What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-20 compared with 2023-08-14 · 274 added, 234 removed, 270 unchanged (65% of the section changed)

20 unchanged sentences

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

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:

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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:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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.

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

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assumptions or in market conditions could significantly affect the estimates.

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

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.

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.

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.

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.

Out - of - Period Adjustments

Following the quarter ended September 30 , 2023, the Company

performed a review of internal controls over financial reporting, encompassing an examination of financial reporting processes.

During this assessment and while preparing financial statements for the three and nine months ended September 30, 2023,

certain previously unrecorded adjustments totaling $8 thousand , net of tax expense, increasing net income were identified pertaining to prior periods.

In accordance with SEC Staff Accounting Bulletin Nos.

these adjustments were evaluated both individually and collectively.

Following this assessment, these adjustments were immaterial to both historical and current reporting

Consequently, the Company determined that no amendment to the previously filed reports was warranted.

However, the Company addressed these prior period adjustments and incorporated them into its financial statements for the three and nine months ended September 30, 2023.

These adjustments are included in the other expense line on the consolidated statements of operations and comprehensive income (loss).

Total assets increased by $53.

5 million to $1.2 billion at September 30, 2023 from December 31, 2022, primarily due to growth in loans receivable

held for investment of $67.3 million , partially offset by a decrease of securities available-for-sale of $12.3 million and a decrease of cash and cash equivalents of $4.6

Loans held for investment, net of the ACL, increased by $67.3 million to $835.4 million at September 30, 2023, compared to $768.0 million at

December 31, 2022.

The increase was primarily due to loan originations of $ 112.2 million during the first nine months of 2023, which consisted of $ 47.4 million of multi-family loans, $36.6 million of construction loans , $15.0 million of other commercial loans and $13.2 million of commercial real estate loans , offset in part by loan payoffs and repayments of $ 44.9 million.

Deposits decreased by $15.4 million to $671.5 million at September 30, 2023, from $686.9 million at December 31, 2022, with $29.4 million of the decrease occurring in the first quarter and $11.5

million in the second quarter, partially offset by an increase of $25.5 million in the third quarter.

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 September 30, 2023, our uninsured deposits, including deposits from affiliates,

represented 37% of our total deposits, as compared to 31% as of December 31, 2022.

Total borrowings increased by $71.7 million to $277.5 million at September 30, 2023, from $205.8 million at December 31, 2022, primarily due to a net increase of

$59.4 million in advances from the FHLB and $12.3 million in additional securities sold under agreements to repurchase.

For the three months ended September 30, 2023, the Company reported net earnings of $ 91 thousand compared to net earnings of $1.3 million for the three months ended September 30, 2022.

The decrease resulted from a decline in pretax earnings of

$1.8 million primarily due to a decrease in net interest income of $1.8 million during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and a $909 thousand increase in non-interest expense, partially offset by a $1.0 million decrease

in the provision for credit losses and a $495 thousand decrease in tax expense .

For the nine months ended September 30, 2023, the Company reported net earnings of $1.9 million compared to net earnings of $4.1

million for the nine months ended September 30, 2022.

The decrease resulted from a decline in pretax earnings of $3.1 million primarily due to a decrease in net interest income of $1.5 million during the first nine months of 2023 compared to the

first nine months of 2022, an increase in non-interest expense of $1.4 million and an increase in the provision for credit losses of $216 thousand .

This decrease in pretax earnings was

offset by an $848 thousand decrease in income tax expense.

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.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Net interest income before provision for credit losses for the

third quarter of 2023 totaled $6.8 million, representing a decrease of $1.8 million, or 21.3%, from net interest income before loan loss provision of $8.6 million for the third quarter of 2022.

The decrease resulted from additional interest

expense, primarily due to an increase in the cost of average borrowings of 4.07% and an increase in the cost of average deposits of 1.

22 % during the third quarter of 2023, compared to the third quarter of 2022.

In addition, the decrease in net interest income before provision for credit losses was caused by an increase in

average borrowings of $151.8 million during the third quarter of 2023, compared to the third quarter of 2022, which was due to a decrease in average deposits of $123.

7 million during the third quarter of 2023.

The net interest margin decreased to 2.33% for the third quarter of 2023, compared to 3.02% for the third quarter of 2022,

primarily due to an overall increase of 216 basis points in the average cost of funds, which reflected higher rates paid on deposits and borrowings because of the eleven increases in interest rates implemented by the Federal Open Market

Committee of the Federal Reserve (the “Federal Reserve” or “FRB”) since the middle of March of 2022 through September of 2023.

The impact of the rising cost of funds was partially offset by an increase in the yield on interest-earnings assets

of 85 basis points, primarily due to higher rates earned on interest-bearing deposits

in other banks and the loan portfolio, partially offset by lower rates earned on FRB and FHLB of Atlanta stock.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Net interest income before provision for credit losses for the nine months ended September 30, 2023, totaled $22.3 million,

representing a decrease of $1.5 million, or 6.3%, from net interest income before loan loss provision of $23.8 million for the nine months ended September 30, 2022.

The decrease resulted from higher interest expense, primarily due to an increase

in the cost of borrowings and deposits, and to a lesser extent, from an increase in average borrowings, which was needed to offset deposit outflows.

The net interest margin decreased to 2.60% for the nine months ended September 30, 2023,

compared to 2.93% for the nine months ended September 30, 2022, primarily due to an overall increase of 332 basis points in the average cost of funds, which reflected the

higher rates that the Bank paid on deposits and borrowings because of the interest rate increases implemented by the FRB.

The decrease in net interest income before provision for credit losses was partially offset by growth of $62.6 million in

average interest-earning assets during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

In addition, the overall rate earned on interest-earning assets increased by 87 basis points as the Bank earned higher rates on interest-earning deposits, securities, and, to a lesser extent, the loan portfolio.

The following tables set forth the average balances, average yields and costs, and certain other information for the periods indicated.

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these loans is included in the total average balance of loans receivable, which has the effect of reducing average loan yields.

For the Three Months Ended

June 30, 2023

June 30, 2022

(Dollars in Thousands)

For the Three Months Ended

September 30, 2023

September 30, 2022

Average Balance

Average Yield/Cost

Average Balance

Average Yield/Cost

Interest-earning assets:

Interest-earning deposits

Interest-bearing deposits in other banks

Loans receivable (1)

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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)

For the Nine Months Ended

September 30, 2023

September 30, 2022

Average Balance

Average Yield/Cost

Average Balance

Average Yield/Cost

Interest-earning assets:

Interest-earning deposits

Interest-bearing deposits in other banks

Loans receivable (1)

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Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

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

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.

Credit Loss Recapture/Provision

For the three months ended September 30, 2023, the Company recorded a

recapture of credit losses under the Current Expected Credit Loss (“CECL”) methodology of $2 thousand , compared to a loan loss provision under the previously used incurred loss model of $1.0 million for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, the Company recorded a

provision for credit loss of $808 thousand , compared to a loan loss

provision of $592 thousand for the nine months ended September 30, 2022.

The provision for credit losses during the third quarter ended September 30, 2023, decreased by $1.0 million compared to the third quarter ended September 30, 2022, due to

a decline in loan origination volume.

The Bank originated $14.0 million in loans during the third quarter of 2023 compared to $101.6 million in loans during the third quarter of 2022.

The provision for credit losses increased by $216 thousand

during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to an increase in loans rated as watch and special mention, which require additional provisions for credit losses.

Provisions for credit

losses during the third quarter and nine months ended September 30, 2023, include provisions for off-balance sheet loan commitments of $ 69 thousand and $ 106 thousand,

respectively.

The ACL increased to $6.9 million as of September 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 to the provision

recorded during the nine months ended September 30, 2023 mentioned above.

The CECL methodology includes estimates of expected loss rates in the future, whereas the former ALLL methodology did not.

The Bank had no non-accrual loans at September 30, 2023.

Loan delinquencies for 30 days or more, but less than 90 days, increased to $1.2 million at September

30, 2023, compared to none at December 31, 2022.

There were no loans past due by greater than 90 days at either September 30, 2023 or December 31, 2022.

No loan charge-offs

were recorded during the three or nine months ended September 30, 2023 or 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.

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 income for the third quarter of 2023 totaled $331 thousand, compared to $365

thousand for the third quarter of 2022.

Non-interest income totaled $880 thousand for the first nine months

of 2023, compared to $907 thousand for the first nine months of 2022.

The decrease was due to lower management fees from new market tax credit projects and l ower grant income received from the U.S.

Treasury’s Community Development Financial Institutions Fund in the first nine months of 2023.

decreases were partially offset by fees from a revenue sharing agreement with another financial institution and an increase in branch services fees for the first nine months of 2023, compared to the first nine months of 2022.

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.

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.

Total non-interest expense was $7.0 million for the third quarter of 2023, representing an increase of $909 thousand, or 15.0%, from $6.1 million

for the third quarter of 2022.

The increase was primarily due to higher compensation and benefits expense of $940 thousand and supervisory costs of $153 thousand, partially

offset by a decrease in professional services expense of $232 thousand.

Non-interest expense totaled $19.

7 million for the first nine

months of 2023, representing an increase of $1.4 million, or 7.4 %, from $18.3 million for the first nine months of 2022.

The increase primarily resulted from increases in

compensation and benefits expense of $1.5 million , supervisory costs of $191 thousand and occupancy costs of $145 thousand.

These increases were partially offset by decreases in professional services expense

of $442 thousand and information services expense of $216 thousand.

The increase in compensation and benefits expense was primarily attributable

to additional full-time employees that the Bank hired over the past twelve months in various production and administrative support positions.

These hires were part of the Company’s overall

efforts to expand its operational capabilities to strategically grow its balance sheet and fulfill the intersecting lending objectives of the Company’s mission and the

funding received from the Emergency Capital Investment Program of the United States Department of the Treasury.

A portion of the increase in compensation expenses during the quarter and first nine months of 2023 pertained to recruiting expenses.

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 .

income tax rate

of 9.75% to taxable income.

The Company recorded income tax expense of $ 39 thousand for the third quarter of 2023 and $534 thousand for the third quarter of 2022.

The effective

tax rate was 31.2 % for the third quarter of 2023, compared to 28.40% for the third quarter of 2022.

For the nine months ended September 30, 2023, income tax expense

was $ 806 thousand , compared to $1.7 million for the nine months ended September 30,

The effective tax rate was 29.50 % for the nine months ended September 30, 2023 ,

compared to 28.35% for the nine months ended September 30, 2022 .

Financial Condition

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.

Total assets increased by $53.

5 million at September 30, 2023, compared to

December 31, 2022, reflecting growth in loans receivable held for investment of $67.3 million and growth in FHLB stock of $3.6 million, partially offset by a decrease of securities available-for-sale of $12.3 million and a decrease of cash and

cash equivalents of $4.6 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

Securities available-for-sale totaled $316.4 million at September 30, 2023, compared with $328.7 million at December 31, 2022.

$12.3 million decrease in securities available-for-sale during the nine months ended September 30, 2023 was primarily due to principal paydowns of $10.5 million and a decline in the fair value of securities of $2.6 million, partially offset by

increases in the carrying value of $778 thousand due to the amortization of net discounts.

The table below presents the carrying amount, weighted average yields

and contractual maturities of our securities as of September 30, 2023.

The table reflects stated final maturities and does not reflect scheduled principal payments or expected payoffs.

The average duration of the portfolio is 2.4 years at September 30, 2023.

September 30, 2023

One Year or Less

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More Than Ten

Weighted Average

(Dollars in thousands)

5 unchanged sentences

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.

Loans receivable held for investment, net of the ACL, increased by

$67.3 million to $835.4 million at September 30, 2023, compared to $768.0 million at December 31, 2022.

The increase was primarily due to loan originations of $ 112.2

million during the first nine months of 2023, which consisted of $ 47.4 million of multi-family loans, $36.6 million of construction loans , $15.0 million of other commercial loans and $13.2 million of commercial real estate loans , offset in part by loan payoffs and

repayments of $ 44.9 million.

The following tables present 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.

June 30, 2023

September 30, 2023

Five Years to

12 unchanged sentences

Commercial - other

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.

Certain multi-family loans have adjustable-rate features based on the

Secured Overnight Financing Rate 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.

However, in the current high

interest rate environment, we have seen more borrowers maintain their loans instead of paying them off due to interest rate caps which make the adjusted interest rate on their existing loan more desirable than getting a new loan at current

interest rates.

Multi-family loans in their initial fixed period totaled $458.6 million or 54.5% of our loan portfolio as of September 30, 2023.

Allowance for Credit Losses

14 unchanged sentences

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.

Such loans may, in the opinion of management, 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

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.

The ACL for collateral dependent

loans is determined using estimates of the fair value of the underlying collateral, less estimated selling costs.

The estimation of the appropriate level of the ACL requires significant judgment by management.

5 unchanged sentences

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

The ACL, formerly known as the allowance for loan losses, was $6.9 million or 0.82% of gross loans held for investment at September 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.

There were no recoveries or charge-offs recorded during either the three or nine month periods ending September 30, 2023 and 2022.

Collateral dependent loans at September 30, 2023 totaled $6.4 million, which had no associated ACL.

Loan delinquencies less than 30 days increased to $10.5 million at September 30, 2023 compared to $8.3 million at December 31, 2022.

Loan delinquencies greater than 30 days delinquent, but less

than 90 days delinquent, increased to $1.2 million at September 30, 2023 compared to none at December 31, 2022.

There were no non-performing loans as of September 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 September 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.

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

September 30, 2023

December 31, 2022

June 30, 2022

September 30, 2022

(Dollars in thousands)

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Commercial real estate

Commercial and SBA

Total allowance for loan losses

2 unchanged sentences

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.

During the three months ended September 30, 2023 and 2022, the Company recorded $98 thousand and $109 thousand, respectively, of amortization expense related to the

core deposit intangible.

During the nine months ended September 30, 2023 and 2022, the Company recorded $293 thousand and $326 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.

nine months ended September 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.

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.

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.

Total liabilities increased by $58.0 million to $962.

million at September 30, 2023 from $904.6 million at December 31, 2022, largely due to an increase in FHLB borrowings of $59.4 million and an increase in securities sold under

agreements to repurchase of $12.3 million, which was partially offset by a decrease in deposits of $15.4 million .

Deposits decreased by $15.4 million to $671.5 million at September 30, 2023, from $686.9 million at December 31, 2022, with decreases of $29.5 million in the first quarter and $11.5 million in the

second quarter, partially offset by an increase of $25.4 million in the third quarter.

The decrease in deposits was attributable to decreases of $21.1 million in liquid deposits (demand, interest checking and money market accounts), $10.5 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), and $5.8

million of savings deposits, partially offset by an increase of $18.0 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) and $4.0 million in other certificates of deposit accounts .

The decrease in deposits was primarily due to customers who left the Bank for higher interest rates available

As of September 30, 2023, our uninsured deposits, including deposits from affiliates, represented approximately 37% 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 to Six Months

(In thousands)

June 30, 2023

September 30, 2023

Time deposits of $250,000 or less

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Not covered by deposit insurance

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.

At September 30, 2023 and December 31, 2022, the Company had outstanding advances from the FHLB totaling $187.7 million and $128.3

million, respectively.

The weighted interest rates were 4.42% and 3.74% as of September 30, 2023 and December 31, 2022, respectively.

The weighted average contractual maturity

was 13 months as of both September 30, 2023 and December 31, 2022, respectively.

The advances were collateralized by loans with a fair value of $457.3 million at September 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 September 30, 2023, the Company was

eligible to borrow an additional $154.3 million as of September 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.

transfer legal control over the assets but still retain effective control through an agreement that both entitles and obliges the Company to repurchase the assets.

As a result, these repurchase agreements are accounted for as collateralized

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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

As of September 30, 2023 securities sold under agreements to repurchase totaled $75.8 million at an average rate of 3.06%.

The fair value of securities pledged totaled $71.0 million as of

September 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

The fair value of securities pledged totaled $64.4 million as of December 31, 2022.

One relationship accounted for 77% of our balance of securities sold under agreements to repurchase as of September 30, 2023.

We expect to maintain this relationship for the

foreseeable future.

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.

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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.

Stockholders’ equity was $275.

0 million, or 22.2%, of the Company’s total assets, at September 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.

S tockholders’ equity also decreased primarily due to the purchase of unearned

shares for the employee stock ownership plan of $3.

4 million and an increase of $1.9 million in the accumulated other comprehensive loss, net of tax.

These decreases

were offset by year-to-date net earnings of $1.9 million.

Book value per share was $13.

48 at September 30, 2023 and $14.11 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

5 unchanged sentences

Agreement, the Purchaser acquired an aggregate of 18,750 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.

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 58,369 shares of the Company’s common stock at an average cost of $8.56 per share for a total cost of $500

thousand , and during the first nine months of 2023 the ESOP purchased 369,949 shares of

the Company’s stock at an average cost of $9.19 per share for a total cost of $3.4 million.

During the second quarter of 2023, the Company issued 92,720 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.

during the first quarter of 2022, the Company issued 61,908 shares of restricted stock to its officers and employees based on performance during 2021 under the LTIP.

All the shares issued to officers and employees vest over periods ranging from 36

1 unchanged sentence

During the first quarter of 2023 and the first quarter of 2022, the Company issued 9,230 and 5,898 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.

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 CFBanc 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:

A reconciliation

between common book value and tangible book value per common share is shown as

Common Equity

Shares Outstanding

(Dollars in thousands)

June 30, 2023:

September 30, 2023:

Common book value

5 unchanged sentences

Tangible book value

All common stock share

amounts and per share amounts above have been retroactively adjusted for the 1-for-8

reverse stock split effective November 1, 2023.

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.

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.

sources of funds include deposits, advances from the FHLB and 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 September 30, 2023, the Bank

had the ability to borrow an additional $154.3 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 September 30, 2023.

The Bank had unpledged securities of

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.

$231.6 million as of September 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

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.

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.

Bank’s liquid assets at September 30, 2023 consisted of $11.5 million in cash and cash equivalents and $231.6 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

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.

The Bank had commitments to fund $15.1 million in loans that were approved but unfunded as of September 30 , 2023.

In addition, the bank had $6.4 million in unfunded line of credit loans and $45.9 million in unfunded construction loans as of September 30, 2023.

The Bank has a significant concentration of deposits with five

customers that accounted for approximately 21 % of its deposits as of September 30, 2023.

The Bank also has a significant concentration of short-term borrowings with one customer that accounted for 77% of the outstanding balance of securities sold under agreements to repurchase as of September 30, 2023.

The Bank has long-term relationships with these customers and expects to maintain its relationships with them 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 from paying 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 $61.5 million during the nine months ended September 30, 2023, compared to consolidated net cash

outflows from investing activities of $275.5 million during the nine months ended September 30, 2022.

Net cash outflows from investing activities for the nine months ended September 30, 2023 were primarily due to the funding of new loans, net of

repayments, of $70.0 million and purchases of FHLB stock of $7.5 million, partially offset by proceeds from principal paydowns on available-for-sale securities of $10.5 million.

Net cash outflows from investing activities during the nine months

ended September 30, 2022 were primarily due to purchases of investment securities of $215.5 million and funding of new loans, net of repayments, of $74.2 million, partially offset by $13.9 million in proceeds from principal paydowns on

available-for-sale securities.

The Company recorded consolidated net cash inflows from financing activities of $52.9 million during the nine months ended

September 30, 2023, compared to consolidated net cash inflows of $90.9 million during the nine months ended September 30, 2022.

Net cash inflows from financing activities during the nine months ended September 30, 2023 were primarily due to

proceeds from FHLB advances of $329.0 million along with a net increase in securities sold under agreements to repurchase of $12.3 million, partially offset by repayments of FHLB advances of $269.6 million and a net decrease in deposits of $15.

Net cash inflows from financing activities during the nine months ended September 30, 2022 were primarily attributable to proceeds from the private placement of

preferred stock of $150.0 million and a net increase of $13.

9 million in securities sold under agreements to repurchase, partially offset by repayments of FHLB advances of

$53.0 million and a net decrease in deposits of $19.5 million.

Capital Resources and Regulatory Capital

6 unchanged sentences

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.)

As of September 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.)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis