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, 2023. 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; therefore, you are encouraged to review
each of the policies included in Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in our 2023 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
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 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.
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.
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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.
Fair values are estimated using relevant market information and other assumptions, as more fully disclosed in Note 7 “Fair Value” 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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Overview
Total assets decreased by $4.9 million to $1.4 billion at March 31, 2024 from December 31, 2023, primarily due to decreases in cash and cash equivalents of $38.1
million and securities available-for-sale of $23.7 million, partially offset by growth in loans receivable held for investment of $46.0 million and other assets of $9.9 million.
Total liabilities decreased by $4.3 million to $1.1 billion at March 31, 2024 from December 31, 2023. The decrease in total liabilities primarily consisted of decreases of $14.0
million in notes payable, $1.8 million in securities sold under agreements to repurchase, and $1.3 million in accrued expenses and other liabilities, which were partially offset by an increase in deposits of $12.9 million.
During the first quarter of 2024, net interest income decreased by $750 thousand, or 9.1%, compared to the first quarter of 2023. This decrease resulted from additional interest
expense, primarily due to an overall increase of 156 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 as well as to
growth of $165.8 million in average interest-earning liabilities from the quarter ended March 31, 2023. This decrease was partially offset by an increase in interest income due to a 46 basis point increase in the overall rate earned on
interest-earning assets as the Bank earned higher rates on interest-earning deposits, securities and the loan portfolio.
In addition, total non-interest expense increased by $1.6 million during the first quarter of 2024 compared to the first quarter of 2023, primarily due to increases of
$905 thousand in non-recurring professional services and $648 thousand in compensation and benefits. Partially offsetting this increase was a decrease in income tax expense of $731 thousand, which reflected a decrease of $2.5 million in
pre-tax income between the two periods.
For the first quarter of 2024, the Company reported a net loss of $162 thousand compared to net income of $1.6 million for the first quarter of 2023.
Results of Operations
Net Interest Income
Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
Net interest income before provision for credit losses for the first quarter of 2024 totaled $7.5 million, representing a decrease of $750 thousand, or 9.1%, from net interest income
before loan loss provision of $8.3 million for the first quarter of 2023. The decrease resulted from additional interest expense, primarily due to an increase in the cost of average borrowings of 1.65% and an increase in the cost of average deposits
of 1.05% during the first quarter of 2024, compared to the first quarter of 2023. In addition, the decrease in net interest income before provision for credit losses was caused by an increase in average borrowings of $165.8 million during the first
quarter of 2024, compared to the first quarter of 2023, which was due to the $100.0 million BTFP borrowing in December 2023 and an increase of $64.1 million in average FHLB advances during the first quarter of 2024. The net interest margin decreased
to 2.27% for the first quarter of 2024, compared to 2.96% for the first quarter of 2023, primarily due to an overall increase of 156 basis points in the average cost of funds, which reflected higher rates paid on deposits and borrowings because of
the increases in interest rates implemented by the Federal Open Market Committee of the Federal Reserve (the “Federal Reserve” or “FRB”) between March 2022 and September 2023. The impact of the rising cost of funds was partially offset by an
increase in the yield on interest-earnings assets of 46 basis points, primarily due to higher rates earned on interest-bearing deposits in other banks, securities and the loan portfolio.
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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For the Three Months Ended
March 31, 2024
March 31, 2023
(Dollars in Thousands)
Average Balance
Interest
Average Yield/Cost
Average Balance
Interest
Average Yield/Cost
Assets
Interest-earning assets:
Interest-bearing deposits
$
99,103
$
1,344
5.42
%
$
17,044
$
119
2.79
%
Securities
305,615
2,075
2.72
%
328,767
2,180
2.65
%
Loans receivable (1)
909,965
11,129
4.89
%
762,669
8,666
4.55
%
FRB and FHLB stock
13,733
245
7.14
%
10,665
209
7.84
%
Total interest-earning assets
1,328,416
$
14,793
4.45
%
1,119,145
$
11,174
3.99
%
Non-interest-earning assets
52,561
67,947
Total assets
$
1,380,977
$
1,187,092
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits
$
125,704
$
1,444
4.59
%
$
134,047
$
771
2.30
%
Savings deposits
59,056
102
0.69
%
61,317
13
0.08
%
Interest checking and other demand deposits
227,504
143
0.25
%
239,024
77
0.13
%
Certificate accounts
163,116
1,110
2.72
%
147,260
442
1.20
%
Total deposits
575,380
2,799
1.95
%
581,648
1,303
0.90
%
FHLB advances
209,299
2,598
4.97
%
145,201
1,454
4.01
%
Bank Term Funding Program borrowing
100,000
1,203
4.81
%
–
–
–
%
Other borrowings
77,601
669
3.45
%
69,618
143
0.82
%
Total borrowings
386,900
4,470
4.62
%
214,819
1,597
2.97
%
Total interest-bearing liabilities
962,280
$
7,269
3.02
%
796,467
$
2,900
1.46
%
Non-interest-bearing liabilities
137,035
109,955
Stockholders’ equity
281,662
280,670
Total liabilities and stockholders’ equity
$
1,380,977
$
1,187,092
Net interest rate spread (2)
$
7,524
1.43
%
$
8,274
2.54
%
Net interest rate margin (3)
2.27
%
2.96
%
Ratio of interest-earning assets to interest-bearing liabilities
138.05
%
140.51
%
(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.
Credit Loss Provision
For the three months ended March 31, 2024, the Company recorded a provision for credit losses of $260 thousand , compared to a provision for credit losses of $88 thousand for the three months ended March 31, 2023. The provision for credit losses during the quarter ended March 31, 2024 increased by $172 thousand compared to the
quarter ended March 31, 2023, due to an increase in loan origination volume. Since the Company has no historical loss rates of its own, it uses peer historical loss rates, which decreased during the first quarter of 2024 and caused the
Company to decrease the factor for historical losses in its computation, causing a decrease in the provision on certain loan categories. The provision for credit losses during the quarter-ended March 31, 2024, included
provisions for off-balance sheet loan commitments of $56 thousand.
The ACL increased to $7.6 million as of March 31, 2024, compared to $7.3 million as of December 31, 2023.
The Bank had non-accrual loans of $401 thousand at March 31, 2024, which were greater than 90 days past due. Loan delinquencies for 30 days or more, but less
than 90 days, decreased to $369 thousand at March 31, 2024, compared to $780 thousand at December 31, 2023. There were no loans past due by greater than 90 days at December 31, 2023. No loan charge-offs were recorded during the three months ended March 31, 2024 or 2023.
Non-interest Income
Non-interest income for the first quarter of 2024 totaled $306 thousand, compared to $289
thousand for the first quarter of 2023.
Non-interest Expense
Total non-interest expense was $7.8 million for the first quarter of 2024, representing an increase of $1.6 million, or 25.8%, from $6.2 million for the first quarter of 2023. The increase was
primarily due to higher non-recurring professional services expense of $905 thousand, and compensation and benefits expense of $648 thousand.
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The increase in professional services was primarily due to hiring a third party firm to assist with reviewing certain general ledger account reconciliations. 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.
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
an income tax benefit of $57 thousand for the first quarter of 2024 and income tax expense of $674 thousand for the first quarter of 2023. The decrease in tax expense reflected a decrease of $2.5 million in pre-tax income between the two periods.
The effective tax rate was 23.75% for the first quarter of 2024, compared to 29.70% for the first quarter of 2023.
Financial Condition
Total Assets
Total assets decreased by $4.9 million at March 31, 2024, compared to December 31, 2023, prima rily due to decreases in cash and cash equivalents of $38.1 million
and securities available-for-sale of $23.7 million, partially offset by growth in loans receivable held for investment of $46.0 million and other assets of $9.9 million.
Securities Available-For-Sale
Securities available-for-sale totaled $293.2 million at March 31, 2024, compared with $317.0 million at December 31, 2023. The $23.7 million decrease in securities available-for-sale
during the three months ended March 31, 2024 was primarily due to principal paydowns of $23.2 million.
The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of March 31, 2024. The table reflects stated final maturities and
does not reflect scheduled principal payments or expected payoffs.
March 31, 2024
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
$
4,979
2.82
%
$
1,302
1.42
%
$
9,025
1.54
%
$
48,724
2.61
%
$
64,030
2.58
%
Federal agency CMO
–
–
505
0.91
%
10,484
4.45
%
11,540
3.34
%
22,529
3.86
%
Federal agency debt
8,870
2.82
%
34,292
1.83
%
4,684
4.47
%
–
–
47,846
2.35
%
Municipal bonds
–
–
2,849
1.60
%
–
–
1,502
1.74
%
4,351
1.73
%
U.S. Treasuries
85,587
3.00
%
58,857
2.56
%
–
–
–
–
144,444
2.81
%
SBA pools
–
–
66
6.97
%
1,887
2.77
%
8,090
2.79
%
10,043
2.90
%
Total
$
99,436
2.95
%
$
97,871
2.53
%
$
26,080
3.05
%
$
69,856
2.84
%
$
293,243
2.75
%
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Loans Receivable
Loans receivable held for investment, net of the ACL, increased by $46.0 million to $926.5 million at March 31, 2024, compared to $880.5 million at December 31, 2023. The
increase was primarily due to loan originations of $71.5 million during the first three months of 2024, which consisted of $38.0 million of multi-family loans, $17.5 million of other commercial loans, $15.0 million of commercial real estate loans and
$1.0 million of construction loans, offset in part by loan payoffs and repayments of $25.5 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.
March 31, 2024
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
$
3,432
$
8,984
$
5,779
$
9,989
$
28,184
Multi-family
14,192
12,625
7,696
566,613
601,126
Commercial real estate
11,031
78,153
33,770
1,763
124,717
Church
4,412
3,057
5,104
–
12,573
Construction
26,586
37,569
26,178
–
90,333
Commercial - other
8,515
28,461
24,140
2,422
63,538
SBA loans
12
552
150
11,761
12,475
Consumer
14
–
–
–
14
$
68,194
$
169,401
$
102,817
$
592,548
$
932,960
Loans maturities after one year with:
Fixed rates
Single-family
$
8,627
$
3,595
$
6,140
$
18,362
Multi-family
8,282
4,177
–
12,459
Commercial real estate
73,370
22,135
–
95,505
Church
2,423
–
–
2,423
Construction
10,564
22,260
–
32,824
Commercial - other
13,461
23,076
221
36,758
SBA loans
15
–
–
15
Consumer
–
–
–
–
$
116,742
$
75,243
$
6,361
$
198,346
Variable rates
Single-family
$
357
$
2,184
$
3,849
$
6,390
Multi-family
4,343
3,519
566,613
574,475
Commercial real estate
4,783
11,635
1,763
18,181
Church
634
5,104
–
5,738
Construction
27,005
3,918
–
30,923
Commercial - other
15,000
1,064
2,201
18,265
SBA loans
537
150
11,761
12,448
Consumer
–
–
–
–
$
52,659
$
27,574
$
586,187
$
666,420
Total
$
169,401
$
102,817
$
592,548
$
864,766
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 $575.9 million or 61.7% of our loan portfolio as of March 31,
2024.
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Allowance for Credit Losses
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, 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.
The estimation of the appropriate level of the ACL requires significant judgment by management. Although management uses the best information available to make these estimates, 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 was $7.6 million, or 0.81% of gross loans held for investment at March 31, 2024, compared to an ACL of $7.3 million, or .83% of gross loans held for investment, at December
31, 2023.
There were no recoveries or charge-offs recorded during the three month periods ending March 31, 2024 and 2023.
Collateral dependent loans at both March 31, 2024 and December 31, 2023 totaled $6.4 million, which had an associated ACL of $112 thousand.
The Bank had non-accrual loans of $401 thousand at March 31, 2024, which were greater than 90 days past due. Loan delinquencies for 30 days or more, but less
than 90 days, decreased to $369 thousand at March 31, 2024, compared to $780 thousand at December 31, 2023. There were no loans past due by greater than 90 days at December 31, 2023. No loan charge-offs were recorded during the three months ended March 31, 2024 or 2023.
We believe that the ACL is adequate to cover currently expected losses in the loan portfolio as of March 31, 2024, 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.
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The following table details our allocation of the ACL to the various categories of loans held for investment and the percentage of loans in each category to total loans at the dates indicated:
March 31, 2024
December 31, 2023
March 31, 2023
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
$
298
3.02
%
$
260
2.79
%
$
261
3.74
%
Multi‑family
4,325
64.44
%
4,413
63.33
%
3,932
65.17
%
Commercial real estate
1,109
13.37
%
1,094
13.47
%
1,012
16.50
%
Church
90
1.35
%
72
1.43
%
92
1.79
%
Construction
956
9.68
%
932
10.14
%
593
7.56
%
Commercial and SBA
774
8.15
%
577
8.84
%
395
5.24
%
Consumer
–
–
–
–
–
–
Total allowance for loan losses
$
7,552
100.00
%
$
7,348
100.00
%
$
6,285
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 March 31, 2024 and 2023, the Company recorded $84 thousand and $98 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, 2023, in which no impairment was determined. No impairment charges were recorded during the
three months ended March 31, 2024 or 2023, for goodwill or the core deposit intangible.
Total Liabilities
Total liabilities decreased by $4.3 million to $1.1 billion at March 31, 2024 from December 31, 2023, largely due to decreases of $14.0 million in notes payable, $1.8 million in
securities sold under agreements to repurchase, and $1.3 million in accrued expenses and other liabilities, which were partially offset by an increase in deposits of $12.9 million.
Deposits
Deposits increased by $12.9 million to $695.5 million at March 31, 2024, from $682.6 million at December 31, 2023. The increase in deposits was attributable to increases of $15.0 million in liquid
deposits (demand, interest checking and money market accounts) and $12.4 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), partially offset by decreases of $12.2 million in Certificate of Deposit Registry Services (“CDARS”) deposits (CDARS deposits are similar to ICS deposits, but involve
certificates of deposit, instead of money market accounts), $1.7 million of savings deposits and $596 thousand in other certificates of deposit accounts . As of March 31, 2024, our uninsured deposits, including deposits from affiliates, represented approximately 38% of our total deposits, as compared to approximately 37% as of December 31, 2023.
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)
March 31, 2024
Time deposits of $250,000 or less
$
29,048
$
47,743
$
46,542
$
7,848
$
131,181
Time deposits of more than $250,000
4,314
4,877
6,979
7,857
24,027
Total
$
33,362
$
52,620
$
53,521
$
15,705
$
155,208
Not covered by deposit insurance
$
2,314
$
3,127
$
4,479
$
6,607
$
16,527
December 31, 2023
Time deposits of $250,000 or less
$
36,212
$
26,248
$
63,118
$
18,202
$
143,780
Time deposits of more than $250,000
4,609
3,904
6,895
8,128
23,536
Total
$
40,821
$
30,152
$
70,013
$
26,330
$
167,316
Not covered by deposit insurance
$
3,109
$
2,154
$
4,395
$
6,628
$
16,286
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Borrowings
At March 31, 2024 and December 31, 2023, the Company had outstanding advances from the FHLB totaling $209.3 million. The weighted interest rate was 4.91% as of both March 31, 2024 and
December 31, 2023. The weighted average contractual maturity was 2 months as of both March 31, 2024 and December 31, 2023. The advances were collateralized by loans with a fair value of $419.2 million at March 31, 2024 and $435.4 million at December
31, 2023. 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 March
31, 2024, the Company was eligible to borrow an additional $105.0 million as of March 31, 2024.
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 obliges 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 March 31, 2024 securities sold under agreements to repurchase totaled $71.7 million at an average rate of 3.62%. The fair value of securities pledged totaled $78.6 million as of March 31, 2024. As of
December 31, 2023, securities sold under agreements to repurchase totaled $73.5 million at an average rate of 2.60%. The fair value of securities pledged totaled $89.0 million as of December 31, 2023.
One relationship accounted for 86% of our balance of securities sold under agreements to repurchase as of March 31, 2024. 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. 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 was 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. This loan was paid off on January 18, 2024. The financial statements of CFC 45 are consolidated with those of the Company.
Stockholders’ Equity
Stockholders’ equity was $281.3 million, or 20.5%, of the Company’s total assets, at March 31, 2024, compared to $281.9 million, or 20.5% of the Company’s total assets
at December 31, 2023. S tockholders’ equity decreased primarily due to an increase of $571 thousand in accumulated other comprehensive loss, net of tax. Book value per share was $14.59 at March 31, 2024 and
$14.65 at December 31, 2023.
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. All the
shares issued to officers and employees vest over periods ranging from 36 months to 60 months.
On March 26, 2024, the Company issued 94,413 shares of restricted stock to its officers and employees under the Amended and Restated LTIP. Each restricted stock award was valued based
on the fair value of the stock on the date of the award.
During the first quarter of 2023, the Company issued 9,230 shares of stock to its directors which were fully vested.
All common stock share amounts and per share amounts above have been retroactively
adjusted, as applicable, for the 1-for-8 reverse stock split effective November 1, 2023. See Note 1 .
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 common book value
and tangible book value per common share is shown as follows:
Common Equity
Capital
Shares
Outstanding
Per Share
Amount
(Dollars in thousands)
March 31, 2024:
Common book value
$
131,292
9,001,613
$
14.59
Less:
Goodwill
25,858
Net unamortized core deposit intangible
2,027
Tangible book value
$
103,407
9,001,613
$
11.49
December 31, 2023:
Common book value
$
131,903
9,001,613
$
14.65
Less:
Goodwill
25,858
Net unamortized core deposit intangible
2,111
Tangible book value
$
103,934
9,001,613
$
11.55
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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 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 $284.3 million, to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. Based on FHLB stock held and collateral pledged as of March 31, 2024, the Bank had the
ability to borrow an additional $105.0 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 March 31, 2024. The Bank had unpledged securities of $107.5
million as of March 31, 2024 which could be used as collateral for borrowings from the Federal Reserve Bank under the BTFP.
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 March 31, 2024 consisted of $67.1 million in cash and cash equivalents and $107.5 million in securities available-for-sale that were not pledged, compared to $105.2 million in cash and cash equivalents and $173.3 million in
securities available-for-sale that were not pledged at December 31, 2023. Currently, we believe the Bank has sufficient liquidity to support growth over the next twelve months and in the longer term.
The Bank had commitments to fund $448 thousand in loans that were approved but unfunded as of March 31, 2024. In addition, the bank had $5.7 million in unfunded line of credit loans
and $49.3 million in unfunded construction loans as of March 31, 2024.
The Bank has a significant concentration of deposits with two customers that accounted for approximately 12% of its deposits as of March 31, 2024. The Bank also has a significant
concentration of short-term borrowings with one customer that accounted for 86% of the outstanding balance of securities sold under agreements to repurchase as of March 31, 2024. 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 $23.4 million during the three months ended March 31, 2024, compared to consolidated net cash outflows
from investing activities of $6.3 million during the three months ended March 31, 2023. Net cash outflows from investing activities for the three months ended March 31, 2024 were primarily due to the funding of new loans, net of repayments, of $46.4
million, partially offset by proceeds from principal paydowns on available-for-sale securities of $23.2 million. Net cash outflows from investing activities during the three months ended March 31, 2023 were primarily due to funding of new loans, net
of repayments, of $9.7 million, partially offset by $3.4 million in proceeds from principal paydowns on available-for-sale securities.
The Company recorded consolidated net cash outflows from financing activities of $3.0 million during the three months ended March 31, 2024, compared to consolidated net cash inflows
of $16.1 million during the three months ended March 31, 2023. Net cash outflows from financing activities during the three months ended March 31, 2024 were primarily due to the $14.0 million repayment of notes payable, partially offset by a net
increase in deposits of $12.9 million. Net cash inflows from financing activities during the three months ended March 31, 2023 were primarily attributable to proceeds from FHLB advances of $40.5 million, partially offset by a net decrease in deposits
of $29.4 million.
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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 March 31, 2024 and December 31, 2023, 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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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.