Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from
the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the Consolidated Financial Statements and
related Notes included in Part I “Item 1, Financial Statements,” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022. Certain statements herein are forward-looking statements within the
meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the U.S. Securities Act of 1933, as amended that reflect our current views with respect to future events and financial
performance. Forward-looking statements typically include words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue,”
“poised,” “optimistic,” “prospects,” “ability,” “looking,” “forward,” “invest,” “grow,” “improve,” “deliver” and other similar expressions. These forward-looking statements are subject to risks and uncertainties, which could cause actual future
results to differ materially from historical results or from those anticipated or implied by such statements. Readers should not place undue reliance on these forward-looking statements, which speak only as of their dates or, if no date is
provided, then as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial
condition or results of operations under different assumptions and conditions. This discussion highlights those accounting policies that management considers critical. All accounting policies are important; however, and therefore you are encouraged
to review each of the policies included in Note 1 “Summary of Significant Accounting Principles” of the Notes to Consolidated Financial Statements in our 2022 Form 10-K to gain a better understanding of how our financial performance is measured and
reported. Management has identified the Company’s critical accounting policies as follows:
Allowance for Credit Losses for Loans
Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit
losses for loans at the time of origination or acquisition. The allowance for credit losses (“ACL”) is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated
statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively
evaluating loans with similar risk characteristics. The Company measures the ACL for each of its loan segments using the weighted-average remaining maturity (“WARM”) method. The weighted average remaining life, including the effect of estimated
prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions. The Company’s ACL
model also includes adjustments for qualitative factors, where appropriate.
Certain loans, such as those that are nonperforming or are considered to be collateral dependent, are deemed to no longer possess risk characteristics similar to other loans in the
loan portfolio, because the specific attributes and risks associated with the loan have likely become unique as the credit quality of the loan deteriorates. As such, these loans may require individual evaluation to determine an appropriate ACL for
the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent in which case the ACL is determined
using estimates of the fair value of the underlying collateral, less estimated selling costs.
Allowance for Loan Losses
Prior to the adoption of ASC 326 on January 1, 2023, the ALLL was accounted for under the guidance of ASC 310 and 450. The ALLL was considered a critical estimate due to the high
degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could have resulted in material changes in the amount of the ALLL considered necessary. The ALLL was
evaluated on a regular basis by management and the Board of Directors and was based on a periodic review of the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may
affect borrowers’ ability to repay, the estimated value of any underlying collateral, prevailing economic conditions, and feedback from regulatory examinations.
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Table of Contents
Goodwill and Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and that are determined to have an indefinite useful life are not amortized, but tested for impairment at
least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has selected November 30th as the date to perform the annual impairment test. Intangible assets
with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s consolidated statement of financial condition.
Income Taxes
Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on
the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred
tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all the deferred tax asset will not be realized. In assessing the realization of deferred tax assets,
management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry‑back years, forecasts of future income and available
tax planning strategies. This analysis is updated quarterly.
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Fair values are estimated using relevant market information and other assumptions, as more fully disclosed in Note 7 of the Notes to Consolidated Financial Statements of this
Quarterly Report on Form 10-Q. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for items. Changes in
assumptions or in market conditions could significantly affect the estimates.
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Table of Contents
Overview
Total assets increased by $47.1 million to $1.2 billion at June 30, 2023 from December 31, 2022, primarily due to growth in loans receivable held for
investment of $56.6 million, partially offset by a decrease of securities available-for-sale of $6.2 million and a decrease of cash and cash equivalents of $5.4 million.
Loans held for investment, net of the ACL, increased by $56.6 million to $824.6 million at June 30, 2023, compared to $768.0 million at December 31, 2022. The increase was primarily due to loan
originations of $98.2 million during the first six months of 2023, which consisted of $38.6 million of multi-family loans, $36.6 million of construction loans and $23.0 million of other commercial loans, offset in part by loan payoffs and
repayments of $41.6 million.
Deposits decreased by $40.9 million to $646.1 million at June 30, 2023, from $686.9 million at December 31, 2022, with $29.4 million of the decrease occurring in the first quarter of 2023.
Management has made reasonable attempts to be responsive to the higher interest rate environment, but some depositors have left the Bank for the highest rates available from other financial institutions in response to rate increases by the Federal
Reserve. As of June 30, 2023, our uninsured deposits, including deposits from affiliates, represented 38% of our total deposits, as compared to 31% as of December 31, 2022.
Total borrowings increased by $89.8 million to $295.6 million at June 30, 2023 , from $205.8 million at December 31, 2022,
primarily due to a net increase of $81.9 million in advances from the Federal Home Loan Bank (the “FHLB”) of Atlanta and $7.9 million in additional securities sold under agreements to repurchase.
Stockholders’ equity was $277.3 million, or 22.5% of the Company’s total assets, at June 30, 2023, compared to $279.5 million, or 23.6% of the Company’s total assets, at December 31, 2022. Upon
adoption of CECL on January 1, 2023, the Company recognized a net decrease in retained earnings of $1.3 million. S tockholders’ equity also decreased due to an increase in unearned shares in the employee stock
ownership plan of $2.8 million. These decreases were offset by year-to-date net earnings of $1.8 million and a reduction of $54 thousand in the accumulated other comprehensive loss, net of tax. Book value per share was $1.71 at June 30, 2023
and $1.76 at December 31, 2022.
For the three months ended June 30, 2023, the Company reported consolidated net earnings of $246 thousand compared to consolidated net earnings of $1.9 million for the
three months ended June 30, 2022. The decrease in net earnings was primarily due to an increase in interest expense before provision for credit losses of $4.0 million, which more than offset growth in interest income of $3.3 million. The
decrease in net earnings was also attributable to a provision for credit losses of $768 thousand during the second quarter of 2023, compared to a recapture of credit losses of $577 thousand during the second quarter
of 2022, and an increase in non-interest expense of $155 thousand.
For the six months ended June 30, 2023, the Company reported net income of $1.8 million compared to net income of $2.8 million for the six months ended June 30, 2022. The decrease
primarily resulted from a provision for credit losses of $810 thousand during the first six months of 2023, compared to a recapture of credit losses of $429 thousand during the first six months of 2022. In addition, non-interest expense increased
by $447 thousand during the first six months of 2023, compared to the first six months of 2022. These amounts were partially offset by improvement in net interest income of $332 thousand during the first six months of 2023, compared to the first
six months of 2022.
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Table of Contents
Results of Operations
Net Interest Income
Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022
Net interest income before provision for credit losses for the second quarter of 2023 totaled $7.3 million, representing a decrease of $770 thousand, or 9.6%, from net interest
income before loan loss provision of $8.0 million for the second quarter of 2022. The decrease resulted from additional interest expense due to an increase of $154.5 million in average borrowings during the second quarter of 2023, compared to the
second quarter of 2022, at an average borrowing rate of 4.30% during the second quarter of 2023, compared to an average borrowing rate of 0.42% during the second quarter of 2022. The increase in borrowings was due to a decrease in average deposits
of $187.3 million during the second quarter of 2023, compared to the second quarter of 2022, with all but $17.4 million of the decrease in average deposits occurring prior to the start of the second quarter of 2023. Net interest margin decreased
to 2.52% for the second quarter of 2023, compared to 3.00% for the second quarter of 2022, primarily due to an increase of 190 basis points in the average cost of funds, which reflected higher rates paid on deposits and borrowings because of the
ten interest rate increases implemented by the Federal Open Market Committee of the Federal Reserve (the “Federal Reserve” or “FRB”) from March of 2022 through June of 2023. The impact of the rising cost of funds was partially offset by an
increase in the yield on interest-earnings assets of 86 basis points, primarily due to higher rates earned on securities, interest-earning deposits, and, to a lesser extent, the loan portfolio.
Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
Net interest income before provision for credit losses for the six months ended June 30, 2023 totaled $15.5 million, representing an increase of $332 thousand, or 2.2%, over net
interest income before loan loss provision of $15.2 million for the six months ended June 30, 2022. The increase resulted from additional interest income, primarily generated from growth of $81.9 million in average interest-earning assets during
the six months ended June 30, 2023, compared to the six months ended June 30, 2022. In addition, the overall rate earned on interest-earning assets increased by 88 basis points as the Bank earned higher rates on securities, interest-earning
deposits, and, to a lesser extent, the loan portfolio. Net interest margin decreased, however, to 2.74% for the six months ended June 30, 2023, compared to 2.89% for the six months ended June 30, 2022, primarily due to an increase of 149 basis
points in the average cost of funds, which grew to 1.76% for the six months ended June 30, 2023, from 0.27% for the six months ended June 30, 2022. The increase in the cost of funds reflected the higher rates that the Bank paid on deposits and
borrowings because of the interest rate increases implemented by the FRB.
The following tables set forth the average balances, average yields and costs, and certain other information for the periods indicated. All average balances are daily average
balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status, but the balance of
these loans is included in the total average balance of loans receivable, which has the effect of reducing average loan yields.
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Table of Contents
For the Three Months Ended
June 30, 2023
June 30, 2022
(Dollars in Thousands)
Average Balance
Interest
Average
Yield/Cost
Average Balance
Interest
Average
Yield/Cost
Assets
Interest-earning assets:
Interest-earning deposits
$
16,615
$
167
4.02
%
$
210,978
$
788
1.49
%
Securities
326,051
2,183
2.68
%
199,472
796
1.60
%
Loans receivable (1)
797,550
9,098
4.56
%
657,026
6,879
4.19
%
FRB and FHLB stock
11,602
192
6.62
%
2,668
38
5.70
%
Total interest-earning assets
1,151,818
$
11,640
4.04
%
1,070,144
$
8,501
3.18
%
Non-interest-earning assets
67,173
107,531
Total assets
$
1,218,991
$
1,177,675
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits
$
115,578
$
932
3.23
%
$
197,751
$
194
0.39
%
Savings deposits
60,826
16
0.11
%
62,458
13
0.08
%
Interest checking and other demand deposits
233,872
87
0.15
%
292,248
42
0.06
%
Certificate accounts
153,972
514
1.34
%
199,043
100
0.20
%
Total deposits
564,248
1,549
1.10
%
751,500
349
0.19
%
FHLB advances
186,664
2,141
4.59
%
39,628
85
0.86
%
Other borrowings
75,821
682
3.60
%
68,352
29
0.17
%
Total borrowings
262,485
2,823
4.30
%
107,980
114
0.42
%
Total interest-bearing liabilities
826,733
$
4,372
2.12
%
859,480
$
463
0.22
%
Non-interest-bearing liabilities
113,803
107,771
Stockholders’ equity
278,455
210,424
Total liabilities and stockholders’ equity
$
1,218,991
$
1,177,675
Net interest rate spread (2)
$
7,268
1.93
%
$
8,038
2.96
%
Net interest rate margin (3)
2.52
%
3.00
%
Ratio of interest-earning assets to interest-bearing liabilities
139.32
%
124.51
%
(1)
Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs and loan premiums.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
For the Six Months Ended
June 30, 2023
June 30, 2022
(Dollars in Thousands)
Average Balance
Interest
Average
Yield/Cost
Average Balance
Interest
Average
Yield/Cost
Assets
Interest-earning assets:
Interest-earning deposits
$
15,187
$
286
3.77
%
$
215,622
$
872
0.81
%
Securities
327,178
4,363
2.67
%
180,220
1,347
1.49
%
Loans receivable (1)
782,101
17,633
4.51
%
655,260
14,083
4.30
%
FRB and FHLB stock
11,175
401
7.18
%
2,668
78
5.85
%
Total interest-earning assets
1,135,641
$
22,683
3.99
%
1,053,770
$
16,380
3.11
%
Non-interest-earning assets
67,953
95,848
Total assets
$
1,203,594
$
1,149,618
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits
$
125,603
$
1,703
2.71
%
$
202,414
$
383
0.38
%
Savings deposits
61,201
29
0.09
%
64,641
21
0.06
%
Interest checking and other demand deposits
237,668
164
0.14
%
261,354
81
0.06
%
Certificate accounts
149,550
956
1.28
%
200,244
214
0.21
%
Total deposits
574,022
2,852
0.99
%
728,653
699
0.19
%
FHLB advances
165,521
3,464
4.19
%
58,738
427
1.45
%
Other borrowings
72,973
825
2.26
%
68,185
44
0.13
%
Total borrowings
238,494
4,289
3.60
%
126,923
471
0.74
%
Total interest-bearing liabilities
812,516
$
7,141
1.76
%
855,576
$
1,170
0.27
%
Non-interest-bearing liabilities
112,281
106,760
Stockholders’ equity
278,797
187,282
Total liabilities and stockholders’ equity
$
1,203,594
$
1,149,618
Net interest rate spread (2)
$
15,542
2.24
%
$
15,210
2.84
%
Net interest rate margin (3)
2.74
%
2.89
%
Ratio of interest-earning assets to interest-bearing liabilities
139.77
%
123.16
%
(1)
Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs and loan premiums.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
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Credit loss provision
For the three months ended June 30, 2023, the Company recorded a provision for credit loss under the Current Expected Credit Loss (“CECL”) methodology of $768 thousand , compared to a loan loss provision recapture under the previously used incurred loss model of $577 thousand for the three months ended June 30, 2022. For the six months ended
June 30, 2023, the Company recorded a provision for credit losses of $810 thousand , compared to a loan loss provision recapture of $429 thousand for the six months ended
June 30, 2022. The increases in the provisions for credit losses during the three and six months ended June 30, 2023 were due to growth in our loan portfolio and increases in loans rated as watch and special mention, which require additional
provision for credit losses. The provisions for credit losses during the three and six months ended June 30, 2023 include provisions for off-balance sheet loan commitments of $83 thousand and $37 thousand, respectively. The loan loss provision
recaptures during the second quarter and six months ended June 30, 2022 were due to the Company’s capital contribution of $75 million to the Bank in June 2022, which reduced the multi-family and commercial real estate loan concentration levels,
and thereby, the risk associated with the qualitative factors used to estimate the required allowance for loan and lease losses (“ALLL”) at that time.
The ACL increased to $7.0 million as of June 30, 2023, compared to $4.4 million as of December 31, 2022. The increase was
primarily due to the implementation of the CECL methodology adopted by the Bank effective January 1, 2023, which increased the ACL by $1.8 million. In addition, the Bank recorded an additional increase in the provision for credit losses of $685
thousand and $773 thousand during the three and six months ended June 30, 2023, respectively. The CECL methodology includes estimates of expected loss rates over the remaining life of loans in the portfolio, whereas the former ALLL methodology
did not.
The Bank had no non-accrual loans at June 30, 2023. No loan charge-offs were recorded
during the three or six months ended June 30, 2023 or June 30, 2022.
Non-interest Income
Non-interest income for the second quarter of 2023 totaled $260 thousand, compared to $261
thousand for the second quarter of 2022.
For the first six months of 2023, non-interest income totaled $549 thousand, compared to $542 thousand for the same period in the prior year. The increase was primarily due to an
increase of $70 thousand in fees from a revenue sharing agreement with another financial institution and an increase in branch services fees of $14 thousand for the first six months of 2023, compared to the first six months of 2022. These
increases were partially offset by lower management fees from new market tax credit projects of $76 thousand in the first six months of 2023.
Non-interest Expense
Total non-interest expense was $6.4 million for the second quarter of 2023, representing an increase of 2.5% from $6.3 million for the second quarter of 2022. The increase of $155 thousand was
primarily due to higher compensation and benefits expense of $427 thousand and supervisory costs of $101 thousand. These increases were partially offset by a decrease in professional services expense of $351 thousand
and a decrease of $22 thousand in various other operating expenses.
For the first six months of 2023, non-interest expense totaled $12.7 million, representing an increase of 4.0% from $12.2 million for the same period in the prior year. The
increase of $447 thousand primarily resulted from increases in compensation and benefits expense of $557 thousand, public relations expense of $60 thousand, trade organization expense of $55 thousand, Delaware franchise taxes of $46 thousand,
occupancy expense of $46 thousand, supervisory costs of $38 thousand and various other operating expenses of $37 thousand. These increases were partially offset by decreases in professional services expense of $210 thousand and IT consulting costs
of $182 thousand.
Income Taxes
Income taxes are computed by applying the statutory federal income tax rate of 21% and the combined California and Washington, D.C. income tax rate of 9.75% to taxable income. The Company recorded
income tax expense of $93 thousand for the second quarter of 2023 and $757 thousand for the second quarter of 2022. The decrease in tax expense reflected a decrease of $2.3 million in pre-tax income between the two periods. The effective tax rate
was 27.43% for the second quarter of 2023, compared to 29.00% for the second quarter of 2022.
For the six months ended June 30, 2023, income tax expense was $767 thousand, compared to $1.1 million for the six months ended June 30, 2022. The decrease in tax
expense reflected a decrease in pretax earnings of $1.3 million between the two periods. The effective tax rate was 29.41% for the six months ended June 30, 2023 , compared to 28.32% for the six months ended
June 30, 2022 .
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Financial Condition
Total Assets
Total assets increased by $47.1 million at June 30, 2023, compared to December 31, 2022, reflecting growth in loans receivable held for investment of $56.6 million, partially offset by a decrease
of securities available-for-sale of $6.2 million and a decrease of cash and cash equivalents of $5.4 million.
Securities Available-For-Sale
Securities available-for-sale totaled $322.5 million at June 30, 2023, compared with $328.7 million at December 31, 2022. The $6.2 million of decrease in securities
available-for-sale during the six months ended June 30, 2023 was primarily due to principal paydowns of $6.8 million, offset by increases in the carrying value of $511 thousand due to the amortization of net discounts and $77 thousand due to
improvement in the fair value of the securities.
The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of June 30, 2023. The table reflects stated final maturities
and does not reflect scheduled principal payments or expected payoffs.
June 30, 2023
One Year or Less
More Than One Year
to Five Years
More Than Five
Years to Ten Years
More Than Ten
Years
Total
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
(Dollars in thousands)
Available‑for‑sale:
Federal agency mortgage‑backed securities
$
4,871
3.70
%
$
1,339
1.54
%
$
9,957
1.39
%
$
53,761
2.57
%
$
69,928
2.46
%
Federal agency CMO
–
–
553
0.85
%
8,018
4.39
%
15,808
3.53
%
24,379
3.75
%
Federal agency debt
9,843
2.88
%
32,232
1.93
%
9,700
2.99
%
–
–
51,775
2.31
%
Municipal bonds
–
–
2,209
1.62
%
562
1.78
%
1,498
1.78
%
4,269
1.69
%
U.S. Treasuries
39,006
2.73
%
121,807
2.85
%
–
–
–
–
160,813
2.82
%
SBA pools
–
–
128
6.54
%
2,153
2.76
%
9,071
2.80
%
11,352
2.84
%
Total
$
53,720
2.84
%
$
158,268
2.63
%
$
30,390
2.80
%
$
80,138
2.77
%
$
322,516
2.72
%
Loans Receivable
Loans receivable held for investment, net of the ACL, increased by $56.6 million to $824.6 million at June 30, 2023, compared to $768.0 million at December 31, 2022.
The increase was primarily due to loan originations of $98.2 million during the first six months of 2023, which consisted of $38.6 million of multi-family loans, $36.6 million of construction loans and $23.0 million of other commercial
loans, offset in part by loan payoffs and repayments of $41.6 million.
The following tables presents loan categories by maturity for the period indicated. Actual repayments historically have, and will likely in the future, differ significantly from
contractual maturities because individual borrowers generally have the right to prepay loans, with or without prepayment penalties.
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Table of Contents
June 30, 2023
One Year or
Less
More Than
One Year to
Five Years
More Than
Five Years to
15 Years
More Than
15 Years
Total
(Dollars in thousands)
Loans receivable held for investment:
Single family
$
2,286
$
10,250
$
2,548
$
10,868
$
25,952
Multi-family
10,180
19,097
8,362
491,530
529,169
Commercial real estate
10,770
58,752
44,987
13,520
128,029
Church
3,368
6,880
3,165
–
13,413
Construction
5,065
48,546
23,724
–
77,335
Commercial - other
14,482
19,946
4,159
13,002
51,589
SBA loans
–
3,112
148
2,464
5,724
Consumer
–
–
–
30
$
46,181
$
166,583
$
87,093
$
531,384
$
831,241
Loans maturities after one year with:
Fixed rates
Single family
$
9,723
$
1,803
$
6,214
$
17,740
Multi-family
15,039
3,419
–
18,458
Commercial real estate
52,477
25,185
10,724
88,386
Church
4,222
–
–
4,222
Construction
28,153
21,523
–
49,676
Commercial - other
4,535
3,070
10,764
18,369
SBA loans
2,457
–
2,464
4,921
Consumer
–
–
–
–
$
116,606
$
55,000
$
30,166
$
201,772
Variable rates
Single family
$
527
$
745
$
4,654
$
5,926
Multi-family
4,058
4,943
491,530
500,531
Commercial real estate
6,275
19,802
2,796
28,873
Church
2,658
3,165
–
5,823
Construction
20,393
2,201
–
22,594
Commercial - other
15,411
1,089
2,238
18,738
SBA loans
655
148
–
803
Consumer
–
–
–
–
$
49,977
$
32,093
$
501,218
$
583,288
Total
$
166,583
$
87,093
$
531,384
$
785,060
Certain multi-family loans have adjustable rate features based on SOFR, but are fixed for the first five years. Our experience has shown that these loans typically payoff during the
first five years and do not reach the adjustable rate phase. Multi-family loans in their initial fixed period totaled $24.3 million or 2.93% of our loan portfolio as of June 30, 2023.
Allowance for Credit Losses
Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326 – Financial Instruments-Credit Losses , to determine
the ACL. ASC 326 requires the Company to recognize estimates for lifetime losses on loans and off-balance sheet loan commitments at the time of origination or acquisition. The recognition of losses at origination or acquisition represents the
Company’s best estimate of the lifetime expected credit loss associated with a loan given the facts and circumstances associated with the particular loan, and involves the use of significant management judgment and estimates, which are subject to
change based on management’s on-going assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses the WARM method when determining estimates for the ACL for each of its portfolio
segments. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its
own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter.
Since historical information (such as historical net losses) may not always, by itself, provide a sufficient basis for determining future expected credit losses, the Company
periodically considers the need for qualitative adjustments to the ACL.
The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist
of loans on nonaccrual status, loans that have recently been modified in response to a borrower’s deteriorating financial condition, loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans, and
other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, may be deemed to no longer possess risk characteristics similar to other loans in
the loan portfolio, because the specific attributes and risks associated with the loan have likely become unique as the credit quality of the loan deteriorates. As such, these loans may require individual evaluation to determine an appropriate ACL
for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. The ACL for collateral
dependent loans is determined using estimates of the fair value of the underlying collateral, less estimated selling costs.
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The estimation of the appropriate level of the ACL requires significant judgment by management. Although management uses the best information available to make these estimations,
future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Changes in management’s estimates of forecasted net losses could materially change the level
of the ACL. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process. Such agencies may require the Company to recognize additions to the ACL based
on judgments different from those of management.
The ACL, formerly known as the allowance for loan losses, was $7.0 million or 0.85% of gross loans held for investment at June 30, 2023, compared to an ALLL of $4.4 million, or
0.57% of gross loans held for investment, at December 31, 2022.
There were no recoveries or charge-offs recorded during either the three or six month period ending June 30, 2023 and 2022.
Collateral dependent loans at June 30, 2023 were $6.8 million, which had an associated ACL of $119 thousand.
There were no delinquent loans greater than 30 days delinquent as of June 30, 2023 and December 31, 2022.
There were no non-performing loans as of June 30, 2023 compared to $144 thousand as of December 31, 2022. Non-performing loans consist of delinquent loans that are 90 days or more
past due and other loans, including loans modified in response to a borrower's financial difficulty, that do not qualify for accrual status.
We believe that the ACL is adequate to cover currently expected losses in the loan portfolio as of June 30, 2023, but there can be no assurance that actual losses will not exceed
the estimated amounts. The OCC and the Federal Deposit Insurance Corporation (“FDIC”) periodically review the ACL as an integral part of their examination process. These agencies may require an increase in the ACL based on their judgments of the
information available to them at the time of their examinations.
The following table details our allocation of the ALLL to the various categories of loans held for investment and the percentage of loans in each category to total loans at the
dates indicated:
June 30, 2023
December 31, 2022
June 30, 2022
Amount
Percent of
Loans in
Each
Category to
Total
Loans
Amount
Percent of
Loans in
Each
Category to
Total
Loans
Amount
Percent of
Loans in
Each
Category to
Total
Loans
(Dollars in thousands)
Single family
$
247
3.12
%
$
109
3.89
%
$
120
5.02
%
Multi‑family
4,255
63.67
%
3,273
65.08
%
2,278
62.45
%
Commercial real estate
1,012
15.40
%
449
14.85
%
153
13.13
%
Church
83
1.44
%
65
2.04
%
48
3.18
%
Construction
788
9.30
%
313
5.27
%
221
5.57
%
Commercial
585
7.07
%
175
8.87
%
138
10.64
%
Consumer
–
–
4
–
4
0.01
%
Total allowance for loan losses
$
6,970
100.00
%
$
4,388
100.00
%
$
2,962
100.00
%
Goodwill and Intangible Assets
The core deposit intangible asset is amortized on an accelerated basis reflecting the pattern in which the economic benefits of the intangible asset are consumed or otherwise used
up. The estimated life of the core deposit intangible is approximately 10 years. During the three months ended June 30, 2023 and 2022, the Company recorded $97 thousand and $108 thousand, respectively, of amortization expense related to the core
deposit intangible. During the six months ended June 30, 2023 and 2022, the Company recorded $195 thousand and $217 thousand, respectively, of amortization expense related to the core deposit intangible.
An assessment of goodwill impairment was performed by a third party as of December 31, 2022, in which no impairment was determined. No impairment charges were recorded during the
six months ended June 30, 2023 or 2022, for goodwill or the core deposit intangible.
Total Liabilities
Total liabilities increased by $49.2 million to $953.9 million at June 30, 2023 from $904.6 million at December 31, 2022, largely due to an increase in FHLB borrowings which was
partially offset by a decrease in deposits.
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Table of Contents
Deposits
Deposits decreased by $40.9 million to $646.1 million at June 30, 2023, from $686.9 million at December 31, 2022, with $29.4 million of the decrease occurring in the first quarter of 2023. The
decrease in deposits was attributable to decreases of $36.7 million in liquid deposits (demand, interest checking and money market accounts), $17.8 million in Insured Cash Sweep (“ICS”) deposits (ICS deposits are the Bank’s money market deposit accounts in excess of FDIC insured limits whereby the Bank makes reciprocal arrangements for insurance with other banks), $6.4 million in other certificates of deposit accounts and $1.9 million of savings deposits, partially offset by an increase of $22.0 million in Certificate of Deposit Registry Service (“CDARS”) deposits (CDARS deposits are similar to ICS deposits, but involve certificates of deposit,
instead of money market accounts). The decrease in deposits was primarily due to customers who left the Bank for higher interest rates available elsewhere. As of June 30, 2023, our uninsured deposits, including
deposits from affiliates, represented approximately 38% of our total deposits, as compared to approximately 31% as of December 31, 2022.
The following table presents the maturity of time deposits as of the dates indicated:
Three
Months or
Less
Three to Six Months
Six Months
to One Year
Over One
Year
Total
(In thousands)
June 30, 2023
Time deposits of $250,000 or less
$
44,630
$
35,440
$
29,822
$
16,023
$
125,915
Time deposits of more than $250,000
3,603
7,927
7,137
6,062
24,729
Total
$
48,233
$
43,367
$
36,959
$
22,085
$
150,644
Not covered by deposit insurance
$
1,603
$
5,176
$
4,887
$
5,063
$
16,729
December 31, 2022
Time deposits of $250,000 or less
$
30,244
$
23,155
$
49,461
$
4,281
$
107,141
Time deposits of more than $250,000
27,912
–
–
–
27,912
Total
$
58,156
$
23,155
$
49,461
$
4,281
$
135,053
Not covered by deposit insurance
$
17,913
$
–
$
–
$
–
$
17,913
Borrowings
Total borrowings increased by $89.8 million to $295.6 million at June 30, 2023, from $205.8 million at December 31, 2022, due to a net increase of $81.9 million in
advances from the FHLB of Atlanta and $7.9 million in additional securities sold under agreements to repurchase.
At June 30, 2023 and December 31, 2022, the Company had outstanding advances from the FHLB totaling $210.3 million and $128.3 million, respectively. The weighted interest rate was
4.74% and 3.74% as of June 30, 2023 and December 31, 2022, respectively. The weighted average contractual maturity was 3 months and 13 months as of June 30, 2023 and December 31, 2022, respectively. The advances were collateralized by loans with a
fair value of $446.3 million at June 30, 2023 and $328.1 million at December 31, 2022. The Company is currently approved by the FHLB of Atlanta to borrow up to 25% of total assets to the extent the Company provides qualifying collateral and holds
sufficient FHLB stock. Based on collateral pledged and FHLB stock as of June 30, 2023, the Company was eligible to borrow an additional $120.8 million as of June 30, 2023.
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may
transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized
financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated statements of financial condition,
while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement
liabilities. These agreements mature on a daily basis. As of June 30, 2023 securities sold under agreements to repurchase totaled $71.4 million at an average rate of 3.01%. The market value of securities pledged totaled $86.3 million as of June
30, 2023. As of December 31, 2022, securities sold under agreements to repurchase totaled $63.5 million at an average rate of 0.38%. The market value of securities pledged totaled $64.4 million as of December 31, 2022.
One relationship accounted for 76% of our balance of securities sold under agreements to repurchase as of June 30, 2023. We expect to maintain this relationship for the foreseeable
future.
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Table of Contents
In connection with the New Market Tax Credit activities of the Company, CFC 45 is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. This CDE acts in
effect as a pass-through for a Merrill Lynch allocation totaling $14.0 million that needed to be deployed. In December 2015, Merrill Lynch made a $14.0 million non-recourse loan to CFC 45, whereby CFC 45 passed that loan through to a QALICB. The
loan to the QALICB is secured by a Leasehold Deed of Trust that, due to the pass-through, non-recourse structure, is operationally and ultimately for the benefit of Merrill Lynch rather than CFC 45. Debt service payments received by CFC 45 from the
QALICB are passed through to Merrill Lynch in return for which CFC 45 receives a servicing fee. The financial statements of CFC 45 are consolidated with those of the Company.
Stockholders’ Equity
Stockholders’ equity was $277.3 million, or 22.5%, of the Company’s total assets, at June 30, 2023, compared to $279.5 million, or 23.6% of the Company’s total assets
at December 31, 2022. Upon adoption of CECL on January 1, 2023, the Company recognized a net decrease in retained earnings of $1.3 million. S tockholders’ equity also decreased due to an increase in unearned
shares in the employee stock ownership plan of $2.8 million. These decreases were offset by year-to-date net earnings of $1.8 million and a reduction of $54 thousand in the accumulated other comprehensive loss, net of tax. Book value per share
was $1.71 at June 30, 2023 and $1.76 at December 31, 2022.
During the first quarter of 2022, the Company completed the exchange of all the Series A Fixed Rate Cumulative Redeemable Preferred Stock, with an aggregate liquidation value of $3
million, plus accrued dividends, for 1,193,317 shares of Class A Common Stock at an exchange price of $2.51 per share of Class A Common Stock.
During the second quarter of 2022, the Company closed a private placement of shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C
(“Series C Preferred Stock”), pursuant to a Purchase Agreement with the United States Department of the Treasury (the “Purchaser”) as part of the Emergency Capital Investment Program (“ECIP”), which has provided funding to Minority Depository
Institutions and Community Development Financial Institutions to increase access to capital for underserved communities that may have been disproportionately impacted by the economic effects of the COVID-19 pandemic. Pursuant to the Purchase
Agreement, the Purchaser acquired an aggregate of 150,000 shares of Series C Preferred Stock for an aggregate purchase price equal to $150.0 million in cash, which is intended to qualify as Tier 1 Capital.
In December of 2022, the Company issued a $5 million line of credit the Employee Stock Ownership Plan to purchase additional shares of Company stock for the Plan. In December of 2022, the ESOP purchased 466,955 shares of the Company’s common stock at an average cost of $1.07 per share for a total cost of $500 thousand and during the first six months of 2023 the ESOP purchased 2,369,086 shares of the
Company’s stock at an average cost of $1.18 per share for a total cost of $2.8 million.
During the second quarter of 2023, the Company issued 741,758 shares of restricted stock to its officers and employees based on performance during 2022 under the Amended LTIP and,
during the first quarter of 2022, the Company issued 495,262 shares of restricted stock to its officers and employees based on performance during 2021 undet the LTIP. All the shares issued to officers and employees vest over periods ranging from 36
months to 60 months.
During the first quarter of 2023 and the first quarter of 2022, the Company issued 73,840 and 47,187 shares of stock, respectively to its directors which were fully vested.
Tangible book value per common share is a non-GAAP measurement that excludes goodwill and the net unamortized core deposit intangible asset, which were both originally
recorded in connection with the merger. The Company uses this non-GAAP financial measure to provide supplemental information regarding the Company’s financial condition and operational performance. A reconciliation between book value and tangible
book value per common share is shown as follows:
Common Equity
Capital
Shares Outstanding
Per Share
Amount
(Dollars in thousands)
June 30, 2023:
Common book value
$
127,289
74,237,227
$
1.71
Less:
Goodwill
25,858
Net unamortized core deposit intangible
2,306
Tangible book value
$
99,125
74,237,227
$
1.34
December 31, 2022:
Common book value
$
129,482
73,432,517
$
1.76
Less:
Goodwill
25,858
Net unamortized core deposit intangible
2,501
Tangible book value
$
101,123
73,432,517
$
1.38
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Table of Contents
Liquidity
The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet our obligations on a timely and cost-effective basis. The Bank’s
sources of funds include deposits, advances from the FHLB, other borrowings, proceeds from the sale of loans and investment securities, and payments of principal and interest on loans and investment securities. The Bank is currently approved by the
FHLB of Atlanta to borrow up to 25% of total assets, or $343.9 million, to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. Based on FHLB stock held and collateral pledged as of June 30, 2023, the Bank had the
ability to borrow an additional $120.8 million from the FHLB of Atlanta. In addition, the Bank had additional lines of credit of $10.0 million with other financial institutions as of June 30, 2023. The Bank had unpledged securities of $241.4
million as of June 30, 2023 which could be used as collateral for borrowings from the Federal Reserve Bank under the Bank Term Funding Program.
The Bank’s primary uses of funds include originations of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and the payment of operating
expenses. Also, when the Bank has more funds than required for reserve requirements or short-term liquidity needs, the Bank invests in federal funds with the Federal Reserve Bank or in money market accounts with other financial institutions. The
Bank’s liquid assets at June 30, 2023 consisted of $10.7 million in cash and cash equivalents and $241.4 million in securities available-for-sale that were not pledged, compared to $16.1 million in cash and cash equivalents and $250.3 million in
securities available-for-sale that were not pledged at December 31, 2022. Currently, we believe the Bank has sufficient liquidity to support growth over the next twelve months and in the longer term.
The Bank has a significant concentration of deposits with one customer that accounted for approximately 9% of its deposits as of June 30, 2023. The Bank also has a significant
concentration of short-term borrowings from one customer that accounted for 76% of the outstanding balance of securities sold under agreements to repurchase as of June 30, 2023. The Bank expects to maintain its relationships with these customers
for the foreseeable future.
The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the private placement completed in June of 2022 and previous
private placements. The Bank is currently under no prohibition to pay dividends to the Company, but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines.
The Company recorded consolidated net cash outflows from investing activities of $53.7 million during the six months ended June 30, 2023, compared to consolidated net cash outflows
from investing activities of $91.5 million during the six months ended June 30, 2022. Net cash outflows from investing activities for the six months ended June 30, 2023 were primarily due to the funding of new loans, net of repayments, of $58.7
million and purchases of FHLB stock of $3.8 million, partially offset by proceeds from principal paydowns on available-for-sale securities of $6.8 million. Net cash outflows from investing activities during the six months ended June 30, 2022 were
primarily due to purchases of investment securities of $104.7 million, partially offset by $9.2 million in proceeds from principal paydowns on available-for-sale securities and $3.4 million in net payoffs of loans receivable, net of new loans
originated.
The Company recorded consolidated net cash inflows from financing activities of $46.2 million during the six months ended June 30, 2023, compared to consolidated net cash inflows of
$140.4 million during the six months ended June 30, 2022. Net cash inflows from financing activities during the six months ended June 30, 2023 were primarily due to proceeds from FHLB advances of $82.0 million along with a net increase in
securities sold under agreements to repurchase of $7.9 million, partially offset by a decrease in deposits of $40.9 million. Net cash inflows from financing activities during the six months ended June 30, 2022 were primarily attributable to
proceeds from the private placement of preferred stock of $150.0 million, a net increase in deposits of $28.1 million and a net increase of $15.3 million in securities sold under agreements to repurchase, partially offset by net of repayments of
FHLB advances of $53.0 million.
Capital Resources and Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of June 30, 2023 and December 31, 2022, the Bank exceeded all capital adequacy requirements to which it
is subject and meets the qualifications to be considered “well capitalized.” (See Note 10 – Stockholders’ Equity and Regulatory Matters.)
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Table of Contents
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.