# BV Financial, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [BV Financial, Inc.](/companies/bvfl.md) (CIK 1302387)
- Form: 10-Q
- Filed: 2023-06-29
- Accepted by EDGAR: Jun 29, 2023, 15:37 ET
- Period: 2023-03-31
- Accession: 0000950170-23-030701
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1302387/000095017023030701/bvfl-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1302387/000095017023030701/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $1.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.42 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 7,425 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $3.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $49.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $64.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $857.5m | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $756.9m | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $74.6m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-03-31 | $100.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,461 characters.

### General

Management’s discussion and analysis is intended to enhance your understanding of our financial condition and results of operations. The financial information in this section is derived from the accompanying financial statements. You should read the financial information in this section in conjunction with the business and financial information contained in this Quarterly Report on Form 10-Q and in the Company’s definitive prospectus dated May 15, 2023, as filed with the Securities and Exchange Commission on May 23, 2023, pursuant to Securities Act Rule 424(b)(3).

### Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

- statements of our goals, intentions and expectations;
- statements regarding our business plans, prospects, growth and operating strategies;
- statements regarding the quality of our loan and investment portfolios; and
- estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

- general economic conditions, either nationally or in our market areas, that are worse than expected including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by supply chain disruptions or otherwise;
- the impact of the COVID-19 pandemic on our business and results of operations;
- changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
- changes in the economic assumptions used to calculated the allowance for credit losses;
- our ability to access cost-effective funding;
- changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio;
- fluctuations in real estate values and both residential and commercial real estate market conditions;
- demand for loans and deposits in our market area;
- our ability to implement and change our business strategies;
- competition among depository and other financial institutions;
- inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations or prepayments on loans we have made and make;
- adverse changes in the securities markets;
- changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements and insurance premiums;
- monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
- changes in the quality or composition of our loan or investment portfolios;
- technological changes that may be more difficult or expensive than expected;
- system failure or cyber-security breaches of our information technology infrastructure;
- the failure to maintain current technologies and/or successfully implement future information technology enhancements;
- the inability of third-party providers to perform as expected;
- our ability to manage market risk, credit risk and operational risk in the current economic environment;
- our ability to enter new markets successfully and capitalize on growth opportunities;
- our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
- changes in consumer spending, borrowing and savings habits;
- changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
- our ability to retain key employees;
- our compensation expense associated with equity allocated or awarded to our employees; and
- changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

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 opening retained earnings, net of taxes, of $547,000.

The ACL is an estimate of the expected credit losses for loans held for investment and for off-balance sheet exposures. ASC 326, "Financial Instruments-Credit Losses" requires an immediate recognition of the credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Charge-offs are recorded to the ACL when management believes the loan in uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is maintained in accordance with U.S. 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 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 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 or not 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 that 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 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. 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.

Deferred Income Taxes

At March 31, 2023, we had a net deferred tax asset totaling $9.2 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, 2023 (Unaudited) and December 31, 2022

***Total Assets.*** Total assets were $857.5 million at March 31, 2023, an increase of $12.5 million, or 1.5%, from $845.0 million at December 31, 2022. The increase was due primarily to a $13.7 million increase in net loans receivable to $672.8 million at March 31, 2023, partially offset by a decrease of $4.1 million in cash and cash equivalents to $64.6 million at March 31, 2023 and a $700,000 decrease in investment in life insurance to $19.3 million at March 31, 2023.

***Cash and Cash Equivalents.*** Cash and cash equivalents decreased $4.1 million, or 5.9%, to $64.6 million at March 31, 2023 from $68.7 million at December 31, 2022 as funds were used to fund the increases in net loans receivable. We regularly review our liquidity position based on alternative uses of available funds as well as market conditions.

***Net Loans Receivable.*** Net loans receivable increased $13.7 million, or 2.1%, to $672.8 million at March 31, 2023 from $659.1 million at December 31, 2022. Increases in commercial real estate and construction loans offset decreases in owner and non-owner occupied one- to four-family loans and commercial loans. We continue to see robust demand for non-office commercial real estate properties and the increase in construction loans was due primarily to draws on existing lines of credit. The decreases in one- to four-family loans and commercial loans were due primarily to payoffs and paydowns exceeding originations during the quarter ended March 31, 2023.

***Securities.*** Securities increased $3.0 million, or 6.9%, to $46.5 million at March 31, 2023 from $43.5 million at December 31, 2022. This increase was primarily due to an increase of $4.0 million in agency securities, partially offset by a $1.3 million decrease in available for sale mortgage-backed securities to $32.7 million at March 31, 2023. Purchases exceeded paydowns and maturities of debt securities for the period.

***Total Liabilities.*** Total liabilities increased $9.7 million, or 1.3%, to $756.9 million at March 31, 2023 from $747.2 million at December 31, 2022. The increase was primarily due to a $25.5 million increase in Federal Home Loan Bank borrowings, partially offset by a decrease in total deposits of $17.6 million.

***Deposits.*** Total deposits decreased $17.6 million, or 2.6%, to $667.0 million at March 31, 2023 from $684.6 million at December 31, 2022. Interest-bearing deposits decreased $2.1 million, or 0.4%, to $515.3 million at March 31, 2023 from $517.4 million at December 31, 2022. Noninterest bearing deposits decreased $15.5 million, or 9.27%, to $151.7 million at March 31, 2023 from $167.2 million at December 31, 2022.

Of the $17.6 million decrease in deposits that occurred in the quarter ended March 31, 2023, $14.5 million, or 79.5%, of the decrease occurred in January as primarily commercial customers made routine annual post-year end distributions, moved cash to alternative investments and made certain large capital expenditures. The Company has been adjusting interest rates paid on deposits to retain and grow these balances. The turmoil experienced in the banking system in early March 2023 has not led to a measurable increase in customer inquiries or withdrawals.

***Federal Home Loan Bank Borrowings.*** We had $37.5 million in Federal Home Loan Bank borrowings at March 31, 2023 compared to $12.0 million in Federal Home Loan Bank borrowings at December 31, 2022. The increase was used to fund loan growth and to maintain on balance sheet liquidity.

***Stockholders’ Equity.*** Stockholders’ equity increased $2.9 million, or 3.0%, to $100.7 million at March 31, 2023, primarily due to $3.1 million in net income, a $300,000 reduction in the other comprehensive loss and a $547,000 negative adjustment to retained earnings resulting from the adoption of ASU Topic 326 during the quarter ended March 31, 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 fees totaled $1.7 million and $1.4 million at March 31, 2023 and 2022, respectively.

### BV FINANCIAL, INC. AND SUBSIDIARIES

*(Dollars in thousands)*

*(Unaudited)*

| Interest-earning assets: | For the Three Months Ended March 31, 2023 Average Outstanding Balance | Interest | Average Yield/Rate(1) | 2022 Average Outstanding Balance | Interest | Average Yield/Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $667,888 | $8,773 | 5.33% | $615,651 | $7,202 | 4.75% |
| Securities available-for-sale | 36,134 | 266 | 2.99% | 38,987 | 136 | 1.41% |
| Securities held-to-maturity | 11,915 | 93 | 3.18% | 5,697 | 39 | 2.54% |
| Cash, cash equivalents and other interest-earning assets | 50,883 | 556 | 4.43% | 100,905 | 36 | 0.14% |
| **Total interest-earning assets** | 766,820 | 9,688 | 5.12% | 761,240 | 7,413 | 3.95% |
| Noninterest-earning assets | 81,403 |  |  | 90,123 |  |  |
| **Total assets** | $848,223 |  |  | $851,363 |  |  |
| **Interest-bearing liabilities:** |  |  |  |  |  |  |
| Interest-bearing demand deposits | $91,842 | 18 | 0.08% | $94,047 | 15 | 0.06% |
| Savings deposits | 164,818 | 40 | 0.10% | 167,793 | 23 | 0.06% |
| Money market deposits | 99,583 | 97 | 0.39% | 106,572 | 45 | 0.17% |
| Certificates of deposit | 152,264 | 510 | 1.36% | 159,750 | 284 | 0.72% |
| **Total interest-bearing deposits** | 508,507 | 665 | 0.53% | 528,162 | 368 | 0.28% |
| Federal Home Loan Bank advances | 24,150 | 289 | 4.85% | — | — | —% |
| Subordinated debentures | 37,069 | 534 | 5.84% | 36,858 | 503 | 5.53% |
| **Total borrowings** | 61,219 | 823 | 5.45% | 36,858 | 503 | 5.53% |
| **Total interest-bearing liabilities** | 569,725 | 1,488 | 1.06% | 565,019 | 871 | 0.63% |
| Noninterest-bearing demand deposits | 158,807 |  |  | 170,418 |  |  |
| Other noninterest-bearing liabilities | 22,042 |  |  | 27,081 |  |  |
| **Total liabilities** | 750,584 |  |  | 762,518 |  |  |
| Equity | 97,649 |  |  | 88,845 |  |  |
| **Total liabilities and equity** | $848,223 |  |  | $851,363 |  |  |
| Net interest income |  | $8,200 |  |  | $6,542 |  |
| Net interest rate spread(2) |  |  | 4.06% |  |  | 3.32% |
| **Net interest-earning assets(3)** | $197,095 |  |  | $196,221 |  |  |
| Net interest margin(4) |  |  | 4.34% |  |  | 3.49% |
| Average interest-earning assets to interest-bearing liabilities | 134.59% |  |  | 134.73% |  |  |

(1) Annualized.

(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

### Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022

***General.*** Net income increased $698,000, or 28.9%, to $3.1 million for the three months ended March 31, 2023, compared to $2.4 million for the three months ended March 31, 2022. The increase was due primarily to increases in net interest income and a reduction in the provision for credit losses, partially offset by a decrease in non-interest income and an increase in non-interest expense.

***Interest Income.*** Interest income increased $2.3 million, or 30.7%, to $9.7 million for the three months ended March 31, 2023 from $7.4 million for the three months ended March 31, 2022. The increase was due primarily to increases in interest income on loans, which is our primary source of interest income, and interest income on cash, cash equivalents and other interest-earning assets. Interest income on loans increased $1.6 million, or 22.2%, to $8.8 million for the three months ended March 31, 2023 from $7.2 million for the three months ended March 31, 2022 due to increases in the average balance of loans and the average yield. The average balance of loans increased $52.2 million, or 8.5%, to $667.9 million for the three months ended March 31, 2023 from $615.7 million for the three months ended March 31, 2022. The weighted average yield on loans increased 58 basis points to 5.33% for the three months ended March 31, 2023 compared to 4.75% for the three months ended March 31, 2022, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans. Interest income on cash, cash equivalents and other interest-earning assets increased $520,000, to $556,000 for the three months ended March 31, 2023 from $39,000 for the three months ended March 31, 2022 due to a 429 basis point increase in the average yield on cash, cash equivalents and other interest-earning assets, partially offset by a $50.1 million decrease in the average balance as excess funds were used to fund loan growth.

***Interest Expense.*** Interest expense increased $617,000, or 70.8%, to $1.5 million for the three months ended March 31, 2023 compared to $871,000 for the three months ended March 31, 2022, due primarily to a $298,000 increase on interest paid on deposits, and a $288,000 increase on interest paid on advances from the Federal Home Loan Bank.

The increase in interest expense on deposits was due to a 25 basis point increase in the average rate, offset by a $19.7 million decrease in the average balance of interest-bearing deposits to $508.5 million at March 31, 2023 from $528.2 million for the three months ended March 31, 2022. The average rate on interest-bearing deposits was 0.53% for the three months ended March 31, 2023 compared to 0.28% for the three months ended March 31, 2022.

Interest expense on Federal Home Loan Bank advances increased to $288,000 for the three months ended March 31, 2023 due to an average balance of $24.2 million for the three months ended March 31, 2023. The average rate on Federal Home Loan Bank advances was 4.85% for the three months ended March 31, 2023. In recent periods, we have relied more heavily on Federal Home Loan Bank advances to supplement deposits to fund loan growth and maintain liquidity.

Interest expense on subordinated debentures increased $31,000, or 6.0%, to $534,000 for the three months ended March 31, 2023 compared to $503,000 for the three months ended March 31, 2022. The average rate on subordinated debentures increased 31 basis points to 5.84% for the three months ended March 31, 2023 compared to 5.53% for the three months ended March 31, 2022, due to increases in market interest rates.

***Net Interest Income.*** Net interest income increased $1.7 million, or 26.1%, to $8.2 million for the three months ended March 31, 2023 from $6.5 million for the three months ended March 31, 2022, as a result of a $2.3 million increase in interest income, offset by a $617,000 increase in interest expense. Our interest rate spread increased 74 basis points to 4.06% for the three months ended March 31, 2023, compared to 3.32% for the three months ended March 31, 2022, while our net interest margin increased 85 basis points to 4.34% for the three months ended March 31, 2023 compared to 3.49% for the three months ended March 31. 2022.

***Provision for Credit Losses.*** BV Financial adopted ASU 326 on January 1, 2023. Under this new current expected loss model, provisions for credit losses are charged to operations to establish an allowance for credit losses at a level to cover expected losses over the expected life of a loan or securities portfolio. Under the previous “incurred loss” model, provisions for loan losses were charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. Prior to adoption of this standard, BV Financial segregated the loan portfolios acquired via mergers and evaluated them against a credit mark established at acquisition. As part of the adoption of the new accounting standard, $3.8 million in remaining acquisition credit marks were transferred to the allowance for credit losses for loans. An additional $750,000 in allowances for credit losses were established, $454,000 for the allowance for credit losses for loans, $289,000 as a reserve for off balance sheet commitments and $10,000 for held-to-maturity securities as of the adoption date. In evaluating the level of the allowance for credit losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

We recorded provisions for credit losses of $2,000 and $177,000 for the three months ended March 31, 2023 and 2022, respectively. Our allowance for credit losses was $8.1 million at March 31, 2023 compared to $2.9 million at March 31, 2022. The ratio of our allowance for credit losses to total loans was 1.19% at March 31, 2023 compared to 0.45% at March 31, 2022, while the allowance for credit losses to non-performing loans was 176.47% at March 31, 2023 compared to 75.9% at March 31, 2022. BV Financial had net recoveries on previously charged off loans of $37,000 and $44,000 in the quarters ended March 31, 2023 and 2022, respectively.

***Non-interest Income.*** Non-interest income decreased $681,000 to $807,000 for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022. The decrease was due primarily to a $548,000 decrease in other income resulting from a decrease in loan-related fees and bargain purchase gain recognized on the acquisition of North Arundel Savings Bank in 2022.

***Non-interest Expense.*** Non-interest expense increased $342,000, or 7.8%, to $4.7 million for the three months ended March 31, 2023 from $4.4 million for the three months ended March 31, 2022. The increase was due primarily to a $500,000 increase in compensation and related benefits to $2.9 million at March 31, 2023 due to general increases in salary and incentive compensation, additional staffing as we built up the infrastructure to support growth, partially offset by a decrease of $216,000 in other non-interest expenses related to data processing conversion expenses incurred in 2022.

***Income Tax Expense.*** We recognized income tax expense of $1.2 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively, resulting in effective rates of 27.7% and 30.9%. Income tax expense increased as a result of the increase in our net income before taxes.

### Liquidity and Capital Resources

***Liquidity***. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At March 31, 2023 we had $70.1 million available under a line of credit with the Federal Home Loan Bank of Atlanta, and had $37.5 million outstanding as of March 31, 2023. In addition, at March 31, 2023, the Bank had $40.0 million in unfunded letters of credit used to secure municipal deposits outstanding against the line of credit with the Federal Home Loan Bank of Atlanta. We also have the ability to participate in the Federal Reserve’s new Bank Term Funding Program as needed. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $3.7 million for the quarter ended March 31, 2023. Net cash used in investing activities, which consists primarily of investments in loans and securities, was $17.3 million for the quarter ended March 31, 2023. Net cash provided by financing activities, consisting primarily of changes in deposits and advances and the repayment of advances to the Federal Home Loan Bank, was $9.6 million for the quarter ended March 31, 2023. 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 Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

***Capital Resources***. At March 31, 2023, the Bank exceeded all of its regulatory capital requirements and was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change our category.

## Controls and procedures

As filed, 872 characters.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the 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, 2023. Based on that evaluation, the Company’s management, including the 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, 2023, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 333 characters.

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.

Filed Jun 29, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-030701. Last ingested by Listed: Oct 24, 2026, 15:11 ET. No prices; not investment advice.