collateral for its FHLB advances qualified mortgage loans in an amount equal to 125% of the outstanding advances. Additionally at June 30, 2009, the Bank had a $2.0 million unsecured demand line of credit facility with M&T Bank which had no outstanding balance. N OTE 9 – P ROFIT S HARING AND D EFERRED C OMPENSATION A GREEMENTS The Bank has a profit-sharing plan and a 401(k) plan for all eligible employees. Contributions to the plans are discretionary by the Board of Directors. Expenses for the years ended June 30, 2009 and June 30, 2008 were $-0- and $-0- for the profit-sharing plan and $32,000 and $28,000 for the 401(k) plan, respectively. Effective as of January 1, 2008, and in the place of prior deferred compensation agreements, the Bank entered into new supplemental executive retirement agreements with two of its executive officers. Under the agreements, each executive will receive a stated annual benefit in monthly installments for 15 years following his or her separation from service after attaining a normal retirement age of 65. If the executive voluntarily separates from service prior to reaching his or her normal retirement age, the executive will receive an unreduced lump sum of the accrued liability balance (i.e., the amount accrued to fund the future benefit expense under the agreement) within thirty days of the separation from service. If the executive separates from service involuntarily (i.e., if he or she is terminated other than for cause or terminates employment for good reason), the executive will receive an unreduced lump sum of the accrued liability balance with thirty days of the separation from service. Upon a change in control or the executive’s disability (as each term is defined in the agreements), the executive will receive a stated annual benefit in monthly installments for 15 years following the change in control and, in the case of a disability, commencing at the executive’s normal retirement age of 65. If the executive dies while actively employed, the executive’s beneficiary will receive an unreduced lump sum of the accrued liability balance within thirty days of the executive’s death. If the executive dies after monthly payments have commenced under the agreement, the executive’s beneficiary will receive the remaining installments in monthly payments in accordance with the schedule of payments due to the executive. Effective as of January 1, 2008, and in the place of a prior supplemental retirement plan, each director of the Bank entered into a new supplemental director retirement agreement. Under the agreements, each director will receive a stated annual benefit in monthly installments for 10 years following his or separation from service after attaining a normal retirement age of 70. If the director voluntarily separates from service prior to reaching his or her normal retirement age, the director will receive an unreduced lump sum of the accrued liability balance (i.e., the amount accrued to fund the future benefit expense under the agreement) within thirty days of the separation from service. If the director separates from service involuntarily (i.e., if he or she is terminated other than for cause), the director will receive an unreduced lump sum of the accrued liability balance with thirty days of the separation from service. Upon a change in control, the director will receive a stated annual benefit in monthly installments for 10 years following the change in control. If the director dies while actively serving as a director, the director’s beneficiary will receive an unreduced lump sum of the accrued liability balance within thirty days of the director’s death. If the director dies after monthly payments have commenced under the agreement, the director’s beneficiary will receive the remaining installments in monthly payments in accordance with the schedule of payments due to the director. F-27 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 9 – P ROFIT S HARING AND D EFERRED C OMPENSATION A GREEMENTS (C ONTINUED ) In connection with the new supplemental retirement agreements, the executives and directors revoked their split dollar life insurance agreements with the Bank. The accrued liabilities for the aforementioned plans were $860,000 and $725,000 for the executive plans and $188,000 and $180,000 for the directors’ plans at June 30, 2009 and 2008, respectively. The Company recognized compensation expense related to these plans in the amount of $142,000 and $167,000 during the years ended June 30, 2009 and 2008, respectively. In addition the Company recognized a liability of $221,000 through beginning retained earnings related to the postretirement benefits covered by endorsement split-dollar life arrangements effective July 1, 2007 with the adoption of EITF 06-4. The Company reversed this entry and recognized $240,000 as income from termination of split-dollar life insurance liability during the year ended June 30, 2009. The Company recognized compensation expense related to the split-dollar benefit in the amount of $-0- and $30,000 for the years ended June 30, 2009 and 2008, respectively. The Company recognized the increase in the cash surrender value of the insurance policies as income from investment in life insurance in the amount of $76,000 and $76,000 during the years ended June 30, 2009 and 2008, respectively. N OTE 10 – C OMMON S TOCK AND E MPLOYEE S TOCK O WNERSHIP P LAN In 2005, the Bank reorganized from a federally chartered mutual savings bank to a federally chartered stock savings bank. Simultaneously, the Bank formed a new holding company, BV Financial, Inc. Also simultaneously, a mutual holding company was formed, Bay-Vanguard, M.H.C. In connection with the reorganization, the Company issued 2,645,000 shares of its common stock. A majority of that stock (1,454,750 shares) was issued to Bay Vanguard, M.H.C. The remainder was sold and issued to depositors of the Bank and the ESOP. At the same time as the reorganization and conversion, the Bank established the ESOP for its employees. On January 12, 2005, the ESOP acquired 103,684 shares of the Company’s common stock in the conversion with funds provided by a loan from the Company. Accordingly, $1,036,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP in 15 equal annual installments through 2020 and bears interest at the rate of five and one quarter percent (5.25%). Shares are released to participants proportionately as the loan is repaid. The Bank will recognize compensation expense as shares are committed for release from collateral at their current market price. Dividends on allocated shares are recorded as a reduction of retained earnings and dividends on unallocated shares are recorded as a reduction of debt. The Company recognized $28,000 and $50,000 of compensation expense for the years ended June 30, 2009 and June 30, 2008, respectively. The ESOP holds the common stock in a trust for allocation among participating employees. 6,912 shares were allocated and 6,912 were released to participants during the year ended June 30, 2009. 3,169 shares were allocated and 6,912 were released to participants during the year ended June 30, 2008. The unearned ESOP shares totaled 69,124 at June 30, 2009. The fair value of the unearned shares at June 30, 2009 was $249,000. All employees of the Bank who attain the age of 21 and complete one year of service with the Bank will be eligible to participate in the ESOP. Each participant’s vested interest under the ESOP is determined according to the following schedule: 1 year – 20%, 2 years – 40%, 3 years 60%, 4 years – 80%, 5 years – 100%. For vesting purposes, a year of service means any plan year in which an employee completes at least 1,000 hours of service (whether before or after the ESOP’s January 12, 2005 effective date). F-28 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 10 – C OMMON S TOCK AND E MPLOYEE S TOCK O WNERSHIP P LAN (C ONTINUED ) Vesting accelerates to 100% upon; (1) termination of the Plan or upon the permanent and complete discontinuance of contributions by the Bank, (2) termination of service on or after the participant’s normal or postponed retirement date, (3) a change in control, or (4) termination of service by reason of death or disability. N OTE 11 – E QUITY I NCENTIVE P LAN On November 8, 2005, stockholders approved the BV Financial, Inc. 2005 Equity Compensation Plan that enabled the Company to grant up to 181,447 stock options and restricted stock awards to employees and directors. On November 14, 2005, the Company granted stock options covering 111,456 shares of common stock to certain employees and directors of the Company, of which 64,646 and 43,466 were exercisable at June 30, 2009 and June 30, 2008, respectively. The options were granted at the then fair market value of the stock of $8.94, vest over five years and expire ten years from the date of grant. Stock options had no intrinsic value at June 30, 2009. The Company recognized $35,000 and $59,000 of expense relating to the granting of stock options during the years ended June 30, 2009 and 2008, respectively. There has been no activity in the stock options to date. On November 14, 2005, the Company granted 44,577 shares of restricted stock to certain employees and directors of the Company. The Company purchased shares in the open market during 2006 to fund this plan. The awards vest over a five-year period and, therefore, the cost of such awards is accrued ratably over a five-year period as compensation expense. The Company recognized $77,000 and $77,000 of expense relating to the grant of shares of restricted stock during the years ended June 30, 2009 and 2008, respectively. Shares vesting were 8,468 and 8,468 for the years ended June 30, 2009 and 2008, respectively. Unvested shares were 12,797 at June 30, 2009. As of June 30, 2009, there was $183,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. The remaining cost is expected to be recognized over a weighted-average period of 1.4 years. N OTE 12 – R EGULATORY M ATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) and risk-weighted assets (as defined), and of Tier I capital (as defined) to adjusted total assets (as defined). Management believes, as of June 30, 2009 and 2008 that the Bank met all capital adequacy requirements to which it was subject. F-29 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 12 – R EGULATORY M ATTERS (C ONTINUED ) As of June 30, 2009, the most recent notification from the Office of Thrift Supervision has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category. The following table presents the Bank’s capital position based on the financial statements: Actual For Capital Adequacy Purposes To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of June 30, 2009: Tangible (to adjusted total assets) $ 10,597 6.94 % $ ³ 2,291 1.5 % N/A N/A Tier 1 capital (to risk-weighted assets) 10,597 11.45 N/A N/A $5,550 ³ 6.0 % Core (to adjusted total assets) 10,597 6.94 ³ 6,097 ³ 4.0 7,638 ³ 5.0 Total (to risk-weighted assets) 11,454 12.38 ³ 7,401 ³ 8.0 9,251 ³ 10.0 As of June 30, 2008: Tangible (to adjusted total assets) $ 8,869 5.55 % $ ³ 2,397 1.5 % N/A N/A Tier 1 capital (to risk-weighted assets) 8,869 9.62 N/A N/A $5,532 ³ 6.0 % Core (to adjusted total assets) 8,869 5.55 ³ 6,389 ³ 4.0 7,990 ³ 5.0 Total (to risk-weighted assets) 9,578 10.39 ³ 7,373 ³ 8.0 9,218 ³ 10.0 The following table provides a reconciliation of total stockholders’ equity per the consolidated financial statements to capital amounts reflected in the above table: 2009 2008 (In Thousands) Total equity $ 13,649 $ 16,345 Adjustments to regulatory capital: Accumulated other comprehensive loss (gain) (20 ) 37 Intangible assets (goodwill, core deposit intangible, software) (294 ) (4,359 ) Equity of BV Financial, Inc. (2,736 ) (3,154 ) Tangible, Tier 1 and Core Capital 10,599 8,869 Allowance for loan losses 855 709 Total Capital $ 11,454 $ 9,578 F-30 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 12 – R EGULATORY M ATTERS (C ONTINUED ) The Bank was allowed a special bad debt deduction at various percentages of otherwise taxable income for various years through December 1, 1987. If the amounts which qualified as deductions for federal income tax purposes prior to December 31, 1987 are later used for purposes other than to absorb loan losses, including distributions in liquidations, they will be subject to federal and state income tax at the then current corporate rate. Retained earnings at June 30, 2009 and 2008 include $1,201,000, for which no provision for income tax has been provided. The unrecorded deferred income tax liability on the above amount was approximately $464,000. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. Bay-Vanguard Federal Savings Bank met the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations. The Board of Directors of Bay-Vanguard, M.H.C. determines whether Bay-Vanguard, M.H.C. will waive or receive dividends declared by the Company each time the Company declares a dividend, which is expected to be on a quarterly basis. Bay-Vanguard, M.H.C. may elect to receive dividends and utilize such funds to pay general corporate expenses. The Office of Thrift Supervision (the “OTS”) has indicated that (i) Bay-Vanguard, M.H.C. shall provide the OTS annually with written notice of its intent to waive its dividends prior to the proposed date of the dividend, and the OTS shall have the authority to approve or deny any dividend waiver request; and (ii) if a waiver is granted, dividends waived by Bay-Vanguard, M.H.C. will be excluded from the Company’s capital accounts for purposes of calculating dividend payments to minority shareholders. Through June 30, 2009, Bay-Vanguard, M.H.C. waived the right to receive its portion of the cash dividends paid which totaled $800,000 on a cumulative basis. The Federal Reserve Board regulations require savings institutions to maintain non-interest earnings reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $44.4 million; a 10% reserve ratio is applied above $44.4 million. The first $10.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. Bay-Vanguard Federal Savings Bank had no reserve requirement at June 30, 2009 and June 30, 2008. F-31 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 13 – I NCOME T AXES The income tax benefit consists of the following for the years ended June 30, 2009 and 2008: 2009 2008 (In Thousands) Current benefit: Federal $ (204 ) $ (44 ) State (39 ) (20 ) (243 ) (64 ) Deferred benefit: Federal (1,354 ) (138 ) State (381 ) (52 ) (1,735 ) (190 ) $ (1,978 ) $ (254 ) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 2009 and 2008 are presented below: 2009 2008 (In Thousands) Deferred tax assets: Deferred compensation $ 413 $ 357 Allowance for loan losses 338 280 Unrealized losses on available for sale securities — 23 Stock-based compensation 75 54 Core deposit intangible 62 31 Impairment loss on investment securities 301 115 Goodwill impairment 1,356 — Other 58 54 Total Deferred Tax Assets 2,603 914 Deferred tax liabilities: Federal Home Loan Bank of Atlanta stock dividends 19 19 Accrual basis books to cash basis tax return 29 31 Depreciation 74 74 Goodwill — 95 Unrealized gains on available for sale securities 13 — Total Deferred Tax Liabilities 135 219 Total Deferred Tax Assets 2,468 695 Valuation allowance (96 ) — Total Deferred Tax Assets, Net of Valuation Allowance $ 2,372 $ 695 F-32 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 13 – I NCOME T AXES (C ONTINUED ) The amount computed by applying the statutory federal income tax rate to loss before income tax benefit is different than the taxes provided for the following reasons: Years Ended June 30, 2009 2008 Amount Percent of Pretax Income Amount Percent of Pretax Income (Dollars In Thousands) Statutory federal income tax rate $ (1,596 ) (34.0 )% $ (198 ) (34.0 )% State tax, net of federal income tax benefit (387 ) (8.3 ) (49 ) (8.3 ) Non-deductible stock-based compensation 8 0.2 13 2.2 Income from investment in life insurance (26 ) (0.5 ) (26 ) (4.4 ) Other 23 0.5 6 1.0 $ (1,978 ) (42.1 )% $ (254 ) (43.5 )% Management determined during the fiscal year ended June 30, 2009 that a deferred tax asset valuation allowance was warranted for its mutual fund security based on the Company’s ability to generate future capital gains if necessary to offset capital losses. In addition, management determined that no deferred tax asset valuation was warranted for its goodwill impairment write-down due to the expectation of taxable income going forward and the availability of tax planning strategies to generate future income to offset operating losses. F-33 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 14 – R ELATED P ARTY T RANSACTIONS The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, officers, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following table presents a summary of the activity of loans receivable from related parties. Year Ended June 30, 2009 (In Thousands) Balance, beginning $ 1,128 Advances — Repayments (70 ) Balance, ending $ 1,058 The Bank had leased one of its office buildings from a relative of an officer of the Bank. The Bank had executed a new lease on August 4, 2004 with an initial term of five years, with two five year renewal options. Rent expense for the year ended June 30, 2008 was $22,000. The annual rent was payable in equal monthly installments. The Bank entered into an agreement to purchase this office building and settlement occurred on June 24, 2008 with a purchase price of $750,000. The lease agreement terminated upon the purchase of the building. (The building is reflected in construction in progress for the years ended June 30, 2009 and June 30, 2008 as it is undergoing significant renovation). Gallagher Evelius & Jones LLP, of which one of the Bank’s directors is a partner, has performed legal services for Bay-Vanguard Federal. Bay-Vanguard Federal paid a total of $60,000 and $60,000 in legal fees to Gallagher Evelius & Jones LLP for fiscal 2009 and fiscal 2008, respectively. F-34 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 15 – L EASING A RRANGEMENTS The Bank assumed a non-cancelable operating lease, whose current term expires in August 2013, with the Pasadena branch acquisition. The lease contains an option which enables the Bank to renew the lease for an additional 5-year period. In addition to minimum rentals, the lease has escalation clauses based upon price indices and includes provisions for additional payments to cover real estate taxes and common area maintenance. At June 30, 2009, the total minimum rental commitment under this lease is outlined below (in thousands): Year ending June 30: 2010 $ 65 2011 67 2012 69 2013 71 2014 12 Total $ 284 Rent expense for the years ended June 30, 2009 and 2008 was $72,000 and $85,000, respectively, including the related party expense disclosed in Note 14. N OTE 16 – C OMMITMENTS AND C ONTINGENCIES Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s consolidated financial position or results of operations. N OTE 17 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS The estimated fair values of the Bank’s financial instruments are summarized below. The fair values are estimates derived primarily from present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values. In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 157, “Fair Value Measurements,” (SFAS 157) which defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. Effective July 1, 2008, the Company adopted SFAS 157. The primary effect of SFAS 157 on the Company was to expand the required disclosures pertaining to the methods used to determine fair values. F-35 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 17 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS (C ONTINUED ) In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company elected a one-year deferral and will begin adoption as of July 1, 2009. In October 2008, the FASB issued FASB Staff Position (FSP) 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 became effective immediately and applies to our June 30, 2009 financial statements. The application of the provisions of (FSP) 157-3 did not materially affect our results of operations or financial condition as of and for the year ended June 30, 2009. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective for the Company July 1, 2008. The Company elected to account for the AMF Ultra Short Mortgage Fund mutual fund it holds at fair value and recognized a trading loss of $471,000 during the year ended June 30, 2009. The Company made this election based on the availability of tax planning strategies to generate future capital gains if necessary to offset capital losses on the mutual fund. The fund pays monthly cash dividends which the Company records as interest income. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity). An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. F-36 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 17 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS (C ONTINUED ) Assets measured at fair value on a recurring basis by level within the fair value hierarchy used at June 30, 2009 are as follows: June 30, 2009 (Level 1) Quoted Prices in Active Markets for Identical Assets (Level 2) Significant Other Observable Inputs (Level 3) Significant Other Unobservable Inputs (In thousands) Securities trading $ 1,076 $ — $ 1,076 $ — Securities available for sale 1,179 1,179 Total $ 2,255 $ — $ 2,255 $ — The following valuation techniques were used to measure the fair value of assets in the table above on a recurring basis as of June 30, 2009. Securities trading – The fair value of securities trading was based on available market pricing for the security. A mutual fund is the only holding we have in this category and we rely on information provided to us by a third party pricing source. Securities available for sale – The fair values of securities available for sale were based on available market pricing for the securities. We rely on third party brokers to obtain and provide us with this market pricing from a definitive security pricing source. Assets measured at fair value on a non recurring basis by level within the fair value hierarchy used at June 30, 2009 are as follows: June 30, 2009 (Level 1) Quoted Prices in Active Markets for Identical Assets (Level 2) Significant Other Observable Inputs (Level 3) Significant Other Unobservable Inputs (In thousands) Impaired loans $ 610 $ — $ — $ 610 Foreclosed real estate 500 500 Repossessed assets 161 161 Total $ 1,303 $ — $ — $ 1,303 The following valuation techniques were used to measure the fair value of assets in the table above on a non recurring basis as of June 30, 2009. Impaired Loans – Loans included in the above table are those that are accounted for under SFAS 114, Accounting by Creditors for Impairment of a Loan , in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value was determined based upon a discounted cash flow from the expected proceeds of the underlying collateral. This asset is included as Level 3 fair value, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balance reduced by any specific impairment reserve. F-37 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 17 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS (C ONTINUED ) Foreclosed real estate – Fair value of foreclosed real estate was based on the price paid by the Bank’s wholly-owned subsidiary Housing Recovery Corporation at auction for the property. This value was subsequently determined to be reasonable based upon an independent third party current industry standard appraisal based on the value of similar properties adjusted for factors including condition and location of property. Repossessed Assets – Fair value of repossessed assets was based on the Company’s appraisal of the property. This value was determined from a current industry standard appraisal guide based on the value of similar properties adjusted for factors including condition and location of property. The following methods and assumptions were used by the Company in estimating the fair values of financial instruments: Cash and Cash Equivalents and Interest Bearing Deposits in Other Banks The carrying amounts of cash and equivalents and interest bearing deposits in other banks approximate fair value. Investment Securities Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying amount of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. Loans Receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such certificates to a schedule of aggregated expected monthly maturities on these deposits. Advances from Federal Home Loan Bank The fair value of borrowings is estimated using discounted cash flow analyses, based on rates currently available to the Bank for borrowings with similar terms and remaining maturities. Accrued Interest Receivable and Payable The carrying amounts of accrued interest receivable and payable approximate fair value. F-38 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 17 – D ISCLOSURE A BOUT F AIR V ALUE OF F INANCIAL I NSTRUMENTS (C ONTINUED ) Off-Balance Sheet Credit Related Instruments Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments were not significant at June 30, 2009 or 2008. The following table summarizes the carrying amounts and fair values of financial instruments at June 30, 2009 and 2008: 2009 2008 Carrying Amount Fair Value Carrying Amount Fair Value (In Thousands) Financial assets: Cash and cash equivalents $ 11,240 $ 11,240 $ 8,282 $ 8,282 Interest bearing time deposits in other banks 124 124 580 580 Securities trading 1,076 1,076 — — Securities available for sale 1,179 1,179 8,838 8,838 Securities held to maturity 11,537 11,689 9,788 9,661 Loans receivable 119,235 128,499 124,843 127,001 Federal Home Loan Bank of Atlanta stock 631 631 654 654 Accrued interest receivable 592 592 670 670 Financial liabilities: Deposits 137,616 138,507 137,032 137,561 Advances from Federal Home Loan Bank — — 7,500 7,633 Off-balance sheet commitments — — — — F-39 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 18 – C ONDENSED F INANCIAL I NFORMATION (P ARENT C OMPANY O NLY ) Information as to the financial position of BV Financial, Inc. and its results of operations and cash flows as of and for the years ended June 30, 2009 and 2008 are summarized below. June 30, 2009 2008 (In Thousands) Statements of Financial Condition Assets Cash $ 1,945 $ 2,215 Employee stock ownership plan loan 754 810 Investment in subsidiary 10,911 13,191 Other assets 39 129 Total assets $ 13,649 $ 16,345 Liabilities and Stockholders’ Equity Other liabilities $ — $ — Total stockholders’ equity 13,649 16,345 Total liabilities and stockholders’ equity $ 13,649 $ 16,345 F-40 Table of Contents BV F INANCIAL , I NC . AND S UBSIDIARIES N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS N OTE 18 – C ONDENSED F INANCIAL I NFORMATION (P ARENT C OMPANY O NLY ) (C ONTINUED ) Years Ended June 30, 2009 2008 (In Thousands) Statements of Operations Interest income $ 43 $ 45 Non-interest expense (72 ) (64 ) Loss before income tax benefit (29 ) (19 ) Income tax benefit 10 9 Loss before equity in net loss of subsidiary (19 ) (10 ) Equity in net loss of subsidiary (2,698 ) (320 ) Net loss $ (2,717 ) $ (330 ) Years Ended June 30, 2009 2008 (In Thousands) Statements of Cash Flows Net loss $ (2,717 ) $ (330 ) Adjustments to reconcile net loss to net cash from operating activities: Equity in net loss of subsidiary 2,698 320 Decrease (increase) in other assets 90 (108 ) Decrease in other liabilities — (4 ) Net cash provided by (used in) operating activities 71 (122 ) Cash Flows from Investing Activities Capital contributed to subsidiary (221 ) (20 ) Principal collected on ESOP loan 56 54 Net cash provided by (used in) investing activities (165 ) 34 Cash Flows from Financing Activities Cash dividend paid, including dividends on unallocated ESOP shares (171 ) (186 ) Treasury stock purchased (5 ) (1,339 ) Net cash used in financing activities (176 ) (1,525 ) Decrease in cash and cash equivalents (270 ) (1,613 ) Cash and cash equivalents at beginning of period 2,215 3,828 Cash and cash equivalents at end of period $ 1,945 $ 2,215 F-41