Item 1. Financial Statements
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)
A SSETS
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
L IABILITIES AND S TOCKHOLDERS
E QUITY
L IABILITIES
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
C OMMITMENTS AND C ONTINGENCIES
S TOCKHOLDERS E QUITY
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)
I NTEREST I NCOME
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
I NTEREST E XPENSE
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
P ROVISION FOR L OAN L OSSES
21
24
21
44
Net Interest Income after Provision for Loan Losses
1,119
873
2,267
1,769
N ONINTEREST I NCOME
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
N ONINTEREST E XPENSES
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
)
B ASIC AND D ILUTED E ARNINGS (L OSS ) P ER
S HARE
$
(0.04
)
$
(0.02
)
$
0.07
$
(0.01
)
D IVIDENDS D ECLARED P ER S HARE
$
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 years 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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Table of Contents
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
6
Table of Contents
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 companys fiscal year beginning after December 15, 2008. This new pronouncement will impact the Companys 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 Statementsan 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 Companys fiscal year beginning July 1, 2009 and is not expected to have a significant impact on our financial statements.
In September 2006, the FASBs 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 employees benefit during his or her retirement, then the liability recognized during the employees active service period should be based on the future cost of insurance to be incurred during the employees
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 Companys financial statements.
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Table of Contents
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 SECs 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, Issuers 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 employers 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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Table of Contents
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 Companys 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 institutions 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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Table of Contents
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 entitys 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 liabilitys 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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Table of Contents
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 loans 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
Companys 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 LiabilitiesIncluding 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.
11
Table of Contents
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements 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 Federals 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 Federals market area, changes in real estate market values in BV Financial and Bay-Vanguard Federals 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 Banks savings accounts are
insured up to the applicable legal limits by the Federal Deposit Insurance Corporations Deposit Insurance Fund. Bay-Vanguard Federal is a member of the Federal Home Loan Bank System.
12
Table of Contents
The Bank has a wholly-owned subsidiary, Housing Recovery Corporation (HRC). HRCs
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 Companys 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 Companys 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 Companys 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 Companys 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
13
Table of Contents
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 issuers 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
Banks 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.
14
Table of Contents
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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Table of Contents
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.
16
Table of Contents
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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Table of Contents
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 institutions 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.
18
Table of Contents
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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Table of Contents
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.
20
Table of Contents
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
Banks 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.
21
Table of Contents
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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