UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
For the fiscal year ended December 31, 2021
For the transition period from to___________
Commission file number 001-39043
BROADWAY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
4601 Wilshire Boulevard, Suite 150 Los Angeles, California 90010
(Address of principal executive offices) (Zip Code)
(323) 634-1700
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‐known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‐T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‐accelerated, a smaller reporting company, or an emerging growth
company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‐2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‐2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
State the aggregate market value of the voting and non‐voting common equity held by non‐affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $169,325,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of March 31, 2022, 45,788,946 shares of the Registrant’s Class A voting common stock, 11,404,618 shares of the Registrant’s Class B non-voting common stock and 15,768,172
shares of the Registrant’s Class C non‐voting common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2022 annual meeting of stockholders, which will be filed no later than May 2, 2022, are incorporated by
reference in Part III, Items 10 through 14 of this report.
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 1A. Risk Factors 24
Item 1B. Unresolved Staff Comments 31
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Mine Safety Disclosure 31
PART II
Item 6. Reserved
Item 8. Financial Statements and Supplementary Data 46
Item 9A. Controls and Procedures 46
Item 9B. Other information 47
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 47
PART III
Item 10. Directors, Executive Officers and Corporate Governance 48
Item 11. Executive Compensation 48
Item 14. Principal Accountant Fees and Services 48
PART IV
Item 15. Exhibits and Financial Statement Schedules 49
Signatures 51
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Forward‐Looking Statements
Certain statements herein, including without limitation, certain matters discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10‐K,
are forward‐looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, that reflect our current views with respect to
future events and financial performance. Forward‐looking statements typically include the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” and other similar expressions. These forward‐looking statements
are subject to risks and uncertainties, including those identified below, 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‐K. 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.
The following factors, among others, could cause future results to differ materially from historical results or from those indicated by forward‐looking statements included in this Form 10‐K: (1) the level of demand
for mortgage and commercial loans, which is affected by such external factors as general economic conditions, market interest rate levels, tax laws and the demographics of our lending markets; (2) the direction and magnitude of changes in interest
rates and the relationship between market interest rates and the yield on our interest‐earning assets and the cost of our interest‐bearing liabilities; (3) the rate and amount of loan losses incurred and projected to be incurred by us, increases in
the amounts of our nonperforming assets, the level of our loss reserves and management’s judgments regarding the collectability of loans; (4) changes in the regulation of lending and deposit operations or other regulatory actions, whether
industry-wide or focused on our operations, including increases in capital requirements or directives to increase loan loss allowances or make other changes in our business operations; (5) legislative or regulatory changes, including those that may
be implemented by the current Administration in Washington, D.C. and the Federal Reserve Board; (6) possible adverse rulings, judgments, settlements and other outcomes of
litigation; (7) problems that may arise in integrating the businesses of our pre-merger companies, which may result in the combined company not operating as effectively and efficiently as expected, or that we may not be able to successfully
integrate the businesses of our pre-merger companies; (8) actions undertaken by both current and potential new competitors; (9) the possibility of adverse trends in property values or economic trends in the residential and commercial real
estate markets in which we compete; (10) the effect of changes in economic conditions; (11) the effect of geopolitical uncertainties; (12) an inability to obtain and retain sufficient operating cash at our holding company; (13) the discontinuation
of LIBOR as an interest rate benchmark; (14) the impact of the COVID-19 pandemic on our future financial condition and operations; (15) other risks and uncertainties detailed in this Form 10‐K, including those described in part I. Item 1A. “Risk
Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ITEM 1. BUSINESS
General
Broadway Financial Corporation (the “Company”) was incorporated under Delaware law in 1995 for the purpose of acquiring and holding all of the outstanding capital stock of Broadway Federal Savings and Loan
Association (“Broadway Federal”) as part of the Broadway Federal’s conversion from a federally chartered mutual savings association to a federally chartered stock savings bank. In connection with the conversion, the Bank’s name was changed to
Broadway Federal Bank, f.s.b. The conversion was completed, and the Bank became a wholly‐owned subsidiary of the Company, in January 1996.
On April 1, 2021, the Company completed its merger (the “Merger”) with CFBanc Corporation (“CFBanc”), with the Company continuing as the surviving entity. Immediately following the Merger,
Broadway Federal Bank, f.s.b. (“Broadway Federal”) merged with and into City First Bank of D.C, National Association with City First Bank of D.C., National Association continuing as the surviving entity (combined with Broadway Federal, “City First”
or the “Bank”). Concurrently with the Merger, the Bank changed its name to City First Bank, National Association.
Concurrently with the completion of the Merger, the Company converted to become a public benefit corporation. The Company works to spur equitable economic development with a mission to
strengthen the overall well-being of historically excluded communities and has deployed loans and investments in the communities we serve that we believe has helped close funding gaps, preserved or increased access to affordable housing, created
and preserved jobs, and expanded critical social services. We believe our status as a Delaware public benefit corporation aligns our business model of creating social, economic, and environmental value for underserved communities with a
stakeholder governance model that allows us to give careful consideration to the impact of our decisions on workers, customers, suppliers, community, the environment, and our impact on society; and to align further our mission and values to our
organizational documents.
The Company is currently regulated by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is currently regulated by the Office of the Comptroller of the
Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Bank’s deposits are insured up to applicable limits by the FDIC. The Bank is also a member of the Federal Home Loan Bank of Atlanta (the “FHLB”). See
“Regulation” for further descriptions of the regulatory systems to which the Company and the Bank are subject.
Available Information
Our internet website address is www.cityfirstbank.com. Our annual reports on Form 10‐K, quarterly reports on Form 10‐Q, current reports on Form 8‐K and all amendments to those reports are available on our website as
soon as reasonably practicable after we file such material with, or furnish such material to, the Securities and Exchange Commission (the “SEC”) and can be obtained free of charge by sending a written request to Broadway Financial Corporation, 4160
Wilshire Boulevard, Suite 150, Los Angeles, California 90010 Attention: Audrey Phillips.
Business Overview
The Company is headquartered in Los Angeles, California and our principal business is the operation of our wholly‐owned subsidiary, City First, which has three offices: two in California (in Los Angeles and the
nearby city of Inglewood) and one in Washington, D.C. City First’s principal business consists of attracting deposits from the general public in the areas surrounding our branch offices and investing those deposits, together with funds generated
from operations and borrowings, primarily in mortgage loans secured by residential properties with five or more units (“multi‐family”) and commercial real estate. Our assets also include mortgage loans secured by residential properties with
one‐to‐four units (“single family”) as well as loans secured by commercial business assets. In addition, we invest in securities issued by federal government agencies, residential mortgage‐backed securities and other investments.
Our revenue is derived primarily from interest income on loans and investments. Our principal costs are interest expenses that we incur on deposits and borrowings, together with general and administrative expenses.
Our earnings are significantly affected by general economic and competitive conditions, particularly monetary trends, and conditions, including changes in market interest rates and the differences in market interest rates for the interest bearing
deposits and borrowings that are our principal funding sources and the interest yielding assets in which we invest, as well as government policies and actions of regulatory authorities.
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The ongoing COVID-19 pandemic (“Pandemic”) has caused significant disruption in the local, national and global economies and financial markets. Continuation and further spread of the Pandemic could cause additional
quarantines, shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The Pandemic could disrupt our operations through its impact on
our employees, depositors, borrowers, and the tenants of our multi-family loan borrowers. The disruptions in the economy may impair the ability of our borrowers to make their monthly loan payments, which could result in significant increases in
delinquencies, defaults, foreclosures, declining collateral values, and losses on our loans.
The Pandemic may also materially disrupt banking and other financial activity generally and in the areas in which the Bank operates. This may result in a decline in customer demand for our products and services,
including loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, operations, consolidated financial condition,
and consolidated results of operations.
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans which are secured by multi‐family residential properties, single family residential properties and commercial real estate, including charter schools,
community facilities, and churches. The remainder of the loan portfolio consists of commercial business loans, loans guaranteed by the Small Business Administration (the “SBA”) and construction-to-permanent loans. At December 31, 2021, our net loan
portfolio, excluding loans held for sale, totaled $648.5 million, or 59.3% of total assets.
We emphasize the origination of adjustable‐rate mortgage loans (“ARM Loans”), most of which are hybrid ARM Loans (ARM Loans having an initial fixed rate period, followed by an adjustable rate period), for our
portfolio of loans held for investment and held for sale. We originate these loans in order to maintain a high percentage of loans that have provisions for periodic repricing, thereby reducing our exposure to
interest rate risk. At December 31, 2021, more than 69% of our mortgage loans had adjustable rate features. However, most of our adjustable rate loans behave like fixed rate loans for periods of time because the loans may still be in their
initial fixed‐rate period or may be subject to interest rate floors.
The types of loans that we originate are subject to federal laws and regulations. The interest rates that we charge on loans are affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, including the FRB, and legislative tax policies.
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The following table details the composition of our portfolio of loans held for investment by type, dollar amount and percentage of loan portfolio at the dates indicated:
December 31,
(Dollars in thousands)
Plus:
Less:
Credit and interest marks on purchased loans, net 1842 - - - -
Multi‐Family and Commercial Real Estate Lending
Our primary lending emphasis has been on the origination of loans for apartment buildings with five or more units. These multi‐family loans amounted to $393.7 million and $272.4 million at December 31, 2021 and 2020,
respectively. Multi‐family loans represented 60.36% of our gross loan portfolio at December 31, 2021 compared to 75.24% of our gross loan portfolio at December 31, 2020. The vast majority of our multi‐family loans amortize over 30 years. As of
December 31, 2021, our single largest multi‐family credit had an outstanding balance of $6.8 million, was current, and was secured by a 33‐unit apartment complex in Vista, California. At December 31, 2021, the
average balance of a loan in our multi‐family portfolio was $1.1 million.
Our commercial real estate loans amounted to $93.2 million and $24.3 million at December 31, 2021 and 2020, respectively. Commercial real estate loans represented 14.29% and 6.71% of our gross loan portfolios at
December 31, 2021 and 2020, respectively. Most commercial real estate loans are originated with principal repayments on a 25- to 30-year amortization schedule but are due in 5 years or 10 years. As of
December 31, 2021, our single largest commercial real estate credit had an outstanding principal balance of $9.7 million, was current, and was secured by a charter school building located in Washington, D.C. At
December 31, 2021, the average balance of a loan in our commercial real estate portfolio was $866 thousand.
The interest rates on multi‐family and commercial ARM Loans are based on a variety of indices, including the Secured Overnight Financing Rate (“SOFR”), the 1‐Year Constant Maturity Treasury Index (“1‐Yr CMT”), the
12‐Month Treasury Average Index (“12‐MTA”), the 11th District Cost of Funds Index (“COFI”), and the Wall Street Journal Prime Rate (“Prime Rate”). All loans previously indexed to LIBOR were converted to SOFR as of December 31, 2021. We currently
offer adjustable rate loans with interest rates that adjust either semi‐annually or semi‐annually upon expiration of an initial three‐ or five‐year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans.
Loans secured by multi‐family and commercial properties are granted based on the income producing potential of the property and the financial strength of the borrower. The primary factors considered include, among
other things, the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to required principal and interest payments, or debt service), and the ratio
of the loan amount to the lower of the purchase price or the appraised value of the collateral.
We seek to mitigate the risks associated with multi‐family and commercial real estate loans by applying appropriate underwriting requirements, which include limitations on loan‐to‐value ratios and debt service
coverage ratios. Under our underwriting policies, loan‐to‐value ratios on our multi‐family and commercial real estate loans usually do not exceed 75% of the lower of the purchase price or the appraised value of the underlying property. We also
generally require minimum debt service coverage ratios of 120% for multi‐family loans and commercial real estate loans. Properties securing multi‐family and commercial real estate loans are appraised by management‐approved independent appraisers.
Title insurance is required on all loans.
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Multi‐family and commercial real estate loans are generally viewed as exposing the lender to a greater risk of loss than single family residential loans and typically involve higher loan principal amounts than loans
secured by single family residential real estate. Because payments on loans secured by multi‐family and commercial real properties are often dependent on the successful operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or general economy. Adverse economic conditions in our primary lending market area could result in reduced cash flows on multi‐family and commercial real estate loans, vacancies and reduced
rental rates on such properties. We seek to reduce these risks by originating such loans on a selective basis and generally restrict such loans to our general market area. In 2008, Broadway Federal ceased out‐of‐state lending for all types of
loans. As a result of the Merger, in 2021 we resumed out-of-state lending on a selective basis, however we currently do not have any loans outstanding that are outside of our market area, which consists of
Southern California and the Washington, D.C. area (including parts of Maryland and Virginia).
Our church loans totaled $22.5 million and $16.7 million at December 31, 2021 and 2020, respectively, which represented 3.45% and 4.60% of our gross loan portfolio at December 31, 2021 and 2020, respectively.
Broadway Federal ceased originating church loans in 2010 in Southern California, however City First originates loans to churches in the Washington D.C. area as part of its community development mission. As of
December 31, 2021, our single largest church loan had an outstanding balance of $3.8 million, was current, and was secured by a church building in Upper Marlboro, Maryland. At December 31, 2021, the average balance of a loan in our church loan
portfolio was $726 thousand.
Single Family Mortgage Lending
While we have historically been primarily a multi‐family and commercial real estate lender, we also
have purchased or originated loans secured by single family residential properties, including investor‐owned properties, with maturities of up to 30 years. Single family loans totaled $45.4
million and $48.2 million at December 31, 2021 and 2020, respectively. Of the single family residential mortgage loans outstanding at December 31, 2021, more than 51% had adjustable rate features. We did not purchase any single family loans
during 2021 and 2020. Of the $45.4 million of single family loans at December 31, 2021, $23.3 million are secured by investor‐owned properties.
The interest rates for our single family ARM Loans are indexed to COFI, SOFR, 12‐MTA and 1‐Yr. CMT. All loans previously indexed to LIBOR were converted to SOFR as of December 31, 2021. We currently offer loans with
interest rates that adjust either semi‐annually or semi‐annually upon expiration of an initial three‐ or five‐year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans. Most of our single family
adjustable rate loans behave like fixed rate loans because the loans are still in their initial fixed rate period or are subject to interest rate floors.
We qualify our ARM Loan borrowers based upon the fully indexed interest rate (SOFR or other index plus an applicable margin) provided by the terms of the loan. However, we may discount the initial rate paid by the
borrower to adjust for market and other competitive factors. The ARM Loans that we offer have a lifetime adjustment limit that is set at the time that the loan is approved. In addition, because of interest rate caps and floors, market rates may
exceed or go below the respective maximum or minimum rates payable on our ARM Loans.
The mortgage loans that we originate generally include due‐on‐sale clauses, which provide us with the contractual right to declare the loan immediately due and payable if the borrower transfers ownership of the
property.
Construction Lending
The Merger added a construction lending program
and portfolio to our existing lending operations and platform. Construction loans totaled $32.1 million and $429 thousand at December 31, 2021 and 2020, respectively, and represented 4.92% of our gross loan portfolio at December 31, 2021. We
acquired $19.8 million of construction loans in the Merger. We provide loans for the construction of single family, multi‐family and commercial real estate projects and for land development. We generally
make construction and land loans at variable interest rates based upon the Prime Rate, or the applicable Treasury Index plus a margin. Generally, we require a loan‐to‐value ratio not exceeding 75% and a loan‐to‐cost ratio not exceeding 85% on
construction loans.
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Construction loans involve risks that are different from those for completed project lending because we advance loan funds based upon the security and estimated value at completion of the project under construction.
If the borrower defaults on the loan, we may have to advance additional funds to finance the project’s completion before the project can be sold. Moreover, construction projects are affected by uncertainties inherent in estimating construction
costs, potential delays in construction schedules due to supply chain or other issues, market demand and the accuracy of estimates of the value of the completed project considered in the loan approval process. In addition, construction projects can
be risky as they transition to completion and lease‐up. Tenants who may have been interested in leasing a unit or apartment may not be able to afford the space when the building is completed, or may fail to lease the space for other reasons such as
more attractive terms offered by competing lessors, making it difficult for the building to generate enough cash flow for the owner to obtain permanent financing. We specialize in the origination of construction
loans for affordable housing developments where rents are subsidized by housing authority agencies. During 2021, we originated $24.9 million of construction loans, compared to $1.5 million of construction loan originations during 2020.
Commercial Lending
The Merger also expanded our portfolio of loans and lending activities to businesses in our market area that are secured by business assets including inventory, receivables, machinery, and equipment. As of December
31, 2021 and 2020, non-real estate commercial loans totaled $46.5 million and $57 thousand, respectively. Commercial loans represented 10.02% of our loan portfolio as of December 31, 2021. We acquired $36.1 million of commercial loans in the Merger, and originated another $26.5 million of commercial loans during the year ended December 31, 2021. As of December 31, 2021, our single largest commercial
loan had an outstanding balance of $4.3 million. At December 31, 2021, the average balance of a loan in our non-real estate commercial loan portfolio was $1.0 million.
The risks related to commercial loans differ from loans secured by real estate, and relate to the ability of borrowers to successfully operate their businesses and the difference between expected and actual cash
flows of the borrowers. In addition, the recoverability of our investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may
fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of our investment is dependent upon the borrower’s ability to collect amounts due from customers.
SBA Guaranteed Loans
City First is an approved SBA lender. We originate loans in the District of Columbia, Maryland, and Virginia under the SBA’s 7(a), SBA Express, International Trade and 504(a) loan programs, in conformity with SBA
underwriting and documentation standards. SBA loans are similar to commercial business loans but have additional credit enhancement provided by the U.S Federal Government with guarantees between 50-85%. Certain loans classified as SBA are secured
by commercial real estate property. All other SBA loans are secured by business assets. As of December 31, 2021, SBA loans totaled $18.8 million and included $18.0 million of loans issued under the Paycheck Protection Program (“PPP”) loans. PPP
loans have terms of two to five years and earn interest at 1%. PPP loans are fully guaranteed by the SBA and have virtually no risk of loss. The Bank expects the vast majority of the PPP loans to be fully forgiven by the SBA. SBA loans totaled
2.89%% of our total loan portfolio as of December 31, 2021. We had no such SBA or PPP loans as of December 31, 2020.
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Loan Originations, Purchases and Sales
The following table summarizes loan originations, purchases, sales, and principal repayments for the periods indicated:
(In thousands)
Gross loans (1):
Loans acquired in the merger with CFBanc 225,885 - -
Loans originated:
Less:
Loan charge‐offs - - ‐
Lower of cost or fair value adjustment on loans held for sale - - (11 )
Transfer of loans to real estate owned - - ‐
Loan originations are derived from various sources including our loan personnel, local mortgage brokers, and referrals from customers. More than 90% of multi-family loan
originations during 2021, 2020 and 2019 were sourced from wholesale loan brokers. All commercial real estate loans, construction loans, commercial loans and SBA loans were derived from our loan personnel. No single family or consumer loans were
originated during the last three years. For all loans that we originate, upon receipt of a loan application from a prospective borrower, a credit report is ordered, and certain other information is verified by an independent credit agency. If
necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required to be performed by an independent licensed or certified appraiser designated and approved by us. The Bank’s
Board of Directors (the “Board”) annually reviews our appraisal policy. Management reviews annually the qualifications and performance of independent appraisers that we use.
It is our policy to obtain title insurance on collateral for all real estate loans. Borrowers must also obtain hazard insurance naming the Bank as a loss payee prior to loan closing. If the original loan amount
exceeds 80% on a sale or refinance of a first trust deed loan, we may require private mortgage insurance and the borrower is required to make payments to a mortgage impound account from which we make disbursements to pay private mortgage insurance
premiums, property taxes and hazard and flood insurance as required.
Each loan requires at least two (2) signatures for approval. The Board has authorized loan approval limits for various management team members up to $7 million per individual, and up to $12 million for the Chief
Executive. Loans in excess of $7 million require review and approval by members of the Board Loan Committee. In addition, it is our practice that all loans approved be reported to the Loan Committee no later than the month following their approval
and be ratified by the Board.
From time to time, we purchase loans originated by other institutions based upon our investment needs and market opportunities. The determination to purchase specific loans or pools of loans is subject to our
underwriting policies, which consider, among other factors, the financial condition of the borrowers, the location of the underlying collateral properties and the appraised value of the collateral properties. We
did not purchase any loans during the years ended December 31, 2021, 2020 or 2019.
We originate loans for investment and for sale. Loan sales are generally made from the loans held‐for‐sale portfolio. During 2021, we did not originate or sell any loans that were classified as held for sale. During
2020, we originated $118.6 million of multi‐family loans for sale, sold $104.3 million of multi‐family loans and transferred $13.7 million of multi-family loans to held for investment from loans held for sale. We transferred the $13.7 million of
multi-family loans to loans held for investment near the end of 2020 because there was room to do so within the regulatory loan concentration guidelines. Loans are generally sold with the servicing released.
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Loan Maturity and Repricing
The following table shows the contractual maturities of loans in our portfolio of loans held for investment at December 31, 2021 and does not reflect the effect of prepayments or scheduled principal amortization.
Amounts Due:
After one year:
All loan types other than multi-family loans have fixed interest rates. 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 pay off during the first five years and do not reach the adjustable rate phase. Multi-family loans in their initial fixed rate period totaled $326.0 million or 50% of our loan portfolio at December 31, 2021.
Asset Quality
General
The underlying credit quality of our loan portfolio is dependent primarily on each borrower’s ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value
of the collateral securing the loan, if any. A borrower’s ability to pay, in the case of single family residential loans and consumer loans, typically is dependent primarily on employment and other sources of income. Multi‐family and commercial
real estate loan borrowers’ ability to pay is typically dependent on the cash flow generated by the property, which in turn is impacted by general economic conditions. Commercial business and SBA loan borrowers’ ability to pay is typically
dependent on the successful operation of their businesses or their ability to collect amounts due from their customers. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrower’s ability to
make loan payments. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, property maintenance and collection or foreclosure delays.
Delinquencies
We perform a weekly review of all delinquent loans and a monthly loan delinquency report is made to the Internal Asset Review Committee of the Board of Directors. When a borrower fails to make a required payment on a
loan, we take several steps to induce the borrower to cure the delinquency and restore the loan to current status. The procedures we follow with respect to delinquencies vary depending on the type of loan, the type of property securing the loan,
and the period of delinquency. In the case of residential mortgage loans, we generally send the borrower a written notice of non‐payment promptly after the loan becomes past due. In the event payment is not received promptly thereafter, additional
letters are sent, and telephone calls are made. If the loan is still not brought current and it becomes necessary for us to take legal action, we generally commence foreclosure proceedings on all real property securing the loan. In the case of
commercial real estate loans, we generally contact the borrower by telephone and send a written notice of intent to foreclose upon expiration of the applicable grace period. Decisions not to commence foreclosure upon expiration of the notice of
intent to foreclose for commercial real estate loans are made on a case‐by‐case basis. We may consider loan workout arrangements with commercial real estate borrowers in certain circumstances.
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The following table shows our loan delinquencies by type and amount at the dates indicated:
Loans delinquent Loans delinquent Loans delinquent
(Dollars in thousands)
Commercial Real Estate 1 $ 2,423 - $ - - $ ‐ - $ - - $ ‐ - $ ‐
Single family - $ - ‐ $ - - $ - ‐ $ - 1 $ 18 ‐ $ -
Total 1 $ 2,423 ‐ $ - - $ - ‐ $ - 1 $ 18 ‐ $ ‐
Non‐Performing Assets
Non‐performing assets (“NPAs”) include non‐accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure (“REO”). NPAs at December 31, 2021 decreased to $684 thousand, or 0.06% of total
assets, from $787 thousand, or 0.16% of total assets, at December 31, 2020.
Non-accrual loans consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings (“TDRs”) that do not qualify for accrual status. As of December 31, 2021, all
our non‐accrual loans were current in their payments, but were treated as non‐accrual primarily because of deficiencies in non‐payment matters related to the borrowers, such as lack of current financial information. The $103 thousand decrease in
non‐accrual loans during the year ended December 31, 2021 was the result of payments received from borrowers that were applied to the outstanding principal balance.
The following table provides information regarding our non‐performing assets at the dates indicated:
December 31,
(Dollars in thousands)
Non‐accrual loans:
Single family $ - $ 1 $ 18 $ - $ -
Multi‐family ‐ ‐ ‐ ‐ ‐
Commercial real estate ‐ ‐ ‐ ‐ ‐
Commercial ‐ ‐ ‐ ‐ ‐
Loans delinquent 90 days or more and still accruing ‐ ‐ ‐ ‐ ‐
Real estate owned acquired through foreclosure - - - 833 878
There were no accrual loans that were contractually past due by 90 days or more at December 31, 2021 or 2020. We had no commitments to lend additional funds to borrowers whose loans were on non‐accrual status at
December 31, 2021.
We discontinue accruing interest on loans when the loans become 90 days delinquent as to their payment due date (missed three payments). In addition, we reverse all previously accrued and uncollected interest for
those loans through a charge to interest income. While loans are in non‐accrual status, interest received on such loans is credited to principal, until the loans qualify for return to accrual status. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
We may from time to time agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is
considered a TDR. Non‐accrual loans modified in a TDR remain on non‐accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the
restructured terms, generally for a period of at least six months. Loans modified in a TDR that are included in non‐accrual loans totaled $684 thousand at December 31, 2021 and $232 thousand at December 31, 2020.
Excluded from non‐accrual loans are restructured loans that were not delinquent at the time of modification or loans that have complied with the terms of their restructured agreement for six months or such longer period as management
deems appropriate for particular loans, and therefore have been returned to accruing status. Restructured accruing loans totaled $1.6 million at December 31, 2021 and $4.2 million at December 31, 2020.
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During 2021, gross interest income that would have been recorded on non‐accrual loans had they performed in accordance with their original terms, totaled $71 thousand. No income
was actually recognized during 2021 related to non-accrual loans.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was signed into law by Congress. The CARES Act provides financial institutions, under specific circumstances, the opportunity
to temporarily suspend certain requirements under generally accepted accounting principles related to TDRs for a limited period of time to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state
regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other insignificant payment delays, are not TDRs if made on a good-faith
basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, nine months or less is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification
program is implemented. The guidance also provides that these modified loans generally will not be classified as non-accrual loans during the term of the modification.
The Bank has implemented a loan modification program for the effects of COVID-19 on its borrowers. At the date of this filing, two borrowers have requested applications, but no
applications for loan modifications have been formally submitted. Both borrowers were current at the time modification program was implemented. To date, no modifications have been granted.
We update our estimates of collateral value on loans when they become 90 days past due and to the extent the loans remain delinquent, every nine months thereafter. We obtain updated estimates of collateral value
earlier than at 90 days past due for loans to borrowers who have filed for bankruptcy or for certain other loans when our Internal Asset Review Committee believes repayment of such loans may be dependent on the value of the underlying collateral.
We also obtain updated collateral valuations for loans classified as substandard every year. For single family loans, updated estimates of collateral value are obtained through appraisals and automated valuation models. For multi‐family and
commercial real estate properties, we estimate collateral value through appraisals or internal cash flow analyses when current financial information is available, coupled with, in most cases, an inspection of the property. For commercial loans, we
estimate the value of the collateral based on financial information provided by borrowers or valuations of business assets, depending on the nature of the collateral. Our policy is to make a charge against our allowance for loan losses, and
correspondingly reduce the book value of a loan, to the extent that the collateral value of the property securing an impaired loan is less than our recorded investment in the loan. See “Allowance for Loan Losses” for full discussion of the
allowance for loan losses.
REO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at fair value less estimated selling costs. Any excess of carrying value over fair value at the time of
acquisition is charged to the allowance for loan losses. Thereafter, we charge non‐interest expense for the property maintenance and protection expenses incurred as a result of owning the property. Any decreases in the property’s estimated fair
value after foreclosure are recorded in a separate allowance for losses on REO. During 2021 and 2020, the Bank did not foreclose on any loans and not have any property classified as REO.
As a result of the Merger, we acquired certain loans that have shown evidence of credit deterioration since origination. These loans are referred to as purchased credit impaired loans (“PCI loans”). These PCI loans
are recorded at their fair value at acquisition, and are not treated as nonaccrual loans for purposes of financial reporting. At acquisition we estimate the amount and timing of expected cash flows for each PCI loan, and the expected cash flows in
excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable
difference). Expected cash flows continue to be estimated each quarter for each PCI loan. If the present value of expected cash flows decreases from the prior estimate, a provision for loan losses is recorded and an allowance for loan losses is
established. If the present value of expected cash flows increases from the prior estimate, the increase is recognized as part of future interest income. At the date of the Merger, we recorded an investment in PCI loans of $883 thousand. As of
December 31, 2021, our recorded investment in PCI loans was $845 thousand. These PCI loans are not classified as NPAs as they are performing in accordance with the cash flows that were expected at the date of the Merger.
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Classification of Assets
Federal regulations and our internal policies require that we utilize an asset classification system as a means of monitoring and reporting problem and potential problem assets. We have incorporated asset
classifications as a part of our credit monitoring system and thus classify potential problem assets as “Watch” and “Special Mention,” and problem assets as “Substandard,” “Doubtful” or “Loss”. An asset is considered “Watch” if the loan is current
but temporarily presents higher than average risk and warrants greater than routine attention and monitoring. An asset is considered “Special Mention” if the loan is current but there are some potential weaknesses that deserve management’s close
attention. An asset is considered “Substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct
possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “Doubtful” have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the
weaknesses make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “Loss” are those considered “uncollectible” and of such little value
that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but that are
considered to possess some weaknesses, are designated “Special Mention.” Our Internal Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to the Internal Asset Review Committee of our Board
of Directors monthly.
The following table provides information regarding our criticized loans (Watch and Special Mention) and classified assets (Substandard) at the dates indicated:
Number Amount Number Amount
(Dollars in thousands)
Special mention loans - - - -
Criticized assets increased to $16.0 million at December 31, 2021, from $2.1 million at December 31, 2020. City First has historically classified all newly originated construction loans as Watch
until a history of loan performance can be established or until the construction project is complete, which is the main reason for the increase in total criticized loans of $13.8 million during 2021. The increase in substandard loans of $1.1
million was due to the down grade of one commercial real estate loan. The loan was current as of December 31, 2021.
Allowance for Loan Losses
In originating loans, we recognize that losses may be experienced on loans and that the risk of loss may vary as a result of many factors, including the type of loan being made, the creditworthiness of the borrower,
general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan. We are required to maintain an adequate allowance for loan and lease losses (“ALLL”) in accordance with U.S. Generally Accepted Accounting
Principles (“GAAP”). The ALLL represents our management’s best estimate of probable incurred credit losses in our loan portfolio as of the date of the consolidated financial statements. Our ALLL is intended to cover specifically identifiable loan
losses, as well as estimated losses inherent in our portfolio for which certain losses are probable, but not specifically identifiable. There can be no assurance, however, that actual losses incurred will not exceed the amount of management’s
estimates.
Our Internal Asset Review Department issues reports to the Board of Directors and continually reviews loan quality. This analysis includes a detailed review of the classification and categorization of problem loans,
potential problem loans and loans to be charged off, an assessment of the overall quality and collectability of the portfolio, and concentration of credit risk. Management then evaluates the allowance, determines its appropriate level and the need
for additional provisions, and presents its analysis to the Board of Directors which ultimately reviews management’s recommendation and, if deemed appropriate, then approves such recommendation.
The ALLL is increased by provisions for loan losses which are charged to earnings and is decreased by recaptures of loan loss provision and charge‐offs, net of recoveries. Provisions are recorded to increase the ALLL
to the level deemed appropriate by management. The Bank utilizes an allowance methodology that considers a number of quantitative and qualitative factors, including the amount of non‐performing loans, our loan loss experience, conditions in the
general real estate and housing markets, current economic conditions, and trends, particularly levels of unemployment, and changes in the size of the loan portfolio.
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The ALLL consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case‐by‐case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
If a loan is impaired, a portion of the allowance is allocated to the loan so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. TDRs are separately identified for impairment and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered
to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated selling costs. For TDRs that subsequently default, we determine the amount of any necessary additional charge‐off based on internal
analyses and appraisals of the underlying collateral securing these loans. At December 31, 2021, impaired loans totaled $2.3 million and had an aggregate specific allowance allocation of $7 thousand.
The general component of the ALLL covers non‐impaired loans and is based on historical loss experience adjusted for qualitative factors. Each month, we prepare an analysis which categorizes the entire loan portfolio
by certain risk characteristics such as loan type (single family, multi‐family, commercial real estate, construction, commercial, SBA and consumer) and loan classification (pass, watch, special mention, substandard and doubtful). With the use of a
migration to loss analysis, we calculate our historical loss rate and assign estimated loss factors to the loan classification categories based on our assessment of the potential risk inherent in each loan type. These factors are periodically
reviewed for appropriateness giving consideration to our historical loss experience, levels of and trends in delinquencies and impaired loans; levels of and trends in charge‐offs and recoveries; trends in volume and terms of loans; effects of any
changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions;
industry conditions; and effects of changes in credit concentrations.
In addition to loss experience and environmental factors, we use qualitative analyses to determine the adequacy of our ALLL. This analysis includes ratio analysis to evaluate the overall measurement of the ALLL and
comparison of peer group reserve percentages. The qualitative review is used to reassess the overall determination of the ALLL and to ensure that directional changes in the ALLL and the provision for loan losses are supported by relevant internal
and external data.
Loans acquired in the Merger were recorded at fair value at acquisition date without a carryover of the related ALLL. Purchased credit impaired loans acquired are loans that have evidence of credit deterioration
since origination and as to which it is probable at the date of acquisition that the Company will not collect all of principal and interest payments according to the contractual terms. These loans are accounted for under ASC 310-30.
Based on our evaluation of the housing and real estate markets and overall economy, including the unemployment rate, the levels and composition of our loan delinquencies and non‐performing loans, our loss history and
the size and composition of our loan portfolio, we determined that an ALLL of $3.4 million, or 0.52% of loans held for investment, was appropriate at December 31, 2021, compared to $3.2 million, or 0.88% of loans held for investment at December 31,
2020. The ALLL as a percentage of gross loans decreased because acquired loans are recorded at fair value without any ALLL at the acquisition date. This decrease was partially offset by an increase in the required allowance due to an increase in
the outstanding balances of loans not acquired in the Merger.
A federally chartered bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, in conjunction with the other federal banking
agencies, provides guidance for financial institutions on the responsibilities of management for the assessment and establishment of adequate valuation allowances, as well as guidance for banking agency examiners to use in determining the adequacy
of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectability of the portfolio in a
reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the guidelines issued by federal regulatory agencies. While we believe that the ALLL has been established and maintained at adequate levels,
future adjustments may be necessary if economic or other conditions differ materially from the conditions on which we based our estimates at December 31, 2021. In addition, there can be no assurance that the OCC or other regulators, as a result of
reviewing our loan portfolio and/or allowance, will not require us to materially increase our ALLL, thereby affecting our financial condition and earnings.
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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:
December 31,
(Dollars in thousands)
The following table shows the activity in our ALLL related to our loans held for investment for the years indicated:
(Dollars in thousands)
Charge‐offs:
Single family ‐ ‐ ‐ ‐ ‐
Multi‐family ‐ ‐ ‐ ‐ ‐
Commercial real estate ‐ ‐ ‐ ‐ ‐
Church ‐ ‐ ‐ ‐ ‐
Commercial ‐ ‐ ‐ ‐ ‐
Total charge‐offs ‐ ‐ ‐ ‐ ‐
Recoveries:
Single family - 4 ‐ ‐ 30
Commercial real estate ‐ ‐ ‐ ‐ ‐
Commercial ‐ ‐ ‐ ‐ ‐
(1) Including net deferred loan costs and premiums.
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Investment Activities
The main objectives of our investment strategy are to provide a source of liquidity for deposit outflows, repayment of our borrowings and funding loan commitments, and to generate a favorable return on investments
without incurring undue interest rate or credit risk. Subject to various restrictions, our investment policy generally permits investments in money market instruments such as Federal Funds Sold, certificates of deposit of insured banks and savings
institutions, direct obligations of the U. S. Treasury, securities issued by federal and other government agencies and mortgage‐backed securities, mutual funds, municipal obligations, corporate bonds, and marketable equity securities.
Mortgage‐backed securities consist principally of securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association which are backed by 30‐year amortizing
hybrid ARM Loans, structured with fixed interest rates for periods of three to seven years, after which time the loans convert to one‐year or six‐month adjustable rate mortgage loans. At December 31, 2021, our securities portfolio, consisting
primarily of federal agency debt, mortgage‐backed securities, bonds issued by the United States Treasury and the SBA, and municipal bonds, totaled $156.4 million, or 14.30% of total assets.
We classify investments as held‐to‐maturity or available‐for‐sale at the date of purchase based on our assessment of our internal liquidity requirements. Securities purchased to meet investment‐related objectives
such as liquidity management or mitigating interest rate risk and which may be sold as necessary to implement management strategies, are designated as available‐for‐sale at the time of purchase. Securities in the held‐to‐maturity category consist
of securities purchased for long‐term investment in order to enhance our ongoing stream of net interest in0come. Securities deemed held‐to‐maturity are classified as such because we have both the intent and ability to hold these securities to
maturity. Held‐to‐maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. Available‐for‐sale securities are reported at fair value. We currently have no securities classified as held‐to‐maturity
securities.
The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2021. The table reflects stated final maturities and does not reflect scheduled
principal payments or expected payoffs.
(Dollars in thousands)
Available‐for‐sale:
At December 31, 2021, the securities in our portfolio had an estimated remaining life of 5.03 years. During 2021, the Bank purchased 5 federal agency mortgage-backed securities with total
amortized cost of $9.6 million, estimated fair value of $9.6 million at December 31, 2021 and an estimated average remaining life of 5.4 years; 2 federal agency debt with total amortized cost of $4.9 million, estimated fair value of $4.9 million at
December 31, 2021 and an estimated average remaining life of 4.7 years; and 1 federal agency CMO with total amortized cost of $2.0 million, estimated fair value of $1.9 million at December 31, 2021 and an estimated average remaining life of 5.1
years. As a result of the merger with CFBanc, we acquired $76.5 million of Federal agency mortgage-backed securities, $33.2 million of Federal agency debt securities, $18.2 million of U.S. Treasury securities, $15.2 million of SBA pool
securities, $3.9 million of Federal agency CMOs, and $2.9 million of municipal bonds. There were no sales of securities during the year ended December 31, 2021.
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The following table sets forth the amortized cost and fair value of available-for-sale securities by type as of the dates indicated. At December 31, 2021, our securities portfolio did not contain securities of any
issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.
At December 31,
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
(Dollars in thousands)
Federal agency collateralized mortgage obligations (“CMO”) 9,391 9,287 - - - -
Sources of Funds
General
Deposits are our primary source of funds for supporting our lending and other investment activities and general business purposes. In addition to deposits, we obtain funds from the amortization and prepayment of
loans and investment securities, sales of loans and investment securities, advances from the FHLB, and cash flows generated by operations.
Deposits
We offer a variety of deposit accounts featuring a range of interest rates and terms. Our deposits principally consist of savings accounts, checking accounts, NOW accounts, money market accounts, and fixed‐term
certificates of deposit. The maturities of term certificates generally range from one month to five years. We accept deposits from customers within our market area based primarily on posted rates, but from time to time we will negotiate the rate
based on the amount of the deposit. We primarily rely on customer service and long‐standing customer relationships to attract and retain deposits. We seek to maintain and increase our retail “core” deposit relationships, consisting of savings
accounts, checking accounts and money market accounts because we believe these deposit accounts tend to be a stable funding source and are available at a lower cost than term deposits. However, market interest rates, including rates offered by
competing financial institutions, the availability of other investment alternatives, and general economic conditions significantly affect our ability to attract and retain deposits.
We participate in a deposit program called the Certificate of Deposit Account Registry Service (“CDARS”). CDARS is a deposit placement service that allows us to place our customers’ funds in FDIC‐insured certificates
of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network (“CDARS Reciprocal”). These deposits totaled $141.6 million and $35.8 million at December 31, 2021 and 2020,
respectively and are not considered to be brokered deposits.
We may also accept deposits from other institutions when we have no reciprocal deposit (“CDARS One‐Way Deposits”). With the CDARS One-Way Deposits program, the Bank accepts deposits from CDARS even though there is no
customer account involved. These one-way deposits, which are considered to brokered deposits, totaled $223 thousand and $9.6 million at December 31, 2021 and 2020, respectively. The decrease in CDARS One-Way Deposits in 2021 was attributable to an
increase in the Bank’s overall liquidity and the intentional non-renewal of these deposits at maturity due to their high cost relative to other deposit sources.
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At December 31, 2021 and 2020, the Bank had $5.0 million and $15.1 million in (non-CDARS) brokered deposits, respectively.
The following table details the maturity periods of our certificates of deposit in amounts of $100 thousand or more at December 31, 2021.
Amount Weighted average rate
(Dollars in thousands)
Certificates maturing:
The following table presents the distribution of our average deposits for the years indicated and the weighted average interest rates during the year for each category of deposits presented.
For the Year Ended December 31,
(Dollars in thousands)
Borrowings
We utilize short‐term and long‐term advances from the FHLB as an alternative to retail deposits as a funding source for asset growth. FHLB advances are generally secured by mortgage loans and mortgage‐backed
securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions fluctuates from time to time in
accordance with the policies of the FHLB. At December 31, 2021, we had $85.9 million in outstanding FHLB advances and had the ability to borrow up to an additional $14.4 million based on available and pledged collateral.
The following table summarizes information concerning our FHLB advances at or for the periods indicated:
At or For the Year Ended
(Dollars in thousands)
FHLB Advances:
Weighted average interest rate at end of year 1.85 % 1.94 % 2.32 %
Average cost of advances during the year 1.96 % 1.91 % 2.42 %
Weighted average maturity (in months) 22 27 18
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The Bank enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Bank may transfer legal control over the assets but
still retain effective control through an agreement that both entitles and obligates the Bank 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 Banks’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the
respective investment securities available-for-sale accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. The outstanding balance of these borrowings totaled $52.0
million as of December 31, 2021. There were no such borrowings as of December 31, 2020. The market value of securities pledged totaled $53.2 million as of December 31, 2021 and included $13.3 million of U.S. Government Agency securities and $39.9
million of mortgage-backed securities. The weighted average rate paid on repurchase agreements was 0.10% for the year ended December 31, 2021.
We participate in and have previously been an “Allocatee” of the New Markets Tax Credit Program of the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. In connection with the New Market Tax Credit activities
of the Bank, CFC 45 is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. In December 2015, a national brokerage firm made a $14.0 million non-recourse loan to CFC 45, whereby CFC 45 was the beneficiary of the loan
from the brokerage firm and passed the proceeds from that loan through to a Qualified Active Low-Income Community Business (“QALICB”). The loan to the QALICB is secured by a Leasehold Deed of Trust from which the funds for repayment of the loan
will be derived. Debt service payments received by CFC 45 from the QALICB are passed through to the brokerage firm, less a servicing fee which is retained by CFC 45. The financial statements of CFC 45 are consolidated with those of the Bank and the
Company.
On March 17, 2004, we issued $6.0 million of Floating Rate Junior Subordinated Debentures (the “Debentures”) in a private placement to a trust that was capitalized to purchase subordinated debt and preferred stock of
multiple community banks. Interest on the Debentures is payable quarterly at a rate per annum equal to the 3‐Month LIBOR plus 2.54%. On October 16, 2014, we made payments of $900 thousand of principal on the Debentures, executed a Supplemental
Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024, and modified the payment terms of the remaining $5.1 million principal amount thereof. The modified terms of the Debentures required quarterly payments of
interest only through March 2019 at the original rate of 3‐Month LIBOR plus 2.54%. Starting in June 2019, the Company was required to begin to make quarterly payments of equal amounts of principal, plus interest, until the Debentures are fully
amortized on March 17, 2024. In September of 2021, we redeemed the remaining amounts outstanding under the Debentures for $3.3 million.
Market Area and Competition
The Bank is a Community Development Financial Institution (“CDFI”) and a certified B Corp, offering a variety of financial services to meet the needs of the communities it serves. Our retail banking network includes
full service banking offices, automated teller machines and internet banking capabilities that are available using our website at www.ciytfirstbank.com. We have three banking offices as of December 31, 2021: two in California (in Los Angeles and in
the nearby City of Inglewood) and one in Washington, D.C.
Both the Washington D.C. and the Los Angeles metropolitan areas are highly competitive banking markets for making loans and attracting deposits. Although our offices are primarily located in low‐to‐moderate income
communities that have historically been under‐served by other financial institutions, we face significant competition for deposits and loans in our immediate market areas, including direct competition from mortgage banking companies, commercial
banks and savings and loan associations. Most of these financial institutions are significantly larger than we are and have greater financial resources, and many have a regional, statewide, or national presence.
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Human Capital Management
Human Capital
We are a unified, commercialCDFI with a focused vision, mission, and strategy that equitably drives economic, social, and environmental justice for our clients and communities in which we work making them better
places to be. We believe that our most important resource is our employees and in order to fulfill future and sustainable growth, our key objectives are to attract, select, retain, and develop top talent in the marketplace that closely align
their personal values with the organization’s values. As such, our culture is defined by our Shared Values principles: “Clients and Communities First”; “We Think Big”; “We Model Excellence”; and “ONE City First”
City First’s Shared Values principles are derived from the most important beliefs and ingrained principles that guide the organization’s actions, behaviors, and culture towards our primary
objectives. Our Shared Values mean that we stand for something in how we view each other, the world, and our place of service in it. With these values centered in all that we do, we work collaboratively with mission-aligned customers looking to
make an impact in under-resourced communities through affordable housing, charter schools, community health centers, nonprofits, and small to medium-sized businesses. Our employees behave in a manner that is consistent with these beliefs.
While the Board of Directors oversees the strategic management of our human capital management, our internal Human Resources team drives the day-to-day management of our human capital
operations and strategy.
Talent Acquisition and Retention
As of December 31, 2021, we employed 78 full-time and 2 part-time employees. Our employees are located in Los Angeles, CA and Washington, DC in our corporate offices, branches, and operating
facilities. Voluntary turnover was 18.5% in 2021. None of our employees are subject to a collective bargaining agreement.
Compensation and Benefits
Our market competitive total employee compensation (salaries, bonuses and all benefits and rewards) is a critical tool enabling us to attract and retain talented people. In addition to base
compensation, these programs include commission-based incentives, corporate incentive compensation plans, restricted stock awards, a 401(k) Plan with an employer matching contribution, an employee stock ownership plan, healthcare, and insurance
benefits including telehealth connection services, health savings accounts, employee assistance program, will prep services, college tuition benefit programs, and vacation/sick/family leave.
Our methodology is to provide pay levels and pay opportunities that are internally fair, cost-effective, and externally competitive to market-based salaries. To determine competitive market
compensation levels, we use market surveys and economic research to benchmark our positions utilizing salary and compensation data of companies with similar positions, asset size and geographical locations. We annually review our salary
structures and grade ranges to keep pace with changes in the marketplace. With the support of third-party experts in this field and within the banking industry, we conduct regular job evaluations to meet changing business needs or when the scope
of existing positions or organizational changes occur. Our standard pay practices ensure that we honor and adhere to pay equity analysis. Our employees are not represented by any collective bargaining group.
Diversity, Equity, and Inclusion
Our legacy and history matter at City First. We are proud of our expanded 75-year history with the merger with Broadway Federal. Our founders in Los Angeles and Washington, DC were local
leaders who saw a need in the community for a bank that addressed the lack of access to capital for historically excluded and disinvested urban majority minority communities.
Our Merger formed one of the largest Black-led Minority Depository Institutions (MDI) in the nation in the midst of a national reawakening to the systemic racial and economic disparities
persisting and growing in our society. The Merger maintains the legacy of the constituent and honors the legacy of African American-led MDI’s across the country that were founded to address the unmet financing needs of the community. Our intent,
purpose, and execution are grounded in our 75-year history of deep commitment to economic justice through the targeted provision of capital for historically excluded and disinvested urban majority minority communities.
Our ownership, responsibility, and commitment to diversity, equity, and inclusion is reflected in the
composition of our workforce, executive leadership team, and board of directors. As of December 31, 2021, more than 80% of the Company’s employees self-identified as minority, approximately 68% of our employees were women, and other diverse
groups such as veterans and people with disabilities were also represented.
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Workforce Training and Development
We align our talent strategy with our business strategy to provide guidance on the proper mix of skills, emerging talent and business needs or issues. This investment to allow employees to
learn, grow, and be fulfilled in their work stems from our development of providing a multi-dimensional approach to curriculum design and competency-based learning centered around culture and technical skills. Learning and development play a
critical and strategic role as we prepare our organization for the future by recognizing continuous needs to upskill or reskill in order to scale our business.
Our employees receive continuing education courses relevant to their respective roles within the organization, as well as access to on-demand learning solutions to enhance leadership
capabilities, advance communications skills and techniques, college credit courses, seminars, and training deeply embedded in cultural dynamics and awareness. To support employees who wish to continue their development and education, we provide
reimbursement to employees who seek development to upskill or reskill while employed at the company. We invest in our talent.
Regulation
General
City First and Broadway Financial Corporation are subject to comprehensive regulation and supervision
by several different federal agencies. City First is regulated by the OCC as its primary federal regulator. The Bank’s deposits generally are insured up to a maximum of $250,000 per account;
the Bank also is regulated by the FDIC as its deposit insurer. The Bank is a member of the Federal Reserve System and is subject to certain regulations of the FRB, including, for example, regulations concerning reserves required to be maintained
against deposits and regulations governing transactions with affiliates., Broadway Financial Corporation is regulated, examined, and supervised by the FRB and the Federal Reserve Bank of Richmond (“FRBR”) and is also required to file certain
reports and otherwise comply with the rules and regulations of the Securities and Exchange Commission under the federal securities laws. The Bank also is subject to consumer protection regulations promulgated by the Consumer Financial
Protection Bureau (“CFPB”).
The OCC regulates and examines the Bank’s business activities, including, among other things, capital
standards, investment authority and permissible activities, deposit taking and borrowing authority, mergers and other business combination transactions, establishment of branch offices, and the structure and permissible activities of any
subsidiaries of the Bank. . The OCC has primary enforcement responsibility over national banks and has substantial discretion to impose enforcement actions on an institution that fails to comply with applicable regulatory requirements, including
capital requirements, or that engages in practices that examiners determine to be unsafe or unsound. In addition, the FDIC has “back-up” enforcement authority that enables it to recommend enforcement action to the OCC with respect to a national
bank and, if the recommended action is not taken by the OCC, to take such action under certain circumstances. In certain cases, the OCC has the authority to refer matters relating to federal
fair lending laws to the U.S. Department of Justice (“DOJ”) or the U.S. Department of Housing and Urban Development (“HUD”) if the OCC determines violations of the fair lending laws may have occurred.
Changes in applicable laws or the regulations of the OCC, the FDIC, the FRB, the CFPB, or other regulatory authorities, or changes in interpretations of such regulations or in agency policies or priorities, could
have a material adverse impact on the Bank and our Company, our operations, and the value of our debt and equity securities. We and our stock are also subject to rules issued by The Nasdaq Stock Market LLC (“Nasdaq”), the stock exchange on which
our voting common stock is traded. Failure to conform to Nasdaq’s rules could have an adverse impact on us and the value of our equity securities.
The following paragraphs summarize certain laws and regulations that apply to the Company and the Bank. These descriptions of statutes and regulations and their possible effects do not purport to be complete
descriptions of all the provisions of those statutes and regulations and their possible effects on us, nor do they purport to identify every statute and regulation that applies to us. In addition, the statutes and regulations that apply to the
Company and the Bank are subject to change, which can affect the scope and cost of their compliance obligations.
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Dodd‐Frank Wall Street Reform and Consumer Protection Act
In July 2010, the Dodd‐Frank Wall Street Reform and Consumer Protection Act (the “Dodd‐Frank Act”) was signed into law. The Dodd‐Frank Act is intended to address perceived weaknesses in the U.S. financial regulatory
system and prevent future economic and financial crises.
The Dodd‐Frank Act established increased compliance obligations across a number of areas in the banking business. In particular, pursuant to the Dodd-Frank Act, the federal banking agencies (comprising the FRB, the
OCC, and the FDIC) substantially revised their consolidated and bank-level risk‐based and leverage capital requirements applicable to insured depository institutions, depository institution holding companies and certain non‐bank financial
companies. Under an existing FRB policy statement, bank holding companies with less than $3 billion in total consolidated assets are not subject to consolidated capital requirements provided they satisfy the conditions in the policy statement. The
Dodd‐Frank Act requires bank holding companies to serve as a source of financial strength for any subsidiary of the holding company that is a depository institution by providing financial assistance in the event of the financial distress of the
depository institution.
The Dodd‐Frank Act also established the CFPB. The CFPB has broad rule‐making authority for a wide range of consumer protection laws that apply to banks and savings institutions of all sizes, including the authority
to prohibit “unfair, deceptive or abusive” acts and practices. At times during the past several years, the CFPB has been active in bringing enforcement actions against banks and nonbank financial institutions to enforce federal consumer financial
laws and has developed a number of new enforcement theories and applications of these laws. The CFPB’s supervisory authority does not generally extend to insured depository institutions, such as the Bank, that have less than $10 billion in assets.
The federal banking agencies, however, have authority to examine for compliance, and bring enforcement action for non-compliance, with respect to the CFPB’s regulations. State attorneys general and state banking agencies and other state financial
regulators also may have authority to enforce applicable consumer laws with respect to institutions over which they have jurisdiction.
Capital Requirements
The Bank’s capital requirements are administered by the OCC and involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated in accordance with
regulations promulgated by the OCC jointly with the FRB and the FDIC. Capital amounts and classifications are also subject to qualitative judgments by the OCC. Failure to meet capital requirements can result in supervisory or, potentially,
enforcement action.
To implement the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have developed a “Community Bank Leverage Ratio” (“CBLR”) (the ratio of a bank’s
tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage
requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. The CARES Act temporarily lowered this
ratio to 8% beginning in the three months ended September 30, 2020. The ratio then rose to 8.5% for 2021 and reestablished at 9% on January 1, 2022.
City First elected to adopt the CBLR option on April 1, 2020 as reflected in its September 30, 2020 Call Report. Its CBLR as of December 31, 2021 is shown in the table below. The Company’s
former subsidiary, Broadway Federal Bank, did not elect to adopt the CBLR and reported the December 31, 2020 capital ratios as shown in the table below.
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Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
At December 31, 2021, the Company and the Bank met all the capital adequacy requirements to which they were subject. In addition, the Bank was “well capitalized” under the regulatory framework
for prompt corrective action. Management believes that no conditions or events have occurred that would materially adversely change the Bank’s capital classifications. From time to time, we may need to raise additional capital to support the Bank’s
further growth and to maintain the “well capitalized” status.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits of federally insured banks, including national banks, up to prescribed statutory limits for each depositor. Pursuant to the Dodd‐Frank Act, the maximum
deposit insurance amount has been permanently increased to $250,000 per depositor, per ownership category.
The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to the FDIC’s Deposit Insurance Fund (“DIF”). The Bank’s DIF assessment is calculated by
multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the Bank. The initial base assessment rate is based on an institution’s capital level, and capital
adequacy, asset quality, management, earnings, liquidity, and sensitivity (“CAMELS”) ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress, and in some cases, additional
discretionary adjustments by the FDIC to reflect additional risk factors.
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The FDIC’s overall premium rate structure is subject to change from time to time to reflect its actual and anticipated loss experience. The financial crisis that began in 2008 resulted in substantially higher levels