BROADWAY FINANCIAL CORP DE 10-K

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”). S ee “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. 1 Table of Contents 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 originat e 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. 2 Table of Contents 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, 2021 2020 2019 2018 2017 Amount Percent of total Amount Percent of total Amount Percent of total Amount Percent of total Amount Percent of total (Dollars in thousands) Single family $ 45,372 6.96 % $ 48,217 13.32 % $ 72,883 18.23 % $ 91,835 25.69 % $ 111,085 32.93 % Multi‑family 393,704 60.36 % 272,387 75.24 % 287,378 71.90 % 231,870 64.86 % 187,455 55.57 % Commercial real estate 93,193 14.29 % 24,289 6.71 % 14,728 3.68 % 5,802 1.62 % 6,089 1.80 % Church 22,503 3.45 % 16,658 4.60 % 21,301 5.33 % 25,934 7.25 % 30,848 9.14 % Construction 32,072 4.92 % 429 0.11 % 3,128 0.78 % 1,876 0.52 % 1,678 0.50 % Commercial 46,539 10.02 % 57 0.02 % 262 0.07 % 226 0.06 % 192 0.06 % SBA Loans 18,837 2.89 % Consumer - 7 0.00 % 21 0.01 % 5 0.00 % 7 0.00 % Gross loans 652,220 100.00 % 362,044 100.00 % 399,701 100.00 % 357,548 100.00 % 337,354 100.00 % Plus: Premiums on loans purchased 58 88 171 259 360 Deferred loan costs, net 1,471 1,218 1,211 721 1,220 Less: Credit and interest marks on purchased loans, net 1842 - - - - Unamortized discounts 3 6 54 43 14 Allowance for loan losses 3.391 3,215 3,182 2,929 4,069 Total loans held for investment $ 648,513 $ 360,129 $ 397,847 $ 355,556 $ 334,851 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 outstandi ng 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 ba lance 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. 3 Table of Contents 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 s elective 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, 20 21, $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. 4 Table of Contents 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. 5 Table of Contents Loan Originations, Purchases and Sales The following table summarizes loan originations, purchases, sales, and principal repayments for the periods indicated: 2021 2020 2019 (In thousands) Gross loans (1): Beginning balance $ 362,044 $ 399,701 $ 363,761 Loans acquired in the merger with CFBanc 225,885 - - Loans originated: Multi‑family 167,097 120,809 103,123 Commercial real estate 43,567 11,870 9,521 PPP Loans 26,497 - - Construction 24,884 1,529 1,681 Commercial 4,942 66 49 Total loans originated 266,987 134,274 114,374 Less: Principal repayments 202,696 67,858 55,742 Sales of loans - 104,073 22,703 Loan charge‑offs - - ‑ Lower of cost or fair value adjustment on loans held for sale - - (11 ) Transfer of loans to real estate owned - - ‑ Ending balance $ 652,220 $ 362,044 $ 399,701 (1) Amount is before deferred origination costs, purchase premiums and discounts, and the allowance for loan losses. Loan originations are derived from various sources including our loan personnel, local mortgage brokers, and referrals from customers. More t han 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 proper ties. We did not purchase any loans du ring 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. 6 Table of Contents 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. Single Family Multi‑ Family Commercial Real Estate Church Construction Commercial SBA Gross Loans Amounts Due: After one year: One year to five years $ 7,774 $ 18,458 $ 51,725 $ 13,197 $ 543 $ 21,115 $ 18,737 $ 131,549 After five years 37,182 371,568 33,955 6,301 12,887 15,702 100 477,695 Total due after one year 44,956 390,026 85,680 19,498 13,430 36,817 18,837 609,244 One year or less 416 3,678 7,513 3,005 18,541 9,722 - 42,976 Total $ 45,372 $ 393,704 $ 93,193 $ 22,503 $ 32,072 $ 46,539 $ 18,837 $ 652,220 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. 7 Table of Contents The following table shows our loan delinquencies by type and amount at the dates indicated: December 31, 2021 December 31, 2020 December 31, 2019 Loans delinquent Loans delinquent Loans delinquent 60‑89 Days 90 days or more 60‑89 Days 90 days or more 60‑89 Days 90 days or more Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount (Dollars in thousands) Commercial Real Estate 1 $ 2,423 - $ - - $ ‑ - $ - - $ ‑ - $ ‑ Single family - $ - ‑ $ - - $ - ‑ $ - 1 $ 18 ‑ $ - Total 1 $ 2,423 ‑ $ - - $ - ‑ $ - 1 $ 18 ‑ $ ‑ % of Gross Loans 0.37 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 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, 2021 2020 2019 2018 2017 (Dollars in thousands) Non‑accrual loans: Single family $ - $ 1 $ 18 $ - $ - Multi‑family ‑ ‑ ‑ ‑ ‑ Commercial real estate ‑ ‑ ‑ ‑ ‑ Church 684 786 406 911 1,766 Commercial ‑ ‑ ‑ ‑ ‑ Total non‑accrual loans 684 787 424 911 1,766 Loans delinquent 90 days or more and still accruing ‑ ‑ ‑ ‑ ‑ Real estate owned acquired through foreclosure - - - 833 878 Total non‑performing assets $ 684 $ 787 $ 424 $ 1,744 $ 2,644 Non‑accrual loans as a percentage of gross loans, including loans receivable held for sale 0.10 % 0.22 % 0.11 % 0.25 % 0.49 % Non‑performing assets as a percentage of total assets 0.06 % 0.16 % 0.10 % 0.43 % 0.64 % 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. 8 Table of Contents 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 fi ling, 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. 9 Table of Contents 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: December 31, 2021 December 31, 2020 Number Amount Number Amount (Dollars in thousands) Watch loans 8 $ 15,950 2 $ 2,145 Special mention loans - - - - Total criticized loans 8 15,950 2 2,145 Substandard loans 7 4,283 9 3,162 Total classified assets 7 4,283 9 3,162 Total 15 $ 20,233 11 $ 5,307 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. 10 Table of Contents 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. 11 Table of Contents 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, 2021 2020 2019 2018 2017 Amount Percent of loans in each category to total loans Amount Percent of loans in each category to total loans Amount Percent of loans in each category to total loans Amount Percent of loans in each category to total loans Amount Percent of loans in each category to total loans (Dollars in thousands) Single family $ 145 0.02 % $ 296 0.08 % $ 312 0.08 % $ 368 0.10 % $ 594 0.17 % Multi‑family 2,657 0.41 % 2,433 0.67 % 2,319 0.58 % 1,880 0.52 % 2,300 0.68 % Commercial real estate 236 0.04 % 222 0.06 % 133 0.03 % 52 0.02 % 71 0.02 % Church 103 0.02 % 237 0.06 % 362 0.09 % 604 0.17 % 1,081 0.32 % Construction 212 0.03 % 22 0.01 % 48 0.01 % 19 0.01 % 17 0.01 % Commercial 23 0.00 % 4 0.00 % 7 0.00 % 6 0.00 % 6 0.00 % Consumer 15 0.00 % 1 0.00 % 1 0.00 % - 0.00 % - 0.00 % Total allowance for loan losses $ 3,391 0.52 % $ 3,215 0.88 % $ 3,182 0.79 % $ 2,929 0.82 % $ 4,069 1.20 % The following table shows the activity in our ALLL related to our loans held for investment for the years indicated: 2021 2020 2019 2018 2017 (Dollars in thousands) Allowance balance at beginning of year $ 3,215 $ 3,182 $ 2,929 $ 4,069 $ 4,603 Charge‑offs: Single family ‑ ‑ ‑ ‑ ‑ Multi‑family ‑ ‑ ‑ ‑ ‑ Commercial real estate ‑ ‑ ‑ ‑ ‑ Church ‑ ‑ ‑ ‑ ‑ Commercial ‑ ‑ ‑ ‑ ‑ Total charge‑offs ‑ ‑ ‑ ‑ ‑ Recoveries: Single family - 4 ‑ ‑ 30 Commercial real estate ‑ ‑ ‑ ‑ ‑ Church - - 260 114 536 Commercial ‑ ‑ ‑ ‑ ‑ Total recoveries - 4 260 114 566 Loan loss provision (recapture) 176 29 (7 ) (1,254 ) (1,100 ) Allowance balance at end of year (1) $ 3,391 $ 3,215 $ 3,182 $ 2,929 $ 4,069 Net charge‑offs (recoveries) to average loans, excluding loans receivable held for sale 0.00 % (0.00 %) (0.07 %) (0.04 %) (0.16 %) ALLL as a percentage of gross loans (2) , excluding loans receivable held for sale 0.52 % 0.88 % 0.79 % 0.82 % 1.20 % ALLL as a percentage of total non‑accrual loans 495.76 % 408.51 % 750.47 % 321.51 % 230.41 % ALLL as a percentage of total non‑performing assets 495.76 % 408.51 % 750.47 % 167.94 % 153.90 % (1) Including net deferred loan costs and premiums. (2) The ALLL as of December 31, 2021 does not include any ALLL for the remaining balance of loans acquired in the City First Merger, which totaled $203.8 million as of that date. 12 Table of Contents 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. At December 31, 2021 One Year or less More than one year to five years More than five years to ten years More than ten years Total Carrying amount Weighted average yield Carrying amount Weighted average yield Carrying amount Weighted average yield Carrying amount Weighted average yield Carrying amount Weighted average yield (Dollars in thousands) Available‑for‑sale: Federal agency mortgage‑backed securities $ - - % $ 593 1.12 % $ 15,271 0.96 % $ 54,166 1.75 % $ 70,030 1.57 % Federal agency CMO - - % - - % 5,443 0.51 % 3,844 1.30 % 9,287 0.83 % Federal agency debt 1,013 0.17 % 14,716 0.94 % 19,142 1.20 % 3,117 0.51 % 37,988 1.01 % Municipal bonds - - % - - % 3,160 1.45 % 1,755 1.56 % 4,915 1.49 % U.S. Treasuries - - % 17,951 0.74 % - - % - - % 17,951 0.74 % SBA pools - - % - - % 3,302 2.00 % 12,923 1.79 % 16,225 1.83 % Total $ 1,013 0.17 % $ 33,260 0.83 % $ 46,318 1.11 % $ 75,805 1.68 % $ 156,396 1.32 % 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. 13 Table of Contents 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, ​ 2021 2020 2019 ​ Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value ​ (Dollars in thousands) ​ Federal agency mortgage-backed securities $ 70,078 $ 70,030 $ 5,550 $ 5,807 $ 7,793 $ 7,957 ​ Federal agency collateralized mortgage obligations (“CMO”) 9,391 9,287 - - - - Federal agency debt 38,152 37,988 2,682 2,827 3,104 3,050 Municipal bonds 4,898 4,915 2,000 2,019 - - U.S. Treasuries 18,169 17,951 - - - - SBA pools 16,241 16,225 - - - - ​ Total $ 156,929 $ 156,396 $ 10,232 $ 10,698 $ 10,807 $ 11,007 ​ 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. 14 Table of Contents 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. December 31, 2021 Amount Weighted average rate (Dollars in thousands) Certificates maturing: Less than three months $ 52,141 0.19 % Three to six months 61,571 0.24 % Six to twelve months 61,401 0.22 % Over twelve months 5,522 0.50 % Total $ 180,635 0.22 % 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, 2021 2020 2019 Average balance Percent of total Weighted average cost of funds Average balance Percent of total Weighted average cost of funds Average balance Percent of total Weighted average cost of funds (Dollars in thousands) Money market deposits $ 159,157 24.77 % 0.41 % $ 47,611 14.88 % 0.71 % $ 25,297 8.86 % 0.88 % Passbook deposits 67,660 10.53 % 0.30 % 55,985 17.51 % 0.50 % 45,548 15.95 % 0.63 % NOW and other demand deposits 223,003 34.70 % 0.05 % 55,003 17.17 % 0.03 % 34,091 11.94 % 0.03 % Certificates of deposit 192,795 30.00 % 0.37 % 161,409 50.44 % 1.56 % 180,611 63.25 % 2.08 % Total $ 642,615 100.00 % 0.26 % $ 320,008 100.00 % 0.99 % $ 285,547 100.00 % 1.50 % 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 2021 2020 2019 (Dollars in thousands) FHLB Advances: Average balance outstanding during the year $ 100,471 $ 114,020 $ 77,049 Maximum amount outstanding at any month‑end during the year $ 113,580 $ 121,500 $ 84,000 Balance outstanding at end of year $ 85,952 $ 110,500 $ 84,000 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 15 Table of Contents 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. 16 Table of Contents 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 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. 17 Table of Contents 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 prim ary 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. 18 Table of Contents 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. 19 Table of Contents Actual Minimum Capital Requirements Minimum Required to Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) December 31, 2021: Community Bank Leverage Ratio (1) $ 98,590 9.32 % $ $ 89,871 8.50 % December 31, 2020: Tier 1 (Leverage) $ 46,565 9.54 % $ 19,530 4.00 % $ 24,413 5.00 % Common Equity Tier 1 $ 46,565 18.95 % $ 11,059 4.50 % $ 15,975 6.50 % Tier 1 $ 46,565 18.95 % $ 14,746 6.00 % $ 19,661 8.00 % Total Capital $ 49,802 20.20 % $ 19,661 8.00 % $ 24,577 10.00 % (1) At the Merger on April 1, 2021, the Company’s former subsidiary, Broadway Federal Bank, was merged into City First Bank, with City First Bank. as the surviving entity, which had elected to adopt Community Bank Leverage Ratio option on April 1, 2020 as reflected in its September 30, 2020 Call Report. 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. 20 Table of Contents 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 2021. During 2020, 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 the 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. 21 Table of Contents 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, 2021, the lending limit for City First is $15.3 million. At December 31, 2021, our largest loan to a single borrower was $9.7 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.” Both City First’s and Broadway Federal’s CRA performance was rated by OCC as “outstanding” in their most recent CRA examinations; both examinations were completed in 2019. 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 of the Bank’s size with these acts is primarily supervised and enforced by the OCC. If the OCC determines that a lender has engaged in a pattern or practice of discrimination in violation of ECOA, the OCC refers the matter to the DOJ. Similarly, HUD is notified of violations of the FHA. The USA Patriot Act, Bank Secrecy Act (“BSA”), and Anti‑Money Laundering (“AML”) Requirements The USA PATRIOT Act was enacted after September 11, 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in the promulgation of several regulations that have a direct impact on savings associations. Financial institutions must have a number of programs in place to comply with this law, including: (i) a program to manage BSA/AML risk; (ii) a customer identification program designed to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations; and (iii) a program for monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Failure to comply with these requirements may result in regulatory action, including the issuance of cease and desist orders, impositions of civil money penalties and adverse changes in an institution’s regulatory ratings, which could adversely affect its ability to obtain regulatory approvals for business combinations or other desired business objectives. Privacy Protection City First is subject to OCC regulations implementing the privacy protection provisions of federal law. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information,” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require City First to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, the Bank is required to provide its customers with the ability to “opt‑out” of having City First share their nonpublic personal information with unaffiliated third parties. 22 Table of Contents City First is also subject to regulatory guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies’ expectations for the creation, implementation, and maintenance of an information security program, which would include administrative, technical, and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Cybersecurity In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in‑depth, layered, defensive approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected persistent threats. Notwithstanding the strength of our defensive measures, the threat from cybersecurity attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third‑party service providers are under constant threat and it is possible that we could experience a significant event in the future. The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a banking organization’s the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management, processes related to information technology and operational resiliency, and the use of third parties in the provision of financial services. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other technology‑based products and services by us and our customers. Bank Holding Company Regulation As a bank holding company, we are subject to the supervision, regulation, and examination of the FRB and the FRBR. In addition, the FRB has enforcement authority over the Company. Applicable statutes and regulations administered by the FRB place certain restrictions on our activities and investments. Among other things, we are generally prohibited, either directly or indirectly, from acquiring more than 5% of the voting shares of any depository or depository holding company that is not a subsidiary of the Company. The Change in Bank Control Act prohibits a person, acting directly or indirectly or in concert with one or more persons, from acquiring control of a bank holding company unless the FRB has been given 60 days prior written notice of such proposed acquisition and within that time period the FRB has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which a disapproval may be issued. The term “control” is defined for this purpose to include ownership or control of, or holding with power to vote, 25% or more of any class of a bank holding company’s voting securities. Under a rebuttable presumption contained in the regulations of the FRB, ownership or control of, or holding with power to vote, 10% or more of any class of voting securities of a bank company will be deemed control for purposes of the Change in Bank Control Act if the institution (i) has registered securities under Section 12 of the Exchange Act, or (ii) no person will own, control, or have the power to vote a greater percentage of that class of voting securities immediately after the transaction. In addition, any company acting directly or indirectly or in concert with one or more persons or through one or more subsidiaries would be required to obtain the approval of the FRB under the Bank Holding Company Act of 1956, as amended, before acquiring control of a bank holding company. For this purpose, a company is deemed to have control of a bank holding company if the company (i) owns, controls, holds with power to vote, or holds proxies representing, 25% or more of any class of voting shares of the holding company, (ii) contributes more than 25% of the holding company’s capital, (iii) controls in any manner the election of a majority of the holding company’s directors, or (iv) directly or indirectly exercises a controlling influence over the management or policies of the national bank or other company. The FRB may also determine, based on the relevant facts and circumstances, that a company has otherwise acquired control of a bank holding company. 23 Table of Contents Restrictions on Dividends and Other Capital Distributions In general, the prompt corrective action regulations prohibit a national bank from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized categories set out in the regulations. In addition to the prompt corrective action restriction on paying dividends, OCC regulations limit certain “capital distributions” by national banks. Capital distributions are defined to include, among other things, dividends and payments for stock repurchases and payments of cash to stockholders in mergers. Under the OCC capital distribution regulations, a national bank that is a subsidiary of a bank holding company must notify the OCC at least 30 days prior to the declaration of any capital distribution by its national bank subsidiary. The 30‑day period provides the OCC an opportunity to object to the proposed dividend if it believes that the dividend would not be advisable. An application to the OCC for approval to pay a dividend is required if: (i) the total of all capital distributions made during that calendar year (including the proposed distribution) exceeds the sum of the institution’s year‑to‑date net income and its retained income for the preceding two years; (ii) the institution is not entitled under OCC regulations to “expedited treatment” (which is generally available to institutions the OCC regards as well run and adequately capitalized); (iii) the institution would not be at least “adequately capitalized” following the proposed capital distribution; or (iv) the distribution would violate an applicable statute, regulation, agreement, or condition imposed on the institution by the OCC. The Bank’s ability to pay dividends to the Company is also subject to a restriction on the payment of dividends by the Bank to the Company if the Bank’s regulatory capital would be reduced below the amount required for the liquidation account established in connection with the conversion of the Bank from the mutual to the stock form of organization. See Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for a further description of dividend and other capital distribution limitations to which the Company and the Bank are subject. Tax Matters Federal Income Taxes We report our income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations. See Note 17 of the Notes to Consolidated Financial Statements for a further description of tax matters applicable to our business. California Taxes As a bank holding company filing California franchise tax returns on a combined basis with its subsidiaries, the Company is subject to California franchise tax at the rate applicable to “financial corporations.” The applicable statutory tax rate is 10.84%.