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BV Financial, Inc. - Quarter Report: 2008 December (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from              to             

Commission file number: 0-51014

 

 

BV FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Federal   14-1920944

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7114 North Point Road, Baltimore, Maryland 21219

(Address of principal executive offices)

(410) 477-5000

(Registrant’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 12, 2009, there were 2,393,809 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

BV FINANCIAL, INC.

FORM 10-Q

Table of Contents

 

          Page
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Statements of Financial Condition at December 31, 2008 and June 30, 2008 (unaudited)    1
   Consolidated Statements of Income for the three and six months ended December 31, 2008 and 2007 (unaudited)    2
   Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended December 31, 2008 and 2007 (unaudited)    3
   Consolidated Statements of Cash Flows for the six months ended December 31, 2008 and 2007 (unaudited)    4
   Notes to Unaudited Consolidated Financial Statements    5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    12
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    22
Item 4.    Controls and Procedures    23
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    24
Item 1A.    Risk Factors    24
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    24
Item 3.    Defaults upon Senior Securities    25
Item 4.    Submission of Matters to a Vote of Security Holders    25
Item 5.    Other Information    25
Item 6.    Exhibits    25
SIGNATURES   

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BV FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

(Unaudited)

 

     December 31,
2008
    June 30,
2008
 
     (Dollars in thousands, except share data)  

ASSETS

    

Cash

   $ 1,432     $ 1,753  

Federal funds sold

     1,731       6,529  
                

Cash and Cash Equivalents

     3,163       8,282  

Interest bearing time deposits in other banks

     168       580  

Securities trading

     1,623       —    

Securities available for sale

     4,342       8,838  

Securities held to maturity

     8,216       9,788  

Loans receivable, net of allowance for loan losses December 31, 2008 - $711; June 30, 2008 - $709

     127,492       124,843  

Premises and equipment, net

     3,080       3,117  

Federal Home Loan Bank of Atlanta stock, at cost

     811       654  

Investment in life insurance

     2,090       2,054  

Accrued interest receivable

     649       670  

Goodwill

     3,940       3,940  

Other intangible assets, net

     335       390  

Other assets

     912       869  
                

Total Assets

   $ 156,821     $ 164,025  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Noninterest bearing deposits

   $ 6,164     $ 6,040  

Interest bearing deposits

     122,051       130,992  
                

Total deposits

     128,215       137,032  

Federal Home Loan Bank advances

     9,500       7,500  

Official checks

     993       657  

Advance payments by borrowers for taxes and insurance

     471       1,187  

Other liabilities

     1,095       1,304  
                

Total Liabilities

     140,274       147,680  
                

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding

     —         —    

Common stock, $0.01 par value; 9,000,000 shares authorized; 2,645,000 shares issued; 2,393,809 and 2,381,258 shares outstanding as of December 31, 2008 and June 30, 2008, respectively

     26       26  

Paid-in capital

     11,128       11,123  

Unearned employee stock ownership plan shares

     (721 )     (756 )

Treasury stock, at cost; 251,191 shares and 263,742 shares as of December 31, 2008 and June 30, 2008, respectively

     (2,106 )     (2,140 )

Retained earnings

     8,194       8,129  

Accumulated other comprehensive income (loss)

     26       (37 )
                

Total Stockholders’ Equity

     16,547       16,345  
                

Total Liabilities and Stockholders’ Equity

   $ 156,821     $ 164,025  
                

See Notes to Unaudited Consolidated Financial Statements.

 

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BV FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended
December 31,
    Six Months Ended
December 31,
 
   2008     2007     2008     2007  
   (Dollars in thousands, except per share data)  

INTEREST INCOME

        

Loans, including fees

   $ 1,981     $ 1,890     $ 3,971     $ 3,770  

Investment securities – taxable

     197       101       425       187  

Other

     2       303       15       526  
                                

Total Interest Income

     2,180       2,294       4,411       4,483  

INTEREST EXPENSE

        

Deposits

     942       1,302       1,916       2,381  

Federal Home Loan Bank advances

     98       95       207       289  
                                

Total Interest Expense

     1,040       1,397       2,123       2,670  
                                

Net Interest Income

     1,140       897       2,288       1,813  

PROVISION FOR LOAN LOSSES

     21       24       21       44  
                                

Net Interest Income after Provision for Loan Losses

     1,119       873       2,267       1,769  
                                

NONINTEREST INCOME

        

Service fees on deposits

     26       33       55       64  

Service fees on loans

     10       6       18       14  

Income from investment in life insurance

     54       18       72       35  

Loss on securities trading

     (199 )     —         (425 )     —    

Termination of split-dollar life insurance liability

     —         —         240       —    

Other income

     15       23       42       39  
                                

Total Noninterest Income (Loss)

     (94 )     80       2       152  
                                

NONINTEREST EXPENSES

        

Compensation and related expenses

     604       580       1,135       1,116  

Occupancy

     63       62       125       117  

Data processing

     97       99       192       174  

Telephone and postage

     16       16       34       33  

Advertising

     34       32       62       62  

Professional fees

     55       56       112       117  

Equipment

     36       45       78       87  

Amortization of intangible assets

     26       22       55       49  

FDIC insurance premiums

     26       3       81       6  

Other

     118       115       204       198  
                                

Total Noninterest Expenses

     1,075       1,030       2,078       1,959  
                                

Income (Loss) before Income Taxes (Benefit)

     (50 )     (77 )     191       (38 )

Provision (Benefit) For Income Taxes

     33       (28 )     30       (11 )
                                

Net (Loss) Income

   $ (83 )   $ (49 )   $ 161     $ (27 )
                                

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

   $ (0.04 )   $ (0.02 )   $ 0.07     $ (0.01 )
                                

DIVIDENDS DECLARED PER SHARE

   $ 0.05     $ 0.05     $ 0.10     $ 0.10  
                                

See Notes to Unaudited Consolidated Financial Statements.

 

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BV FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     Three Months Ended
December 31,
    Six Months Ended
December 31,
 
     2008     2007     2008    2007  
     (In thousands)  

Net Income (Loss)

   $ (83 )   $ (49 )   $ 161    $ (27 )

Unrealized net holding gains on available-for-sale securities, net of taxes of $83, $3, $42 and $4

     125       9       63      9  
                               

Comprehensive Income (Loss)

   $ 42     $ (40 )   $ 224    $ (18 )
                               

See Notes to Unaudited Consolidated Financial Statements.

 

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BV FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
December 31,
 
     2008     2007  
     (In thousands)  

Cash Flows from Operating Activities

    

Net income (Loss)

   $ 161     $ (27 )

Adjustments to reconcile net income (loss) to net cash from operating activities:

    

Net amortization of discounts and premiums

     13       —    

Provision for loan losses

     21       44  

Net change in securities trading

     925       —    

Amortization of deferred loan fees/costs

     (98 )     35  

Provision for depreciation

     78       82  

Amortization of intangible assets

     55       49  

Increase in cash surrender value of life insurance

     (36 )     (35 )

Stock-based compensation expense

     77       101  

Termination of split-dollar life insurance liability

     (240 )     —    

Decrease (increase) in other assets

     43       (687 )

Increase in other liabilities

     31       156  
                

Net Cash Provided by (Used in) Operating Activities

     1,030       (282 )
                

Cash Flows from Investing Activities

    

Net decrease (increase) in interest bearing deposits in other banks

     412       (587 )

Purchases of securities available for sale

     —         (76 )

Proceeds from maturities and calls of securities available for sale

     2,000       —    

Purchases of securities held to maturity

     —         (6,205 )

Proceeds from maturities and calls of securities held to maturity

     1,000       500  

Principal collected on mortgage backed securities

     609       74  

Net increase in loans

     (2,676 )     (3,686 )

Purchase of premises and equipment

     (41 )     (79 )

Purchase of Federal Home Loan Bank stock

     (270 )     —    

Proceeds from the sale of Federal Home Loan Bank stock

     113       248  

Net cash received in branch acquisition

     —         46,913  
                

Net Cash Provided by Investing Activities

     1,147       37,102  
                

Cash Flows from Financing Activities

    

Increase (decrease) in official checks

     336       (1,381 )

Net decrease in deposits

     (8,817 )     (13,532 )

Decrease in advance payments by borrowers for taxes and insurance

     (716 )     (717 )

Advances from Federal Home Loan Bank

     8,500       7,500  

Repayment of advances from Federal Home Loan Bank

     (6,500 )     (13,000 )

Cash dividends paid

     (96 )     (105 )

Purchases of stock for treasury

     (3 )     (755 )
                

Net Cash Used In Financing Activities

     (7,296 )     (21,990 )
                

Net Increase (Decrease) in Cash and Cash Equivalents

     (5,119 )     14,830  

Cash and Cash Equivalents – Beginning

     8,282       5,357  
                

Cash and Cash Equivalents – Ending

   $ 3,163     $ 20,187  
                

Supplementary Cash Flows Information

    

Interest paid

   $ 2,126     $ 2,380  
                

Income taxes paid

   $ —       $ 63  
                

Net loans transferred to repossessed assets

   $ 104     $ —    
                

See Notes to Unaudited Consolidated Financial Statements.

 

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BV FINANCIAL, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

December 31, 2008

 

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America. However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the period ended December 31, 2008 are not necessarily indicative of the results that may be expected for the entire year. These unaudited consolidated financial statements should be read in conjunction with BV Financial, Inc.’s (the “Company” or “BV Financial”) Annual Report on Form 10-K for the year ended June 30, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Bay-Vanguard Federal Savings Bank (the “Bank” or “Bay-Vanguard Federal”) and its wholly-owned subsidiary, Housing Recovery Corporation. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification

Certain prior year amounts have been reclassified to conform with the current year’s presentation. Such reclassifications had no effect on net income.

 

(2) Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the appropriate period. Unearned shares under the Bay-Vanguard Federal Savings Bank Employee Stock Ownership Plan (“ESOP”) are not included in outstanding shares. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding as adjusted for the dilutive effect of stock options and unvested stock awards based on the “treasury stock” method. As of December 31, 2008 and 2007, the Company had 12,797 and 21,265 shares of unvested restricted stock, respectively, and 111,456 shares and 111,456 shares of unexercised stock options, respectively, none of which were dilutive.

 

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Information related to the calculation of earnings (loss) per share is summarized for the three and six months ended December 31, 2008 and 2007 as follows:

 

     Three Months Ended December 31,     Six Months Ended December 31,  
     2008     2007     2008    2007  
     Basic     Diluted     Basic     Diluted     Basic    Diluted    Basic     Diluted  
     (In thousands, except per share data)  

Net income (loss)

   $ (83 )   $ (83 )   $ (49 )   $ (49 )   $ 161    $ 161    $ (27 )   $ (27 )
                                                              

Weighted average common shares outstanding

     2,312       2,312       2,391       2,391       2,309      2,309      2,397       2,397  

Dilutive securities:

                  

Restricted stock

     —         —         —         —         —        —        —         —    

Stock options

     —         —         —         —         —        —        —         —    
                                                              

Adjusted weighted average shares

     2,312       2,312       2,391       2,391       2,309      2,309      2,397       2,397  
                                                              

Per share amount

   $ (0.04 )   $ (0.04 )   $ (0.02 )   $ (0.02 )   $ 0.07    $ 0.07    $ (0.01 )   $ (0.01 )
                                                              

 

(3) Equity Incentive Plan

On November 8, 2005, stockholders approved the BV Financial, Inc. 2005 Equity Compensation Plan (the “Plan”) that enabled the Company to grant up to 181,447 stock options and restricted stock awards to employees and directors. On November 14, 2005, the Company granted stock options covering 111,456 shares of common stock to certain employees and directors of the Company, of which 64,646 and 43,486 were exercisable at December 31, 2008 and December 31, 2007, respectively. The options were granted at the then fair market value of the stock of $8.94, vest over five years and expire ten years from the date of grant.

Stock options had no intrinsic value at December 31, 2008. The Company recognized $10,000 and $22,000 of expense relating to the granting of stock options during the three and six months ended December 31, 2008, respectively, and $17,000 and $36,000 for the three and six months ended December 31, 2007, respectively. There has been no exercise of vested stock options through December 31, 2008.

On November 14, 2005, the Company granted 44,577 shares of restricted stock to certain employees and directors of the Company. The Company purchased shares in the open market during 2006 to fund this plan. The awards vest over a five-year period and, therefore, the cost of such awards is accrued ratably over a five-year period as compensation expense. The Company recognized $17,000 and $37,000 of expense relating to the grant of shares of restricted stock during the three and six months ended December 31, 2008, respectively, and $17,000 and $37,000 of expense during the three and six months ended December 31, 2007, respectively. Shares vesting were 8,468 and 8,468 for the periods ended December 31, 2008 and 2007, respectively. Unvested shares were 12,797 at December 31, 2008.

At December 31, 2008, there was $223,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted average period of 1.8 years.

 

(4) Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (R) “Business Combinations” (“SFAS No. 141 (R)”). This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business

 

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combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations completed beginning July 1, 2009.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning July 1, 2009 and is not expected to have a significant impact on our financial statements.

In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The Company adopted this EITF effective July 1, 2007 and recorded a cumulative-effect adjustment to retained earnings of $(221,000). The Bank terminated its executive and director split-dollar life insurance retirement death benefit and recognized income of $240,000 in the quarter ended September 30, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective for the Company July 1, 2008. The Company elected to account for the Shay AMF Ultra Short Mortgage Fund mutual fund it holds at fair value and there was no impairment recognized with this adoption as the investment had been written down to fair value at June 30, 2008. Future gains and losses will be reflected through earnings.

In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. Adoption is not expected to have a significant impact on the Company’s financial statements.

 

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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements.

In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The implementation of this standard will not have a material impact on our financial position and results of operations.

In September 2008, the FASB ratified the Emerging Issues Task Force (EITF) Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements.

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently evaluating the potential impact that this potential change would have on its financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ended after December 15, 2009. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements.

 

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In November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-6, “Equity Method Investment Accounting Considerations”. EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its financial statements.

In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, “Accounting for Defensive Intangible Assets”. EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. This new pronouncement will impact the Company’s accounting for any defensive intangible assets acquired in a business combination completed beginning July 1, 2009.

 

(5) FDIC Temporary Liquidity Guaranty Program

The FDIC recently increased the amount of insured bank deposits to $250,000 per account. On October 14, 2008, the FDIC insurance was also extended to unlimited coverage for non-interest bearing deposit transaction accounts, and will last through December 31, 2009 unless otherwise extended by the FDIC. Under the program, effective December 5, 2008, insured depository institutions that have not opted out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 0.10% surcharge applied to non-interest bearing transaction deposit account balances in excess of $250,000, which surcharge will be added to the institution’s existing risk-based deposit insurance assessments. The Bank is participating in the FDIC Temporary Liquidity Guaranty Program.

 

(6) Goodwill, Other Intangible Assets and Branch Acquisition

On August 24, 2007, the Bank acquired a branch office in Pasadena, Maryland from Greater Atlantic Bank. The Bank paid a premium on the net liabilities, primarily on deposits of $51.5 million assumed at closing. The premium was comprised of goodwill totaling $3.9 million and identifiable intangibles (core deposit intangible) totaling $502,000. The goodwill is deductible for tax purposes. Core deposit intangibles are amortized on an accelerated basis over a 7-year period and goodwill is evaluated on an annual basis to determine impairment, if any. Any impairment of goodwill would be recorded against income in the period of impairment.

 

(7) Fair Values for Financial Instruments

In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 157, “Fair Value Measurements,” (SFAS 157) which defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. Effective July 1, 2008, the Company adopted SFAS 157. The primary effect of SFAS 157 on the Company was to expand the required disclosures pertaining to the methods used to determine fair values.

 

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In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The application of the provisions of (FSP) 157-2 did not materially affect our results of operations or financial condition as of and for the period ended December 31, 2008.

In October 2008, the FASB issued FASB Staff Position (FSP) 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to our December 31, 2008 financial statements. The application of the provisions of (FSP) 157-3 did not materially affect our results of operations or financial condition as of and for the period ended December 31, 2008.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy under SFAS 157 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that requires inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Assets measured at fair value on a recurring basis by level within the fair value hierarchy used at December 31, 2008 are as follows:

 

     December 31,
2008
   (Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Other
Unobservable
Inputs
     (Dollars in thousands)

Securities trading

   $ 1,623    $ —      $ 1,623    $ —  

Securities available for sale

     4,342      —        4,342      —  
                           

Total

   $ 5,965    $ —      $ 5,965    $ —  
                           

 

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The following valuation techniques were used to measure the fair value of assets in the table above on a recurring basis as of December 31, 2008.

Securities trading – The fair value of securities trading was based on available market pricing for the security. A mutual fund is the only holding we have in this category and we rely on information provided to us by a third party pricing source.

Securities available for sale– The fair values of securities available for sale were based on available market pricing for the securities. We rely on third party brokers to obtain and provide us with this market pricing from a definitive security pricing source.

Assets measured at fair value on a non recurring basis by level within the fair value hierarchy used at December 31, 2008 are as follows:

 

     December 31,
2008
   (Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Other
Unobservable
Inputs
     (Dollars in thousands)

Impaired loans

   $ 1,296    $ —      $ —      $ 1,296

Repossessed assets

     147      —        —        147
                           

Total

   $ 1,443    $ —      $ —      $ 1,443
                           

The following valuation techniques were used to measure the fair value of assets in the table above on a non recurring basis as of December 31, 2008.

Impaired Loans – Loans included in the above table are those that are accounted for under SFAS 114, Accounting by Creditors for Impairment of a Loan, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value was determined based upon a discounted cash flow from the expected proceeds of the underlying collateral. This asset is included as Level 3 fair value, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balance reduced by any specific impairment reserve.

Repossessed Assets – Fair value of repossessed assets was based on the Company’s appraisal of the property. This value was determined from a current industry standard appraisal guide based on the value of similar properties adjusted for factors including condition and location of property.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective for the Company July 1, 2008. The Company elected to account for the AMF Ultra Short Mortgage Fund mutual fund it holds at fair value and recognized a trading loss of $425,000 during the six months ended December 31, 2008. The Company made this election based on the availability of tax planning strategies to generate future capital gains if necessary to offset capital losses on the mutual fund. The fund pays monthly cash dividends which the Company records as interest income.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of BV Financial. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and footnotes appearing in Part I, Item 1 of this document.

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Bay-Vanguard, M.H.C., BV Financial and Bay-Vanguard Federal. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.

Bay-Vanguard, M.H.C., BV Financial and Bay-Vanguard Federal’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of BV Financial and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in BV Financial and Bay-Vanguard Federal’s market area, changes in real estate market values in BV Financial and Bay-Vanguard Federal’s market area, and changes in relevant accounting principles and guidelines.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, BV Financial does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

BV Financial (the “Company”) was organized as a federally chartered corporation at the direction of Bay-Vanguard Federal Savings Bank (the “Bank” or “Bay-Vanguard Federal”) in January 2005 to become the mid-tier stock holding company for Bay-Vanguard Federal upon the completion of its reorganization into the mutual holding company form of organization. Pursuant to the Plan of Reorganization, the Bank converted to stock form with all of its stock owned by the Company and organized Bay-Vanguard, M.H.C. (the “MHC”) as a federally chartered mutual holding company that owned 55% of the common stock of the Company.

Bay-Vanguard Federal is headquartered in Baltimore, Maryland and is a community-oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public using such funds to originate one-to four-family real estate, mobile home, construction, multi-family and commercial real estate and consumer loans.

The Bank’s savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. Bay-Vanguard Federal is a member of the Federal Home Loan Bank System.

 

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The Bank has a wholly-owned subsidiary, Housing Recovery Corporation (“HRC”). HRC’s primary business is holding real estate and other assets acquired by the Bank through foreclosure or repossession.

Critical Accounting Policies

The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets and liabilities or income and expense to be critical accounting policies. The Company considers the allowance for loan losses, fair value option for financial assets, the determination of other than temporary impairment of investments, intangible asset impairment and the deferred tax asset valuation allowance to be critical accounting policies.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. However, historically, the Company’s estimates and assumptions have provided results that did not differ materially from actual results.

Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for loan losses based on an evaluation of the portfolio, past loss experience, economic conditions and business conditions affecting its primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, the duration of the current business cycle, bank regulatory examination results and other factors related to the collectibility of the loan portfolio. Although the Company believes that it uses the best information available to establish the allowance for loan losses, fair value option for financial assets, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. For example, a downturn in the local economy could cause increases in nonperforming loans. Additionally, a decline in real estate values could cause some of the Company’s loans to become inadequately collateralized. In either case, this may require the Company to increase its provisions for loan losses, which would negatively impact earnings. Further, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews the Company’s allowance for loan losses. Such agency may require the Company to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. An increase to the allowance required to be made by the Office of Thrift Supervision would negatively impact the Company’s earnings. Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

Fair Value Option for Financial Assets and Financial Liabilities. SFAS 157 establishes a three level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets of liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Management has presented certain financial instruments measured at fair value on either a recurring or nonrecurring basis by level within the hierarchy. Management obtains fair values from various broker pricing sources on a monthly basis, at a minimum, and reviews the fair values for

 

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reasonableness. Although the Company believes that it uses the best information available to establish fair values for these certain financial instruments, future changes to the fair value may be significant if certain future events occur that cause actual results to differ from the assumptions used in making determinations about fair value. For example, market data used as inputs to calculate pricing for a particular financial instrument may change dramatically.

Other-than-Temporary Impairment of Investment Securities. There are certain securities in an unrealized loss position that management believes at this time are temporarily impaired. If the fair value of these securities does not recover in a reasonable period of time or management can no longer demonstrate the ability and intent to hold them until recovery, a write-down through the consolidated statements of income would be necessary.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or until maturity. In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts.

Intangible Asset Impairment. The Company has goodwill and core deposit intangible assets arising from a branch purchase. The goodwill is evaluated annually for impairment while the core deposit intangible is being amortized over seven years.

Deferred Tax Asset Valuation Allowance. Management determined during the quarter ended December 31, 2008 that a valuation allowance was warranted based on a history of taxable income, the expectation of taxable income going forward and the availability of tax planning strategies to generate future income, including capital gains if necessary to offset capital losses on its mutual fund security.

Comparison of Financial Condition at December 31, 2008 and June 30, 2008

Total assets decreased $7.2 million, or 4.4%, to $156.8 million at December 31, 2008 from $164.0 million at June 30, 2008 primarily due to a $5.1 million decrease in cash and cash equivalents and a $4.4 million decrease in securities, offset by a $2.7 million increase in loans.

Loans receivable increased $2.7 million, or 2.2%, to $127.5 million at December 31, 2008 from $124.8 million at June 30, 2008, primarily due to a $1.4 million increase in residential real estate loans, and a $1.5 million increase in non-residential and construction loans. Non-residential and construction loans increased due to the Bank’s focus on shorter-term higher-rate loan products. Residential loans increased due to competitive rates and marketing efforts in our local communities.

Securities decreased $4.4 million or 2.4%, from $18.6 million at June 30, 2008 primarily due to the redemption of $500,000 of the AMF Ultra Short Mortgage mutual fund, a trading loss of $425,000 on the same mutual fund and principal payments of $3,000,000 on U.S. government agencies securities. Securities trading are carried at fair value with gains and losses being reflected through earnings.

Cash and cash equivalents decreased $5.1 million, or 61.5%, from $8.3 million at June 30, 2008 to $3.2 million at December 31, 2008, to fund the $2.7 million increase in loans and partially fund the $8.8 million decrease in deposits.

 

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Deposits decreased $8.8 million, or 6.4%, to $128.2 million at December 31, 2008, primarily due to a $8.9 million decrease in certificates of deposit. Federal Home Loan Bank advances increased $2.0 million, or 26.7%, to $9.5 million at December 31, 2008 due to loan growth and a decrease in deposits.

Total equity increased $202,000, or 1.2%, to $16.5 million at December 31, 2008 primarily as a result of net income of $161,000 for the period, offset by the payment of dividends.

Results of Operations for the Three Months Ended December 31, 2008 and 2007

General. Net loss increased $34,000, or 69.4%, to a net loss of $83,000 for the three months ended December 31, 2008 compared to a loss of $49,000 in the same period in the prior year due primarily to a $199,000 loss on securities trading in noninterest income and a $45,000 increase in noninterest expenses, offset by a $243,000 increase in net interest income and a $33,000 benefit for income tax.

Net Interest Income. The following table summarizes interest income and expense for the three months ended December 31, 2008 and 2007.

 

     Three Months
Ended December 31,
 
     2008    2007    % change  
     (Dollars in thousands)       

Interest Income:

        

Loans, including fees

   $ 1,981    $ 1,890    4.8 %

Investment securities – taxable

     197      101    95.1  

Other

     2      303    (99.3 )
                

Total interest income

     2,180      2,294    (5.0 )

Interest Expense:

        

Deposits

     942      1,302    (27.7 )

Federal Home Loan Bank advances

     98      95    3.2  
                

Total interest expense

     1,040      1,397    (25.6 )
                

Net interest income

   $ 1,140    $ 897    27.1  
                

The following table summarizes average balances and average yield and costs for the three months ended December 31, 2008 and 2007.

 

     Three Months Ended December 31,  
     2008     2007  
     Average
Balance
   Yield/
Cost
    Average
Balance
   Yield/
Cost
 
     (Dollars in thousands)  

Loans

   $ 127,471    6.22 %   $ 119,665    6.32 %

Investment securities

     16,695    4.72       7,364    5.49  

Interest-bearing time deposits in other banks

     227    1.76       812    4.93  

Federal funds sold

     1,588    0.25       25,848    4.53  

Interest-bearing deposits

     122,421    3.08       132,561    3.93  

Federal Home Loan Bank advances

     11,429    3.43       8,000    4.75  

 

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Net interest income for the three months ended December 31, 2008 increased $243,000, or 27.1%, compared to the same period last year, as a result of increases in investment securities and the loan portfolio and a decrease in interest expense due to a decrease in the rate paid on interest bearing deposits and the rate charged on the FHLB advances. Total interest income decreased as a result of the decrease in average interest-earning assets to $146.0 million from $153.7 million. The decrease in average interest-earning assets was mainly due to a decrease in federal funds, attributable to the funding of loan growth and decrease in deposits. Total interest expense decreased as a result of a decrease in the average rate paid on deposits and a decrease in the average balance of deposits to $122.4 million, compared to average deposits of $132.6 million in 2007.

Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses for the three months ended December 31, 2008 and 2007.

 

     Three Months
Ended December 31,
 
     2008     2007  
     (In thousands)  

Allowance at beginning of period

   $ 709     $ 422  

Provision for loan losses

     21       24  

Charge-offs

     (19 )     (6 )
                

Allowance at end of period

   $ 711     $ 440  
                

The provision for loan losses decreased from $24,000 for the three months ended December 31, 2007 to $21,000 for the three months ended December 31, 2008. The decrease in the provision for loan losses was due to a decrease in delinquencies.

 

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The following table provides information with respect to our nonperforming assets at the dates indicated.

 

     At December 31,
2008
    At June 30,
2008
    % change  
     (Dollars in thousands)        

Nonaccruing loans:

      

Construction

   $ 1,016     $ 2,623     (61.3 )

One- to four-family

     172       —       N/A  

Other consumer

     31       62     (50.0 )
                      

Total

     1,219       2,685     (54.6 )
                      

Accruing loans past due 90 days or more

     —         —       —    

Troubled debt restructuring (1)

     —         46     (100.0 )

Foreclosed real estate

     —         —       —    

Other repossessed assets

     147       41     258.5  
                      

Total non-performing assets

   $ 1,366     $ 2,772     (50.7 )
                      

Total non-performing loans to total loans

     0.96 %     2.10 %  

Total non-performing loans to total assets

     0.78       1.64    

Total non-performing assets to total assets

     0.87       1.69    

 

(1) As defined in Statement of Financial Accounting Standards No. 15.

Nonperforming assets decreased $1.4 million, or 50.7%, primarily due to a decrease in nonaccruing construction loans. The Bank refinanced one of the nonaccruing construction loans splitting the original loan amount between the two primary borrowers. Two of the properties were only 85% complete. The borrower who took this part of the refinancing provided additional properties for collateral so that there would be enough equity to finish the remaining 15% of the project. The project has been completed and the two units will be rented to improve cash flows for repayment. The borrower who refinanced the other properties is repaying a term loan that is secured by the two completed units, which are rented and producing income. The borrower is adding personal cash to help make the payments. Both of the refinanced loans were granted at the current market rates available and at the same risk and compliance as other such loans available.

Noninterest Income. The following table summarizes noninterest income for the three months ended December 31, 2008 and 2007.

 

     Three Months
Ended December 31,
   % change  
     2008     2007   
     (Dollars in thousands)       

Service fees on deposits

   $ 26     $ 33    (21.2 )%

Service fees on loans

     10       6    66.7  

Income from investment in life insurance

     54       18    200.0  

Loss on securities trading

     (199 )     —      N/A  

Other income

     15       23    (34.8 )
                 

Total

   $ (94 )   $ 80    (217.5 )
                 

 

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The decrease in noninterest income was due to a loss on trading securities of $199,000 associated with a decline in the AMF Ultra Short Mortgage mutual fund, offset by $36,000 of income resulting from the proceeds from a life insurance policy on a former director.

Noninterest Expenses. The following table summarizes noninterest expenses for the three months ended December 31, 2008 and 2007.

 

     Three Months
Ended December 31,
    % change  
     2008     2007    
     (Dollars in thousands)        

Compensation and related expenses

   $ 604     $ 580     4.1 %

Occupancy

     63       62     1.6  

Data processing

     97       99     (2.0 )

Telephone and postage

     16       16     —    

Advertising

     34       32     6.3  

Professional fees

     55       56     (1.8 )

Equipment

     36       45     (20.0 )

Amortization of intangible assets

     26       22     18.2  

FDIC insurance premiums

     26       3     766.7  

Other

     118       115     2.6  
                  

Total

   $ 1,075     $ 1,030     4.4  
                  

Efficiency ratio (1)

     102.8 %     105.4 %  

 

(1) Computed as noninterest expenses divided by the sum of net interest income and other income.

Total noninterest expenses increased $45,000, or 4.4%. Compensation and related expenses increased $24,000 or 4.1%, primarily as a result of the Bank adding branch tellers and the position of Assistant Chief Financial Officer to its accounting department. FDIC insurance premiums increased $23,000 or 766.7% as the FDIC increased its assessment rates.

The Company anticipates a significant increase in the cost of federal deposit insurance from current levels of five to seven basis points. The FDIC has recently proposed to increase the assessment rate for the most highly rated institutions to between 12 and 14 basis points for the first quarter of 2009 and to between 10 and 14 basis points thereafter. Assessment rates could be further increased if an institution’s FHLB advances exceed 15% of deposits. The FDIC has also established a program under which it fully guarantees all non-interest bearing transaction accounts and senior unsecured debt of a bank or its holding company. The Company is participating in the program and will be assessed ten basis points for non-interest bearing transaction account balances in excess of $250,000 and 75 basis points of the amount of debt issued.

Income Taxes. The provision for income taxes increased $61,000, or 217.9%, from a benefit of $28,000 for the three months ended December 31, 2007 to an expense of $33,000 for the three months ended December 31, 2008. The effective tax rate was (66.0)% for the three months ended December 31, 2008 compared to 36.4% for the three months ended December 31, 2007. The primary reason for the significant change in the effective tax rate for the period ended December 31, 2008 was due to the tax effects of losses on securities trading. Management determined that a deferred tax asset valuation allowance of $198,000 was warranted at December 31, 2008 for losses incurred on the AMF Mutual Fund.

 

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Results of Operations for the Six Months Ended December 31, 2008 and 2007

General. Net income increased $188,000, or 696.3%, to $161,000 for the six months ended December 31, 2008 compared to a net loss of $27,000 for the same period in the prior year primarily due to a $475,000 increase in net interest income, offset by a $150,000 decrease in noninterest income and a $119,000 increase in noninterest expenses.

Net Interest Income. The following table summarizes changes in interest income and expense for the six months ended December 31, 2008 and 2007.

 

     Six Months
Ended December 31,
   % change  
     2008    2007   
     (Dollars in thousands)       

Interest Income:

        

Loans, including fees

   $ 3,971    $ 3,770    5.3 %

Investment securities – taxable

     425      187    127.3  

Other

     15      526    (97.2 )
                

Total interest income

     4,411      4,483    (1.6 )

Interest Expense:

        

Deposits

     1,916      2,381    (19.5 )

Federal Home Loan Bank advances

     207      289    (28.4 )
                

Total interest expense

     2,123      2,670    (20.4 )
                

Net interest income

   $ 2,288    $ 1,813    26.2  
                

The following table summarizes average balances and average yield and costs for the six months ended December 31, 2008 and 2007.

 

     Six Months Ended December 31,  
     2008     2007  
     Average
Balance
   Yield/
Cost
    Average
Balance
   Yield/
Cost
 
          (Dollars in thousands)       

Loans

   $ 126,929    6.26 %   $ 119,138    6.33 %

Investment securities

     17,469    4.87       6,597    5.70  

Interest-earning deposits

     335    1.79       567    4.94  

Federal funds

     2,231    1.08       20,621    4.96  

Deposits

     123,801    3.10       121,323    3.93  

Federal Home Loan Bank advances

     11,192    3.70       11,595    4.98  

Net interest income for the six months ended December 31, 2008 increased $475,000, or 26.2%, compared to the same period last year, as a result of increases in the loan portfolio and investment securities and a decrease in interest expense due to a decrease in the rate paid on interest bearing deposits and the rate charged on the FHLB advances. Total interest income decreased as a result of the lower interest yields on average interest-earning assets.

 

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Total interest expense decreased as a result of a decrease in the average rate paid on deposits offset by an increase in the average balance of deposits to $123.8 million, compared to average deposits of $121.3 million in 2007. Interest expense on FHLB advances decreased due primarily to a lower average rate paid on these advances.

Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses for the six months ended December 31, 2008 and 2007.

 

     Six Months
Ended December 31,
 
     2008     2007  
     (In thousands)  

Allowance at beginning of period

   $ 709     $ 402  

Provision for loan losses

     21       44  

Charge-offs

     (19 )     (6 )
                

Allowance at end of period

   $ 711     $ 440  
                

The provision for loan losses decreased $23,000 to $21,000 for the six months ended December 31, 2008. The decrease in the provision for loan losses reflects a decrease in nonperforming loans, offset by an increase in net charge-offs.

Noninterest Income. The following table summarizes noninterest income for the six months ended December 31, 2008 and 2007.

 

     Six Months
Ended December 31,
   % change  
     2008     2007   
     (Dollars in thousands)       

Service fees on deposits

   $ 55     $ 64    (14.1 )%

Service fees on loans

     18       14    28.6  

Income from investment in life insurance

     72       35    105.7  

Loss on securities trading

     (425 )     —      N/A  

Termination of split-dollar life insurance policy

     240       —      N/A  

Other income

     42       39    7.7  
                 
   $ 2     $ 152   
                 

The decrease in noninterest income was due to a loss on trading securities of $425,000 associated with a decline in the AMF Ultra Short Mortgage mutual fund, offset by $240,000 of income resulting from the termination of $3.9 million in split-dollar life insurance policies and $36,000 of income resulting from the proceeds from a life insurance policy on a former director.

 

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Noninterest Expenses. The following table summarizes noninterest expenses for the six months ended December 31, 2008 and 2007.

 

     Six Months
Ended December 31,
    % change  
     2008     2007    
     (Dollars in thousands)        

Compensation and related expenses

   $ 1,135     $ 1,116     1.7 %

Occupancy

     125       117     6.8  

Data processing

     192       174     10.3  

Telephone and postage

     34       33     3.0  

Advertising

     62       62     —    

Professional fees

     112       117     (4.3 )

Equipment expense

     78       87     (10.3 )

Amortization of intangible assets

     55       49     12.2  

FDIC insurance premiums

     81       6     1,250.0  

Other

     204       198     3.0  
                  

Total

   $ 2,078     $ 1,959     6.1  
                  

Efficiency ratio (1)

     90.7 %     99.7 %  

 

(1) Computed as noninterest expenses divided by the sum of net interest income and other income.

Total non-interest expenses increased $119,000, or 6.1%. Compensation and related expenses increased $19,000 or 1.7%, primarily as a result of the Bank’s hiring additional branch tellers and adding the position of Assistant Chief Financial Officer to its accounting department. FDIC insurance premiums increased $75,000 or 1,250.0%, as the FDIC increased its assessment rates. Data processing costs increased $18,000, or 10.3%, due to additional charges related to the branch acquisition.

Income Taxes. Provision for income taxes increased $41,000, or 372.3%, from an $11,000 benefit for the six months ended December 31, 2007 to an expense of $30,000 for the six months ended December 31, 2008. The effective tax rate was 15.7% for the six months ended December 31, 2008 compared to (28.9%) for the six months ended December 31, 2007. The increase in the effective tax rate was due to the change in the Maryland income tax rate and the impact this had on deferred tax balances.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Treasury and federal agency securities.

 

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Our most liquid assets are cash and cash equivalents and interest-bearing deposits in other banks. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2008, cash and cash equivalents totaled $3.2 million. Securities classified as trading and available-for-sale, which provide additional sources of liquidity, totaled $1.6 million and $4.3 million, respectively, at December 31, 2008. In addition, at December 31, 2008, we had the ability to borrow a total of approximately $40.0 million from the Federal Home Loan Bank of Atlanta. On that date, we had advances outstanding of $9.5 million. Additionally, at December 31, 2008, the Bank had a $2.0 million unsecured demand line of credit facility with M&T Bank, which had no outstanding balance.

At December 31, 2008, we had $1.0 million in loan commitments outstanding. In addition to commitments to originate loans, we had $2.5 million in unused lines of credit and $2.0 million of construction loans in process. Certificates of deposit due within one year at December 31, 2008 totaled $32.4 million, or 25.3% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31 2008. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposits. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including risk-based capital measures. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2008, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit described in the liquidity and capital resources section.

For the six months ended December 31, 2008, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable as the Company is a smaller reporting company.

 

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Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

BV Financial is not involved in any pending legal proceedings. Bay-Vanguard Federal is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition and results of operations.

 

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008, which could materially and adversely affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding the Company’s repurchases of its common stock during the quarter ended December 31, 2008.

 

Period

   (a)
Total
Number of
Shares
Purchased (1)
   (b)
Average
Price
Paid
per
Share
   (c)
Total
Number
Of Shares
Purchased

As Part of
Publicly
Announced
Plans or
Programs
   (d)
Maximum
Number
of Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs

October 1, 2008 to October 31, 2008

   —      $ —      —      47,830

November 1, 2008 to November 30, 2008

   —        —      —      47,830

December 1, 2008 to December 31, 2008

   —        —      —      47,830
               

Total

   —      $ —      —     
               

 

(1) On March 20, 2008, BV Financial announced the adoption of a stock repurchase program to acquire up to 97,830 shares, or 10%, of BV Financial’s outstanding shares of common stock, excluding shares held by Bay-Vanguard M.H.C. The program will continue until it is completed or terminated by the Board of Directors.

 

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Table of Contents
Item 3. Defaults upon Senior Securities

Not Applicable.

 

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of the Company was held on November 6, 2008. The results of the vote on the matters presented at the meeting are as follows:

 

  1. The following individuals were elected as directors, each for a three-year term:

 

     Votes for    Votes Withheld
Brian K. McHale    2,264,230    40,408
Anthony J. Narutowicz    2,265,230    39,408
Jerry S. Sopher    2,264,230    40,408

 

  2. The appointment of Beard Miller Company LLP as auditor for the Company for the fiscal year ending June 30, 2009 was ratified by stockholders by the following vote:

 

For: 2,300,261   Against: 3,852   Abstain: 525

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

3.1   Charter of BV Financial, Inc. (1)
3.2   Bylaws of BV Financial, Inc. (1)
4.0   Stock Certificate of BV Financial, Inc. (1)
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0   Section 1350 Certification

 

(1) Incorporated by reference into this document from the Exhibits filed with the Securities and Exchange Commission on the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-119083.

 

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BV FINANCIAL, INC.
Dated: February 12, 2009   By:  

/s/ Carolyn M. Mroz

    Carolyn M. Mroz
    President and Chief Executive Officer
    (principal executive officer)
Dated: February 12, 2009   By:  

/s/ Edmund T. Leonard

    Edmund T. Leonard
    Chairman of the Board and Chief Financial Officer
    (principal financial and accounting officer)

 

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