Examiner-in-Charge School Feb 2024

MATTERS REQUIRING BOARD ATTENTION (MRBA)

PROFITABILITY

Management has complied with the Supervisory requirement to prepare a Profit Plan annually; however, plans have not yet resulted in the adequate generation of core operating profits. The institution remains unprofitable due to a combination of asset mix, narrowing net interest margin, and high overhead expenses. The Board should review all elements of institution earnings thoroughly and prepare future profit plans with the goal of restoring profitability through changes to the asset and liability mix, overhead expenses, and/or non-interest income. Failure to restore profitability will limit the institution’s ability to support holding company debt payments, augment capital, and provide a cushion for interest rate risk exposure.

EXAMINER COMMENTS AND CONCLUSIONS (ECC)

EARNING - 3

Earnings are less than satisfactory. The institution remains structurally unprofitable, and core earnings have been negative or negligible the last five years. Further, earnings projections indicate that near-term profits, while improving, will not be sufficient to provide for organizational needs. The sustained poor earnings performance and weak income projections indicate that further efforts are needed to improve profitability to levels sufficient for operational and Holding Company debt service needs. The reported September 30, 2023, Return on Average Assets ratio of 1.00 percent falls to negative 0.02 percent when adjusted to exclude nonrecurring items that include realized securities losses of $40,000 and allowance for credit loss (ACL) reverse provisions of $943,000. Refer to the Matters Requiring Board Attention pages for recommendations to address underlying earnings deficiencies. In accordance with Generally Accepted Accounting Principles (GAAP), management should record a $150,000 contingent loss expense that has been deemed probable related to the Leon Smith lawsuit. This expense will further reduce current year earnings.

CFO Johnnie Yale provided examiners with the accounting entries to signify that the contingent loss expense was recorded on November 17, 2023.

Despite loan growth realized during 2023, interest rate sensitivity, caused primarily by exposure to longer-term assets, has prevented meaningful earnings improvement. The Net Interest Margin (NIM) of 3.03 percent has declined from 3.11 percent at year-end 2022 (ratio adjusted for nonrecurring interest recoveries that totaled $539,000).

Noninterest expenses remain elevated ……

Budgeting practices have improve; however, projected 2024 profits of $40,000 are insufficient to support operating needs….

Chairman Barbara Royal stated that she believes earnings will continue to improve as expenses related to loan collections, litigation, and consultants decline. President Jack Casey stated that the key to improving profitability is growing loans but that he and the Board are committed to maintain strong credit quality.

*Comment sections have been omitted for the purposes of this CSBS Course.

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