BV Financial, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 charge-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;
• our continued ability to originate loans outside of 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;
• a potential government shutdown;
• 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.

Allowance for Credit Losses

On January 1, 2023, the Company adopted Accounting Standards Updates (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” Accounting Standards Codification ("ASC") 326 requires entities to estimate an allowance for credit losses ("ACL") on certain types of financial instruments measured at amortized cost using a current expected credit losses ("CECL") methodology, replacing the prior-required incurred loss methodology. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. The impairment model for available-for-sale debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, by recording an increase in the reported balance of loans and the allowance for credit losses on loans, an increase in the liability for credit losses on commitments to extend credit and reducing total equity of both the Company and the Bank. As a result of adopting ASC 326, the Company recorded a decrease to retained earnings, net of taxes, of $547,000.

The ACL is an estimate of the expected credit losses for loans held for investment and for off-balance sheet exposures. ASC 326, "Financial Instruments-Credit Losses," requires an immediate recognition of the credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Charge-offs are recorded to the ACL when management believes the loan in uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is maintained in accordance with GAAP and in compliance with appropriate regulatory guidelines. The ACL includes quantitative estimates of losses for collectively and individually evaluated loans. The quantitative estimate for collectively evaluated loans (other than investor commercial real estate loans) is determined using the average charge-off method that utilizes historical losses for all Maryland banks with assets less than $1 billion beginning in March 2000. The investor commercial real estate portfolio utilizes the national loss history for banks with assets less than $1 billion over the same time period. Adjustments are made to the historical loss factors under each scenario for economic conditions, portfolio concentrations, collateral values, the level and trend of delinquent and problem loans and internal changes in staffing, loan policies and monitoring of the portfolio. Loans are selected for individual evaluation primarily based on their payment status and whether the loan has been placed on non-accrual status. Loans on non-accrual status include all loans greater than 90 days delinquent and other loans with weaknesses sufficient for management to place these loans on non-accrual status. The ACL is measured on a collective basis when similar risk factors exist as determined by internal loan coding and assignment to a portfolio segment. The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model's calculation also uses an adjustment for a 12-month forecast period utilizing the most recent 12-month economic forecast from the Board of Governors of the Federal Reserve System for national gross domestic product ("GDP"). The model compares the average history of loss rates described above to the forecasted GDP to determine the value of the forward-looking adjustment. The establishment of the allowance for credit losses is significantly affected by management's judgment and by economic and other uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Federal Deposit Insurance Corporation and the Maryland Office of the Commissioner of Financial Regulation, as an integral part of their examination process, periodically review the allowance for credit losses for reasonableness and, as a result of such reviews, we may be required to increase our ACL or recognize loan charge-offs. The calculation of ACL excludes accrued interest receivable balances because these balances are reversed in a timely manner against previously recognized interest income when a loan is placed on non-accrual.

ASU Update 2022-02 On January 1, 2023, the Company adopted ASU 2022-02 –Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the TDRs recognition and measurement guidance and, instead, requires that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU Update 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company adopted ASU 2022-02 using a modified retrospective transition method for TDRs. The impact of adoption was immaterial. The disclosure amendments in the Update 2022-02 were applied prospectively.

Goodwill

The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates it is likely impairment has occurred. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. In any given year the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is in excess of its carrying value. If it is not more likely than not that the fair value of the reporting unit is in excess of the carrying value, or if the Company elects to bypass the qualitative assessment, a quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value of net assets is estimated based on analyses of the Company’s market value, discounted cash flows, and peer values. The determination of goodwill impairment is sensitive to market-based economics and other key assumptions used in determining or allocating fair value. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations. Our annual goodwill impairment test is performed each year as of September 30. The Company performed its 2022 goodwill impairment qualitative assessment and determined its goodwill was not considered impaired. We monitor our performance and evaluate our goodwill for impairment annually or more frequently as needed.

Deferred Income Taxes

At September 30, 2023, we had a net deferred tax asset totaling $9.0 million. In accordance with ASC Topic 740 “Income Taxes,” we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established if it is not more likely than not realizable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize its federal and state deferred tax asset.

Comparison of Financial Condition at September 30, 2023 (Unaudited) and December 31, 2022

Total Assets. Total assets were $931.4 million at September 30, 2023, an increase of $86.4 million, or 10.2%, from $845.0 million at December 31, 2022. The increase was due primarily to a $45.8 million increase in cash and cash equivalents, and a $39.8 million increase in net loans receivable to $698.9 million at September 30, 2023, partially offset by decreases of $1.4 million in repossessed assets and $417,000 in the cash value of life insurance.

Cash and Cash Equivalents. Cash and cash equivalents increased $45.8 million, or 67.7%, to $114.5 million at September 30, 2023 from $68.7 million at December 31, 2022, primarily due to the stock offering and an increase in borrowings from the FHLB.

Net Loans Receivable. Net loans receivable increased $39.8 million, or 6.0%, to $698.9 million at September 30, 2023 from $659.1 million at December31, 2022. Increases of $20.1 million in commercial real estate and $2.3 million in construction loans were partially offset by decreases of $16.6 million of owner and non-owner occupied one-to-four-family loans and $4.0 million of commercial loans. The increase in construction loans was due primarily to draws on existing lines of credit. The decreases in one- to four-family loans and commercial loans were due primarily to payoffs and pay downs exceeding originations during the nine-months ended September 30, 2023.

Allowance for Credit Losses. The Company adopted ASU 326 on January 1, 2023. Under this new current expected loss model, provisions for credit losses are charged to operations to establish an allowance for credit losses at a level to cover expected losses over the expected life of a loan or securities portfolio. Under the previous “incurred loss” model, provisions for loan losses were charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. Prior to adoption of this standard, the Company segregated the loan portfolios acquired via mergers and evaluated them against a credit mark established at acquisition. As part of the adoption of the new accounting standard, $3.8 million in remaining acquisition credit marks were transferred to the allowance for credit losses for loans. An additional $753,000 in allowances for credit losses were established, $454,000 for the allowance for credit losses for loans, $289,000 as a reserve for off-balance sheet commitments and $10,000 for held-to-maturity securities as of the adoption date. In evaluating the level of the allowance for credit losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts of future economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

Our allowance for credit losses was $8.2 million at September 30, 2023 compared to $3.8 million at September 30, 2022. The ratio of our allowance for credit losses to total loans was 1.15% at September 30, 2023 compared to 0.50% at September 30, 2022, while the allowance for credit losses to non-performing loans was 213.5% at September 30, 2023 compared to 51.1% at September 30, 2022.

Securities. Securities available for sale (“AFS”) increased $2.6 million, or 7.8%, to $35.6 million at September 30, 2023 from $33.0 million at December 31, 2022. This increase was primarily due to an increase of $4.0 million in agency securities, partially offset by decreases in mortgage-backed and corporate securities due to pay downs and maturities and a $252,000 decrease in the market value of the AFS portfolio.

Total Liabilities. Total liabilities decreased $10.9 million or 1.4%, to $736.3 million at September 30, 2023 from $747.2 million at December 31, 2022.The decrease was primarily due to a decrease in total deposits of $38.1 million, partially offset by an increase in FHLB borrowings.

Deposits. Total deposits decreased $38.1 million, or 5.6%, to $646.5 million at September 30, 2023 from $684.6 million at December 31, 2022. Interest-bearing deposits decreased $14.1 million, or 2.7%, to $503.3 million at September 30, 2023 from $517.4 million at December 31, 2022 as a $76.7 million, or 14.3%, decrease in lower-cost transaction accounts were offset by a $38.6 million, or 26.3% increase in certificates of deposit. Noninterest bearing deposits decreased $24.0 million, or 14.4%, to $143.2 million at September 30, 2023 from $167.2 million at December 31, 2022.

The Company has been increasing interest rates paid on deposits in an attempt to retain and grow these balances.

Federal Home Loan Bank Borrowings. The Company had $37.5 million in FHLB borrowings at September 30, 2023 compared to $12.0 million at December 31, 2022. The increase was used to fund loan growth and to maintain on balance sheet liquidity.

Stockholders’ Equity. Stockholders’ equity increased $97.3 million, or 99.6%, to $195.1 million at September 30, 2023, primarily due to the stock offering noted above, $10.7 million in net income and a $547,000 negative adjustment to retained earnings resulting from the adoption of ASC Topic 326 “Financial Instruments-Credit Losses” during the quarter ended March 31, 2023.

Asset Quality. Non-performing assets at September 30, 2023 totaled $4.4 million consisting of $3.8 million in nonperforming loans and $555,000 in other real estate owned, compared to $7.9 million at December 31, 2022, consisting of $5.9 million in non-performing loans and $2.0 million in other real estate owned. At September 30 2023, the allowance for credit losses on loans was $8.2 million, which represented 1.15% of total loans and 213.5% of non-performing loans compared to $3.8 million at December 31, 2022, which represented 0.57% of total loans and 64.8% of non-performing loans. In addition, at December 31, 2022, the Bank had credit marks of $3.8 million that were not included in the Bank’s allowance for loan loss estimate which is in accordance with U.S. Generally Accepted Accounting Principles. The credit marks were established for specific loans acquired in previous mergers.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2023 and 2022

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Average balances exclude loans held for sale, if applicable. Net deferred loan origination fees totaled $1.8 million and $1.5 million at September 30, 2023 and 2022, respectively.

(dollars in thousands)

(Unaudited)

(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.

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.

(In thousands)

45

BV FINANCIAL, INC. AND SUBSIDIARIES

(dollars in thousands)

(Unaudited)

(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.

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.

(In thousands)

General. Net income increased $1.1 million, or 41.0%, to $3.7 million for the three months ended September 30, 2023, compared to $2.6 million for the three months ended September 30, 2022. The increase was due primarily to an increase in net interest income and a reduction in the provision for credit losses and an increase in noninterest income, partially offset by increases in noninterest expense and income tax expense.

Interest Income. Interest income increased $3.1 million, or 36.6%, to $11.7 million for the three months ended September 30, 2023 from $8.6 million for the three months ended September 30, 2022. The increase was due primarily to increases in interest income on loans, and interest income on cash, cash equivalents and other interest-earning assets. Interest income on loans increased $1.8 million, or 23.0%, to $9.8 million for the three months ended September 30, 2023 from $7.9 million for the three months ended September 30, 2022 due to increases in the average balance of loans and the average yield. The average balance of loans increased $54.6 million, or 8.5%, to $694.0 million for the three months ended September 30, 2023 from $639.3 million for the three months ended September 30, 2022. The weighted average yield on loans increased 66 basis points to 5.58% for the three months ended September 30, 2023 compared to 4.92% for the three months ended September 30, 2022, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans due to the higher interest rate environment. Interest income on cash, cash equivalents and other interest-earning assets increased $1.1 million to $1.6 million for the three months ended September 30, 2023 from $458,000 for the three months ended September 30, 2022 due to an increase in the average balance of cash, cash equivalents and other interest-earning assets of $29.9 million as well as a 324 basis point increase in the average yield.

Interest income increased $7.9 million, or 33.2%, to $31.9 million for the nine months ended September 30, 2023 from $24.0 million for the nine months ended September 30, 2022. The increase was due primarily to increases in interest income on loans and interest income on cash, cash equivalents and other interest-earning assets. Interest income on loans increased $5.1 million, or 22.7%, to $27.9 million for the nine months ended September 30, 2023 from $22.7 million for the nine months ended September 30, 2022 due to increases in the average balance of loans and the average yield. The average balance of loans increased $52.8 million, or 8.4%, to $680.4 million for the nine months ended September 30, 2023 from $627.6 million for the nine months ended September 30, 2022. The weighted average yield on loans increased 64 basis points to 5.47% for the nine months ended September 30, 2023 compared to 4.84% for the nine months ended September 30, 2022, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans due to the higher interest rate environment. Interest income on cash, cash equivalents and other interest-earning assets increased $2.2 million, to $3.0 million for the nine-months ended September 30, 2023 from $726,000 for the nine months ended September 30, 2022 due to a 419 basis point increase in the average yield on cash, cash equivalents and other interest-earning assets, partially offset by a $20.0 million decrease in the average balance as excess funds were used to fund loan growth.

Interest Expense. Interest expense increased $2.0 million, or 244.5%, to $2.8 million for the three months ended September 30, 2023 compared to $816,000 for the three months ended September 30, 2022, due to a $1.5 million increase in interest expense on deposits as rates paid increased and depositors moved money into higher cost certificate of deposit accounts and a $530,000 increase in interest expense on advances from the FHLB that were used to fund loan growth and deposit outflow.

The increase in interest expense on deposits was due to a 118 basis point increase in the average rate, offset by a $30.4 million decrease in the average balance of interest-bearing deposits to $499.9 million at September 30, 2023 from $530.3 million for the three months ended September 30, 2022. The average rate on interest-bearing deposits was 1.40% for the three months ended September 30, 2023 compared to 0.22% for the three months ended September 30, 2022.

Interest expense on FHLB advances increased to $530,000 for the three months ended September 30, 2023. There were no advances outstanding the three months ended September 30, 2022. In recent periods, we have relied more heavily on FHLB advances to supplement deposits to fund loan growth and maintain liquidity.

Interest expense on subordinated debentures increased $26,400, or 5.0%, to $545,000 for the three months ended September 30, 2023 compared to $519,000 for the three months ended September 30, 2022. The average rate on subordinated debentures increased 25 basis points to 5.82% for the three months ended September 30, 2023 compared to 5.57% for the three months ended September 30, 2022, due to increases in market interest rates on the $3.0 million adjustable-rate subordinated debt assumed in the Delmarva acquisition.

Interest expense increased $4.1 million, or 163.1%, to $6.6 million for the nine months ended September 30, 2023 compared to $2.5 million for the nine months ended September 30, 2022, due to a $2.7 million increase in interest expense on deposits as rates paid increased and depositors moved money into higher cost certificate of deposit accounts, and a $1.3 million increase in the interest expense on advances from the FHLB that were used to fund loan growth and deposit outflow.

The increase in interest expense on deposits was due to a 73 basis point increase in the average rate, offset by a $25.4 million decrease in the average balance of interest-bearing deposits to $505.3 million at September 30, 2023 from $530.6 million for the nine months ended September 30, 2022. The average rate on interest-bearing deposits was 0.98% for the nine months ended September 30, 2023 compared to 0.25% for the nine months ended September 30, 2022.

Interest expense on FHLB advances increased to $1.3 million for the nine months ended September 30, 2023. There were no advances outstanding the nine months ended September 30, 2022. In recent periods, we have relied more heavily on FHLB advances to supplement deposits to fund loan growth and maintain liquidity.

Interest expense on subordinated debentures increased $90,000, or 5.9%, to $1.6 million for the nine months ended September 30, 2023 compared to $1.5 million for the nine months ended September 30, 2022. The average rate on subordinated debentures increased 30 basis points to 5.84% for the nine months ended September 30, 2023 compared to 5.54% for the nine months ended September 30, 2022, due to increases in market interest rates on the $3.0 million adjustable-rate subordinated debt assumed in the Delmarva acquisition.

Net Interest Income. Net interest income increased $1.1 million, or 14.5%, to $8.9 million for the three months ended September 30, 2023 from $7.8 million for the three months ended September 30, 2022, as a result of a $3.1 million increase in interest income, offset by a $2.0 million increase in interest expense. Our interest rate spread decreased 39 basis points to 3.46% for the three months ended September 30, 2023, compared to 3.85% for the three months ended September 30, 2022, while our net interest margin increased 10 basis points to 4.10% for the three months ended September 30, 2023 compared to 4.00% for the three months ended September 30. 2022.

Net interest income increased $3.9 million, or 18.0%, to $25.3 million for the nine months ended September 30, 2023 from $21.4 million for the nine months ended September 30, 2022, as a result of a $8.0 million increase in interest income, offset by a $4.1 million increase in interest expense. Our interest rate spread increased 19 basis points to 3.77% for the nine months ended September 30, 2023, compared to 3.58% for the nine months ended September 30, 2022, while our net interest margin increased 47 basis points to 4.21% for the nine months ended September 30, 2023 compared to 3.73% for the nine months ended September 30, 2022.

Provision for Credit Losses.

We recorded a recovery for credit losses of $333,000 for the three months ended September 30, 2023 compared to a provision for loan losses of $186,000 for the three months ended September 30, 2022. We recorded a recovery for credit losses of $480,000 for the nine months ended September 30, 2023 compared to a provision for loan losses of $587,000 in the nine months ended September 30, 2022. Our allowance for credit losses was $8.2 million at September 30, 2023 compared to $3.8 million at September 30, 2022. The ratio of our allowance for credit losses to total loans was 1.15% at September 30, 2023 compared to 0.50% at September 30, 2022, while the allowance for credit losses to non-performing loans was 213.5% at September 30, 2023 compared to 51.1% at September 30, 2022. The Company had net recoveries on previously charged off loans of $255,000 in the quarter ended September 30, 2023 as compared to net recoveries of $49,000 in the quarter ended September 30, 2022 and net recoveries on previously charged off loans of $421,000 in the nine months ended September 30, 2023 as compared to net recoveries of $86,000 in the nine months ended September 30, 2022

Non-interest Income. For the three months ended September 30, 2023, noninterest income totaled $882,000 compared to $682,000 in the quarter ended September 30, 2022. In the quarter ended September 30, 2023, the Company recognized a gain of $188,000 on the sale of a former branch building. In the quarter ended September 30, 2022, the Company recognized a gain of $45,000 on the sale of another former branch building.

For the nine months ended September 30, 2023, noninterest income totaled $3.1 million compared to $3.3 million for the nine months ended September 30, 2022. In the nine months ended September 30, 2023, the Company recognized a gain of $678,000 on the sale of other real estate owned, $235,000 in excess life insurance proceeds and a $188,000 gain on the sale of a closed branch office. In the nine months ended September 30, 2022, the Company recognized a $694,000 gain on bargain purchase from the acquisition of North Arundel Savings Bank and $620,000 in prepayment penalties on loans.

Non-interest Expense. For the three months ended September 30, 2023, noninterest expense totaled $5.0 million compared to $4.6 million for the three months ended September 30, 2022. Compensation and benefits expenses increased by 18.1% due to increases in staffing and salary levels. Occupancy, professional fees, FDIC insurance premiums and other expenses also increased. Expenses for holding foreclosed real estate decreased $325,000 as a result of a property sale.

For the nine months ended September 30, 2023, noninterest expense totaled $14.3 million as compared to $13.6 million for the nine months ended September 30, 2023. Increases in compensation and benefits, and professional fees were partially offset by lower other expenses.

Income Tax Expense. We recognized income tax expense of $1.4 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively, resulting in effective rates of 27.5% and 28.7%. In the nine months ended September 30, 2023 and 2022, we recognized income tax expense of $3.9 million and $2.8 million, resulting in effective tax rates of 26.7% and 26.3%, respectively. Income tax expense increased as a result of the increase in our net income before taxes.

Liquidity and Capital Resources

Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities of securities. We also have the ability to borrow from the FHLB of Atlanta. At September 30, 2023, we had $178.5 million available under a line of credit with the FHLB of Atlanta, and had $37.5 million of FHLB advances outstanding as of September 30, 2023. In addition, at September 30, 2023, the Bank had $40.0 million in unfunded letters of credit used to secure municipal deposits outstanding against the line of credit with the FHLB of Atlanta. This resulted in additional borrowing availability from the FHLB of $100.9 million. The Company also has a short term unsecured facility from a correspondent bank in the amount of $20.0 million. We also have the ability to participate in the Federal Reserve’s Bank Term Funding Program as needed.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $11.7 million for the nine months ended September 30,2023. Net cash used in investing activities, which consists primarily of investments in loans and securities, was $40.1 million for the nine months ended September 30, 2023. Net cash provided by financing activities, consisting primarily of the sale of common shares, changes in deposits and advances from the FHLB, was $75.1 million for the nine months ended September 30, 2023. We are committed to maintaining a strong liquidity position.

The decrease in deposits in the year to date period was due to customers moving excess cash to other investments and seeking out higher yields. In many, but not all cases, the Company is matching competitive rates to retain existing deposits. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances, brokered deposits or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. At September 30, 2023, the Company had no brokered deposits. At June 30, 2023, the Company had $10.0 million in brokered deposits. The Bank's uninsured deposits totaled $200.2 million or 28.91% of total deposits of which $70.1 million were secured using the market value of pledged collateral or letters of credit issued by FHLB, and an additional $44.9 million were deposits of BV Financial, Inc. at the Bank.

Capital Resources. At September 30, 2023, the Bank exceeded all of its regulatory capital requirements and was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change our category.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2023. Based on that evaluation, the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2023, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.