Item 1A. Risk Factors 21
Item 1B. Unresolved Staff Comments 26
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Mine Safety Disclosure 27
PART II
Item 6. Reserved
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39
Item 8. Financial Statements and Supplementary Data 39
Item 9A. Controls and Procedures 39
Item 9B. Other Information 40
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 40
PART III
Item 10. Directors, Executive Officers and Corporate Governance 41
Item 11. Executive Compensation 41
Item 14. Principal Accountant Fees and Services 41
PART IV
Item 15. Exhibits and Financial Statement Schedules 42
Signatures 44
Table of Contents
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 “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,”
“predicts,” “potential,” “continue,” “poised,” “optimistic,” “prospects,” “ability,” “looking,” “forward,” “invest,” “grow,” “improve,” “deliver” and similar expressions, but the absence of such words or expressions does not mean a statement is not
forward-looking. 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 COVID-19 or other health crises on our future financial condition and operations; (15) the impact of recent volatility in the banking sector due to the failure of certain banks due to high levels of exposure to liquidity risk, interest
rate risk, uninsured deposits and cryptocurrency risk; (16) 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 as part of the bank’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. (“Broadway Federal”). The conversion was completed, and the Broadway Federal 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 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.
On June 7, 2022, the Company closed a private placement (the “Private Placement”) of shares of the Company’s Senior Non-Cumulative Perpetual
Preferred Stock, Series C, par value $0.01 (the “Series C Preferred Stock”), pursuant to a Letter Agreement (collectively with the annexes, exhibits and schedules thereto, including the Securities Purchase Agreement - Standard Terms, the
“Purchase Agreement”), dated as of June 7, 2022, with the United States Department of the Treasury (the “Purchaser”). The Purchase Agreement was entered into pursuant to the Purchaser’s Emergency Capital Investment Program.
Pursuant to the Purchase Agreement, the Purchaser acquired an aggregate of 150,000 shares of Series C Preferred Stock, for an aggregate purchase
price equal to $150.0 million in cash. The liquidation value of the Series C Preferred Stock is $1,000 per share.
In June 2022, the Company down streamed $75.0 million of the proceeds from the Private Placement to the Bank to enhance capital of the Company. As a result of the
downstream, the Bank’s tier 1 leverage ratio increased to 15.75% as of December 31, 2022 from 9.32% as of December 31, 2021.
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, 4601 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, loan customers, large non-profit entities,
local municipalities, and depositors who believe in the Bank’s mission-driven focus. These 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.
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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.
Current Operating Environment
The Federal Reserve increased short-term
interest rates seven times during 2022 by 4.25% to curb inflation. The Bank’s loan portfolio remained flat during the first half of the year but increased by 18.7% during the
second half of the year as borrowers adjusted to higher interest rates.
Early in 2022, the Bank’s management invested excess cash into short-term U.S. Treasury and
agency securities and mortgage-backed securities to earn higher yields. In addition, the $150.0 million in Emergency Capital Investment Program (“ECIP”) proceeds received upon the sale of preferred stock to the U.S. Treasury were primarily invested in two-to three-year U.S. Treasuries during June and July. These activities led to a decrease in the duration of the securities portfolio to 3.2 years as of December 31, 2022 from 4.4 years as of December 31, 2021 and an increase in the yield on interest earning assets to 3.36%
during 2022 from 2.86% in 2021. The Company’s cost of funds decreased to 0.40% during the year ended December 31, 2022, from 0.47% for the year ended December 31, 2021 primarily due to a decrease in the cost of borrowings which resulted from
payoffs and maturities of higher rate advances from the Federal Home Loan Bank of San Francisco in January and February of 2022, slightly offset by higher borrowing costs at the end of the year. There is no dividend requirement on the preferred
stock issued to the U.S. Treasury until June of 2024.
In November of 2022, the Bank began borrowing from the FHLB to compensate for customer withdrawals to meet their year end cash flow needs. FHLB advances increased by $95.5 million during November of 2022 at an average rate of 4.08%, and remained at the same level during December of 2022 at an average rate of 4.58%. At December 31, 2022 and as of the date of this report, the Bank had additional borrowing capacity with the FHLB and sufficient collateral to meet its
liquidity needs.
Overall, the Company’s net interest margin increased to 3.05% during 2022 compared to 2.42% during 2021.
As of December 31, 2022, there were no loans greater than 30 days delinquent and only $144 thousand in non-performing loans. However, due to general concerns of a recession in the near future, the Bank continues to heavily monitor its loan portfolio for credit concerns.
As of December 31, 2022, Broadway Financial Corporation had $75 million in available capital to support the Bank and for general corporate purposes.
Industry Update
The failure of three regional banks in March of 2023 and the resultant negative outlook on the banking sector has called into question the exposure of banks to crypto risk, liquidity risk, interest rate risk, and the
exposure of banks to unrecognized investment losses due to investments classified as “held to maturity” on the balance sheet. Also, analysts have been monitoring the level of uninsured deposits in banks due to the liquidity risk associate with high
levels of uninsured deposits.
City First Bank has no crypto risk exposure and all of our investments are available-for-sale and marked to market on a monthly basis. As of March 23, 2023, the Bank had $150 million in borrowing
capacity with the FHLB based on pledged loan collateral and $228 million in additional borrowing capacity with the Federal Reserve Bank based on unpledged securities.
The Bank’s interest rate risk has increased over the last year due to the increasing rate environment but remains moderate. Our percentage of uninsured deposits was 31% as of December 31, 2022.
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, 2022, our
net loan portfolio totaled $768.0 million, or 64.9% of total assets.
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We emphasize the origination of adjustable‐rate loans, most of which are hybrid loans (loans having an initial fixed rate period which are initially 5 years, followed by an adjustable rate period),
for our portfolio of loans held for investment. 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, 2022, more
than 79% of our 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. See “Regulation” for more information on the government regulations to which we are subject.
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 1,010 1,842 – – –
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 $502.1 million and $393.7 million at December 31, 2022 and 2021, respectively. Multi‐family loans represented 65.08% of our gross loan portfolio at December 31, 2022
compared to 60.36% of our gross loan portfolio at December 31, 2021. The vast majority of our multi‐family loans amortize over 30 years. As of December 31, 2022, our single largest multi‐family credit had an outstanding balance of $11.8
million, was current, and was collateralized by a 53-unit apartment complex in Downey, California.
At December 31, 2022, the average balance of a loan in our multi‐family portfolio was $1.3 million.
Our commercial real estate loans amounted to $114.6 million and $93.2 million at December 31, 2022 and 2021, respectively. Commercial real estate loans represented 14.85% and 14.29% of our gross loan
portfolios at December 31, 2022 and 2021, 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, 2022, our single
largest commercial real estate credit had an outstanding principal balance of $15.7 million, was current, and was a bridge loan collateralized by a 72-unit apartment complex located in Washington, D.C. At December 31, 2022, the average balance of a
loan in our commercial real estate portfolio was $1.2 million.
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The interest rates on multi‐family and commercial adjustable-rate mortgage loans (“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, 2022. 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.
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 $15.8 million and $22.5 million at December 31, 2022 and 2021, respectively, which represented 2.04% and 3.45% of our gross
loan portfolio at December 31, 2022 and 2021, 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, 2022, our single largest church loan had an outstanding balance of $2.3 million, was current, and was collateralized by a church building and parcel of land in Baltimore, Maryland. At December 31, 2022, the average balance of a loan in our church loan portfolio was $610 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 $30.0 million and $45.4 million at December 31, 2022 and 2021, respectively. Of the single family residential mortgage loans outstanding at December 31, 2022,
more than 22% had adjustable rate features. We did not purchase any single family loans during 2022 and 2021. Of the $30.0 million of single family loans at December 31, 2022, $19.5 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, 2022. 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.
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Construction Lending
The Merger added a construction lending program and portfolio to our existing lending operations and platform. Construction loans totaled $40.7 million and $32.1 million at December 31, 2022 and 2021,
respectively, and represented 5.27% and 4.92% of our gross loan portfolio at December 31, 2022 and 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.
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 2022, we originated $29.6 million of construction loans, compared to $24.9 million of construction loan originations during 2021.
Commercial Lending
Our commercial lending portfolio consists 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, 2022 and 2021, non-real estate commercial loans totaled $64.8 million and $46.5 million, respectively. Commercial loans represented 8.40% of our loan portfolio as of December 31, 2022. For the year ended December 31,
2022, we originated $26.9 million of commercial loans. As of December 31, 2022, our single largest commercial loan had an outstanding balance of $10.0 million. At December 31, 2022, the average balance of a loan in our non-real estate commercial
loan portfolio was $1.2 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 Washington, D.C,
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, 2022 and
2021, SBA loans totaled $3.6 million and $18.8 million, respectively. Our December 31, 2022 SBA loans included $2.7 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 0.47% of our total loan portfolio as of December
31, 2022.
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:
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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 2022, 2021
and 2020 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 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’s 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, 2022, 2021 or 2020.
During 2022 and 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.
Loan Maturity and Repricing
The following table shows the contractual maturities of loans in our portfolio of loans held for investment at December 31, 2022 and does not reflect the effect of prepayments or scheduled principal
amortization (in thousands):
Amounts due:
After one year:
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 $446.6 million or 58% of our loan portfolio at December 31, 2022.
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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.
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 – – – – – – – – – – – –
Total – $ – – $ – 1 $ 2,423 – $ – – $ – – $ –
% of Gross Loans – % – % 0.37 % – % – % – %
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, 2022 decreased to $144 thousand, or
0.01% of total assets, from $684 thousand, or 0.06% of total assets, at December 31, 2021.
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, 2022, 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 $540 thousand
decrease in non‐accrual loans during the year ended December 31, 2022 was the result of the payoff of one non-accrual loan.
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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 $ –
Loans delinquent 90 days or more and still accruing – – – – –
Real estate owned acquired through foreclosure – – – – 833
There were no accrual loans that were contractually past due by 90 days or more at December 31, 2022 or 2021. We had no commitments to lend additional funds to borrowers whose loans were on
non‐accrual status at December 31, 2022.
We discontinue accruing interest on loans when the loans become 90 days delinquent as to their payment due date (three missed 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 $144 thousand at December 31, 2022 and $684 thousand at December 31, 2021. 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, 2022 and $1.6 million at December 31, 2021.
During 2022, gross interest income that would have been recorded on non‐accrual loans had they performed in accordance with their original terms, totaled $31 thousand. No income was recognized during
2022 on non-accrual loans prior to payoff. Interest income of $102 thousand was recognized upon the payoff of one non-accrual church loan during 2022.
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.
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. 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, 2022, our recorded investment in PCI loans was $125 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:
(Dollars in thousands)
Special mention loans – –
Criticized assets increased to $47.8 million at December 31, 2022, from $16.0 million at December 31, 2021. 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 $31.9 million during 2022. The decrease in substandard loans of $2.3
million was due to the improvement of three church loans and one multi-family loan. The loans were current as of December 31, 2022.
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, 2022, impaired loans totaled $1.7 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 $4.4 million, or 0.57% of loans held for investment, was appropriate at December 31, 2022, compared to $3.4 million, or 0.52%
of loans held for investment at December 31, 2021. This increase was due to new loans originated at an average ALLL provision rate of 0.65% during 2022. The CFB loan portfolio as of the merger date was marked to market, so there is no
ALLL associated with it.
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, 2022. 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)
Consumer 4 – % 15 – % 1 – % 1 0.01 % – – %
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 – – – – –
Commercial real estate – – – – –
Church – – – – –
Commercial – – – – –
Total charge‐offs – – – – –
Recoveries:
Single family – – 4 – –
Commercial real estate – – – – –
Commercial – – – – –
(1) Including net deferred loan costs and premiums.
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, 2022, 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 $328.7 million, or 27.76% 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 income. 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.
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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, 2022, 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
(In thousands)
The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2022. The table
reflects stated final maturities and does not reflect scheduled principal payments or expected payoffs.
(Dollars in thousands)
Available‐for‐sale:
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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, interest checking 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 $74.6 million and $141.6 million at
December 31, 2022 and 2021, 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 $0 and $223 thousand at December 31, 2022 and 2021, respectively.
At December 31, 2022 and 2021, the Bank had $4.3 million and $5.0 million in (non-CDARS) brokered deposits, respectively.
As of December 31, 2022 and 2021, approximately $212.9 million and $265.8 million of our total deposits were not insured by FDIC insurance.
The following table details the maturity periods of our certificates of deposit in amounts of $100 thousand or more at December 31, 2022.
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 Years Ended December 31,
(Dollars in thousands)
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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, 2022, we had $128.3 million in outstanding FHLB advances and had the ability to borrow up to an additional $70.6 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 Years Ended December 31,
(Dollars in thousands)
FHLB Advances:
Weighted average interest rate at end of year 3.74 % 1.85 % 1.94 %
Average cost of advances during the year 1.74 % 1.96 % 1.91 %
Weighted average maturity (in months) 13 22 27
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 statements of financial condition, while the
securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. As of
December 31, 2022, securities sold under agreements to repurchase totaled $63.5 million at an average rate of 0.38%. These agreements mature on a daily basis. The market value of securities pledged totaled $64.4 million as of December 31, 2022
and included $33.3 million of federal agency debt, $19.2 million of U.S. Treasuries and $11.9 million of federal agency mortgage-backed securities. As of December 31, 2021, securities sold under agreements to repurchase totaled $52.0 million at
an average rate of 0.10%. The market value of securities pledged totaled $53.2 million as of December 31, 2021 and included $25.9 million of federal agency
mortgage-backed securities, $13.3 million of federal agency debt, $9.8 million of SBA pool, and $4.2 million of federal
agency CMO.
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, 2022: two in California (in
Los Angeles and in the nearby City of Inglewood) and one in Washington, D.C.
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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.
Human Capital Management
Human Capital
We are a unified, commercial CDFI 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 employees are one of our most important resources and in order to fulfill future and sustainable growth, our key objectives include attracting, selecting, retaining, and developing top talent in the marketplace that closely align our employees’ 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 critical 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.
As of December 31, 2022, we employed 83 full-time and one part-time employee.
Our employees are primarily located in Los Angeles, California and Washington, D.C. in our corporate offices, branches, and operating facilities. We also employ several remote workers who are in various locations throughout the U.S.
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 are designed to ensure that we honor and adhere to
pay equity analysis.
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, D.C. 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.
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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, 2022, more than 80% of the Company’s employees self-identified as minority, approximately 64% of our employees were women, and other diverse groups such as veterans and people with disabilities were also represented.
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.
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 SEC 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.
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.
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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 Coronavirus Aid Relief and Economic Security Act temporarily lowered this ratio to 8% as of
September 30, 2020. The ratio then rose to 8.5% at the end of 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, 2022 and 2021 is shown in the table below.
Amount Ratio Amount Ratio
(Dollars in thousands)
At December 31, 2022, 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.
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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.
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 of bank failures than had occurred in the immediately preceding years. These failures dramatically increased the resolution costs incurred by the FDIC and substantially reduced the available amount of the DIF.
Consistent with the requirements of the Dodd‐Frank Act, the FDIC adopted its most recent DIF restoration plan in September 2020; that plan is designed to enable the FDIC to achieve the statutorily
required reserve ratio of 1.35% by September 30, 2028. The FDIC Board has set the designated reserve ratio for each of the years 2021 and 2022 at 2%. The statute provides that in setting the amount of assessments necessary to meet the designated
reserve ratio requirement, the FDIC is required to offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne
by institutions with more than $10 billion in assets. Accordingly, the FDIC has provided assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular
assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC has applied the credits each quarter that the reserve ratio was at least 1.38% to offset the regular deposit insurance assessments of institutions with
credits. The Bank did not receive any assessment credits during 2022. During 2021, the Bank received two assessment credits totaling $49 thousand.
Although it rarely does so, the FDIC has the authority to terminate a depository institution’s deposit insurance upon a finding that the
institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of a bank’s depositors.
Guidance on Commercial Real Estate Lending
In December 2015, the federal banking agencies released a statement titled “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”). The CRE Statement expresses
the banking agencies’ concerns with banking institutions that ease their commercial real estate underwriting standards, directs financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure
and monitor lending risks, and indicates that the agencies will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The banking agencies previously issued guidance titled “Prudent
Commercial Real Estate Loan Workouts” which provides guidance for financial institutions that are working with commercial real estate (“CRE”) borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or
prolonged delays in selling or renting commercial properties and details risk‐management practices for loan workouts that support prudent and pragmatic credit and business decision‐making within the framework of financial accuracy, transparency,
and timely loss recognition. The banking agencies had also issued previous guidance titled “Interagency Guidance on Concentrations in Commercial Real Estate” stating that a banking institution will be considered to be potentially exposed to
significant CRE concentration risk, and should employ enhanced risk management practices, if total CRE loans represent 300% or more of its total capital and the outstanding balance of the institution’s CRE loan portfolio has increased by 50% or
more during the preceding 36 months.
In October 2009, the federal banking agencies adopted a policy statement supporting workouts of CRE loans, which is referred to as the “CRE Policy
Statement.” The CRE Policy Statement provides guidance for examiners, and for financial institutions that are working with CRE borrowers who are experiencing diminished
operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The CRE Policy Statement details risk‐management practices for loan workouts that support prudent and pragmatic credit and
business decision‐making within the framework of financial accuracy, transparency, and timely loss recognition. The CRE Policy Statement states that financial institutions that implement prudent loan workout arrangements after performing
comprehensive reviews of the financial condition of borrowers will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing
loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. The CRE Policy Statement
reiterates existing guidance that examiners are expected to take a balanced approach in assessing an institution’s risk‐management practices for loan workout activities.
In October 2018, the OCC provided Broadway Federal with a letter of “no supervisory objection” permitting it to increase the non‐multifamily commercial real estate loan concentration limit to 100% of
Tier 1 Capital plus ALLL, including a sublimit of 50% for land/construction loans, which brought the total CRE loan concentration limit to 600% of Tier 1 Capital plus ALLL.
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Loans to One Borrower
The Bank is in compliance with the statutory and regulatory limits applicable to loans to any one borrower. As of December 31, 2022, the lending limit for City First is $29.0 million. At December 31,
2022, our largest loan to a single borrower was $15.7 million; that loan was performing in accordance with its terms and was otherwise in compliance with regulatory requirements.
Community Reinvestment Act and Fair Lending
The Community Reinvestment Act, as implemented by OCC regulations (“CRA”), requires each national bank to make efforts to meet the credit needs of
the communities it serves, including low‐ and moderate‐income neighborhoods. The CRA requires the OCC to assess an institution’s performance in meeting the credit needs of its communities as part of its examination of the institution, and to take
such assessments into consideration in reviewing applications for mergers, acquisitions, and other transactions. An unsatisfactory CRA rating may be the basis for denying an application. Community groups have successfully protested applications
on CRA grounds. In connection with the assessment of a savings institution’s CRA performance, the OCC assigns ratings of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Company’s CRA performance was rated by the OCC as “outstanding” in their most recent CRA examination which was completed in 2022.
The Bank is also subject to federal fair lending laws, including the Equal Credit Opportunity Act (“ECOA”) and the Federal Housing Act (“FHA”), which
prohibit discrimination in credit and residential real estate transactions on prohibited bases, including race, color, national origin, gender, and religion, among others. A lender may be liable under one or both acts in the event of overt
discrimination, disparate treatment, or a disparate impact on a prohibited basis. The compliance of national banks with these acts is primarily supervised and enforced by the OCC. If the OCC determines that a lender has engaged in a pattern or