Business context and reporting period
BV Financial, Inc. is the holding company for BayVanguard Bank, a community bank serving the Baltimore metropolitan area and Maryland’s Eastern Shore. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods or December 31, 2022, as applicable. Dollar amounts below are in millions unless noted.
After quarter-end, on July 31, 2023, the Company completed its conversion from a mutual holding company structure and sold 9.799 million shares at $10 per share. The offering generated approximately $98 million gross and $95 million net proceeds. The M.H.C. ceased to exist; the Company reported approximately 11.375 million shares outstanding as of August 11, versus 7.430 million at June 30.
Financial results and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $10.5 | $8.0 | $20.2 | $15.4 |
| Net interest income | $8.2 | $7.2 | $16.4 | $13.7 |
| Net income | $3.9 | $2.8 | $7.0 | $5.2 |
| Diluted earnings per share | $0.52 | $0.37 | $0.94 | $0.70 |
| Net interest margin | 4.19% | 3.70% | 4.26% | 3.59% |
- Q2 net interest income rose 14.9%; net income rose 41.0%. For the six months, net interest income increased 19.9% and net income increased 35.4%.
- Higher loan yields and average loan balances, along with higher yields on cash and other interest-earning assets, lifted interest income. Deposit costs and FHLB borrowing costs rose substantially, partially offsetting the increase.
- Noninterest income was $1.4 million in Q2, including a $678,000 gain on sale of foreclosed real estate. Six-month noninterest income was $2.2 million. Noninterest expense was $4.5 million in Q2 and $9.2 million for the six months.
- At June 30, total assets were $920.8 million, up 8.9% from year-end; net loans were $694.8 million, up 5.4%. Commercial investor real estate loans were $270.3 million, or 38.4% of total loans; total real estate loans were 92.9% of the portfolio.
- Cash and cash equivalents were $110.3 million, versus $68.7 million at year-end. Deposits were $670.1 million, down 2.1%; noninterest-bearing deposits fell $21.5 million while interest-bearing deposits rose $7.0 million. FHLB borrowings increased to $37.5 million from $12.0 million; subordinated debentures were $37.1 million.
- Stockholders’ equity was $104.5 million. The Bank’s actual capital ratios were 13.68% Tier 1 leverage, 17.05% Tier 1 risk-based and common equity Tier 1, and 18.29% total risk-based capital; the filing states the Bank exceeded regulatory requirements and was well capitalized.
- Six-month operating cash flow was $61.0 million, investing cash use was $34.5 million, and financing cash provided was $15.1 million. Operating cash flow included a $54.0 million increase in other liabilities, which management attributed primarily to funds collected for the subsequent capital raise; therefore, reported operating cash flow should not be viewed as solely recurring operating cash generation.
Material changes, outlook, risks and unusual items
- The allowance for credit losses was $8.2 million at June 30, compared with $3.8 million at year-end. The ratio to total loans was 1.16%; nonaccrual loans decreased to $4.5 million, or 0.65% of loans, from $5.9 million, or 0.88%. The Company recorded a $150,000 recovery of credit losses in Q2 and a $147,000 recovery for the six months.
- Adoption of CECL on January 1 reduced retained earnings by $547,000 after tax and increased the loan allowance; the filing identifies significant management judgment and estimation uncertainty in the allowance.
- Q2 earnings included the $678,000 foreclosed-real-estate sale gain. Six-month 2022 results included a $694,000 bargain-purchase gain, loan prepayment penalties and branch-sale gain, making some year-over-year noninterest comparisons less representative of recurring performance.
- Management cited deposit retention and pricing, access to FHLB advances, and loan and securities cash flows as liquidity sources. It expects sufficient funds for current commitments and anticipates retaining a significant portion of maturing time deposits; if retention is weaker, it may use additional FHLB funding or raise deposit rates, increasing interest expense. FHLB availability was reported as $74.6 million, with $37.5 million outstanding and $40.0 million in unfunded letters of credit against the line.
- Key disclosed risks include funding costs and deposit mix, uninsured deposits, interest-rate and securities valuation changes, commercial real estate and regional economic conditions, credit-loss estimates, and operational, technology and cybersecurity risks. Two local-government relationships represented 3.5% and 3.2% of deposits; CDs of $250,000 or more totaled $47.9 million and may not be FDIC-insured.
- No specific earnings or financial guidance was provided. Management reported effective disclosure controls and no material change in internal control over financial reporting. It stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Review the July 31 conversion and offering: final share count, use of approximately $95 million net proceeds, the $47.5 million investment in the Bank, and the resulting effect on per-share comparisons and capital.
- Assess deposit stability, uninsured and large-account concentrations, upcoming CD maturities, and whether the Bank’s funding needs increase reliance on higher-cost deposits or FHLB advances.
- Monitor commercial real estate exposure, criticized/substandard loans, nonaccrual and past-due trends, collateral values, and whether the CECL allowance remains adequate as the portfolio and economic outlook change.
- Evaluate the sustainability of net interest margin and earnings as asset yields, deposit costs and borrowings reprice; distinguish recurring results from the foreclosed-property gain and other unusual items.
- Reconcile cash-flow quality and the $54.0 million increase in other liabilities associated primarily with capital-raise funds. Also note the cover-page response indicating the Company had not filed all required Exchange Act reports during the preceding 12 months, and verify the context and any subsequent compliance updates.