BV Financial, Inc. (BVFL) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis reflects the information contained in our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information at and for the years ended December 31, 2023 and 2022 is derived in part from the audited consolidated financial statements that appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information contained in this annual report, including the consolidated financial statements and related notes of BV Financial.

Overview

Summary of Financial Condition and Operating Results. At December 31, 2023, we had $885.3 million in consolidated assets, an increase of $40.3 million, or 4.8%, from $845.0 million at December 31, 2022. The increase was due primarily to a $37.1 million increase in net loans receivable to $696.2 million at December 31, 2023, a $5.1 million increase in cash and cash equivalents and a $1.7 million increase in available-for-sale securities, partially offset by a decrease of $1.8 million in foreclosed real estate. Total liabilities decreased $61.0 million, or 8.2%, from $747.2 million at December 31, 2022 to $686.2 million at December 31, 2023. The decrease was primarily due to a decrease in total deposits of $50.5 million, and a decrease in borrowings of $12.0 million slightly offset by a $1.3 million increase in other liabilities.

Stockholders’ equity increased $101.3 million, or 103.6%, to $199.1 million at December 31, 2023, primarily due to the net proceeds of $86.9 million from the sale of 9.8 million shares of common stock and $13.7 million in net income.

Net income increased $3.2 million, or 30.3%, to $13.7 million for the year ended December 31, 2023, compared to $10.5 million for the year ended December 31, 2022. The increase was due primarily to a $4.3 million increase in net interest income, and a $1.0 million decrease in the provision for credit losses partially offset by a decrease of $1.9 million in noninterest income.

Business Strategy

We have focused primarily on continuing and enhancing our community-oriented retail banking strategy. Highlights of our current business strategy include the following:

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Pursue opportunistic acquisitions and partnerships. We intend to continue to prudently pursue opportunities to acquire banks that offer opportunities for solid financial returns. Our primary focus will be on franchises that enhance our funding profile, product capabilities or geographic density or footprint, while maintaining an acceptable risk profile. We believe in the need to make significant technological investments and the importance of scale in banking.

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•
Grow our loan portfolio with an emphasis on commercial real estate and residential mortgage lending. While we intend to continue to focus on the origination of commercial real estate loans, we intend to remain a residential mortgage lender in our market area and maintain a balance between the commercial real estate and residential mortgage portfolios. We originated $106.9 million of commercial real estate and $6.4 million of residential mortgages loans during the year ended December 31, 2023. At December 31, 2023, $389.7 million, or 55.3%, of our total loan portfolio consisted of commercial real estate loans and $238.1 million, or 33.8%, of our total loan portfolio consisted of residential mortgages.

•
Manage credit risk to maintain a low level of non-performing assets. We believe that maintaining strong asset quality is paramount to our long-term success. We follow conservative underwriting guidelines with sound loan administration, and focus on originating loans secured by real estate. This includes enhanced loan monitoring of higher risk portfolio segments, higher risk individual loans and larger relationships within the portfolio, and frequent loan grade review. Our non-performing assets totaled $ 10.7 million, or 1.21% of total assets, at December 31, 2023. Our total non-performing loans to total loans ratio was 1.50% at December 31, 2023.

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Increase core deposits with an emphasis on non-interest-bearing deposits. Deposits are our primary source of funds for lending and investment. Core deposits (which we define as all deposits except for time deposits) were 72.6% of total deposits at December 31, 2023. In particular, non-interest-bearing demand deposits were 22.4% of our total deposits at December 31, 2023. We continue to focus on expanding core deposits by leveraging our business development officers and commercial lending and retail relationships.

We intend to continue to pursue these business strategies, subject to changes necessitated by future market conditions, regulatory restrictions and other factors. While we are committed to the business strategies noted above, we recognize the challenges and uncertainties of the current environment and plan to execute these strategies as market conditions allow.

Summary of Critical Accounting Policies and Critical Accounting Estimates

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have determined to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies:

Allowance for Credit Losses. The determination of our allowance for credit losses is considered a critical accounting estimate by management because of the high degree of judgment involved in determining qualitative loss factors, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for credit losses is a valuation amount that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on our loan portfolio. The allowance is established through provisions for credit losses charged against income. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is evaluated on a no less than a quarterly basis by management. 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. See Note 1 to our audited consolidated financial

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statements for a detailed discussion of our accounting policies and methodologies for establishing the allowance for credit losses.

BV Financial adopted this “current expected loss” model on January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit commitments. Prior period amounts continue to be reported in accordance with previously applicable GAAP. 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 now standard, BV Financial segregated the loan portfolios acquired via mergers and evaluated them against a credit allowance established at acquisition. As part of the adoption of the “current expected loss” model, in 2023, $3.8 million in remaining acquisition credit marks were transferred to the allowance for credit losses.

To estimate expected credit losses under CECL, BV Financial relies on information about historical losses, current market conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Quantitative and qualitative adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing forecasts for gross domestic product growth in the United States, portfolio concentrations and trends in the growth of portfolio segments and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, reduce the estimated value of underlying collateral or impact the internal capabilities of the Company to manage the loan portfolio. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Non-accrual, substandard, and other loans as determined by management have risk characteristics different from other loans in their portfolio segment are individually analyzed for potential uncollectable balances. Reserves on individually assessed loans are measured on a loan-by-loan basis using one of three acceptable methods: the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Determinations as to the need for a specific allowance are made after considering all relevant factors regarding the borrower, the collateral and economic conditions. Depending on this assessment, management may establish a specific allowance on the loan.

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 BV Financial 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 BV Financial 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 BV Financial’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. BV Financial performed its 2023 annual goodwill impairment qualitative assessment and determined BV Financial’s 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 December 31, 2023, we had a net deferred tax asset totaling $9.0 million. In accordance with Accounting Standards Codification (“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

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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.

For more information on our critical accounting policies, see Note 1 of the notes to our consolidated financial statements.

Selected Financial Data

The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

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Comparison of Financial Condition at December 31, 2023 and December 31, 2022

Total Assets.

Total assets were $885.3 million at December 31, 2023, an increase of $40.3 million, or 4.8%, from $845.0 million at December 31, 2022. The increase was due primarily to a $37.1 million increase in net loans receivable to $696.2 million at December 31, 2023, a $5.1 million increase in cash and cash equivalents and a $1.7 million increase in available-for-sale securities, partially offset by a decrease of $1.8 million in foreclosed real estate.

Cash and Cash Equivalents.

Cash and cash equivalents increased $5.1 million, or 7.4%, to $73.7 million at December 31, 2023 from $68.7 million at December 31, 2022 primarily due to the proceeds of the stock offering. Proceeds were also used to fund loan growth and deposit outflows as well as pay-off FHLB advances.

Securities.

Securities available for sale (“AFS”) increased $1.7 million, or 5.3%, to $34.8 million at December 31, 2023 from $33.0 million at December 31, 2022. This increase was primarily due to an increase of $4.0 million in agency securities, and a

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$500,000 increase in the market value of the AFS portfolio, partially offset by decreases in mortgage-backed and corporate securities due to paydowns and maturities.

Management monitors and manages the investment portfolio on a monthly basis and believes the inherent risks in the portfolio are acceptable. AFS securities are reviewed each quarter to determine whether a decline in the fair value of the securities is a result of a deterioration in credit quality. No reserve for credit losses has been recorded on AFS securities.

Gross unrealized losses on AFS securities at December 31, 2023 and 2022 were $2.7 million and $3.2 million, respectively. The unrealized losses are the result of changes in interest rates since the securities were issued. The Company intends to, and has the ability to, hold investment securities with unrealized losses until they mature, at which time the Company will receive pay-offs in full for the security.

The AFS portfolio holds 95%, or $35.8 million of its portfolio in securities issued by Government Sponsored Enterprises ("GSE") backed by the full faith and credit of the United States Government. The remainder of the portfolio consists of bonds issued by bank holding companies.

The held-to-maturity ("HTM") portfolio consists of $7.0 million in securities issued by GSEs and $1.7 million in securities issued by bank holding companies. At December 31, 2023 and 2022, the securities in the HTM portfolio not issued by a GSE has an allowance for credit loss of $6,000 and $0, respectively.

No individual security in either the AFS or HTM portfolios issued by a non-GSE has a book value greater than $750,000.

Net Loans Receivable.

Net loans receivable increased $37.1 million, or 5.6%, to $696.2 million at December 31, 2023 from $659.1 million at December 31, 2022. The increases were due to increases of $60.3 million in investor commercial real estate, $10.7 million in owner occupied commercial real estate, $3.9 million in construction loans and $1.1 million farm loans offset by decreases of $24.7 million in owner and non-owner occupied one- to four-family loans and $9.8 million in commercial loans. The decreases in one- to four-family loans and commercial loans were due primarily to payoffs and paydowns exceeding originations during the year ended December 31, 2023.

Foreclosed Real Estate.

Foreclosed real estate decreased by $1.8 million or 91.4% as the largest foreclosed real estate asset, that consisted of two vacant buildings in Baltimore City, Maryland, were sold, generating a gain of $709,000. These buildings were assumed in the acquisition of Delmarva Bancshares and its subsidiary, 1880 Bank in 2020.

Total Liabilities.

Total liabilities decreased $61.0 million or 8.2%, to $686.2 million at December 31, 2023 from $747.2 million at December 31, 2022. The decrease was primarily due to a decrease in total deposits of $50.5 million, and a decrease in borrowings of $12 million slightly offset by an increase in other liabilities.

Deposits.

Total deposits decreased $50.5 million, or 7.4%, to $634.1 million at December 31, 2023 from $684.6 million at December 31, 2022. Interest-bearing deposits decreased $25.3 million, or 4.9%, to $492.1 million at December 31, 2023 from $517.4 million at December 31, 2022. Noninterest bearing deposits decreased $25.2 million, or 15.1%, to $142.0 million at December 31, 2023 from $167.2 million at December 31, 2022. During the fourth quarter of 2023, $15.0 million in certificates of deposit held by a local government entity were moved to another financial institution. Other deposits decreased as customers both reallocated non-interest bearing deposit balances to other asset classes and sought higher rates available elsewhere. The Company had no brokered deposits as of December 31, 2023.

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Federal Home Loan Bank Borrowings.

The Company had no Federal Home Loan Bank borrowings at December 31, 2023 compared to $12.0 million in Federal Home Loan Bank borrowings at December 31, 2022. In the quarter ended December 31, 2023, the Company paid off all of the $37.5 million in borrowings that were outstanding.

Stockholders’ Equity.

Stockholders’ equity increased $101.3 million, or 103.6%, to $199.1 million at December 31, 2023, primarily due to net proceeds of $86.9 million from the stock offering and $13.7 million in net income.

Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs, and certain other information for the years 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 were included in the computation of average balances. 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. Net deferred loan fees totaled $1.8 million and $1.5 million for the years ended December 31, 2023 and 2022, respectively.

1.
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.

2.
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

3.
Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. 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 prior 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 the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.

Comparison of Operating Results for the Years Ended December 31, 2023 and December 31, 2022

General.

The Company reported net income of $13.7 million or $1.47 per diluted share compared to net income of $10.5 million or $1.32 per diluted share for the year ended December 31, 2022.

Interest Income.

Total interest income increased 30.2 % for the year ended December 31, 2023 when compared to the year ended December 31, 2022. Interest income on loans increased by $6.5 million or 20.7%. Higher yields on loans contributed $3.8 million to the increase while an increase in the average balance outstanding contributed $2.7 million to the increase.

Interest income on investment securities available-for-sale increased by $546,000 or 89.5% as the increase in yields on the adjustable-rate portion of the portfolio offset a decline in the average balance of AFS investments.

Interest income on investment securities held-to-maturity increased $122,000 or 49.8%, primarily due to higher average balances in these securities.

Other interest income primarily consists of interest earned on overnight cash investments. Interest income in this category increased by $2.9 million, or 236.1%, due to the impact of higher rates offsetting lower average balances.

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Interest Expense.

Total interest expense increased by $5.8 million or 167.9% to $9.2 million for the year ended December 31, 2023 from $3.4 million for the year ended December 31, 2022. The increase in the cost of interest-bearing deposits and the increase in the average balance of FHLB borrowings were the primary drivers in the increase in total interest expense.

Interest paid on interest-bearing deposits increased by $4.3 million or 313.7% for the year ended December 31, 2023 compared to the year ended December 31, 2022. The impact of higher rates paid offset a lower average balance on these deposits. Higher rates paid on deposits were influenced by, among other factors, the Federal Reserve rate increases during the year, intense competition for deposits in the Bank's market area, and a greater percentage of deposits consisting of higher-yielding certificates of deposit. Non-interest bearing deposits decreased in the year as customers took advantage of higher market interest rates to redeploy their excess cash into interest-bearing products.

Interest expense on advances from the FHLB increased by $1.4 million in the year from a de minimus amount in the previous year as the Bank had advances outstanding for the majority of the year. However, the $37.5 million in outstanding FHLB advances were repaid in October 2023.

Interest expense on subordinated debt increased by $103,000, or 4.9%, during the year primarily due to the increase in the rate paid on the $3.1 million floating rate junior subordinated debt assumed in the acquisition of Delmarva Bancshares in 2020. This debt was paid in full in February 2024.

Net Interest Income.

Net interest income increased $4.3 million to $34.2 million from $29.9 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in the rates earned on interest-earning assets and the increased balances in these assets offset the increase in interest expense that resulted from higher rates paid on interest-bearing liabilities and the higher average balance of these liabilities.

Provision for Credit Losses.

The provision for credit losses for the year ended December 31, 2023 was a credit of $45,000 compared to an expense of $1.0 million for the year ended December 31, 2022. The Company adopted ASC 326 (CECL) as of January 1, 2023. Note 4 of the consolidated financial statements detail the impacts of the adoption of the new standard.

The $45,000 credit to the provision for credit losses consisted of a $42,000 addition to the allowance for credit losses - loans offset by decreases of $5,000 and $82,000 in the allowances for credit losses for HTM securities and off balance sheet commitments, respectively. In the year ended December 31, 2023, net recoveries of previously charged-off loans totaled $467,000. These recoveries directly reduced the required increase in the allowance for credit losses-loans.

Non-interest Income. Non-interest income information is as follows.

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Non-interest income decreased $1.9 million to $3.8 million for the year ended December 31, 2023 from $5.7 million for the year ended December 31, 2022. The decrease was due primarily to there being no gain on bargain purchases in 2023 as compared to $1.3 million recognized in 2022 related to the acquisition of North Arundel Savings Bank on January 1, 2022. Lower income generated from the investment in life insurance due to the $1.1 million in death benefits received in 2022 compared to $235,000 received in 2023, offsetting higher gains on the sale of foreclosed real estate of $706,000 in the year ended December 31, 2023.

Non-interest Expense. Non-interest expense information is as follows.

Non-interest expense decreased $586,000 to $19.4 million for the year ended December 31, 2023 from $20.0 million for the year ended December 31, 2022. The decrease was due primarily to decreases in merger expenses (included in the "Other" category) of $2.5 million and foreclosed real estate holding costs of $779,000 primarily related to the sale of two foreclosed properties in 2022, partially offset by increases in compensation and benefits of $2.2 million due to increases in staffing and salary levels. Professional fees increased due to higher accruals for audit and reviews of the periodic SEC filings as well as higher internal audit accruals due to an expanded scope of work to include review and testing of FDICIA controls.

Income Tax Expense.

Income tax expense for the year ended December 31, 2023 was $4.9 million resulting in an effective tax rate of 26.4%. Income tax expense for the year ended December 31, 2022 was $4.0 million resulting in an effective tax rate of 27.7%. The primary reason for the increase in the respective effective tax rates was a lower amount of tax exempt income, primarily income from life insurance.

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal goal of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee, which consists of members of senior management, is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:

1.
growing our volume of core deposit accounts;

2.
holding higher levels of cash and cash equivalents;

3.
continuing the diversification of our loan portfolio by adding more commercial-related loans, which typically have variable rates and shorter maturities; and

4.
purchasing short-term and adjustable rate securities.

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By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.

We have not engaged in hedging activities, such as engaging in futures or options, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

Change in Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases instantaneously by up to 400 basis points or decreases instantaneously by up to 400 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The table below sets forth, as of December 31, 2023, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

1.
Assumes an immediate uniform change in interest rates at all maturities.

The tables above indicate that at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 4.17% increase in net interest income.

The table above also illustrates that BV Financial’s net interest income is subject to significant decreases if interest rates were to decrease instantaneously by the amounts presented. This is due to a number of factors including:

1.
Short-term assets such as cash and cash equivalents will reprice immediately based on the Fed Funds target rate.

2.
The floating rate securities in the available-for-sale portfolio will reprice lower with a short (quarterly) lag.

3.
Loans with variable interest rates will begin to reprice at rates lower than the current note rates.

4.
New assets (loans & investment securities) will be placed on the balance sheet at the lower current market interest rates.

5.
Our non-maturing deposits remain at historical low rates and with the level of rate decreases presented, the rates paid on these deposits could not be lowered very much.

6.
Our certificate of deposit liabilities will take time to reprice to lower market rates.

The increase in net interest income in the rising rate scenarios is less than the decrease in the falling rate scenario primarily due to the largest category of interest-earning assets, the loan portfolio, takes longer to reprice to the higher market rates than other assets and liabilities. A high level of new loan growth at higher market rates would be required to help offset the delay in the repricing of the current loan portfolio. The model also assumes that the non-maturing deposit portfolio will quickly reprice to a calculated percentage of the increase in market rates.

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Economic Value of Equity. We also compute amounts by which the net present value of our assets and liabilities (economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases instantaneously by 100, 200, 300 and 400 basis point increments or a decrease instantaneously by 100, 200, 300, and 400 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. EVE as a measurement tool for interest rate risk measures the changes in the values of assets and liabilities based on the structure of the individual instrument (maturity, interest rate, re-pricing characteristic) when different levels of market interest rates are assumed.

The table below sets forth, as of December 31, 2023, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

1.
Assumes an immediate uniform change in interest rates at all maturities.

The table above indicates that at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 5.58% increase in EVE, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience an 5.00% decrease in EVE. As indicated in the table above, our EVE falls considerably in the instantaneous down scenarios due to the value of the low or zero rate non-maturing deposit portfolio declining as the theoretical spread between the cost of these deposits and new assets declines. In the up scenarios, the value of these instruments increases less as the model assumes a significant lag before these rates increase.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the tables.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

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 December 31, 2023 and December 31, 2022, we had $150.0 million and $96.8 million available under a line of credit with the Federal Home Loan Bank of Atlanta, and had no and $12.0 million outstanding as of December 31, 2023 and December 31, 2022, respectively, with the Federal Home Loan Bank of Atlanta. In addition, at December 31, 2023 and December 31, 2022, the Bank had $25.0 million and $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.

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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 $15.2 million and $9.7 million for the years ended December 31, 2023 and 2022, respectively. Net cash (used in) provided by investing activities, which consists primarily of investments in loans and securities, was $(35.2) million and $(27.8) million for the years ended December 31, 2023 and 2022, respectively. Net cash provided by (used in) financing activities, consisting primarily of changes in deposits and advances and the repayment of advances to the Federal Home Loan Bank, was $25.1 million and $(24.5) million for the years ended December 31, 2023 and 2022, respectively.

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. Time deposits that are scheduled to mature in less than one year from December 31, 2023 totaled $111.4 million. 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 December 31, 2023, BayVanguard Bank exceeded all of its regulatory capital requirements, and was categorized as well capitalized at December 31, 2023. Management is not aware of any conditions or events since the most recent notification that would change our category.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2023, we had outstanding commitments to extend credit of $49.4 million and $935,000 of letters of credit. See Note 4 to the consolidated financial statements for further information.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Recent Accounting Pronouncements

Please refer to Note 1 to the consolidated financial statements of BV Financial for the years ended December 31, 2023 and 2022 included with this document for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.