Message From the Chairman
Dear Shareholders:
I am pleased to forward our Annual Report for fiscal 2024 highlighting our financial results. Last year at this time, it was noted in the Chairman’s Message that, “Current general economic conditions do not seem to be improving and the Federal Open Market Committee (“FOMC”) has responded to higher inflation data by raising the federal funds rate to the highest level in 22 years and at the quickest pace in 40 years.” A year later and inflation numbers are finally starting to decline in a consistent manner. Like many others, we began the 2024 calendar year believing that rate cuts were likely and there would be multiple rate cuts in the year. Today, we are more than half way through the year and we are still waiting for the rate cuts to materialize. But we may finally start to see some rate relief as the FOMC has recently signaled that inflation is declining, which would allow for a less restrictive monetary policy. Throughout this last fiscal year, we have continued to be good stewards of our capital by executing a strategy that called for us to slow growth in a potential recessionary environment and work to ensure strong credit quality. This conservative credit culture has served us well in the past and continues to do so in the present, particularly in light of the elevated credit risk around commercial real estate loans.
Fiscal 2024
Overall, our fiscal 2024 financial results, described in the following Financial Highlights, reflected a decline in both net income and total assets compared to the prior year. Throughout fiscal 2024, operating conditions were challenging with the macroeconomic headwinds of an inverted yield curve, higher interest rates, high inflation, rising unemployment rates and modest gross domestic product growth. As a result, the Bank made the strategic decision to restrict loan growth and took a defensive position with the balance sheet, resulting in a lower balance of loans held for investment, but thereby limiting new exposures to credit risk. In addition, the deposit environment was highly competitive and depositors were actively seeking higher rates for their deposits. This resulted in a decline in our total deposits and an increase in our interest expense as we were competing to retain those relationships or replace them with higher cost funding sources.
Last year, we described that our fiscal 2024 Business Plan forecast disciplined growth in loans held for investment, growth in retail deposits (primarily core deposits), control of operating expenses, and sound capital management decisions. The Business Plan was predicated on the forecast of gradual rate cuts by the FOMC and the beginning of the return to a normally sloped yield curve.
But when the rate environment we envisioned did not materialize, we deviated from the Business Plan as it relates to loan growth. Loan originations and purchases for the held for investment portfolio were $75.5 million in fiscal 2024, a 68 percent decrease from the fiscal 2023 volume, and loan prepayments exceeded new loan origination volume resulting in a two percent decrease in loans held for investment. On the funding side, core deposits decreased by $115.1 million or 16 percent at June 30, 2024 from the same date last year as a result of depositors moving funds into higher yielding investment opportunities and were partially replaced with brokered certificates of deposit such that total deposits declined by seven percent. Operating expenses for fiscal 2024 increased by approximately one percent from the prior year resulting from the inflationary environment but were well-controlled. Last year, we mentioned our intent to expand our contingency funding sources and successfully executed that plan by increasing total borrowing capacity from all sources by approximately seven percent in comparison to the prior fiscal year. In addition, we paid a quarterly cash dividend of $0.14 per share in fiscal 2024 while repurchasing approximately 197,000 shares of our common stock under the stock repurchase plans. Our capital management activities resulted in an approximately 88 percent distribution of fiscal 2024 net income.
Fiscal 2025
Similar to fiscal 2024, we plan to emphasize measured growth in loans held for investment; the continued growth of retail deposits; disciplined control of operating expenses where we continue to improve operating efficiencies; and sound capital management decisions. We believe this is reasonable in a less restrictive monetary policy environment, where elevated interest rates and the inverted yield curve begin to reverse course and normalize. We currently plan to return capital to shareholders in the form of cash dividends and believe that maintaining our cash dividend is very important to shareholders. We also recognize that prudent capital returns through stock repurchase programs is an essential capital management tool that we will continue to use as a component of our capital management strategy. We remain committed to single-family, multi-family, and commercial real estate mortgage lending as our primary sources of asset growth and we will redeploy cash flows from investment securities to support the growth of our loan portfolio. Since we suspect that we are on the cusp of interest rate cuts by the FOMC, we believe there will be adjustments to the yield curve that will better support loan growth in the balance sheet at a lower cost of funds, and likely expansion in our net interest margin. This strategy is intended to improve core revenue, over time, through a higher net interest margin, higher net interest income and ultimately, coupled with the growth of the Company, an increase in net income.
A Final Word
As I think about the upcoming year framed by recent operating conditions, the word that comes to mind is resilience. The last few years have seen the world recovering from a once in a lifetime pandemic, banking industry turmoil in terms of elevated liquidity, interest rate and commercial real estate credit risks, and the highest rate of inflation in over 40 years. I would like to share a quote that I believe is apropos to our experience. “Everyone experiences tough times; it is a measure of your determination and dedication how you deal with them and how you can come through them.” – Lakshmi Mittal (Executive Chairman for ArcelorMittal, the world’s second largest steelmaking company). As we look to the next fiscal year, I want to assure you that we are determined and dedicated. We adjust our operating strategies on an ongoing basis to overcome challenging conditions but not in a way that jeopardizes our long-term viability in
