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 March 31, 2024
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 X 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 May 10, 2024, 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
5
Notes to Unaudited Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 4.
Controls and Procedures
42
PART II.
OTHER INFORMATION
Legal Proceedings
43
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
44
Signatures
45
BV FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2024
December 31, 2023
(dollars in thousands, except per share amounts)
(unaudited)
(derived from audited financial statements)
Assets
Cash
$
8,520
9,260
Interest-bearing deposits in other banks
70,317
64,482
Cash and cash equivalents
78,837
73,742
Equity investment
246
256
Securities available for sale
33,752
34,781
Securities held to maturity (fair value of $9,154 and $9,206, ACL of $5 and $6)
10,153
10,209
Total loans
708,736
704,802
Allowance for credit losses
(8,506
)
(8,554
Net loans
700,230
696,248
Foreclosed real estate
170
Premises and equipment, net
14,473
14,250
Federal Home Loan Bank of Atlanta stock, at cost
654
626
Investment in life insurance
19,744
19,657
Accrued interest receivable
3,147
3,279
Goodwill
14,420
Intangible assets, net
967
1,012
Deferred tax assets, net
8,699
8,969
Other assets
7,053
7,635
Total assets
892,545
885,254
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits
139,107
142,030
Interest-bearing deposits
500,381
492,090
Total deposits
639,488
634,120
Subordinated debentures
34,767
37,251
Other liabilities
16,538
14,818
Total liabilities
690,793
686,189
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 March 31, 2024 and December 31, 2023; 11,375,803 shares issued and outstanding as of March 31, 2024 and December 31, 2023
114
Paid-in capital
110,534
110,465
Retained earnings
100,346
97,772
Unearned common stock held by employee stock ownership plan
(7,286
(7,328
Accumulated other comprehensive loss
(1,956
(1,958
Total stockholders' equity
201,752
199,065
Total liabilities and stockholders' equity
See notes to consolidated financial statements. 1
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
Interest Income
2024
2023
Loans, including fees
9,782
8,773
Investment securities available for sale
306
266
Investment securities held to maturity
92
93
Other interest income
824
556
Total interest income
11,004
9,688
Interest Expense
Interest on deposits
1,986
665
Interest on FHLB borrowings
—
289
Interest on subordinated debentures
1,055
534
Total interest expense
3,041
1,488
Net interest income
7,963
8,200
Provision for credit losses
18
Net interest income after provision for credit losses
7,945
8,198
Noninterest Income
Service fees on deposits
103
94
Fees from debit cards
171
173
Income from investment in life insurance
87
318
Other income
217
222
Total noninterest income
578
807
Noninterest Expense
Compensation and related benefits
3,129
2,879
Occupancy
438
416
Data processing
377
349
Advertising
13
Professional fees
112
200
Equipment
102
105
Foreclosed real estate and holding costs
127
Amortization of intangible assets
46
FDIC insurance premiums
83
54
Other
627
511
Total noninterest expense
4,923
4,700
Net income before tax
3,600
4,305
Income tax expense
1,026
1,190
Net income
2,574
3,115
Basic earnings per share
0.24
0.39
Diluted earnings per share
See notes to consolidated financial statements. 2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(dollars in thousands)
Other comprehensive income
Unrealized loss on securities available for sale
369
Income tax relating to securities available for sale
(1
(101
268
Total comprehensive income
2,576
3,383
See notes to consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2024 and 2023
Common stock
Unearned common stock held by ESOP
Total
Balance, December 31, 2023
(net of tax of $1)
Stock compensation
69
ESOP shares committed to be released
Balance, March 31, 2024
Balance, December 31, 2022
74
15,406
84,612
(2,341
97,751
(net of tax of $101)
66
CECL ASU Transition
(547
Balance, March 31, 2023
15,472
87,180
(2,073
100,653
See notes to consolidated financial statements. 4
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
(109
Amortization of deferred loan fees/costs
(38
(173
Amortization of debt issuance costs
39
Write-off fair market value of subordinate debt
566
0
Depreciation of premises and equipment
212
218
Deferred tax expense
269
Increase in cash surrender value of life insurance
(87
(83
Stock-based compensation expense
27
65
Decrease in accrued interest and other assets
714
431
Increase in other liabilities
228
56
Net cash provided by operating activities
4,567
3,607
Cash flows from investing activities
Proceeds from maturities and principal payments of investment securities available for sale
6,321
1,243
Purchases of investment securities available for sale
(5,328
(4,002
Proceeds from maturities and principal payments of investment securities held to maturity
58
Net increase in loans
(3,869
(14,213
Purchase of premises and equipment
(435
(49
Proceeds from life insurance benefits
731
Proceeds from sale of Federal Home Loan Bank stock
8
Purchase of Federal Home Loan Bank of Atlanta stock
(28
(1,083
Net cash used in investing activities
(3,283
(17,307
Cash flows provided by financing activities
(Decrease) increase in official checks
(218
400
Net increase (decrease) in deposits
5,412
(17,525
Increase in advance payments by borrowers for taxes and insurance
1,710
1,280
Advances from the Federal Home Loan Bank of Atlanta
25,500
Repayment of subordinate debt
(3,093
Net cash provided by financing activities
3,811
9,655
Net increase (decrease) in cash and cash equivalents
5,095
(4,045
Cash and cash equivalents at beginning of period
68,652
Cash and cash equivalents at end of period
64,607
Supplementary cash flows information
Interest paid
2,480
Income taxes paid
Supplementary noncash transactions
Impact of ASC 326 adoption
547
See notes to consolidated financial statements. 5
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") included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Business
BV Financial, Inc. (“BV Financial,” the “Company” or “we”) was organized as a federal corporation and savings andloan holding company in January 2005 as part of the mutual holding company reorganization of Bay-Vanguard FederalSavings Bank. In February 2019, the Company became a Maryland-chartered corporation and a bank holdingcompany.
Prior to consummation of its mutual to stock conversion in July 2023, BayVanguard, M.H.C., Inc. (the “MHC”) wasthe Maryland-chartered mutual holding company of the Company. The MHC’s only business was the ownership of86.3% of the outstanding common stock of the Company. On January 19, 2023, the MHC adopted a Plan ofConversion and Reorganization (the “Plan”) pursuant to which the MHC undertook a “second-step” conversion andBayVanguard Bank (the “Bank”), the Company’s wholly owned subsidiary, reorganized from the two-tier mutualholding company structure to the fully-public stock holding company structure (the “Conversion”). The Conversionwas consummated on July 31, 2023 on which date the MHC ceased to exist. As part of the Conversion, the Companysold 9,798,980 shares of its common stock at a price of $10.00 per share. Each outstanding share of Company commonstock owned by the existing public stockholders of the Company were converted into new shares of Company commonstock based on an exchange ratio of 1.5309-to-1. The Company had 11,375,803 shares of Company common stockoutstanding as a result of the stock offering and Conversion.
The Company is a registered bank holding company subject to comprehensive regulation and examination by theBoard of Governors of the Federal Reserve System (the “Federal Reserve Board”).
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 and the Bank. All intercompany balancesand 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 "GAAP". 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
A significant portion 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 factors. For securities that are not explicitly 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 March 31, 2024, 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 thatreflects the expected contractual credit losses, even when the risk of such loss is remote. Any security, either explicitlyor 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, FannieMae and Freddie Mac.
The allowance for credit losses ("ACL") for HTM securities is computed using bond global default rates tracked byS&P with a loss given default of 45%. Accrued interest receivable on the HTM debt securities excluded from thisanalysis totaled $12,000 at March 31, 2024.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district FederalHome Loan Bank (the “FHLB") in an amount determined by both asset size and borrowings from the FHLB. Purchasesand sales of stock are made directly with the FHLB at par value.
The Bank held $654,000 and $626,000 of FHLB restricted stock at March 31, 2024 and December 31, 2023, 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
7
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, theundisbursed portion of loans in process, net deferred loan origination fees and costs, fair value adjustments on loansacquired 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. TheCompany is amortizing these amounts over the contractual life of the loan using the interest method. For purchasedloans, the related premium or discount is recognized over the contractual life of the purchased loan and is included aspart of interest income. The accrual of interest is generally discontinued when the contractual payment of principal orinterest has become 90 days past due or management has serious doubts about further collectability of principal orinterest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process ofcollection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interestcredited to income is reversed. Interest received on non-accrual loans generally is either applied against principal orreported as interest income, according to management's judgment as to the collectability of principal. Generally, loansare restored to accrual status when the obligation is brought current, has performed in accordance with the contractualterms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is nolonger in doubt. Interest payments on impaired loans are recorded in the same manner as interest payments onnonaccrual loans.
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 loss history is updated through the most recent quarter-end prior to the reporting period. The investor commercial real estate portfolio utilizes the national loss history for banks with assets less than $1 billion over the same time period. Investor CRE loans are made nationwide, therefore, management deems it appropriate to utilize national loss rates when evaluating this portfolio. 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. 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.
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.
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 March 31, 2024 or December 31, 2023.
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
9
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 and on an interim basis if an event or circumstance indicates it is likely an impairment has occurred. Any impairment of goodwill would be recorded against income in the period of impairment.
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. Core deposit intangibles are evaluated annually for impairment. 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 are computed by dividing net income by the weighted average number of common shares outstanding for the appropriate period. Diluted earnings per share are 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 March 31, 2024 and March 31, 2023, the Company had 55,648 and 36,350 shares, respectively, of unexercised stock options. As a result of the
10
Conversion, the shares have been adjusted to reflect the 1.5309-to-1 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 12.
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 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.
Accounting Standards Updates
ASU 2023-07, “Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures.” The amendments in ASU 2023-07 are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The adoption of ASU 2023-07 is not expected to have a material impact on the Bank’s financial statements.
ASU 2023-09, “Income Taxes (Topic 740), Improvement to Income Tax Disclosures.” The amendments in ASU 2023-09 require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The adoption of ASU 2023-09 is not expected to have a material impact on the Bank’s financial statements.
11
Note 2 - Securities
Securities available for sale at March 31, 2024 and December 31, 2023 consisted of the following:
Amortized cost
Gross unrealized gains
Gross unrealized losses
Fair value
Available for sale
Agencies
691
690
Corporate securities
1,724
292
1,432
Mortgage-backed securities
28,700
2,405
26,299
Treasury
5,335
5,331
36,450
2,702
4,728
4,723
1,722
304
1,418
31,032
2,397
28,640
37,482
2,706
Securities held to maturity at March 31, 2024 and December 31, 2023 consisted of the following:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Held to maturity
4,002
19
3,983
Corporate securities (1)
3,195
542
2,653
2,956
440
2,518
1,001
9,154
4,003
22
3,981
3,194
570
2,624
3,012
414
2,601
1,006
9,206
(1) Amount is net of CECL credit reserve of $5,000 at March 31, 2024 and $6,000 at December 31, 2023.
The Company pledged securities with an amortized cost of $35.4 million and a fair value of $32.5 million at March 31, 2024 to secure deposits from municipalities. At December 31, 2023, the Company pledged securities with an amortized cost of $41.4 million and a fair value of $38.6 million to secure deposits from municipalities.The amortized cost and fair value of securities
12
as of March 31, 2024 and December 31, 2023, 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
18,792
18,634
4,190
4,169
Due after one year through five years
3,486
3,318
3,223
2,680
Due after five years through ten years
1,929
1,612
520
481
Due after ten years
12,243
10,188
2,220
1,824
8,156
8,053
4,605
4,478
25
24
7,788
7,350
3,745
3,138
16,933
14,900
2,436
2,063
All mortgage-backed securities are guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae.
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
60
232
742
Agency securities
78
2,404
24,319
24,397
Treasuries
6,789
2,636
25,061
31,850
2,396
2,418
9,032
9,054
667
221
751
478
26,152
26,630
89
5,868
2,617
26,903
32,771
14
2,482
2,496
9,087
9,101
(1) Fair value amount is net of CECL credit reserve of $5,000 at March 31, 2024 and $6,000 at December 31, 2023.
As of March 31, 2024 and December 31, 2023, the Company determined that for its available-for-sale debt securities in an unrealized loss position, it did not intend to sell nor was it more likely than not that it would be required to sell the security and that the decline in fair value was not due to credit factors, put due to changes in interest rates and other factors. Accordingly, at March 31, 2024 and December 31, 2023, the Company did not record an allowance for credit losses for its available-for-dale debt securities.
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 March 31, 2024.
AAA
A-
BBB/BBB+
BBB-
Not Rated
499
1,248
698
750
6,958
The following table provides a breakdown of our HTM debt securities by year of origination at March 31, 2024.
2022
2021
2020
2019
Prior
2,445
1,820
134
1,002
6,572
2,579
The following table is a roll forward of our allowance for credit losses on HTM debt securities at March 31, 2024.
Three Months Ended March 31, 2024
Three Months Ended March 31, 2023
Beginning Balance
Impact of adopting ASC 326
(Recovery) for credit losses
(3
Ending Balance
15
Note 3 – Loans Receivable
Portfolio loans, net of deferred costs and fees, are summarized by type as follows at March 31, 2024 and December 31, 2023:
Period Ended
Amount
Percent
Real estate
One to four family - owner occupied
128,585
18.14
%
130,026
18.45
One to four family - non owner occupied
103,957
14.67
108,090
15.34
Commercial owner occupied
100,139
14.13
102,512
14.54
Commercial investor
292,109
41.20
287,194
40.76
Construction and land
22,575
3.19
21,865
3.10
Farm loans
14,567
2.06
14,877
2.11
Total real estate loans
661,932
93.39
664,564
94.30
Marine and other consumer loans
17,990
2.54
18,279
2.59
Guaranteed by U.S. Government
3,517
0.50
3,715
0.53
Commercial
25,297
3.57
18,244
2.58
Total consumer and commercial
46,804
6.61
40,238
5.70
100.0
Total loans, net of deferred costs and fees
Net deferred loan origination fees and costs at March 31, 2024 and December 31, 2023 totaled $1.9 million and $1.8 million, respectively.
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.
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.
16
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.
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 March 31, 2024 and December 31, 2023 were as follows:
No
With an
Allowance
1,303
1,160
190
273
704
739
7,844
8,057
314
321
388
10,743
10,550
Total consumer and commercial loans
Total nonaccrual loans
10,745
10,554
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 March 31, 2024 follows:
30 - 59
60 - 89
90+
Days
Current
Past Due
Loans
2,604
787
3,391
125,194
1,029
295
436
1,760
98,379
329
6,808
7,137
284,972
550
806
21,769
4,512
8,287
13,094
648,838
104
3,413
24,909
150
492
46,312
4,662
8,675
13,586
695,150
17
An analysis of days past due loans as of December 31, 2023 follows:
2,043
645
619
3,307
126,719
322
219
541
107,549
901
468
1,369
101,143
371
6,907
7,278
279,916
826
258
1,084
20,781
4,463
8,471
13,579
650,985
18,240
401
17,843
39,798
4,502
1,046
14,019
690,783
Allowance for Credit Losses ("ACL")
The following tables detail activity in the ACL at and for the three months ended March 31, 2024 and 2023. 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)
1,728
52
1,697
1,030
29
(43
1,015
563
3,725
(155
3,570
772
(10
763
179
(5
174
7,997
85
(284
7,797
403
428
Other consumer
154
281
557
151
709
8,554
86
(133
8,506
The following table summarized the ACL activity for the three months ended March 31, 2024.
Reduction in credit losses - loans
Reduction in allowance for securities - HTM
Provision for allowance for credit losses - unfunded commitments
152
Provision for credit losses per the consolidated statements of income
March 31, 2023
Impact of ASC 326 Adoption
344
1,117
1,470
562
356
21
939
366
444
2,272
1,506
3,791
496
594
135
3,654
3,688
35
7,390
68
336
406
91
208
299
159
544
705
3,813
4,232
38
8,095
The following table summarized the ACL activity for the three months ended March 31, 2023.
Provision for credit losses - loans
Reduction in allowance for credit losses - unfunded commitments
(8
Provision for credit losses per the consolidated statement of income
Term Loans by Origination Year
Term Loans Amortized Cost Basis by Origination Year
Balance at March 31, 2024
Revolving
Pass
6,364
7,859
13,142
9,865
79,621
10,610
127,707
Special Mention
Substandard
343
36
878
Doubtful
Loss
Total One to four family - owner occupied
13,485
80,120
10,646
Current Period Gross Write-off
564
13,201
30,583
18,812
10,292
28,656
102,108
1,849
Total One to four family - non owner occupied
30,505
1,496
20,582
15,984
16,526
5,896
33,503
93,987
935
5,217
6,152
Total Commercial owner occupied
6,831
38,720
3,101
68,455
96,594
65,434
15,469
35,212
284,265
1,036
Total Commercial investor
22,277
36,248
8,167
7,842
1,527
2,037
487
688
20,748
1,546
1,827
Total Construction and land
2,033
969
328
4,137
1,815
259
8,028
Total Farm loans
309
3,387
2,151
6,335
1,751
4,055
17,988
Total Marine and other consumer loans
4,057
-
3,493
Total Guaranteed by U.S. Government
4,679
467
4,069
7,948
3,456
24,219
1,078
Total Commercial
4,457
4,290
Total Loans
18,890
120,298
162,904
132,049
47,499
196,856
689,106
9,289
9,574
19,630
163,292
132,392
56,788
206,430
20
Balance at December 31, 2023
6,387
7,906
13,727
9,974
9,707
71,463
10,492
129,656
331
370
71,794
10,531
(2
13,810
30,603
10,742
7,611
22,795
106,143
1,947
24,742
20,967
16,071
16,642
5,998
5,071
31,536
96,285
943
1,502
3,782
6,227
6,941
6,573
35,318
68,682
89,812
65,624
16,205
9,991
28,823
279,137
1,150
23,112
29,973
6,901
9,650
2,271
650
20,176
1,400
1,689
2,050
993
4,141
2,281
261
2,641
5,553
3,542
2,187
6,417
1,788
396
3,945
18,275
3,949
(80
26
417
3,272
501
4,299
6,236
2,000
628
3,483
17,147
697
4,699
4,180
120,790
164,669
133,780
47,644
36,462
171,574
685,411
9,250
18,991
165,069
56,894
37,964
179,774
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 March 31, 2024.
Loan Balance
Estimated Collateral Values
Real Estate
Business\Other Assets
4,559
One to four family - non-owner occupied
451
Commercial owner occupied real estate
Commercial investor real estate
10,070
822
97
210
124
Marine and other consumer
10,452
17,932
Borrowers experiencing financial difficulty ("BEFD") modifications included in the individually assessed loan schedules above, as of March 31, 2024 were as follows:
Number of Loans
Amortized Cost
249
130
785
Total accrual BEFD modification loans
2,200
Modifications on non-accrual
All BEFD modifications were loan term extensions. There were no BEFD modifications past due as of March 31, 2024. 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 months ended March 31, 2024.
Term Extensions
Payment Deferral and Term Extensions
Percentage of Total Loans
0.04
0.02
0.14
Faarm loans
0.11
0.31
Note 4 - Goodwill And Other Intangible Assets
Goodwill and other intangible assets are presented in the tables below.
As of March 31, 2024
As of December 31, 2023
Carrying Amount
Accumulated Amortization
Net
Core deposit intangible
1,868
856
As of March 31, 2024 future estimated annual amortization expense is as follows:
Year ending
2025
180
2026
2027
2028
Thereafter
Total Estimated Amortization Expense
Management performed its annual analysis of goodwill and core deposit intangibles ("CDI") during the fourth quarter of 2023 and concluded that there was no impairment at December 31, 2023. At March 31, 2024, management's analysis concluded that there were no changes in the Company's financial statements or operations subsequent to the fourth quarter 2023 annual analysis that would indicate that it was more likely than not that goodwill or CDI was impaired.
23
Note 5 – Foreclosed Real Estate
Foreclosed real estate assets are presented net of the valuation allowance. The Company considers foreclosed real estate as classified assets for regulatory and financial reporting. Foreclosed real estate 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 foreclosed real estate of $170,000 and $170,000 at March 31, 2024 and December 31, 2023, respectively.
During the three months ended March 31, 2024 and March 31, 2023, the Company incurred foreclosed real estate expenses of $5,000 and $96,000, respectively.
The Company had $220,000 and $174,000 in loans secured by residential real estate for which formal foreclosure proceedings were in process as of March 31, 2024 and December 31, 2023, respectively.
The table below shows the foreclosed real estate roll forward balance as of March 31, 2024.
December 31,2023
Beginning of period balance
1,987
Improvements and additions
57
Proceeds from sale
(2,583
Gain on sale
End of period balance
Note 6 - Deposits
Deposits consisted of the following:
Balance
Percentage
Noninterest-bearing checking accounts
21.75%
22.40%
Interest-bearing checking accounts
90,146
14.10%
83,656
13.19%
Money market accounts
86,728
13.56%
87,310
13.77%
Savings accounts
149,655
23.40%
147,608
23.28%
Certificates of deposit
173,852
27.19%
173,516
27.36%
100.00%
At March 31, 2024, the Bank had two account relationships from local government entities that comprised 3.5% and 1.6% of total deposits, respectively. At March 31, 2024 the Company had $10.0 million of brokered certificates of deposits. The Company had no brokered deposits at December 31, 2023.
At March 31, 2024 and December 31, 2023, the Bank had $29.1 million and $32.1 million in certificates of deposits of $250,000 or more, respectively. Deposits in excess of $250,000 may not be insured by the FDIC.
At March 31, 2024 scheduled maturities of certificates of deposits are as follows:
Within one year
116,384
Year 2
40,289
Year 3
4,771
Year 4
8,958
Year 5
3,450
Total certificates of deposit
Note 7 - Borrowings And Subordinated Debt
A summary of the Company’s borrowings at March 31, 2024 and December 31, 2023 are indicated as follows:
Maturity
Rate
BV Financial Inc. Series 2020 Notes
2030
35,000
4.88%
Easton Capital Trust I
2034
3,093
SOFR + 2.85%
Total Borrowings, gross
38,093
Less: Debt issuance costs
(233
(272
Less: net fair value adjustment
(570
Total Borrowings, net
During the quarter ended March 31, 2024, the Company paid off $3.0 million in junior subordinated debt assumed via a previous acquisition that had an interest rate in the most recent quarter of 8.49%. This resulted in the write-off (increase in interest expense) of the remaining purchase accounting fair market value adjustment of $566,000.
Note 8 – Lease Commitments And Contingencies
Operating Leases
The Company determines if an arrangement is a lease at inception. All of the Company’s leases are currently classifiedas operating leases and are included in other assets and other liabilities on the Company’s Consolidated BalanceSheets. Periodic operating lease costs are recorded in occupancy expenses of premises on the Company's ConsolidatedStatements of Income.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and leaseliabilities represent the Company’s obligation to make lease payments arising from the lease arrangements. Operatinglease ROU assets and liabilities are recognized at the lease commencement date based on the present value of theexpected future lease payments over the remaining lease term. In determining the present value of future leasepayments, the Company uses its incremental borrowing rate based on the information available at the leasecommencement date. The operating ROU assets are adjusted for any lease payments made at or before the leasecommencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable orunfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extendor terminate the lease when it is reasonably certain that the Company will exercise such options provided in the leaseterms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that includelease and non-lease components, such as common area maintenance charges, are accounted for separately.
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
1,079
1,128
Operating lease liabilities
1,115
1,162
Other information related to leases:
Weighted average remaining lease term of operating leases
5.3 years
5.5 years
Weighted average discount rate of operating leases
4.26
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
Cash paid for lease liability
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:
243
After one but within two years
443
After two but within three years
After three but within four years
64
After four but within five years
After five years
213
Total undiscounted lease payments
1,130
Less: imputed interest
(15
Present value of operating lease liabilities
Note 9 – 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.
To be well
capitalized under
For capital
prompt corrective
Actual
adequacy purposes
action provisions
Ratio
Tier 1 Leverage ratio
165,718
19.26
34,425
4.00
43,031
5.00
Tier 1 capital (to risk-weighted assets)
23.94
41,538
6.00
55,384
8.00
Common Equity Tier 1 Capital Ratio (to risk-weighted assets)
31,153
4.50
44,999
6.50
Total Capital ratio (to risk-weighted assets)
174,374
25.19
69,229
10.00
To be wellcapitalized under
162,125
18.50
35,055
43,819
24.00
40,523
54,031
30,393
43,900
170,571
25.26
67,539
Note 10 – 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 March 31, 2024 or the year ended December 31, 2023.
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
28
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.
Foreclosed real estate is adjusted for fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed real estate 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 March 31, 2024 and December 31, 2023 measured at fair value on a recurring basis.
Level 1
Level 2
Level 3
Quoted prices
Significant
in active
other
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 March 31, 2024 and December 31, 2023 were included in the tables below.
Individually evaluated loans
Foreclosed real estate and repossessed assets
10,915
10,724
Note 11 – 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, foreclosed real estate, 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.
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The Company’s estimated fair values of financial instruments are presented in the following table.
Carrying
hierarchy
amount
Financial assets
Securities held to maturity
Securities held to available for sale
Federal Home Loan Bank of Atlanta stock
Loans receivable
685,045
686,879
Financial liabilities
Deposits
636,834
631,720
Subordinated Debentures
27,559
31,018
Accrued interest payable
753
193
Note 12 – 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 Conversion, previously outstanding shares were adjusted to reflect the 1.5309-to-1 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 months ended March 31, 2024, and 2023, 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
10,638
7,967
Dilutive securities
Stock options
31
Adjusted weighted average shares outstanding
10,669
7,989
Earnings-per share amount
Note 13 – 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
519
818
State
238
372
Total current expense
757
Deferred expense
32
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 2023 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 22, 2024.
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 our current beliefs and expectations and are 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.
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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 2023 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 March 31, 2024, we had a net deferred tax asset totaling $8.7 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 March 31, 2024 (Unaudited) and December 31, 2023
Total Assets. Total assets were $892.5 million at March 31, 2024, an increase of $7.2 million, or 0.82%, from $885.3 million at December 31, 2023. The increase was due primarily to a $5.1 million increase in cash and a $3.9 million increase in loans receivable funded by an increase in deposits and quarterly net income. The increase in deposits included the issuance of $10 million in brokered deposits during the period.
Cash and Cash Equivalents. Cash and cash equivalents increased $5.1 million, or 6.9%, to $78.8 million at March 31, 2024 from $73.7 million at December 31, 2023 primarily due to the increase in deposits.
Net Loans Receivable. Loans receivable increased $3.9 million, or 0.56%, to $708.7 million at March 31, 2024 from $704.8 million at December 31, 2023. Increases in commercial and industrial loans of $7.0 million and investor commercial real estate loans of $4.9 million offset decreases in owner occupied one-to-four loans of $1.4 million, non-owner occupied one- to four-family loans of $4.1 million and owner occupied commercial real estate loans of $2.4 million.
Allowance for Credit Losses.
Our allowance for credit losses – loans was $8.5 million at March 31, 2024 compared to $8.55 million at December 31, 2023. The slight decrease in the required ACL resulted from lower historical loss rates and lower life of loan calculations offsetting the higher balances of loans outstanding at March 31, 2024 compared to December 31, 2023. The ratio of our allowance for credit losses to total loans was 1.20% at March 31, 2024 compared to 1.19% at March 31, 2023, while the allowance for credit losses to non-performing loans was 79.2% at March 31, 2024 compared to 176.5% at March 31, 2023.
Securities. Securities available for sale (“AFS”) decreased $1.0 million, or 3.0%, to $33.8 million at March 31, 2024 from $34.8 million at December 31, 2023. The decrease was due to new purchases not fully replacing maturities and paydowns in the portfolio. Securities held-to-maturity were relatively unchanged at $10.2 million.
Total Liabilities. Total liabilities increased $4.6 million or 0.7%, to $690.8 million at March 31, 2024 from $686.2 million at December 31, 2023. The increase was primarily due to an increase in total deposits of $5.4 million, and an increase in escrow accounts and other accrued balances offsetting the pay-off of the junior subordinated debt of $3.0 million.
Deposits. Total deposits increased $5.4 million, or 0.85%, to $639.5 million at March 31, 2024 from $634.1 million at December 31, 2023. Interest-bearing deposits increased $8.3 million, or 1.7%, to $500.4 million at March 31, 2024 from $492.1 million at December 31, 2023. Noninterest bearing deposits decreased $2.9 million, or 2.1%, to $139.1 million at March 31, 2024 from $142.0 million at December 31, 2023. During the first quarter of 2024, the Company replaced $10.0 million in retail certificates of deposits with $10 million of brokered deposits at a cost lower than that would have been required to retain the retail certificates.
Federal Home Loan Bank Borrowings. The Company had no Federal Home Loan Bank borrowings at March 31, 2024 or December 31, 2023.
Stockholders’ Equity. Stockholders’ equity increased $2.7 million, or 1.3%, to $201.8 million at March 31, 2024, primarily due to net income.
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Comparison of Operating Results for the Three Months Ended March 31, 2024 and 2023
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 $1.9 million and $1.7 million at March 31, 2024 and 2023, respectively.
For the Three Months Ended March 31,
Average Outstanding Balance
Interest
Average Yield/Rate(1)
(Unaudited)
Interest-earning assets:
708,367
5.54%
667,888
5.33
Securities available-for-sale
34,045
3.61%
36,134
2.99
Securities held-to-maturity
10,815
3.41%
11,915
3.18
Cash, cash equivalents and other interest-earning assets
62,681
5.27%
50,883
4.43
Total interest-earning assets
815,908
5.41%
766,820
5.12
Noninterest-earning assets
67,460
81,403
883,368
848,223
Interest-bearing liabilities:
Interest-bearing demand deposits
84,550
236
1.12%
91,842
0.08
Savings deposits
146,629
0.18%
164,817
40
0.10
Money market deposits
87,738
352
1.61%
99,583
173,093
1,333
3.09%
152,264
510
1.36
Total interest-bearing deposits
492,010
1.62%
508,506
Federal Home Loan Bank advances
24,150
4.85
35,805
11.82%
37,069
5.84
Total borrowings
61,219
823
5.45
Total interest-bearingliabilities
527,815
2.31%
569,725
1.06
Noninterest-bearing demand deposits
139,688
158,807
Other noninterest-bearing liabilities
16,145
22,042
683,648
750,574
Equity
199,720
97,649
Total liabilities and equity
Net interest rate spread(2)
3.10%
4.06
Net interest-earning assets(3)
288,093
197,095
Net interest margin(4)
3.91%
4.34
Average interest-earning assets to interest-bearing liabilities
154.58
134.59
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 March 31, 2024
Interest Income Increase (Decrease) Due to
(In thousands)
Volume
Interest income:
559
450
1,009
Investment securities AFS
(19
59
Investment securities HTM
(9
Total Investment securities
67
Equity Investments
Short-term investments and other
interest-earning assets
155
113
1,316
Interest expense:
(88
1,409
1,321
FHLB Borrowings & Other Borrowings
(289
(37
558
521
Total Borrowings
(326
Total interest-bearing liabilities
(414
1,967
1,553
Change in net interest income
1,102
(1,339
(237
General. Net income decreased by $541,000 or 17.4% for the three months ended March 31, 2024, compared to $3.1 million for the three months ended March 31, 2023. The decrease was due primarily to the write-off (increase in interest expense) of the remaining purchase accounting fair market value adjustment of $566,000 upon the pay-off of $3.0 million in junior subordinated debt assumed in a prior acquisition.
Interest Income. Interest income increased $1.3 million, or 13.6%, to $11.0 million for the three months ended March 31, 2024 from $9.7 million for the three months ended March 31, 2023. 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 $1.0 million, or 11.5%, to $9.8 million for the three months ended March 31, 2024 from $8.8 million for the three months ended March 31, 2023 due to increases in the average balance of loans and the average rate earned on loans. The average balance of loans increased $40.5 million, or 6.1%, to $708.4 million for the three months ended March 31, 2024 from $667.9 million for the three months ended March 31, 2023. The weighted average yield on loans increased 21 basis points to 5.54% for the three months ended March 31, 2024 compared to 5.33% for the three months ended March 31, 2023, 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 $268,000 to $824,000 for the three months ended March 31, 2024 from $556,000 for the three months ended March 31, 2023 due to an increase in the average balance of cash, cash equivalents and other interest-earning assets and the average rate.
Interest Expense. Interest expense increased $1.5 million, or 104.4%, to $3.0 million for the three months ended March 31, 2024 compared to $1.5 million for the three months ended March 31, 2023, due to a $1.3 million increase in interest expense on deposits as rates paid increased and depositors moved money into higher cost certificate of deposit accounts, a $521,000 increase in interest expense on subordinated debt due to the write-off of the fair market value adjustment noted above somewhat offset by a $289,000 decrease in interest expense on advances from the FHLB as there were no advances outstanding in the quarter ended March 31, 2024.
The increase in interest expense on deposits was due to a 109 basis point increase in the average rate, offset by a $16.5 million decrease in the average balance of interest-bearing deposits to $492.0 million at March 31, 2024 from $508.5 million for the three months ended March 31, 2023. The average rate on interest-bearing deposits was 1.62% for the three months ended March 31, 2024 compared to 0.53% for the three months ended March 31, 2023.
Interest expense on FHLB advances decreased to $0 for the three months ended March 31, 2024 from $289,000 in the three months ended March 31, 2023 as all advances were paid off.
Interest expense on subordinated debentures increased $521,000, or 97.6%, to $1.1 million for the three months ended March 31, 2024 compared to $534,000 for the three months ended March 31, 2023.The increase was due primarily to the write-off (increase in interest expense) of the remaining purchase accounting fair market value adjustment of $566,000 upon the pay-off of $3.0 million in junior subordinated debt assumed in a prior acquisition.
Net Interest Income. Net interest income was $8.0 million for the three months ended March 31, 2024 compared to $8.2 million in the three months ended March 31, 2023. The net interest margin for the three months ended March 31, 2024 was 3.91% compared to 4.34% for the three months ended March 31, 2023. The 125 basis point increase in the cost of interest-bearing liabilities offset the higher average balances and rates earned on loans and short-term investments. Included in interest expense is the above-mentioned write-off of the $566,000 remaining fair market value adjustment on the pay-off the $3.0 million junior subordinated debt. Additionally, the cost of interest-bearing deposits increased by 109 basis points to 1.62% in the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023.
Provision for Credit Losses.
The provision for credit losses was $18,000 for the three months ended March 31, 2024 compared to a provision for credit losses of $2,000 for the three months ended March 31, 2023. The provision in the current quarter consisted of a credit to the ACL-loans of $133,000, a credit to the ACL-HTM securities of $1,000 and an increase in the ACL-Unfunded commitments of $152,000. The Company had net recoveries on previously charged off loans of $85,000 in the quarter ended March 31, 2024 as compared to net recoveries of $37,000 in the quarter ended March 31, 2023.
Non-interest Income. For the three months ended March 31, 2024, noninterest income totaled $578,000 compared to $807,000 in the quarter ended March 31, 2023. The decrease is almost entirely due to lower income on insurance policies. In the quarter ended March 31, 2023, the Company received a $235,000 death benefit on the policies.
Non-interest Expense. For the three months ended March 31, 2024, noninterest expense totaled $4.9 million compared to $4.7 million for the three months ended March 31, 2023. Compensation and benefits expenses increased by 8.7% due to increases in staffing and salary levels. Other expenses increased $116,000 or 22.7% primarily due to higher fraud losses. Professional fees decreased by $88,000 or 44.0% due to the recovery of previously expensed legal fees of $109,000 on the disposition of a problem loan. Foreclosed real estate expenses decreased by $122,000 or 96.1% due to the sale of large foreclosed real estate properties in 2023.
Income Tax Expense. For the three months ended March 31, 2024, income tax expense was $1.0 million for an effective tax rate of 28.5%. In the quarter ended March 31, 2023, income tax expense was $1.2 million for an effective tax rate of 27.65%. The lower tax rate in the quarter ended March 31, 2023 was due to a higher level of income from life insurance in that quarter.
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 March 31, 2024, we had $169.1 million available under a line of credit with the FHLB of Atlanta, and had $25.0 million of FHLB 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 $144.1 million. The Company also has a short term unsecured facility from a correspondent bank in the amount of $20.0 million.
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. We are committed to maintaining a strong liquidity position.
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 March 31, 2024 and March 31, 2023, the Company had $10 million and $0 in brokered deposits, respectively. The Bank's uninsured deposits totaled $190.1 million or 27.9% of total deposits of which $57.2 million were secured using the market value of pledged collateral or letters of credit issued by FHLB, and an additional $42.5 million were deposits of BV Financial, Inc. at the Bank.
Capital Resources. At March 31, 2024, 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 March 31, 2024. 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 March 31, 2024, 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 March 31, 2024, 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
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: May 13, 2024
/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