UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______to________
Commission File Number: 001-41764
BV FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
14-1920944
(State of Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
7114 North Point Road, Baltimore, MD, 21219
(Address of Principal Executive Offices) (Zip Code)
(410) 477-5000
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
BVFL
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 9, 2023, the registrant had 11,375,803 shares of common stock outstanding.
TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets
1
Consolidated Statements of Income
2
Consolidated Statements of Comprehensive Income
3
Consolidated Statements of Changes in Stockholders' Equity
4
Consolidated Statements of Cash Flows
6
Notes to Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
50
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
51
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
52
Signatures
53
BV FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2023
December 31, 2022
(dollars in thousands, except pe share amounts)
(unaudited)
(derived from audited financial statements)
Assets
Cash
$
6,764
12,704
Interest-bearing deposits in other banks
107,695
55,948
Cash and cash equivalents
114,459
68,652
Equity investment
229
221
Securities available for sale
35,616
33,034
Securities held to maturity (fair value of $9,013 and $9,660, ACL of $7 and $0)
10,263
10,461
Loans held for maturity
707,037
662,944
Allowance for credit losses
(8,153
)
(3,813
Net loans
698,884
659,131
Foreclosed real estate
555
1,987
Premises and equipment, net
14,405
15,176
Federal Home Loan Bank of Atlanta stock, at cost
2,407
977
Investment in life insurance
19,566
19,983
Accrued interest receivable
3,450
2,952
Goodwill
14,420
Intangible assets, net
1,057
1,195
Deferred tax assets, net
9,045
9,113
Other assets
7,021
7,661
Total assets
931,377
844,963
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits
143,203
167,202
Interest-bearing deposits
503,273
517,416
Total deposits
646,476
684,618
FHLB borrowings
37,500
12,000
Subordinated debentures
37,198
37,039
Other liabilities
15,121
13,555
Total liabilities
736,295
747,212
Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding Common stock, $0.01 par value; 45,000,000 shares authorized at September 30, 2023 and 14,000,000 authorized at December 31, 2022; 11,375,803 shares issued and outstanding as of September 30, 2023; 7,958,904 shares issued outstanding as of December 31, 2022
114
74
Paid-in capital
110,364
15,406
Retained earnings
94,763
84,612
Unearned common stock held by employee stock ownership plan
(7,635
—
Accumulated other comprehensive loss
(2,524
(2,341
Total stockholders' equity
195,082
97,751
Total liabilities and stockholders' equity
See notes to consolidated financial statements. 1
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
Interest Income
2023
2022
Loans, including fees
9,764
7,936
27,863
22,712
Investment securities available for sale
302
123
846
399
Investment securities held to maturity
89
275
143
Other interest income
1,560
458
2,958
726
Total interest income
11,715
8,570
31,942
23,980
Interest Expense
Interest on deposits
1,764
297
3,694
987
Interest on FHLB borrowings
530
1,313
Interest on subordinated debentures
545
519
1,621
1,531
Other interest expense
Total interest expense
2,839
816
6,628
2,518
Net interest income
8,876
7,754
25,314
21,462
Provision for (recovery of) credit losses
(333
186
(480
587
Net interest income after provision for credit losses
9,209
7,568
25,794
20,875
Noninterest Income
Service fees on deposits
109
110
304
344
Fees from debit cards
183
543
567
Income from investment in life insurance
85
549
310
Gain on sale of loans
Gain on foreclosed real estate
678
Gain on sale of fixed assets
188
45
279
Other income
317
251
798
1,848
Total noninterest income
882
681
3,060
3,349
Noninterest Expense
Compensation and related benefits
3,149
2,666
8,887
7,480
Occupancy
397
1,178
1,221
Data processing
345
339
1,034
1,070
Advertising
5
33
16
Professional fees
220
133
597
452
Equipment
105
197
319
412
Foreclosed real estate and holding costs
13
338
173
396
Amortization of intangible assets
46
138
137
FDIC insurance premiums
120
57
237
165
Other
608
511
1,656
2,300
Total noninterest expense
5,008
4,602
14,252
13,649
Net income before tax
5,083
3,647
14,602
10,575
Income tax expense
1,399
1,035
3,904
2,781
Net income
3,684
2,612
10,698
7,794
Basic earnings per share
0.35
0.33
1.21
0.98
Diluted earnings per share
1.20
See notes to consolidated financial statements. 2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(dollars in thousands)
Other comprehensive loss
Unrealized loss on securities available for sale
(347
(909
(252
(3,109
Income tax relating to securities available for sale
95
250
69
855
(659
(183
(2,254
Total comprehensive income
3,432
1,953
10,515
5,540
See notes to consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 2023 and 2022
Accumulated
Unearned
other
Common
Paid-in
common stock
Retained
comprehensive
stock
capital
held by ESOP
earnings
loss
Total
Balance, June 30, 2023
15,599
91,079
(2,272
104,480
(net of tax of $95)
Stock compensation
63
Proceeds from issuance of common stock, net of offering costs
40
94,702
94,742
Purchase of unearned common stock held by ESOP plan
(7,839
ESOP shares committed to be released
204
Balance, September 30, 2023
Balance, June 30, 2022
14,273
79,270
(1,691
91,926
(net of tax of $250)
92
Balance, September 30, 2022
14,365
81,882
(2,350
93,971
See notes to consolidated financial statements. 4
For the Nine Months Ended September 30, 2023 and 2022
Balance, December 31, 2022
(net of tax of $69)
256
CECL ASU 326 transition
(547
Balance, December 31, 2021
71
9,383
74,088
(96
83,446
Shares issued to M.H.C. for NASB merger
4,500
4,502
(net of tax of $855)
463
464
Stock options exercised
19
See notes to consolidated financial statements. 5
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Net accretion of discounts and premiums
(145
(452
Provision for (recovery of ) credit losses
Gain on sale of foreclosed real estate
(678
Gain on bargain purchase
(694
Amortization of deferred loan fees/costs
(335
(1,198
Amortization of debt issuance costs
117
116
Depreciation of premises and equipment
652
651
Gain on sale of assets
(188
(279
Deferred tax expense
189
Increase in cash surrender value of life insurance
(313
(310
Stock-based compensation expense
483
Decrease in accrued interest and other assets
144
1,051
Increase (decrease) in other liabilities
1,284
(306
Net cash provided by operating activities
11,699
7,769
Cash flows from investing activities
Proceeds from maturities and principal payments of investment securities available for sale
3,929
6,400
Purchases of investment securities available for sale
(6,918
(5,080
Proceeds from maturities and principal payments of investment securities held to maturity
434
1,507
Purchases of investment securities held to maturity
(6,911
Net increase in loans
(40,140
(27,772
Purchase of premises and equipment
(117
(209
Proceeds from sale of premises and equipment
456
709
Proceeds from life insurance benefits
731
Purchase of participation foreclosed real estate
(57
Proceeds from sale of foreclosed real estate
2,167
Proceeds from sale of Federal Home Loan Bank Stock
8
Purchase of Federal Home Loan Bank of Atlanta stock
(1,438
(85
Net cash received in acquisition
8,521
Net cash used in investing activities
(40,945
(22,920
Cash flows provided by financing activities
Increase in official checks
1,118
201
Net decrease in deposits
(37,861
(16,411
Increase (decrease) in advance payments by borrowers for taxes and insurance
(607
(1,426
Advances from the Federal Home Loan Bank of Atlanta
25,500
Purchase of unearned common stock held by employee stock ownership plan
Issuance of common stock funded by stock offering
97,990
Offering costs
(3,248
Net cash provided by (used in) financing activities
75,053
(17,617
Net increase (decrease) in cash and cash equivalents
45,807
(32,768
Cash and cash equivalents at beginning of period
111,190
Cash and cash equivalents at end of period
78,422
Supplementary cash flows information
Interest paid
7,434
2,800
Income taxes paid
3,855
3,210
Supplementary noncash transactions
Impact of ASC 326 adoption
547
See notes to consolidated financial statements. 6
Note 1 – Summary Of Significant Accounting Policies
General
The unaudited consolidated financial statements and other financial information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes, of BV Financial, Inc. (the "Company") as of and for each of the years ended December 31, 2022 and 2021, contained in the Company's definitive prospectus dated May 15, 2023, as filed with the Securities and Exchange Commission on May 23, 2023.
Business
The Company was organized as a federally chartered corporation in January 2005 to become the mid-tier stock holding company for Bay-Vanguard Federal Savings Bank, a federally chartered savings bank, 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. In August 2018, Bay-Vanguard Federal Savings Bank became a Maryland-chartered stock savings bank and changed its name to BayVanguard Bank (the "Bank"). In February 2019, each of the M.H.C. and the Company became a Maryland-chartered corporation. In February 2019, the Company issued 4,099,822 shares to the M.H.C. in connection with the acquisition of Kopernik Bank (“Kopernik”). In January 2022, the Company issued 251,004 shares to the M.H.C. in connection with the acquisition of North Arundel Savings Bank. At June 30, 2023 and December 31, 2022, the M.H.C. owned 86.15% and 86.28% of the common stock of the Company, respectively.
On July 31, 2023, the Company completed its conversion from the mutual holding company form of reorganization to the stock holding company form of organization (the "Conversion"). In connection with the Conversion, the M.H.C. ceased to exist. Also as part of the Conversion, the Company sold 9,798,980 shares of its common stock (which included 783,918 shares issued to the ESOP) at a price of $10.00 per share. Each outstanding share of Company common stock owned by the public stockholders of the Company (stockholders other than the M.H.C.) were converted into new shares of Company common stock based on an exchange ratio of 1.5309-to-1. Gross proceeds from the conversion totaled $90.2 million and net proceeds were $86.9 million. The Company had 11,375,803 shares of Company common stock outstanding as a result of the Conversion. Additionally, concurrently with the conversion, the Bank converted to a Maryland-Chartered Commercial Bank.
The Bank is headquartered in Baltimore, Maryland and is a full-service community-oriented financial institution dedicated to serving the financial service needs of consumers and businesses. The Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate one-to-four-family real estate, construction, multi-family, commercial real estate, farm, marine loans, commercial and consumer loans.
The Bank's deposits are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation's Deposit Insurance Fund. The Bank is a member of the Federal Home Loan Bank System.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank and the wholly-owned subsidiaries of the Bank. 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 balance sheet 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 credit losses, goodwill and 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 and on the Eastern Shore of Maryland. The Company does not have any significant concentrations to any one industry or customer.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, cash items in the process of clearing, and interest-bearing deposits with banks with original maturities of less than 90 days.
Securities
The Company classifies investment securities as held to maturity ("HTM") or available for sale ("AFS"). 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 premiums or accretion of discounts). Net unrealized gains and losses for debt securities classified as available for sale are recognized as increases or decreases in other comprehensive income or loss, net of taxes, and excluded from the determination of net income.
Equity securities are reported at fair value with unrealized gains and losses included in net gains/losses in noninterest 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. Premiums and discounts on callable debt securities are amortized through the earliest call date.
When the fair value of an AFS debt security has declined below its amortized cost basis, the Company is required to assess whether the decline is from a credit loss or other factor. For securities that are not guaranteed by the federal government, an analysis is performed on the individual security using the latest available information to determine if the decline in fair value is attributable to a credit loss. If such determination is made, the Company would record an allowance for credit loss for the debt instrument. As of September 30, 2023, we have recognized no credit losses on AFS securities.
For HTM debt securities, an allowance will be recognized when lifetime credit losses are expected, in an amount that reflects the expected contractual credit losses, even when the risk of such loss is remote. Any security, either explicitly or implicitly guaranteed by the U.S. Government is excluded from this analysis. This includes U.S. Treasury securities, securities issued by agencies of the U.S. Government and mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The allowance for credit losses ("ACL") for HTM securities is computed using bond global default rates tracked by S&P with a loss given default of 45%. Accrued interest receivable on the HTM debt securities excluded from this analysis totaled $12,000 at September 30, 2023.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (the "FHLB") System to hold stock of its district FHLB in an amount determined by both asset size and borrowings from the FHLB. Purchases and sales of stock are made directly with the FHLB at par value. The Bank held $2.4 million and $977,000 of FHLB restricted stock at September 30, 2023 and December 31, 2022, respectively.
The restricted stock is carried at cost. Management evaluates whether this investment is impaired based on its assessment of the ultimate recoverability of the investment rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the investment is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this
situation has persisted, (2) commitments by the FHLB 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 FHLB.
Loans Receivable
Loans receivable are stated at unpaid principal balances, adjusted for premiums and discounts on loans purchased, the undisbursed portion of loans in process, net deferred loan origination fees and costs, fair value adjustments on loans acquired in a merger, and the allowance for credit 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 of the related loans. 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 collectability 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 collectability 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 collectability of the total contractual principal and interest is no longer in doubt.
All of the loans acquired in connection with business combinations on the Company's balance sheet were acquired prior to the adoption of Accounting Standards Codification ("ASC") 320 on January 1, 2023. The accounting for these loans is described below.
Loans acquired in connection with business combinations are recorded at fair value with no carryover of any allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. These purchased credit impaired (“PCI”) loans are accounted for under FASB’s Accounting Standards Codification (“ASC 310-30”, Loans and Debt Securities Acquired with Deteriorated Credit Quality). The non-accretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows will require the Company to evaluate the need for an addition to the allowance for loan losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the non-accretable discount, which will then be reclassified as accretable discount to be recognized into interest income over the remaining life of the loan.
ASC 326 supersedes this guidance for PCI assets and replaces the concept with purchased credit deteriorated ("PCD") designation. PCD assets are acquired assets that as of the date of the acquisition have experienced a more than insignificant deterioration in credit quality since origination.
Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. These loans are initially recorded at fair value, and include premiums and discounts as acquisition accounting adjustments. These purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. An allowance for credit losses is recorded for any credit deterioration in these loans subsequent to acquisition.
Acquired loans that meet the criteria for impairment or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the borrower is contractually delinquent if the Company expects to fully collect the new carrying value (i.e., fair value) of the loans. At acquisition, these loans may have discounts to adjust the loans to fair value. These discounts are considered non-accretable until the loan is paid in full or until an improvement in expected cash flows is illustrated. As such, the Company may no longer consider the loan to be nonperforming and may
9
accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the non-accretable discount.
Allowance for Credit Losses
The ACL is an estimate of the expected credit losses for loans held for investment and for off-balance sheet exposures. ASC 326, "Financial Instruments-Credit Losses," requires an immediate recognition of the credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Charge-offs are recorded to the ACL when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is maintained in accordance with U.S. generally accepted accounting principles ("GAAP") and is in compliance with appropriate regulatory guidelines.
The ACL includes quantitative estimates of losses for collectively and individually evaluated loans. The quantitative estimate for collectively evaluated loans (other than investor commercial real estate loans) is determined using the average charge-off method that utilizes historical losses for all Maryland banks with assets less than $1 billion beginning in March 2000. The investor commercial real estate portfolio utilizes the national loss history for banks with assets less than $1 billion over the same time period. Adjustments are made to the historical loss factors under each scenario for economic conditions, portfolio concentrations, collateral values, the level and trend of delinquent and problem loans and internal changes in staffing, loan policies and monitoring of the portfolio. Loans are selected for individual evaluation primarily based on their payment status and whether the loan has been placed on non-accrual. Loans on non-accrual status include all loans greater than 90 days delinquent and other loans with weaknesses sufficient for management to place these loans on non-accrual status.
The ACL is measured on a collective basis when similar risk factors exist as determined by internal loan coding and assignment to a portfolio segment.
The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model's calculation also uses an adjustment for a 12-month forecast period utilizing the most recent 12-month economic forecast from the Board of Governors of the Federal Reserve System for national gross domestic product ("GDP"). The model compares the average history of loss rates described above to the forecasted GDP to determine the value of the forward looking adjustment.
The establishment of the allowance for credit losses is significantly affected by management's judgment and by economic and other uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Federal Deposit Insurance Corporation (the "FDIC") and the Maryland Office of the Commissioner of Financial Regulation, as an integral part of their examination process, periodically review the allowance for credit losses for reasonableness and, as a result of such reviews, we may be required to increase our ACL or recognize loan charge-offs.
The calculation of ACL excludes accrued interest receivable balances because these balances are reversed in a timely manner against previously recognized interest income when a loan is placed on non-accrual status.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposure
The Company's off-balance sheet credit instruments primarily consist of unfunded commitments on existing loans. The Company records a reserve for unfunded commitments on off-balance sheet credit exposures through a charge to the provision for credit loss expense. The reserve is estimated by loan segment at each measurement date under the ASC 326 model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company's consolidated balance sheets.
In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded on the balance sheet when they are funded.
10
Mortgage Loans Held for Sale
Mortgages originated for sale are carried at the lower of aggregate cost or fair value of each outstanding loan. Sales of loans are recorded when the proceeds are received. Any gain or loss is recorded in noninterest income. There were no mortgage loans held for sale on September 30, 2023 or December 31, 2022.
The Company sells certain of its mortgage loans on a best effort basis to third-party investors on a servicing released basis. Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third-party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third party investors to put the mortgage loans back to the Company.
Foreclosed Real Estate
Foreclosed real estate and repossessed assets are composed of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. If the fair value of the asset, net of estimated selling costs, is less than the related loan balance at the time of acquisition, a charge against the allowance for credit losses is recorded. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value less estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in noninterest income and expenses.
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 estimated useful lives of the respective assets. Expenditures for improvements are capitalized while costs for maintenance and repairs are expensed as incurred.
Leases
The Company determines if an arrangement is a lease at inception. All of the Company’s leases are currently classified as operating leases and are included in other assets and other liabilities on the Company’s Consolidated Balance Sheets. Periodic operating lease costs are recorded in occupancy expenses of premises on the Company's Consolidated Statements of Income.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the expected future lease payments over the remaining lease term. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The operating ROU assets are adjusted for any lease payments made at or before the lease commencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable or unfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options provided in the lease terms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components, such as common area maintenance charges, are accounted for separately.
Investment in Life Insurance
Investment in life insurance is reflected at the net cash surrender value to the Company.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is evaluated for impairment at least annually. Any impairment of goodwill would be recorded against income in the period of impairment.
11
Intangible Assets
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 an estimated useful life. Any impairment of intangible assets would be recorded against income in the period of impairment.
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.
Statements of Cash Flows
Cash and cash equivalents in the statements of cash flows include cash, federal funds sold and interest-bearing deposits in other banks. 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.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the appropriate period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding as adjusted for the dilutive effect of stock options based on the treasury stock method. Unearned ESOP shares are removed from the weighted average number of shares in the calculations. As of September 30, 2023 and September 30, 2022, the Company had 55,648 and 57,179 shares, respectively, of unexercised stock options. As a result of the second-step conversion, the shares have been adjusted to reflect the 1.5309 exchange ratio. Options with an exercise price greater than the average market price of the common shares are excluded from the calculation as their effect would be anti-dilutive.
Information related to the calculation of earnings per share is presented in Note 13.
Stock Based Compensation
The Company accounts for stock-based compensation under the fair value method of accounting. For stock options, the Company uses a Black-Scholes valuation model to measure stock-based compensation expense at the date of grant. Compensation expense related to stock-based awards is recognized over the period during which an individual is required to provide service in exchange for such award.
Revenue Recognition
Management is required by accounting pronouncements governing the recognition of revenue to recognize revenue when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
The Company records revenue from contracts with customers in accordance with ASC 606, “Revenue from Contracts with Customers.” Under ASC 606, the Company must identify the contract with a customer, identify the performance obligations
12
in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASC 606. The Company evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity.
Recently Adopted Accounting Standards
On January 1, 2023, the Company adopted Accounting Standards Updates (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASC 326 requires entities to estimate an allowance for credit losses (ACL) on certain types of financial instruments measured at amortized cost using a current expected credit losses (CECL) methodology, replacing the previously-required incurred loss methodology. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. The impairment model for held-to-maturity and available-for-sale debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, by recording an increase in the reported balance of loans and the allowance for credit losses on loans, an increase in the liability for credit losses on commitments to extend credit and reducing total equity of both the Company and the Bank. As a result of adopting ASC 326, the Company recorded a decrease to retained earnings, net of taxes, of $547,000. The addition to PCD loans and ACL upon adoption of ASC 326 was $3.8 million.
ASU Update 2022-02
On January 1, 2023, the Company adopted ASU 2022-02 –Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminated the troubled debt restructurings ("TDRs") recognition and measurement guidance and, instead requires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU Update 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company adopted ASU 2022-02 using a modified retrospective transition method for TDRs. The impact of adoption was immaterial. The disclosure amendments in the Update 2022-02 were applied prospectively.
The following table shows the impact of the Company's adoption of ASC 326 on loans, the allowance for credit losses, and the Company's reserve for unfunded commitments.
January 1, 2023
As Reported Under
Pre-ASC 326
ASC 326
Adoption
Change
Total loans, net of deferred fees and costs
666,722
3,778
Allowance for credit losses-loans
(8,045
(4,232
Total loans, net
658,677
(454
Liabilities: Reserve for Unfunded Commitments
289
284
Reclassification
Certain prior period amounts, escrows and operating accounts, have been reclassified to conform with the current period's presentation. Such reclassifications had no effect on net income or stockholders’ equity.
Note 2 - Merger
On January 1, 2022, North Arundel Savings Bank (“NASB”) was merged into BayVanguard Bank. At closing, NASB had $34.2 million in loans and $40.8 million in deposits. As part of this transaction, BV Financial, Inc. issued 251,004 shares to the M.H.C.
The assets acquired and liabilities assumed were accounted for under the acquisition method of accounting. The assets and liabilities were recorded at their fair values as of January 1, 2022 based on management’s best estimate using the information available as of the merger date. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $1.3 million and a core deposit intangible of $85,000.
In 2022, the Company incurred merger related expenses of $1.6 million, which were recorded in the Consolidated Statements of Income. These costs were expensed as incurred.
14
A summary of the NASB transaction during the period ended December 31, 2022 follows:
ACQUISITION OF NORTH ARUNDEL SAVINGS BANK (NASB)
As recorded by
Fair value
As recorded at
NASB
adjustments
acquisition
Fair Value of Equity Acquired
5,460
Cash & cash equivalents
Securities held to maturity
772
(a)
784
1,500
(36
1,464
Loans receivable
34,258
(b)
34,173
Allowance for loan loss
(236
236
(c)
Premises and equipment
258
1,017
(d)
1,275
Core deposit intangible
(e)
Deferred taxes
49
198
(f)
247
1,259
Total Assets Acquired
46,381
1,427
47,808
Liabilities assumed
Deposits
40,321
439
(g)
40,760
Advance payments by borrowers for taxes and insurance
121
Accrued expenses and other liabilities
127
Total liabilities assumed
40,569
41,008
Net assets acquired
6,800
Bargain purchase gain recorded at merger
1,340
The fair value of loans acquired from North Arundel Savings Bank was estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of North Arundel Savings Bank's allowance for loan losses associated with the loans that were acquired. The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the straight-line method. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair value.
There were no PCI loans acquired in this transaction.
The following table details the acquired loans as of January 1, 2022:
Contractually required principal at acquisition
Contractual cash flows not expected to be collected (credit mark)
(394
Expected cash flows at acquisition
33,864
Interest component of expected cash flows (accretable premium)
309
Fair value of acquired loans
The NASB was a merger transaction with a mutual bank and, thus, no consideration was given.
15
Note 3 - Securities
Securities available for sale at September 30, 2023 and December 31, 2022 consisted of the following:
Amortized cost
Gross unrealized gains
Gross unrealized losses
Available for sale
Agencies
4,764
4,752
Corporate securities
1,721
369
1,352
Mortgage-backed securities
32,612
3,107
29,512
39,097
3,490
2,218
286
1,932
34,045
2,943
31,102
36,263
3,229
The Company pledged securities with an amortized cost of $40.7 million and a fair value of $37.0 million at September 30, 2023 to secure deposits from municipalities. At December 31, 2022, the Company pledged securities with an amortized cost of $40.2 million and a fair value of $36.9 million to secure deposits from municipalities.
Securities held to maturity at September 30, 2023 and December 31, 2022 consisted of the following:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Held to maturity
Corporate securities (1)
3,193
660
2,533
4,005
3,960
3,065
546
2,520
1,251
9,013
3,200
408
2,792
4,009
25
3,984
3,252
371
2,884
804
9,660
(1) Amount is net of CECL credit reserve of $7,000 at September 30, 2023.
The amortized cost and fair value of securities as of September 30, 2023 and December 31, 2022, 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.
cost
value
Maturing
Due under one year
6,466
6,410
Due after one year through five years
7,167
6,859
28
26
Due after five years through ten years
8,092
7,545
3,762
3,039
Due after ten years
17,372
14,802
2,468
1,988
509
502
9,986
9,477
4,042
4,015
9,160
8,631
3,840
3,383
16,608
14,424
2,579
2,262
All mortgage-backed securities are guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae.
17
Investment securities with unrealized losses for continuous periods of less than 12 months and 12 months or longer are as follows:
Less than 12 months
Over 12 months
losses
81
669
288
683
Agency securities
3,986
599
3,103
26,915
27,514
99
5,254
3,391
27,598
32,852
2,540
67
544
2,402
2,469
1,249
8,902
8,969
1,182
535
10,595
2,408
20,400
30,995
821
11,777
32,177
244
1,706
164
1,086
2,811
640
8,501
9,587
Most of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal unrealized losses when compared to total amortized cost. The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase and are not related to credit concerns. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary and therefore no impairment has been recorded during the respective periods of presentation.
18
We monitor the credit quality of HTM debt securities through both internal analysis performed on a quarterly basis and credit ratings when available. The following table reflects the credit ratings for the HTM debt securities at September 30, 2023.
AAA
A-
BBB/BBB+
BBB-
Not Rated
499
1,248
698
748
Mortgage-backed securities issued by GSEs and Ginnie Mae
7,070
The following table provides a breakdown of our HTM debt securities by year of origination at September 30, 2023.
2021
2020
2019
Prior
749
2,444
1,827
160
1,078
6,581
2,604
The following table is a roll forward of our allowance for credit losses on HTM debt securities at September 30, 2023.
Three Months Ended September 30, 2023
Nine Months Ended September 30, 2023
Beginning Balance
Impact of adopting ASC 326
(Recovery) for credit losses
(3
Ending Balance
Note 4 – Loans Receivable
Portfolio loans, net of deferred costs and fees, are summarized by type as follows at September 30, 2023 and December 31, 2022:
Period Ended
Amount
Percent
Real estate
One to four family - owner occupied
134,200
18.98
%
137,742
20.73
One to four family - non owner occupied
112,039
15.85
125,065
18.82
Commercial owner occupied
99,054
14.01
91,853
13.82
Commercial investor
279,779
39.56
226,854
34.14
Construction and land
20,250
2.86
17,937
2.70
Farm loans
14,918
2.11
13,823
2.08
Total real estate loans
660,240
93.37
613,274
92.29
Marine loans
16,533
2.34
15,791
2.38
Other consumer
2,049
0.29
2,361
0.36
Guaranteed by U.S. Government
4,137
0.59
4,933
0.74
Commercial
24,078
3.41
28,052
4.23
Total consumer and commercial
46,797
6.63
51,137
7.71
Total loans
100.0
664,411
Less:
Deferred origination fees, net
(1,467
Total loans, net of deferred costs and fees
Net deferred loan origination fees and costs at September 30, 2023 totaled $1.8 million.
In the normal course of banking business, risks related to specific loan categories are as follows:
Real Estate Loans – Real estate loans are typically made to consumers and businesses and are secured by real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by the economy as well as borrower-specific occurrences. Also impacting credit risk would be a shortfall in the value of the real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the collateral.
Residential lending repayment is generally dependent on economic and market conditions in the Company's lending area. Commercial real estate, commercial 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.
Marine Loans – Marine loans are typically made to consumers and are secured by marine-based collateral. Credit risk is similar to real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan. Marine loans may entail greater risk than residential mortgage loans, as they are collateralized by assets that depreciate rapidly. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower.
Other Consumer – Other consumer loans include installment loans and personal lines of credit which may be secured or unsecured. Credit risk is similar to real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan, if any. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower.
20
Guaranteed by the U.S. Government – Loans guaranteed by the U.S. Government present similar risks as reflected in the other categories mentioned herein. However, the primary differentiating factor is that an explicit guarantee is provided by the government therefore substantially mitigating any risk of loss in the event of credit deterioration. Guaranteed by the U.S. Government loans in the table above include $27,000 and $488,000 of Paycheck Protection Program ("PPP") loans at September 30, 2023 and December 31, 2022, respectively. The PPP loans are 100% guaranteed by the Small Business Administration ("SBA"). A substantial portion of these loans are expected to be forgiven by the SBA. Due to the guarantee from the federal government and nature of the PPP initiative, there is no allowance for credit losses recorded for PPP loans.
Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.
Non-accrual loans as of September 30, 2023 and December 31, 2022 were as follows:
No
With an
Allowance
1,331
1,371
585
752
1,184
1,433
185
3,797
5,803
59
22
Total consumer and commercial loans
Total nonaccrual loans
3,810
5,884
Non-accrual loans decreased $2.1 million from $5.9 million, or 0.88% of total loans, at December 31, 2022 to $3.8 million, or 0.54% of total loans, at September 30, 2023. Loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. In accordance with the Company’s policy, such interest income is recognized on a cash basis or cost-recovery method, until qualifying for return to accrual status.
The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. An analysis of days past due loans as of September 30, 2023 follows:
30 - 59
60 - 89
90+
Days
Current
Past Due
Loans
1,061
249
1,979
132,221
111,722
468
98,586
20,065
1,639
2,949
657,291
66
1,983
0
46,731
1,111
265
3,015
704,022
21
An analysis of days past due loans as of December 31, 2022 follows:
2,311
793
896
4,000
133,742
777
170
379
1,326
123,739
1,048
103
2,056
3,207
88,646
1,743
225,111
43
203
17,734
4,446
1,109
4,924
10,479
602,795
15,732
65
2,296
124
51,013
4,511
4,983
10,603
653,808
Allowance for Credit Losses ("ACL")
The following tables detail activity in the ACL at and for the three and nine months ended September 30, 2023 and the allowance for loan losses at and for the three and nine months ended September 30, 2022. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.
Three Months Ended
Charge-offs
Recoveries
Provisions (recovery)
1,342
(2
34
147
1,521
1,212
214
(292
1,134
459
(26
433
3,784
41
3,825
480
(105
376
145
156
7,422
(224
7,445
451
454
(4
(8
290
254
741
(41
708
8,163
(6
261
(265
8,153
The following table summarized the ACL activity for the three months ended September 30, 2023.
Provision for Credit Losses - loans
Reduction in allowance for securities - HTM
(1
Reduction in allowance for credit losses - unfunded commitments
(67
Provision for credit losses per the consolidated statement of income
September 30, 2022
(27
252
594
(53
208
119
327
1,819
128
1,947
76
84
23
2,974
55
191
3,220
58
(10
130
(5
3,104
3,339
Nine Months Ended
Impact of ASC 326 Adoption
1,117
60
562
356
(31
366
78
(11
2,272
1,506
47
93
496
153
(366
135
3,654
3,688
460
(355
Marine and other consumer loans
68
336
(64
91
(47
159
27
42
3,813
4,232
(66
487
The following table summarized the ACL activity for the nine months ended September 30, 2023.
Provision for credit losses - loans
(164
259
(7
36
695
77
(185
280
1,225
(9
(24
2,554
(16
554
(38
112
(54
140
Term Loans by Origination Year
Term Loans Amortized Cost Basis by Origination Year
Balance at September 30, 2023
Revolving
Pass
5,963
7,950
13,808
10,153
10,201
74,741
10,893
133,709
Special Mention
Substandard
167
263
491
Doubtful
Loss
Total One to four family - owner occupied
13,975
10,221
75,004
10,934
Current Period Gross Write-off
13,320
30,462
22,856
11,169
7,886
24,302
109,995
2,044
Total One to four family - non owner occupied
26,346
15,698
16,529
16,917
6,018
5,155
32,456
92,773
952
1,510
3,819
6,281
Total Commercial owner occupied
6,970
6,665
36,275
55,059
90,444
68,602
17,415
10,294
25,083
266,897
6,930
5,952
12,882
Total Commercial investor
24,345
31,035
4,033
10,881
2,195
671
18,521
1,414
315
1,729
Total Construction and land
2,085
1,056
3,991
2,292
2,674
5,698
Total Farm loans
2,901
2,207
6,363
1,773
211
3,078
Total Marine loans
(58
303
184
154
195
1,157
2,036
Total Other consumer
1,170
-
445
3,665
Total Guaranteed by U.S. Government
603
10,234
6,272
1,389
975
3,901
23,374
704
Total Commercial
4,605
24
Total Loans
97,880
172,882
139,459
48,921
38,036
174,822
682,893
9,296
1,530
13,110
24,144
139,626
58,217
39,566
187,932
Balance at December 31, 2022
2018
7,009
14,907
10,742
10,708
8,285
73,585
11,674
136,910
783
832
74,368
11,723
45,369
27,088
12,325
7,337
5,224
23,369
120,712
1,598
853
1,902
4,353
8,935
6,077
25,271
17,678
17,244
6,299
5,590
11,502
25,610
83,923
979
1,534
936
4,481
7,930
7,278
7,124
12,438
30,091
83,975
74,933
24,133
11,369
3,500
22,186
220,096
4,836
1,922
6,758
8,336
24,108
10,135
3,338
1,376
986
15,912
267
2,025
1,253
4,165
657
266
2,752
455
5,528
2,486
7,413
2,028
223
1,145
2,437
2,496
495
212
216
1,329
2,339
1,351
175
525
840
3,089
10,301
6,885
5,116
1,798
2,282
27,607
2,727
181,613
152,981
62,538
40,022
32,758
160,401
641,987
2,577
3,292
6,625
9,881
22,424
65,115
43,314
39,383
170,282
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, such that additional general or specific loss allowances may be required.
In connection with the filing of our periodic reports with the FDIC and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
Through our loan evaluation process, we have identified certain loans for which the primary source of loan repayment may no longer be a viable option. The Company is dependent on the liquidation of the collateral to provide funds for repayment of the loan. The following table shows the loans determined by management to be collateral dependent at September 30, 2023.
Estimated Collateral Values
Real Estate
Business\Other Assets
5,894
One to four family - non-owner occupied
778
Commercial owner occupied real estate
1,825
Commercial investor real estate
1,185
1,470
378
Marine and other consumer
44
10,345
Prior to the adoption of ASC 326, an impaired loan generally was one for which it was probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans were individually evaluated for impairment. When the Company classified a problem loan as impaired, it recorded an impairment for that portion of the asset that was deemed uncollectible, based on the present value of the expected future cash flows
discounted at the loan's original effective interest rate or based on the fair value of the collateral if the loan was collateral dependent.
The following is a summary of impaired loans by class of loans as of December 31, 2022:
Recorded Investment
Unpaid Principal
Related Allowance
Average Recorded Investment
Interest Income Recognized
With an allowance recorded
Real estate loans
100
70
30
174
With no allowance recorded
1,956
2,789
632
39
1,854
1,406
1,432
1,889
248
Marine Loans
56
Guaranteed by the U.S. Government
6,179
6,183
7,007
Combined
2,892
97
655
703
6,349
6,353
7,181
352
Prior to the adoption of ASC 326, loans that are modified to make concessions to help a borrower remain current and/or to avoid foreclosure were classified as TDRs. Generally, we did not forgive principal or interest on a loan or modify the interest rate on loans to below market rates. When we modified loans as a TDR, we evaluated any possible impairment similar to other impaired loans. If we determined that the value of the modified loan was less than the recorded investment in the loan, impairment is recognized. The Company has no commitments to lend additional funds to borrowers whose loans have been modified.
The status of TDRs as of December 31, 2022 follows:
Number of Contracts
Performing
Non-Performing
559
815
320
205
Other Consumer
1,177
The following TDRs were modified during the year ended December 31, 2022:
29
Borrowers experiencing financial difficulty ("BEFD") modifications included in the individually assessed loan schedules above, as of September 30, 2023 are as follows:
Number of Loans
Amortized Cost
131
Total accrual BEFD modification loans
1,569
Modifications on non-accrual
All BEFD modifications were loan term extensions. There were no BEFD modifications past due as of September 30, 2023. There was one loan, on non-accrual, that had payment defaults in the past 12 months.
The following tables detail the amortized cost basis at the end of the reporting period for loans made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023.
Term Extensions
Payment Deferral and Term Extensions
Percentage of Total Loans
0.00
0.02
0.04
0.17
0.23
Note 5 - Goodwill And Other Intangible Assets
Goodwill and other intangible assets are presented in the tables below.
As of September 30, 2023
As of December 31, 2022
Carrying Amount
Accumulated Amortization
Net
1,868
811
673
As of September 30, 2023 future estimated annual amortization expense is as follows:
Year ending
2024
180
2025
2026
2027
Thereafter
291
Total Estimated Amortization Expense
Management performed its annual analysis of goodwill and core deposit intangibles ("CDI") during the fourth quarter of 2022 and concluded that there was no impairment at December 31, 2022. At September 30, 2023, management's analysis concluded that there were no changes in the Company's financial statements or operations subsequent to the fourth quarter 2022 annual analysis that would indicate that it was more likely than not that goodwill or CDI was impaired.
Note 6 – Foreclosed Real Estate (Other Real Estate Owned (“OREO”))
OREO assets are presented net of the valuation allowance. The Company considers OREO as classified assets for regulatory and financial reporting. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related selling costs. The Company had OREO of $555,000 and $2.0 million at September 30, 2023 and December 31, 2022, respectively.
During the nine months ended September 30, 2023 and September 30, 2022, the Company incurred OREO expenses of $173,000 and $396,000, respectively.
The Company had $302,000 and $114,000 in loans secured by residential real estate for which formal foreclosure proceedings were in process as of September 30, 2023 and December 31, 2022, respectively.
The table below shows the OREO roll forward balance as of September 30, 2023.
December 31,2022
Beginning of period balance
Improvements and additions
Proceeds from sale
(2,167
Gain on sale
End of period balance
Note 7 - Deposits
Deposits consisted of the following:
Balance
Percentage
Noninterest-bearing checking accounts
22.16%
24.43%
Interest-bearing checking accounts
79,512
12.30%
96,829
14.14%
Money market accounts
87,277
13.50%
102,301
14.94%
Savings accounts
151,407
23.42%
171,772
25.09%
Certificates of deposit
185,077
28.63%
146,514
21.40%
100.00%
At September 30, 2023, the Bank had two account relationships from local government entities that comprised 3.6% and 2.9% of total deposits, respectively.
At September 30, 2023 and December 31, 2022, the Bank had $47.5 million and $28.6 million in certificates of deposits of $250,000 or more, respectively. Deposits in excess of $250,000 may not be insured by the FDIC.
Within one year
118,177
Year 2
40,870
Year 3
11,794
Year 4
4,953
Year 5
9,283
Total certificates of deposit
Note 8 - Borrowings
A summary of the Company’s borrowings at September 30, 2023 and December 31, 2022 are indicated as follows:
Maturity
Rate
Federal Home Loan Bank Advances
5.57%
4.58%
BV Financial Inc. Series 2020 Notes
2030
35,000
4.88%
Easton Capital Trust I
2034
3,093
SOFR + 2.85%
Libor + 2.85%
Total Borrowings, gross
75,593
50,093
Less: Debt issuance costs
(311
(427
Less: net fair value adjustment
(584
(627
Total Borrowings, net
74,698
49,039
Note 9 – Lease Commitments And Contingencies
Operating Leases
The Company's operating lease agreements are primarily for leases of branches and office space. Topic 842 requires operating lease agreements to be recognized on the consolidated balance sheet as a right-of-use-asset with a corresponding lease liability.
The table below details the Right of Use asset (net of accumulated amortization), lease liability and other information related to the Company's operating leases:
Consolidated Balance
Sheet Classification
Operating lease right of use asset
1,075
617
Operating lease liabilities
1,107
645
Other information related to leases:
Weighted average remaining lease term of operating leases
5.9 years
4.1 years
Weighted average discount rate of operating leases
4.60
3.96
The table below details the Company's lease cost, which is included in occupancy expense in the Consolidated Statements of Income.
Operating lease cost
72
187
213
Cash paid for lease liability
176
31
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
Lease payments due:
207
After one but within two years
After two but within three years
196
After three but within four years
151
After four but within five years
64
After five years
Total undiscounted lease payments
1,131
Less: imputed interest
Present value of operating lease liabilities
Note 10 – Regulatory Matters
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.
The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital, and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
In connection with the adoption of the Basel III Capital Rules, the Bank elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.
Insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk-based capital ratio of 10%; and (4) a Tier 1 leverage ratio of 5%.
The maintenance of a capital conservation buffer of 2.5% is also required. The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and does not have any current applicability to the Bank. The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
32
To be well
capitalized under
For capital
prompt corrective
Actual
adequacy purposes
action provisions
Ratio
Tier 1 Leverage ratio
158,940
17.40
36,537
4.00
45,671
5.00
Tier 1 capital (to risk-weighted assets)
23.63
57,175
8.50
53,812
8.00
Common Equity Tier 1 Capital Ratio (to risk-weighted assets)
47,085
7.00
43,722
6.50
Total Capital ratio (to risk-weighted assets)
167,221
24.86
70,628
10.50
67,265
10.00
To be wellcapitalized under
109,939
13.39
32,845
41,057
16.76
55,762
52,482
45,922
42,642
113,757
17.34
68,883
65,602
Note 11 – Fair Value Measurements
The Company adopted ASC Topic 820, “Fair Value Measurements” and ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides a framework for measuring and disclosing fair value under U.S. GAAP. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the consolidated balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, AFS investment securities) or on a nonrecurring basis (for example, individually evaluated loans).
ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Under ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:
Level 1 inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own
assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. Intra-quarter transfers in and out of level 3 assets and liabilities recorded at fair value on a recurring basis are disclosed. There were no such transfers during the quarter ended September 30, 2023 or the year ended December 31, 2022.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities Available for Sale
AFS investment securities are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include agency and mortgage-backed securities issued by government sponsored entities (“GSEs”), municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Equity Securities Carried at Fair Value Through Income
Equity securities carried at fair value through income are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 equity securities include those traded on an active exchange, such as the New York Stock Exchange. Level 2 equity securities include mutual funds with asset-backed securities issued by GSEs as the underlying investment supporting the fund. Equity securities classified as Level 3 include mutual funds with asset-backed securities in less liquid markets.
The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is individually evaluated and an ACL is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are segregated individually. Management estimates the fair value of individually evaluated loans using one of several methods, including the collateral value, market value of similar debt, or discounted cash flows. Individually evaluated loans not requiring an allowance are those for which the fair value of expected repayments or collateral exceed the recorded investment in such loans.
In accordance with FASB ASC 820, loans where an allowance is established based on the fair value of collateral (loans with impairment) require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the loan as nonrecurring Level 2. When the fair value of the collateral dependent loan is derived from an appraisal, the Company records the loan as nonrecurring Level 3. Fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in the fair value. The fair values of collateral dependent loans that are not measured based on collateral values are measured using discounted cash flows and considered to be Level 3 inputs.
Other Real Estate Owned ("OREO")
OREO is adjusted for fair value upon transfer of the loans to foreclosed assets. Subsequently, OREO is reported at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the foreclosed asset as nonrecurring Level 2 when the fair
value is derived from an appraisal, the Company records the foreclosed asset at nonrecurring Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets as of September 30, 2023 and December 31, 2022 measured at fair value on a recurring basis.
Level 1
Level 2
Level 3
Quoted prices
Significant
in active
markets for
observable
unobservable
identical assets
inputs
Agency Securities
The Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a non recurring basis as of September 30, 2023 and December 31, 2022 were included in the tables below.
Individually evaluated loans
Foreclosed real estate and repossessed assets
4,365
Impaired loans
35
Note 12 – Fair Value Of Financial Instruments
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company.
The Company’s estimated fair values of financial instruments are presented in the following table.
Carrying
hierarchy
amount
Financial assets
Securities held to available for sale
Federal Home Loan Bank of Atlanta stock
671,138
639,027
Financial liabilities
505,207
551,348
FHLB Borrowings
11,976
Subordinated Debentures
30,320
33,595
Accrued interest payable
916
Note 13 – Earnings Per Share (“EPS”)
Basic earnings per common share represent income available to common shareholders, divided by the weighted average number of common shares outstanding during the period. As a result of the second step conversion, previously outstanding shares have been adjusted to reflect the 1.5309 exchange ratio. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may have been issued by the Company related to outstanding unvested restricted stock unit and performance stock unit awards were determined using the treasury stock method and included in the calculation of dilutive common stock equivalents. The Company has not granted any stock options since 2017.
As of three and nine months ended September 30, 2023, and 2022, there were no, unvested restricted stock or performance stock unit awards which were excluded from the calculation as their effect would be anti-dilutive. Basic and diluted earnings per share have been computed based on weighted-average common and common equivalent shares outstanding as follows:
(dollars in thousands, except per share data)
Basic
Diluted
Weighted average common shares outstanding
10,600
7,957
8,858
7,947
Dilutive securities
Stock options
Adjusted weighted average shares outstanding
10,630
7,979
8,898
7,969
Earnings-per share amount
Note 14 – Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. If it is more likely than not that some portion or the entire deferred tax asset will not be realized, deferred tax assets will be reduced by a valuation allowance. It is the Company’s policy to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense.
Current expense
Federal
1,004
659
2,434
1,719
State
347
1,125
873
Total current expense
1,460
1,006
3,559
2,592
Deferred expense
(61
37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis is intended to enhance your understanding of our financial condition and results of operations. The financial information in this section is derived from the accompanying financial statements. You should read the financial information in this section in conjunction with the business and financial information contained in this Quarterly Report on Form 10-Q and in the Company’s definitive prospectus dated May 15, 2023, as filed with the Securities and Exchange Commission on May 23, 2023, pursuant to Securities Act Rule 424(b)(3).
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by law or regulation, we do not undertake, and we specifically disclaim any obligation to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies and Use of Critical Accounting Estimates
Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.
On January 1, 2023, the Company adopted Accounting Standards Updates (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” Accounting Standards Codification ("ASC") 326 requires entities to estimate an allowance for credit losses ("ACL") on certain types of financial instruments measured at amortized cost using a current expected credit losses ("CECL") methodology, replacing the prior-required incurred loss methodology. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. The impairment model for available-for-sale debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, by recording an increase in the reported balance of loans and the allowance for credit losses on loans, an increase in the liability for credit
losses on commitments to extend credit and reducing total equity of both the Company and the Bank. As a result of adopting ASC 326, the Company recorded a decrease to retained earnings, net of taxes, of $547,000.
The ACL is an estimate of the expected credit losses for loans held for investment and for off-balance sheet exposures. ASC 326, "Financial Instruments-Credit Losses," requires an immediate recognition of the credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Charge-offs are recorded to the ACL when management believes the loan in uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is maintained in accordance with GAAP and in compliance with appropriate regulatory guidelines. The ACL includes quantitative estimates of losses for collectively and individually evaluated loans. The quantitative estimate for collectively evaluated loans (other than investor commercial real estate loans) is determined using the average charge-off method that utilizes historical losses for all Maryland banks with assets less than $1 billion beginning in March 2000. The investor commercial real estate portfolio utilizes the national loss history for banks with assets less than $1 billion over the same time period. Adjustments are made to the historical loss factors under each scenario for economic conditions, portfolio concentrations, collateral values, the level and trend of delinquent and problem loans and internal changes in staffing, loan policies and monitoring of the portfolio. Loans are selected for individual evaluation primarily based on their payment status and whether the loan has been placed on non-accrual status. Loans on non-accrual status include all loans greater than 90 days delinquent and other loans with weaknesses sufficient for management to place these loans on non-accrual status. The ACL is measured on a collective basis when similar risk factors exist as determined by internal loan coding and assignment to a portfolio segment. The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model's calculation also uses an adjustment for a 12-month forecast period utilizing the most recent 12-month economic forecast from the Board of Governors of the Federal Reserve System for national gross domestic product ("GDP"). The model compares the average history of loss rates described above to the forecasted GDP to determine the value of the forward-looking adjustment. The establishment of the allowance for credit losses is significantly affected by management's judgment and by economic and other uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Federal Deposit Insurance Corporation and the Maryland Office of the Commissioner of Financial Regulation, as an integral part of their examination process, periodically review the allowance for credit losses for reasonableness and, as a result of such reviews, we may be required to increase our ACL or recognize loan charge-offs. The calculation of ACL excludes accrued interest receivable balances because these balances are reversed in a timely manner against previously recognized interest income when a loan is placed on non-accrual.
ASU Update 2022-02 On January 1, 2023, the Company adopted ASU 2022-02 –Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the TDRs recognition and measurement guidance and, instead, requires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU Update 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company adopted ASU 2022-02 using a modified retrospective transition method for TDRs. The impact of adoption was immaterial. The disclosure amendments in the Update 2022-02 were applied prospectively.
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates it is likely impairment has occurred. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. In any given year the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is in excess of its carrying value. If it is not more likely than not that the fair value of the reporting unit is in excess of the carrying value, or if the Company elects to bypass the qualitative assessment, a quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value of net assets is estimated based on analyses of the Company’s market value, discounted cash flows, and peer values. The determination of goodwill impairment is sensitive to market-based economics and other key assumptions used in determining or allocating fair value. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations. Our annual goodwill impairment test is performed each year as of September 30. The Company performed its 2022 goodwill impairment
qualitative assessment and determined its goodwill was not considered impaired. We monitor our performance and evaluate our goodwill for impairment annually or more frequently as needed.
At September 30, 2023, we had a net deferred tax asset totaling $9.0 million. In accordance with ASC Topic 740 “Income Taxes,” we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established if it is not more likely than not realizable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize its federal and state deferred tax asset.
Comparison of Financial Condition at September 30, 2023 (Unaudited) and December 31, 2022
Total Assets. Total assets were $931.4 million at September 30, 2023, an increase of $86.4 million, or 10.2%, from $845.0 million at December 31, 2022. The increase was due primarily to a $45.8 million increase in cash and cash equivalents, and a $39.8 million increase in net loans receivable to $698.9 million at September 30, 2023, partially offset by decreases of $1.4 million in repossessed assets and $417,000 in the cash value of life insurance.
Cash and Cash Equivalents. Cash and cash equivalents increased $45.8 million, or 67.7%, to $114.5 million at September 30, 2023 from $68.7 million at December 31, 2022, primarily due to the stock offering and an increase in borrowings from the FHLB.
Net Loans Receivable. Net loans receivable increased $39.8 million, or 6.0%, to $698.9 million at September 30, 2023 from $659.1 million at December31, 2022. Increases of $20.1 million in commercial real estate and $2.3 million in construction loans were partially offset by decreases of $16.6 million of owner and non-owner occupied one-to-four-family loans and $4.0 million of commercial loans. The increase in construction loans was due primarily to draws on existing lines of credit. The decreases in one- to four-family loans and commercial loans were due primarily to payoffs and pay downs exceeding originations during the nine-months ended September 30, 2023.
Allowance for Credit Losses. The Company adopted ASU 326 on January 1, 2023. Under this new current expected loss model, provisions for credit losses are charged to operations to establish an allowance for credit losses at a level to cover expected losses over the expected life of a loan or securities portfolio. Under the previous “incurred loss” model, provisions for loan losses were charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. Prior to adoption of this standard, the Company segregated the loan portfolios acquired via mergers and evaluated them against a credit mark established at acquisition. As part of the adoption of the new accounting standard, $3.8 million in remaining acquisition credit marks were transferred to the allowance for credit losses for loans. An additional $753,000 in allowances for credit losses were established, $454,000 for the allowance for credit losses for loans, $289,000 as a reserve for off-balance sheet commitments and $10,000 for held-to-maturity securities as of the adoption date. In evaluating the level of the allowance for credit losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts of future economic conditions and other qualitative and quantitative factors which could affect potential credit losses.
Our allowance for credit losses was $8.2 million at September 30, 2023 compared to $3.8 million at September 30, 2022. The ratio of our allowance for credit losses to total loans was 1.15% at September 30, 2023 compared to 0.50% at September 30, 2022, while the allowance for credit losses to non-performing loans was 213.5% at September 30, 2023 compared to 51.1% at September 30, 2022.
Securities. Securities available for sale (“AFS”) increased $2.6 million, or 7.8%, to $35.6 million at September 30, 2023 from $33.0 million at December 31, 2022. This increase was primarily due to an increase of $4.0 million in agency securities, partially offset by decreases in mortgage-backed and corporate securities due to pay downs and maturities and a $252,000 decrease in the market value of the AFS portfolio.
Total Liabilities. Total liabilities decreased $10.9 million or 1.4%, to $736.3 million at September 30, 2023 from $747.2 million at December 31, 2022.The decrease was primarily due to a decrease in total deposits of $38.1 million, partially offset by an increase in FHLB borrowings.
Deposits. Total deposits decreased $38.1 million, or 5.6%, to $646.5 million at September 30, 2023 from $684.6 million at December 31, 2022. Interest-bearing deposits decreased $14.1 million, or 2.7%, to $503.3 million at September 30, 2023 from $517.4 million at December 31, 2022 as a $76.7 million, or 14.3%, decrease in lower-cost transaction accounts were offset by a $38.6 million, or 26.3% increase in certificates of deposit. Noninterest bearing deposits decreased $24.0 million, or 14.4%, to $143.2 million at September 30, 2023 from $167.2 million at December 31, 2022.
The Company has been increasing interest rates paid on deposits in an attempt to retain and grow these balances.
Federal Home Loan Bank Borrowings. The Company had $37.5 million in FHLB borrowings at September 30, 2023 compared to $12.0 million at December 31, 2022. The increase was used to fund loan growth and to maintain on balance sheet liquidity.
Stockholders’ Equity. Stockholders’ equity increased $97.3 million, or 99.6%, to $195.1 million at September 30, 2023, primarily due to the stock offering noted above, $10.7 million in net income and a $547,000 negative adjustment to retained earnings resulting from the adoption of ASC Topic 326 “Financial Instruments-Credit Losses” during the quarter ended March 31, 2023.
Asset Quality. Non-performing assets at September 30, 2023 totaled $4.4 million consisting of $3.8 million in nonperforming loans and $555,000 in other real estate owned, compared to $7.9 million at December 31, 2022, consisting of $5.9 million in non-performing loans and $2.0 million in other real estate owned. At September 30 2023, the allowance for credit losses on loans was $8.2 million, which represented 1.15% of total loans and 213.5% of non-performing loans compared to $3.8 million at December 31, 2022, which represented 0.57% of total loans and 64.8% of non-performing loans. In addition, at December 31, 2022, the Bank had credit marks of $3.8 million that were not included in the Bank’s allowance for loan loss estimate which is in accordance with U.S. Generally Accepted Accounting Principles. The credit marks were established for specific loans acquired in previous mergers.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2023 and 2022
Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Average balances exclude loans held for sale, if applicable. Net deferred loan origination fees totaled $1.8 million and $1.5 million at September 30, 2023 and 2022, respectively.
For the Three Months Ended September 30,
Average Outstanding Balance
Interest
Average Yield/Rate(1)
(Unaudited)
Interest-earning assets:
693,956
5.58%
639,340
4.92
Securities available-for-sale
35,868
3.35%
35,619
1.37
Securities held-to-maturity
12,493
2.84%
7,985
2.66
Cash, cash equivalents and other interest-earning assets
115,554
5.35%
85,673
Total interest-earning assets
857,871
5.42%
768,617
4.42
Noninterest-earning assets
74,240
85,757
932,111
854,374
Interest-bearing liabilities:
Interest-bearing demand deposits
82,096
219
1.06%
94,455
0.07
Savings deposits
150,522
0.13%
170,742
0.05
Money market deposits
85,982
255
1.18%
110,470
0.20
181,292
1,240
2.71%
154,640
200
0.52
Total interest-bearing deposits
499,892
1.40%
530,307
0.22
Federal Home Loan Bank advances
5.60%
—%
37,175
5.82%
36,964
5.57
Total borrowings
74,675
5.71%
Total interest-bearingliabilities
574,567
1.96%
567,271
0.57
Noninterest-bearing demand deposits
144,603
173,542
Other noninterest-bearing liabilities
63,261
20,289
782,431
761,102
Equity
149,680
93,272
Total liabilities and equity
Net interest rate spread(2)
3.46%
3.85
Net interest-earning assets(3)
283,304
201,346
Net interest margin(4)
4.10%
Average interest-earning assets to interest-bearing liabilities
149.31
135.49
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by current rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and volume.
For the Three Months Ended September 30, 2023
Interest Income Increase (Decrease) Due to
(In thousands)
Volume
Interest income:
769
1,059
1,828
Investment securities AFS
177
179
Investment securities HTM
Total Investment securities
181
215
Short-term investments and other
interest-earning assets
403
699
1,102
1,206
1,939
3,145
Interest expense:
(107
1,574
1,467
FHLB Borrowings & Other Borrowings
Total Borrowings
533
556
Total interest-bearing liabilities
426
1,597
2,023
Change in net interest income
780
342
1,122
For the Nine Months Ended September 30,
680,436
5.47%
627,642
4.84
35,746
3.16%
37,443
1.43
12,276
3.00%
7,228
2.64
76,310
5.19%
96,272
1.00
804,768
5.31%
768,585
4.17
81,460
83,691
886,228
852,276
87,159
380
0.58%
94,189
158,324
141
0.12%
169,997
0.06
92,457
0.71%
108,560
0.18
167,313
2,682
2.14%
157,887
721
0.61
505,253
0.98%
530,633
988
0.25
33,099
5.30%
37,123
5.84%
36,911
5.54
70,222
2,934
5.59%
575,475
1.54%
567,544
2,519
154,521
172,082
36,180
22,239
766,176
761,865
120,052
90,411
21,461
3.77%
3.58
229,293
201,041
4.21%
3.73
139.84
135.42
For the Nine Months Ended September 30, 2023
2,162
2,989
5,151
(40
447
113
132
73
506
579
(775
3,007
2,232
6,502
7,962
(186
2,706
90
1,322
1,403
1,136
2,973
4,109
324
3,529
3,853
General. Net income increased $1.1 million, or 41.0%, to $3.7 million for the three months ended September 30, 2023, compared to $2.6 million for the three months ended September 30, 2022. The increase was due primarily to an increase in net interest income and a reduction in the provision for credit losses and an increase in noninterest income, partially offset by increases in noninterest expense and income tax expense.
Interest Income. Interest income increased $3.1 million, or 36.6%, to $11.7 million for the three months ended September 30, 2023 from $8.6 million for the three months ended September 30, 2022. The increase was due primarily to increases in interest income on loans, and interest income on cash, cash equivalents and other interest-earning assets. Interest income on loans increased $1.8 million, or 23.0%, to $9.8 million for the three months ended September 30, 2023 from $7.9 million for the three months ended September 30, 2022 due to increases in the average balance of loans and the average yield. The average balance of loans increased $54.6 million, or 8.5%, to $694.0 million for the three months ended September 30, 2023 from $639.3 million for the three months ended September 30, 2022. The weighted average yield on loans increased 66 basis points to 5.58% for the three months ended September 30, 2023 compared to 4.92% for the three months ended September 30, 2022, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans due to the higher interest rate environment. Interest income on cash, cash equivalents and other interest-earning assets increased $1.1 million to $1.6 million for the three months ended September 30, 2023 from $458,000 for the three months ended September 30, 2022 due to an increase in the average balance of cash, cash equivalents and other interest-earning assets of $29.9 million as well as a 324 basis point increase in the average yield.
Interest income increased $7.9 million, or 33.2%, to $31.9 million for the nine months ended September 30, 2023 from $24.0 million for the nine months ended September 30, 2022. The increase was due primarily to increases in interest income on loans and interest income on cash, cash equivalents and other interest-earning assets. Interest income on loans increased $5.1 million, or 22.7%, to $27.9 million for the nine months ended September 30, 2023 from $22.7 million for the nine months ended September 30, 2022 due to increases in the average balance of loans and the average yield. The average balance of loans increased $52.8 million, or 8.4%, to $680.4 million for the nine months ended September 30, 2023 from $627.6 million for the nine months ended September 30, 2022. The weighted average yield on loans increased 64 basis points to 5.47% for the nine months ended September 30, 2023 compared to 4.84% for the nine months ended September 30, 2022, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans due to the higher interest rate environment. Interest income on cash, cash equivalents and other interest-earning assets increased $2.2 million, to $3.0 million for the nine-months ended September 30, 2023 from $726,000 for the nine months ended September 30, 2022 due to a 419 basis point increase in the average
yield on cash, cash equivalents and other interest-earning assets, partially offset by a $20.0 million decrease in the average balance as excess funds were used to fund loan growth.
Interest Expense. Interest expense increased $2.0 million, or 244.5%, to $2.8 million for the three months ended September 30, 2023 compared to $816,000 for the three months ended September 30, 2022, due to a $1.5 million increase in interest expense on deposits as rates paid increased and depositors moved money into higher cost certificate of deposit accounts and a $530,000 increase in interest expense on advances from the FHLB that were used to fund loan growth and deposit outflow.
The increase in interest expense on deposits was due to a 118 basis point increase in the average rate, offset by a $30.4 million decrease in the average balance of interest-bearing deposits to $499.9 million at September 30, 2023 from $530.3 million for the three months ended September 30, 2022. The average rate on interest-bearing deposits was 1.40% for the three months ended September 30, 2023 compared to 0.22% for the three months ended September 30, 2022.
Interest expense on FHLB advances increased to $530,000 for the three months ended September 30, 2023. There were no advances outstanding the three months ended September 30, 2022. In recent periods, we have relied more heavily on FHLB advances to supplement deposits to fund loan growth and maintain liquidity.
Interest expense on subordinated debentures increased $26,400, or 5.0%, to $545,000 for the three months ended September 30, 2023 compared to $519,000 for the three months ended September 30, 2022. The average rate on subordinated debentures increased 25 basis points to 5.82% for the three months ended September 30, 2023 compared to 5.57% for the three months ended September 30, 2022, due to increases in market interest rates on the $3.0 million adjustable-rate subordinated debt assumed in the Delmarva acquisition.
Interest expense increased $4.1 million, or 163.1%, to $6.6 million for the nine months ended September 30, 2023 compared to $2.5 million for the nine months ended September 30, 2022, due to a $2.7 million increase in interest expense on deposits as rates paid increased and depositors moved money into higher cost certificate of deposit accounts, and a $1.3 million increase in the interest expense on advances from the FHLB that were used to fund loan growth and deposit outflow.
The increase in interest expense on deposits was due to a 73 basis point increase in the average rate, offset by a $25.4 million decrease in the average balance of interest-bearing deposits to $505.3 million at September 30, 2023 from $530.6 million for the nine months ended September 30, 2022. The average rate on interest-bearing deposits was 0.98% for the nine months ended September 30, 2023 compared to 0.25% for the nine months ended September 30, 2022.
Interest expense on FHLB advances increased to $1.3 million for the nine months ended September 30, 2023. There were no advances outstanding the nine months ended September 30, 2022. In recent periods, we have relied more heavily on FHLB advances to supplement deposits to fund loan growth and maintain liquidity.
Interest expense on subordinated debentures increased $90,000, or 5.9%, to $1.6 million for the nine months ended September 30, 2023 compared to $1.5 million for the nine months ended September 30, 2022. The average rate on subordinated debentures increased 30 basis points to 5.84% for the nine months ended September 30, 2023 compared to 5.54% for the nine months ended September 30, 2022, due to increases in market interest rates on the $3.0 million adjustable-rate subordinated debt assumed in the Delmarva acquisition.
Net Interest Income. Net interest income increased $1.1 million, or 14.5%, to $8.9 million for the three months ended September 30, 2023 from $7.8 million for the three months ended September 30, 2022, as a result of a $3.1 million increase in interest income, offset by a $2.0 million increase in interest expense. Our interest rate spread decreased 39 basis points to 3.46% for the three months ended September 30, 2023, compared to 3.85% for the three months ended September 30, 2022, while our net interest margin increased 10 basis points to 4.10% for the three months ended September 30, 2023 compared to 4.00% for the three months ended September 30. 2022.
Net interest income increased $3.9 million, or 18.0%, to $25.3 million for the nine months ended September 30, 2023 from $21.4 million for the nine months ended September 30, 2022, as a result of a $8.0 million increase in interest income, offset by a $4.1 million increase in interest expense. Our interest rate spread increased 19 basis points to 3.77% for the nine months ended September 30, 2023, compared to 3.58% for the nine months ended September 30, 2022, while our net interest margin increased 47 basis points to 4.21% for the nine months ended September 30, 2023 compared to 3.73% for the nine months ended September 30, 2022.
48
Provision for Credit Losses.
We recorded a recovery for credit losses of $333,000 for the three months ended September 30, 2023 compared to a provision for loan losses of $186,000 for the three months ended September 30, 2022. We recorded a recovery for credit losses of $480,000 for the nine months ended September 30, 2023 compared to a provision for loan losses of $587,000 in the nine months ended September 30, 2022. Our allowance for credit losses was $8.2 million at September 30, 2023 compared to $3.8 million at September 30, 2022. The ratio of our allowance for credit losses to total loans was 1.15% at September 30, 2023 compared to 0.50% at September 30, 2022, while the allowance for credit losses to non-performing loans was 213.5% at September 30, 2023 compared to 51.1% at September 30, 2022. The Company had net recoveries on previously charged off loans of $255,000 in the quarter ended September 30, 2023 as compared to net recoveries of $49,000 in the quarter ended September 30, 2022 and net recoveries on previously charged off loans of $421,000 in the nine months ended September 30, 2023 as compared to net recoveries of $86,000 in the nine months ended September 30, 2022
Non-interest Income. For the three months ended September 30, 2023, noninterest income totaled $882,000 compared to $682,000 in the quarter ended September 30, 2022. In the quarter ended September 30, 2023, the Company recognized a gain of $188,000 on the sale of a former branch building. In the quarter ended September 30, 2022, the Company recognized a gain of $45,000 on the sale of another former branch building.
For the nine months ended September 30, 2023, noninterest income totaled $3.1 million compared to $3.3 million for the nine months ended September 30, 2022. In the nine months ended September 30, 2023, the Company recognized a gain of $678,000 on the sale of other real estate owned, $235,000 in excess life insurance proceeds and a $188,000 gain on the sale of a closed branch office. In the nine months ended September 30, 2022, the Company recognized a $694,000 gain on bargain purchase from the acquisition of North Arundel Savings Bank and $620,000 in prepayment penalties on loans.
Non-interest Expense. For the three months ended September 30, 2023, noninterest expense totaled $5.0 million compared to $4.6 million for the three months ended September 30, 2022. Compensation and benefits expenses increased by 18.1% due to increases in staffing and salary levels. Occupancy, professional fees, FDIC insurance premiums and other expenses also increased. Expenses for holding foreclosed real estate decreased $325,000 as a result of a property sale.
For the nine months ended September 30, 2023, noninterest expense totaled $14.3 million as compared to $13.6 million for the nine months ended September 30, 2023. Increases in compensation and benefits, and professional fees were partially offset by lower other expenses.
Income Tax Expense. We recognized income tax expense of $1.4 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively, resulting in effective rates of 27.5% and 28.7%. In the nine months ended September 30, 2023 and 2022, we recognized income tax expense of $3.9 million and $2.8 million, resulting in effective tax rates of 26.7% and 26.3%, respectively. Income tax expense increased as a result of the increase in our net income before taxes.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities of securities. We also have the ability to borrow from the FHLB of Atlanta. At September 30, 2023, we had $178.5 million available under a line of credit with the FHLB of Atlanta, and had $37.5 million of FHLB advances outstanding as of September 30, 2023. In addition, at September 30, 2023, the Bank had $40.0 million in unfunded letters of credit used to secure municipal deposits outstanding against the line of credit with the FHLB of Atlanta. This resulted in additional borrowing availability from the FHLB of $100.9 million. The Company also has a short term unsecured facility from a correspondent bank in the amount of $20.0 million. We also have the ability to participate in the Federal Reserve’s Bank Term Funding Program as needed.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $11.7 million for the nine months ended September 30,2023. Net cash used in investing activities, which consists primarily of investments in loans and securities, was $40.1 million for the nine months ended September 30, 2023. Net cash provided by financing activities, consisting primarily of the sale of common shares, changes in deposits and advances from the FHLB, was $75.1 million for the nine months ended September 30, 2023. We are committed to maintaining a strong liquidity position.
The decrease in deposits in the year to date period was due to customers moving excess cash to other investments and seeking out higher yields. In many, but not all cases, the Company is matching competitive rates to retain existing deposits. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances, brokered deposits or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. At September 30, 2023, the Company had no brokered deposits. At June 30, 2023, the Company had $10.0 million in brokered deposits. The Bank's uninsured deposits totaled $200.2 million or 28.91% of total deposits of which $70.1 million were secured using the market value of pledged collateral or letters of credit issued by FHLB, and an additional $44.9 million were deposits of BV Financial, Inc. at the Bank.
Capital Resources. At September 30, 2023, the Bank exceeded all of its regulatory capital requirements and was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change our category.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Company is a smaller reporting company.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2023. Based on that evaluation, the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2023, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – Other Information
Item 1. Legal Proceedings
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed under the heading "Risk Factors" contained in the Prospectus. The Company's evaluation of the risk factors applicable to it has not changed materially from those disclosed in the Prospectus.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
3.1
Amended and Restated Articles of Incorporation of BV Financial, Inc. (1)
3.2
Amended and Restated Bylaws of BV Financial Bancorp, Inc. (2)
31.1.
31.2
Certification of Co- Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Co-Chief Executive Officers and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials for the quarter ended September 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 13, 2023
/s/ Timothy L. Prindle
Timothy L. Prindle
Co-President and Chief Executive Officer
/s/ David M. Flair
David M. Flair
/s/ Michael J. Dee
Michael J. Dee
Executive Vice President and Chief Financial Officer