Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and other
factors that have affected our reported results of operations and financial condition or may affect our future results or financial condition. The following discussion should be read in conjunction with the Consolidated Financial Statements and
related Notes included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10 K.
Acquisition of CFBanc Corporation
On April 1, 2021, the Company completed its Merger with CFBanc, with Broadway Financial Corporation continuing as the surviving entity. Prior to the acquisition, CFBanc was headquartered in Washington, D.C. and
conducted its business through its wholly-owned national bank subsidiary, City First Bank of D.C., National Association. Immediately following this merger, Broadway Federal, a subsidiary of Broadway Financial Corporation, 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 (which concurrently changed its name to City First Bank, National Association).
In connection with the Merger, in exchange for the then outstanding common and preferred shares of CFBanc, the Company issued to holders of CFBanc shares 13,999,879 shares of the Company’s Class A Common Stock and
11,404,621 of Class B Common Stock which were valued at $2.49 per share (which was the closing price of the Company’s shares the day prior to the acquisition), along with 3,000 shares of Series A Preferred Stock with a par value of $1,000 per share.
The total consideration paid on the acquisition date was valued at $66.3 million.
As of the Merger date, CFBanc had $471.0 million in total assets, $227.7 million in gross loans, and $353.7 million of total deposits. As a result of the Merger, the Company recorded goodwill of $26.0 million. Goodwill
represents the future economic benefits rising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill
recognized in this transaction is not deductible for income tax purposes. The Merger was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at
estimated fair value on the acquisition date, in accordance with FASB ASC Topic 805, Business Combinations. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value
Measurements.
Overview
Total assets increased by $610.1 million to $1.1 billion at December 31, 2021 from $483.4 million at December 31, 2020. The increase in total assets was primarily due to the Merger, wh ich increased total assets by $501.2 million, as well as an increase of $108.9 million in asset growth since the Merger. The growth in total assets mainly consisted of increases of $288.4 million in loans (including $225.9 million of loans
acquired in the Merger) and securities available-for-sale of $145.7 million (including the impact of $150.0 million of securities available-for-sale acquired in the Merger).
Total liabilities increased by $517.9 million to $952.4 million at December 31, 2021 from $434.5 million at December 31, 2020. The increase in total liabilities during 2021 resulted primarily from the assumption of the deposits, borrowings, and other liabilities at the completion of the Merger, and consisted of increases of $472.4 million in deposits and $66.0 million of other borrowings, offset by reductions in FHLB
advances of $24.5 million and junior subordinated debentures of $3.3 million due to repayments of amounts outstanding.
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We recorde d a net loss of $4.1 million for the year ended December 31, 2021 or $(0.07) per share compared to a net loss of $642 thousand or $(0.02) per share for the year
ended December 31, 2020. The increase in the net loss for 2021 was primarily due to an increase in non-interest expenses of $14.7 million, principally as a result of including the non-interest expenses of City First and its subsidiaries after the
Merger. The increase in non-interest expenses consisted mainly of Merger-related costs of $5.6 million, data processing conversion costs of $2.4 million (including non-recurring data processing costs of $2.0 million to migrate the Company’s
information systems to a common platform after the Merger), and additional employee-related expenses of $1.1 million during the fourth quarter. These increased costs were partially offset by an increase in net interest income of $8.8 million in 2021 due to an increase in the average balance of interest-earning assets of $384.5 million. Results for calendar 2021 were also positively impacted by an increase of $1.8 million in income from the U.S.
Treasury’s Community Development Financial Institution Fund grants compared to calendar 2020.
The following table summarizes the return on average assets, the return on average equity and the average equity to average assets ratios for the periods indicated:
For the Year Ended December 31,
2021
2020
2019
Return on average assets
(0.54
%)
(0.13
%)
(0.05
%)
Return on average equity
(4.46
%)
(1.30
%)
(0.42
%)
Average equity to average assets
11.54
%
10.00
%
11.58
%
Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
General
Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from our loans and investments
(interest earning assets) and interest expense is incurred from deposits and borrowings (interest bearing liabilities). Typically, our results of operations are also affected by our provision for loan losses, non-interest income generated from
service charges and fees on loan and deposit accounts, gains or losses on the sale of loans and REO, non-interest expenses, and income taxes.
Net Interest Income
For the year ended December 31, 2021, net interest income before provision for loan losses increased by $8.8 million, or 72.6%, to $21.0 million, compared to $12.2 million for the year ended December 31, 2020. The
increase in net interest income primarily resulted from additional net interest income earned on assets acquired in the Merger, and a decrease in the cost of funds.
Interest income and fees on loans receivable increased by $5.8 million during the year ended December 31, 2021, compared to the year ended December 31, 2020. This increase was primarily due to an increase of $118.9
million in the average balance of loans receivable, primarily resulting from the Merger, which increased interest income by $5.0 million. In addition, the average loan yield increased by 18 basis points during the year, from 4.06% for the year ended
December 31, 2020, to 4.24% for the year ended December 31, 2021, which increased interest income by $797 thousand. The increase in the average loan yield primarily resulted from the higher yields earned on the commercial loan portfolio acquired in
the Merger.
Interest income on securities increased $1.1 million to $1.4 million for the year ended December 31, 2021, compared to $253 thousand for the year ended December 31, 2020. The increase in interest income on securities
primarily resulted from an increase of $111.0 million in the average balance of securities resulting from the Merger, which increased interest income by $1.3 million. This increase was partially offset by a decrease of 124 basis points in the
average interest yield earned on investment securities, which reflected the declining interest rate environment and reduced interest income by $196 thousand.
Other interest income increased by $150 thousand in 2021, compared to the same period in 2020, primarily due to higher average cash balances in other banks. The average cash balances increased by $154.1 million during
the year ended December 31, 2021, compared to the year ended December 31, 2020. The Company also recorded $51 thousand in higher interest income on regulatory stock during 2021, primarily due to interest earned on FRB and FHLB stock acquired in the
Merger, along with the existing holdings of FHLB stock.
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Interest expense on deposits decreased by $1.5 million during calendar 2021, compared to calendar 2020, due to a decrease of 73 basis points in the average cost of deposits. The average cost of deposits decreased to
0.26% for 2021, compared to 0.99% for 2020, which reduced interest expense by $2.5 million. This decrease was partially offset by an increase of $322.6 million in the average balance of deposits, primarily due to deposits assumed in the Merger and
organic growth of deposits after the Merger, which increased interest expense by $1.1 million.
Interest expense on borrowings decreased by $239 thousand during the year ended December 31, 2021, compared to the year ended December 31, 2020, because of a change in the mix of borrowings that resulted in a decrease
of 57 basis points in the average borrowing rate. Interest on borrowings decreased by $211 thousand because of a decrease of $13.5 million in the average balance of outstanding FHLB advances, and another $73 thousand from the pay-off of the Company’s
remaining junior subordinated debentures in September of 2021. These decreases were partially offset by the effects of a net increase of $31.7 million in borrowings, due to the addition of average short-term borrowings of $46.8 million assumed in
the Merger at an average rate of ten (10) basis points, which increased interest expense by $45 thousand.
Net interest margin decreased by ten (10) basis points to 2.42% for calendar 2021, from 2.52% for calendar 2020, primarily due to lower rates earned on higher balances of interest-earning cash deposits in other banks
and lower rates earned on securities. The effects of these lower rates were partially offset by higher loan yields and a lower cost of funds in 2021.
Analysis of Net Interest Income
Net interest income is the difference between income on interest earning assets and the expense on interest bearing liabilities. Net interest income depends upon the relative amounts of interest earning assets and
interest bearing liabilities and the interest rates earned or paid on them. The following table sets forth average balances, average yields and costs, and certain other information for the years indicated. All average balances are daily average
balances. The yields set forth below include the effect of deferred loan fees, deferred origination costs, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans that are on
non-accrual status; however, the balance of these loans is included in the total average balance, which has the effect of reducing average loan yields.
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Table of Contents
For the year ended December 31,
2021
2020
2019
(Dollars in Thousands)
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
Assets
Interest‑earning assets:
Interest‑earning deposits and other short‑term investments
$
203,493
$
302
0.15
%
$
49,377
$
203
0.41
%
$
19,447
$
439
2.26
%
Securities
121,623
1,396
1.15
%
10,605
253
2.39
%
13,531
359
2.65
%
Loans receivable (1)
537,872
22,831
4.24
%
418,952
17,016
(2) 4.06
%
375,206
15,845
(3) 4.22
%
FHLB and FRB stock
3,862
223
5.78
%
3,438
172
5.00
%
2,916
204
7.00
%
Total interest‑earning assets
866,850
$
24,752
2.85
%
482,372
$
17,644
3.66
%
411,100
$
16,847
4.10
%
Non‑interest‑earning assets
51,386
10,530
10,089
Total assets
$
918,236
$
492,902
$
421,909
Liabilities and Stockholders’ Equity
Interest‑bearing liabilities:
Money market deposits
$
159,157
$
660
0.41
%
$
47,611
$
340
0.71
%
$
25,297
$
222
0.88
%
Passbook deposits
67,660
204
0.30
%
55,985
281
0.50
%
45,548
285
0.63
%
NOW and other demand deposits
223,003
105
0.05
%
55,003
19
0.03
%
34,091
11
0.03
%
Certificate accounts
192,795
707
0.37
%
161,409
2,523
1.56
%
180,611
3,758
2.08
%
Total deposits
642,615
1,676
0.26
%
320,008
3,163
0.99
%
285,547
4,276
1.50
%
FHLB advances
100,471
1,968
1.96
%
114,020
2,179
1.91
%
77,049
1,862
2.42
%
Junior subordinated debentures
2,335
60
2.57
%
3,908
133
3.40
%
4,891
248
5.07
%
Other borrowings
46,836
45
0.10
%
-
-
0.00
%
-
-
0.00
%
Total borrowings
149,642
2,073
1.39
%
117,928
2,312
1.96
%
81,940
2,110
2.58
%
Total interest‑bearing liabilities
792,257
$
3,749
0.47
%
437,936
$
5,475
1.25
%
367,487
$
6,386
1.74
%
Non‑interest‑bearing liabilities
20,050
5,655
5,566
Stockholders’ equity
105,929
49,311
48,856
Total liabilities and stockholders’ equity
$
918,236
$
492,902
$
421,909
Net interest rate spread (4)
$
21,003
2.38
%
$
12,169
2.41
%
$
10,461
2.36
%
Net interest rate margin (5)
2.42
%
2.52
%
2.54
%
Ratio of interest‑earning assets to interest‑bearing liabilities
109.42
%
110.15
%
111.87
%
(1)
Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs, loan premiums and loans receivable held for sale.
(2)
Includes non‑accrual interest of $162 thousand, reflecting interest recoveries on non‑accrual loans that were paid off for the year ended December 31, 2020.
(3)
Includes non-accrual interest of $567 thousand, reflecting interest recoveries on non-accrual loans that were paid off, and deferred cost amortization of $254 thousand for the year ended December 31, 2019.
(4)
Net interest rate spread represents the difference between the yield on average interest‑earning assets and the cost of average interest‑bearing liabilities.
(5)
Net interest rate margin represents net interest income as a percentage of average interest‑earning assets.
Changes in our net interest income are a function of changes in both rates and volumes of interest earning assets and interest bearing liabilities. The following table sets forth information regarding changes in our
interest income and expense for the years indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the total change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
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Table of Contents
Year ended December 31, 2021
Compared to
Year ended December 31, 2020
Year ended December 31, 2020
Compared to
Year ended December 31, 2019
Increase (Decrease) in Net
Interest Income
Increase (Decrease) in Net
Interest Income
Due to
Volume
Due to
Rate
Total
Due to
Volume
Due to
Rate
Total
(In thousands)
Interest‑earning assets:
Interest‑earning deposits and other short‑term investments
$
298
$
(199
)
$
99
$
315
$
(551
)
$
(236
)
Securities
1,339
(196
)
1,143
(72
)
(34
)
(106
)
Loans receivable, net
5,018
797
5,815
1,794
(623
)
1,171
FHLB and FRB stock
23
28
51
33
(65
)
(32
)
Total interest‑earning assets
6,678
430
7,108
2,070
(1,273
)
797
Interest‑bearing liabilities:
Money market deposits
513
(193
)
320
166
(48
)
118
Passbook deposits
51
(128
)
(77
)
58
(62
)
(4
)
NOW and other demand deposits
77
9
86
7
1
8
Certificate accounts
415
(2,231
)
(1,816
)
(370
)
(865
)
(1,235
)
Total deposits
1,056
(2,543
)
(1,487
)
(139
)
(974
)
(1,113
)
FHLB advances
(264
)
53
(211
)
740
(423
)
317
Junior subordinated debentures
(45
)
(28
)
(73
)
(44
)
(71
)
(115
)
Other borrowings
45
-
45
-
-
-
Total borrowings
(264
)
25
(239
)
696
(494
)
202
Total interest‑bearing liabilities
792
(2,518
)
(1726
)
557
(1,468
)
(911
)
Change in net interest income
$
5,886
$
2,948
$
8,834
$
1,513
$
195
$
1,708
Loan Loss Provision
During the year ended December 31, 2021, we recorded a provision for loan losses of $176 thousand, compared to a loan loss provision of $29 thousand during the same period in 2020. The net
increase in the required loan loss provision in calendar 2021 was due to growth in the loan portfolio during the year. No loan charge-offs or recoveries were recorded during the year ended December 31, 2021. See “Allowance for Loan Losses” for
additional information.
Non‑Interest Income
For the year ended December 31, 2021, non-interest income totaled $3.2 million, compared to $1.0 million for the prior year. The increase of $2.2 million in non-interest income was primarily due an increase of $1.8
million in grant income from the CDFI Fund recognized during 2021 compared to 2020, and management fees of $154 thousand related to the NMTC projects managed by the Bank that were acquired in the Merger. These increases were partially offset by the
absence of any gain on sale of loans for the year ended December 31, 2021, compared to a gain on sale of loans of $276 thousand during the year ended December 31, 2020.
Non‑Interest Expense
Non-interest expenses totaled $28.9 million for the year ended December 31, 2021, compared to $14.2 million for the year ended December 31, 2020. The increase of $14.7 million in non-interest expenses during 2021 was
primarily due to Merger-related expenses of $5.6 million ($4.2 million net of tax), $2.4 million in data processing conversion costs, the inclusion of non-interest expenses of the acquired operations of CFB and related compensation expenses.
The increase of $7.6 million in compensation and benefits expense during 2021 was primarily due additional costs related to the addition of CFBanc employees subsequent to the Merger date. Subsequent to the Merger date,
the Company added additional employees to fill new roles based on the size of the combined organization (for example, a Chief Human Resources Director and an Information Technology Officer); the creation and filling of these new roles, among others,
increased compensation and benefits expense during 2021 by $535 thousand. Also, the increase was partially a result of an increase in accrued bonuses and retention payments, and a non-recurring expansion of the annual contribution to the Company’s
Employee Stock Ownership Plan (“ESOP”) to increase the equity ownership of the Company’s employees, especially those employees formerly with CFBanc, so that the interests of the employees would be better aligned with those of stockholders.
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Information services expenses increased by $2.9 million to $3.8 million during the year ended December 31, 2021, compared to $937 thousand for the year ended December 31, 2020. The current year’s results included
non-recurring data processing costs of $2.4 million to migrate the Company’s information systems to a common platform after the Merger.
Corporate insurance increased by $219 thousand to primarily due to higher costs for director’s and officer’s insurance, workers compensation insurance and general liability insurance for the combined operations of the
Bank after the Merger.
Supervisory costs increased by $294 thousand to $493 thousand for 2021 from $199 thousand for 2020 due to the higher asset size after the Merger and the increase in deposit insurance due to growth in deposits from
$315.6 million at December 31, 2020 to $788.1 million at December 31, 2021. Deposits of $353.7 million were assumed in the Merger.
Professional services expenses were $3.8 million for the year ended December 31, 2021, an increase of
$1.4 million from $2.3 million for the year ended December 31, 2020. The increase largely related to costs associated with the completion of the Merger and the increased costs of operating a
larger institution post-Merger.
Other operating costs increased by $1.5 million to $2.1 million for 2021 from $649 thousand in 2020 due to increases in public company costs, CDARS and ICS costs, business development costs, branch security costs,
travel costs, board fees, costs associated with New Market Tax Credits and other costs associated with operating a larger institution post-Merger.
Income Taxes
Income tax expense or benefit is computed by applying the statutory federal income tax rate of 21%. State taxes are recorded at the State of California tax rate and apportioned based on an allocation schedule to
reflect that a portion of the Bank’s operations are conducted in the Washington, D.C. area. The Company recorded an income tax benefit of $937 thousand for the year ended December 31, 2021, representing an effective tax rate of 19.2%, compared to an
income tax benefit of $407 thousand for the year ended December 31, 2020, representing an effective tax rate of 38.8%. The income tax benefit for the calendar 2021 is net of a valuation allowance of $369 thousand on the Company’s deferred tax assets
to record the write down of the tax benefits from net operating losses for the State of California, net of the federal tax benefit. This change in the valuation allowance was required because the shares of common stock issued in private placements
that closed a few days after the Merger triggered a limitation on the use of net operating loss carryforwards.
Our deferred tax asset totaled $6.1 million at December 31, 2021 and $5.6 million at December 31, 2020. See Note 1 “Summary of Significant Accounting Policies” and Note 17 “Income Taxes” of the Notes to Consolidated
Financial Statements for a further discussion of income taxes and a reconciliation of income tax at the federal statutory tax rate to the actual income tax benefit.
Comparison of Financial Condition at December 31, 2021 and 2020
Total Assets
Total assets increased by $610.1 million to $1.1 billion at December 31, 2021, from $483.4 million at December 31, 2020. The increase in total assets was primarily due to the Merger, which increased total assets by
$501.1 million, as well as $108.9 million in asset growth since the Merger.
Securities Available-For-Sale
As of December 31, 2021, we had $156.4 million of investment securities classified as available-for-sale, compared to $10.7 million at December 31, 2020. The increase during 2021 was primarily due to the acquisition of
$150.0 million of securities in the Merger, $14.4 million in investment purchases since the merger, paydowns of $17.5 million, amortization of premiums and discounts of $628 thousand and decreases in market value of $532 thousand.
Loans Receivable Held for Sale
The Bank had no loans held for sale as of December 31, 2021 and 2020. During 2021, the Bank did not originate any loans for sale, transfer loans between the held for sale and held for investment categories, or sell
any loans that were classified as held for sale. During 2020, the Bank originated $118.6 million in loans held for sale, sold $104.3 million in loans held for sale, transferred $13.7 million from loans held for sale to loans held for investment, and
received $637 thousand in loan repayments.
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Loans Receivable Held for Investment
Loans receivable held for investment, net of the allowance for loan losses, totaled $648.5 million at December 31, 2021, compared to $360.1 million at December 31, 2020. The increase of $288.4 million in loans
receivable held for investment during 2021 was primarily due to loans of $225.9 million acquired in the Merger. Since the Merger, the Bank has originated $143.2 million of multi-family loans, $43.6 million of commercial real estate loans, $26.5
million of PPP loans, $24.9 million of construction loans and $4.9 million of other loans. Before the Merger, the Bank originated $23.9 million of multi-family loans. Loan repayments during 2021 totaled $202.5 million with $180.9 million having
occurred since the merger and $21.6 million having occurred prior to the Merger.
During 2020, the Bank originated $134.3 million in new loans, $120.8 million of which were multi-family loans, $11.9 million of which were commercial real estate loans, $1.5 million of which construction loans, and $66
thousand of which were commercial loans. Of the multi-family loans originated in 2020, we allocated $118.6 million, or 98%, to loans held for sale and $2.2 million, or 2%, to loans held for investment. In addition, we transferred $13.7 million to
loans held for investment from loans held for sale.
Allowance for Loan Losses
As a smaller reporting company as defined by the SEC, we are not required to adopt the current expected credit losses, or CECL, accounting standard until January 1, 2023; consequently, the Bank’s ALLL is based on
evidence available at the date of preparation of its financial statements (incurred loss method), rather than projections of future economic conditions over the life of the loans. In determining the adequacy of the ALLL within the context of the
current uncertainties posed by the COVID-19 Pandemic and the economic environment, management has considered the historical and current performance of the Bank’s portfolio, as well as various measures of the quality and safety of the portfolio, such
as debt service coverage and loan-to-value ratios.
We record a provision for loan losses as a charge to earnings when necessary in order to maintain the ALLL at a level sufficient, in management’s judgment, to absorb probable incurred losses in the loan portfolio. At
least quarterly we assess the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss
experience for each type of loan, the size and composition of our loan portfolio, the levels and composition of our loan delinquencies, non‑performing loans and net loan charge‑offs, the value of underlying collateral on problem loans, regulatory
policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.
Our ALLL was $3.4 million or 0.52% of our gross loans receivable held for investment at December 31, 2021 compared to $3.2 million, or 0.88% of our gross loans receivable held for investment at December 31, 2020. The
ALLL as a percentage of gross loans decreased during 2021 because the loans that were acquired in the Merger are recorded at fair value without any ALLL at the acquisition date. During the years ended December 31, 2021 and 2020, we recorded loan loss
provisions of $176 thousand and $29 thousand, respectively.
As of December 31, 2021, we had $2.4 million of total delinquent loans compared to no loan delinquencies
at December 31, 2020. Total delinquent loans at December 31, 2021, which were all less than 90 days past due, represented 0.37% of gross loans. Our NPLs consist of delinquent loans that are 90
days or more past due and other loans, including troubled debt restructurings that do not qualify for accrual status. At December 31, 2021, NPLs totaled $684 thousand (or 0.10% of gross loans) compared to $787 thousand (or 0.22% of gross loans) at
December 31, 2020. The decrease in NPLs was the result of payments received from borrowers that were applied to the outstanding principal balance. The Bank did not have any REO at December 31, 2021 or 2020.
In connection with our review of the adequacy of our ALLL, we track the amount and percentage of our NPLs that are paying currently, but nonetheless must be classified as NPL for reasons unrelated to payments, such as
lack of current financial information and an insufficient period of satisfactory performance. As of December 31, 2021 and 2020, all of our NPLs were current in their payments. Also, in determining the ALLL, we evaluate the ratio of the ALLL to NPLs,
which was 495.8% at December 31, 2021 compared to 408.5% at December 31, 2020.
When reviewing the adequacy of the ALLL, we also consider the impact of charge‑offs, including the changes and trends in loan charge‑offs. There were no loan charge‑offs during 2021 or 2020. In determining charge‑offs,
we update our estimates of collateral values on NPLs by obtaining new appraisals at least every nine months. If the estimated fair value of the loan collateral less estimated selling costs is less than the recorded investment in the loan, a
charge‑off for the difference is recorded to reduce the loan to its estimated fair value, less estimated selling costs. Therefore, any losses inherent in our total NPLs are recognized periodically through charge‑offs. The impact of updating these
estimates of collateral value and recognizing any required charge‑offs is to increase charge‑offs and reduce the ALLL required on these loans. Due to prior charge‑offs and increases in collateral values, the
average recorded investment in NPLs was only 42% of estimated fair value less estimated selling costs as of December 31, 2021.
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We had no loan charge-offs or recoveries during the year ended December 31, 2021. Loan loss recoveries totaled $4 thousand during 2020, resulting from the payoffs of non‑accrual loans which had been previously
partially charged off.
Impaired loans at December 31, 2021 were $2.3 million, compared to $4.7 million at December 31, 2020. The
decrease of $2.4 million in impaired loans was primarily due to payoffs and repayments. Specific reserves for impaired loans were $7 thousand or 0.30% of the aggregate impaired loan amount at
December 31, 2021 compared to $141 thousand, or 2.98% of the aggregate impaired loan amount at December 31, 2020. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non‑impaired loans) was
0.52% at December 31, 2021 compared to 0.85% at December 31, 2020. The decrease in the coverage ratio during 2021 was primarily due to an increase in non-impaired loans acquired in the Merger that did not require an ALLL at December 31, 2021. The
remaining balance of loans acquired in the Merger totaled $202.7 million at December 31, 2021.
On March 27, 2020, the CARES Act was signed into law by Congress. The CARES Act provides financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally
accepted accounting principles related to TDRs for a limited period of time to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify
that short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other insignificant payment delays, are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to
any relief. Under this guidance, nine months or less is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified
loans generally will not be classified as non-accrual loans during the term of the modification.
The Bank has implemented a loan modification program for the effects of COVID-19 on its borrowers. At the date of this filing, two borrowers have requested applications, but no applications for
loan modifications have been formally submitted. Both borrowers were current at the time modification program was implemented. To date, no modifications have been granted.
We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of December 31, 2021, but because of the current uncertainties posed by the COVID-19 Pandemic and other economic
uncertainties, there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the ALLL as an integral part of their examination process. These agencies may require an
increase in the ALLL based on their judgments of the information available to them at the time of their examinations.
Office Properties and Equipment, Net
Net office properties and equipment increased by $7.8 million to $10.3 million at December 31, 2021 from $2.5 million as of December 31, 2020. The large increase was due to the merger, as CFBanc owned the land and
building in which it operated its headquarters and branch. Office properties and equipment, net increased by $7.0 million as of the date of the merger. The remaining increase after the Merger was the result of building and leasehold improvements.
Goodwill and Intangible Assets
As a result of the merger, the Company recorded $26.0 million of goodwill. Goodwill acquired in a purchase business combination that is determined to have an indefinite useful life is not amortized, but is tested for
impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed.
No impairment charges were recorded during 2021 for goodwill impairment. Management’s assessment of goodwill is performed in accordance with ASC 350-20 – Intangibles-Goodwill and Other, which allows the Company to
perform a qualitative assessment of goodwill to determine if it is more likely than not the fair value of the Company’s equity is below its carrying value. The Company performed its qualitative assessment as of November 30, 2021. Due to the
relatively short amount of time that has passed between the acquisition date, the fact that the combined Company is realizing the intended benefits of the Merger (i.e. lower cost of funds, increased ability to lend, etc.), and the Company’s stock
price post-acquisition, no impairment charges were recorded during 2021 for goodwill
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The Company recorded $3.3 million of core deposit intangible asset as a result of the merger. The core deposit intangible asset is amortized on an accelerated basis reflecting the pattern in which the economic benefits
of the intangible asset are consumed or otherwise used up. The estimated life of the core deposit intangible is approximately 10 years. During the year ended December 31, 2021, the Company recorded $393 thousand of amortization expense related to the
core deposit intangible asset.
The following table outlines the estimated amortization expense related to the core deposit intangible asset during the next five fiscal years and thereafter:
(In thousands)
2022
$
435
2023
390
2024
336
2025
315
2026
304
Thereafter
1,156
$
2,936
Total Liabilities
Total liabilities increased by $517.9 million to $952.4 million at December 31, 2021 from $434.5 million at December 31, 2020. The increase in total liabilities was primarily comprised of increases of $472.4 million
in deposits and $66.0 million in other borrowings, offset by decreases in FHLB advances and junior subordinated debentures of $24.5 million and $3.3 million, respectively.
Deposits
Deposits at December 31, 2021 were $788.1 million compared to $315.6 million at December 31, 2020. The increase in deposits of $472.4 million was due to deposits of $353.7 million assumed in the Merger and additional
growth in deposits of $122.0 million since the Merger, primarily in money market and demand deposit accounts.
Five customer relationships accounted for approximately 22% of our deposit balances at December 31, 2021. We expect to maintain these relationships with these customers for the foreseeable future.
Borrowings
Total borrowings at December 31, 2021 consisted of advances to the Bank from the FHLB of $86.0 million, repurchase agreements of $52.0 million, and borrowings associated with our Qualified Active Low-Income Business
lending activities of $14.0 million, compared to advances from the FHLB of $110.5 million and junior subordinated debentures of $3.3 million at December 31, 2020.
Balances of outstanding FHLB advances decreased to $86.0 million at December 31, 2021, from $110.5 million at December 31, 2020, due to the payoff of $27.7 million in advances that matured during the year, which
payoffs were partially offset by $3.2 million in advances assumed in the Merger (net of payments). The weighted average rate on FHLB advances was 1.85% at December 31, 2021, compared to 1.94% at December 31, 2020.
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.
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Two customer relationships accounted for 84% of our balance of securities sold under agreements to repurchase . We expect to maintain these relationships for the foreseeable future.
In connection with the New Market Tax Credit activities of City First Bank, CFC 45 is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. This CDE acts in effect as a pass-through for a
Merrill Lynch allocation totaling $14.0 million that needed to be deployed. In December 2015, Merrill Lynch made a $14.0 million non-recourse loan to CFC 45, whereby CFC 45 passed that loan through to a QALICB. The loan to the QALICB is secured by a
Leasehold Deed of Trust that, due to the pass-through, non-recourse structure, is operationally and ultimately for the benefit of Merrill Lynch rather than CFC 45. Debt service payments received by CFC 45 from the QALICB are passed through to Merrill
Lynch in return for which CFC 45 receives a servicing fee. The financial statements of CFC 45 are consolidated with those of the Bank and the Company.
On September 17, 2021, the Company fully redeemed its Floating Rate Junior Subordinated Debentures.
Stockholders’ Equity
Stockholders’ equity was $141.0 million, or 12.89% of the Company’s total assets, at December 31, 2021, compared to $48.9 million, or 10.11% of the Company’s total assets, at December 31, 2020. The Company issued
$63.3 million in common stock at a price per share of $2.49 and $3.0 million in preferred stock in connection with the Merger. In addition, the Company raised $30.8 million in net proceeds (after costs of $2.0 million) from the sale of 18,474,000
shares of common stock in private placements at a price of $1.78 per share immediately following the Merger on April 6, 2021.
The Company’s book value per common share was $1.92 at December 31, 2021, and its tangible book value per common share was $1.52 at December 31, 2021. Tangible book value per common share is a non-GAAP measurement
that excludes goodwill and the net unamortized core deposit intangible asset, which were both originally recorded in connection with the Merger. The Company uses this non-GAAP financial measure to provide meaningful supplemental information
regarding the Company’s financial condition and operational performance. A reconciliation between book value and tangible book value per common share is shown as follows:
Common Equity
Capital
Shares
Outstanding
Per Share
Amount
(dollars in thousands)
Common book value
$
138,000
71,768,419
$
1.92
Less:
Goodwill
25,996
Net unamortized core deposit intangible
2,936
Tangible book value:
$
109,068
71,768,419
$
1.52
Capital Resources
Our principal subsidiary, City First, must comply with capital standards established by the OCC in the conduct of its business. Failure to comply with such capital requirements may result in significant limitations on
its business or other sanctions. As a “small bank holding company”, we are not subject to consolidated capital requirements under the new Basel III capital rules. The current regulatory capital requirements and possible consequences of failure to
maintain compliance are described in Part I, Item 1 “Business‑Regulation” and in Note 19 of the Notes to Consolidated Financial Statements.
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Liquidity
The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet our obligations on a timely and cost-effective basis. The Bank’s sources of funds include deposits,
advances from the FHLB, other borrowings, proceeds from the sale of loans and investment securities, and payments of principal and interest on loans and investment securities. The Bank is currently approved by the FHLB of Atlanta to borrow up to 25%
of total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. This approved limit and collateral requirement would have permitted the Bank to borrow an additional $14.4 million at December 31, 2021 based on
pledged collateral. In addition, the Bank had additional lines of credit of $11.0 million with other financial institutions as of that date.
The Bank’s primary uses of funds include withdrawals of and interest payments on deposits, originations of loans, purchases of investment securities, and the payment of operating expenses. Also, when the Bank has more
funds than required for reserve requirements or short‑term liquidity needs, the Bank invests excess cash with the Federal Reserve Bank or other financial institutions. The Bank’s liquid assets at December 31, 2021 consisted of $231.5 million in cash and cash equivalents and $52.4 million in securities available‑for‑sale that were not pledged, compared to $96.1 million in cash and cash equivalents and $10.7 million in securities available‑for‑sale that
were not pledged at December 31, 2020. We believe that the Bank has sufficient liquidity to support growth over the foreseeable future.
The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the private placements completed in December 2016, and April 2021 and dividends received from the
Bank in 2020 and 2021. The Bank is currently under no prohibition to pay dividends, but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines.
The Company recorded consolidated net cash inflows from operating activities of $565 thousand during the year ended December 31, 2021 and net cash outflows from operating activities of $13.6 million during the year
ended December 31, 2020. Net cash inflows from operating activities during 2021 were primarily attributable to an increase in accrued expenses and other liabilities. Net cash outflows from operating activities during 2020 were primarily attributable
to originations of loans receivable held for sale of $118.6 million offset by proceeds from sales and repayments of loans receivable held for sale of $105.2 million.
The Company recorded consolidated net cash inflows from investing activities of $25.0 million during the year ended December 31, 2021 and net cash inflows from investing activities of $50.7 million during the year
ended December 31, 2020. Net cash inflows from investing activities during 2021 were primarily attributable to $84.7 million of cash acquired in the Merger offset by net loan originations of $62.4 million and purchases of available for sale
securities of $16.5 million. Net cash inflows from investing activities during 2020 were primarily attributable to a net decrease in loans receivable held for investment of $51.1 million and principal repayments on available-for-sale securities of
$2.5 million, offset by purchases of available-for-sale municipal bonds of $2.0 million and purchase of FHLB stock of $742 thousand.
The Company recorded consolidated net cash inflows from financing activities of $109.8 million and $43.4 million during the years ended December 31, 2021 and 2020, respectively. Net cash inflows from financing
activities during 2021 were primarily attributable to a net inflow of deposits of $118.7 million and net proceeds of $30.8 million from the issuance of common stock, offset by net repayments of FHLB advances of $27.7 million, repayments of securities
sold under agreements to repurchase of $8.0 million, and repayments of junior subordinated debentures of $3.3 million. Net cash inflows from financing activities during 2020 were primarily attributable to an increase in proceeds from FHLB advances
of $60.0 million and a net inflow of deposits of $17.9 million, offset by repayments of FHLB advances of $33.5 million and repayments of junior subordinated debentures of $1.0 million.
Off‑Balance‑Sheet Arrangements and Contractual Obligations
We are party to financial instruments with off‑balance‑sheet risk in the normal course of our business, primarily in order to meet the financing needs of our customers. These instruments involve, to varying degrees,
elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments
primarily include lending commitments and lease commitments as described below.
Lending commitments include commitments to originate loans and to fund lines of credit. Commitments to extend credit are agreements to lend to a customer if there is no violation of any condition established in the
commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. We evaluate creditworthiness on a case‑by‑case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments.
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In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non‑cancellable operating leases on buildings
and land used for office space and banking purposes. The following table details our contractual obligations at December 31, 2021.
Less than
one year
More than
one year to
three years
More than
three years to
five years
More than
five years
Total
(Dollars in thousands)
Certificates of deposit
$
191,943
$
8,937
$
1,033
$
64
$
201,977
FHLB advances
18,140
35,280
32,532
‑
85,952
Commitments to originate loans
13,384
‑
‑
‑
13,384
Commitments to fund construction loans
10,352
10,352
Commitments to fund unused lines of credit
9,326
‑
‑
-
9,326
Operating lease obligations
229
480
445
‑
1,154
Total contractual obligations
$
243,374
$
44,697
$
34,010
$
64
$
322,145
Impact of Inflation and Changing Prices
Our consolidated financial statements, including accompanying notes, have been prepared in accordance with GAAP which require the measurement of financial position and operating results primarily in terms of historical
dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in increased costs of our operations. Unlike industrial companies, nearly all our assets and
liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
As a result, the Bank’s performance is influenced by general economic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The
Federal Reserve implements national monetary policies (such as seeking to curb inflation and combat recession) by its open-market operations in U.S. government securities, by adjusting the required level of reserves for financial institutions subject
to its reserve requirements, and by varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal Reserve in these areas can influence the growth of loans, investments, and deposits, and also
affect interest rates charged on loans, and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions.
This discussion highlights those accounting policies that management considers critical. All accounting policies are important, however, and therefore you are encouraged to review each of the policies included in Note 1 “Summary of Significant
Accounting Principles” of the Notes to Consolidated Financial Statements to gain a better understanding of how our financial performance is measured and reported. Management has identified the Company’s critical accounting policies as follows:
Allowance for Loan Losses
The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic
environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and the Board of Directors and is based on a periodic review of the
collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral, prevailing economic
conditions, and feedback from regulatory examinations. See Item 1, “Business – Asset Quality – Allowance for Loan Losses” for a full discussion of the allowance for loan losses.
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Business Combinations
Business combinations are accounted for using the acquisition accounting method. Under the acquisition method, the Company measures the identifiable assets acquired, including identifiable intangible assets, and
liabilities assumed in a business combination at fair value on the acquisition date. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the
acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Changes to the acquisition date fair values of assets acquired and liabilities assumed may be made as adjustments to goodwill over a 12-month
measurement period following the date of acquisition. Such adjustments are attributable to additional information obtained related to fair value estimates of the assets acquired and liabilities assumed.
Acquired Loans
Acquired loans that are not considered to be purchased credit impaired (“PCI”) loans are recognized at fair value at the acquisition date, with the resulting credit and non-credit discount or premium being amortized or
accreted into interest income using the level yield method. Acquired loans that in management’s judgement have shown evidence of deterioration in credit quality since origination are classified as PCI loans. Factors that indicate a loan may have
shown evidence of credit deterioration include delinquency, downgrades in credit rating, non-accrual status, and other negative factors identified by management at the time of initial assessment. The Company estimates 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). Over the life of the PCI loan, expected cash flows continue to be estimated each quarter. 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.
The estimates used to determine the fair values of non-PCI and PCI acquired loans can be complex and require significant judgment regarding items such as default rates, timing and amount of future cash flows,
prepayment rates and other factors.
Goodwill and Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and that are determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if
events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has selected November 30th as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized
over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s consolidated statement of financial condition.
Income Taxes
Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the
available evidence including historical and projected taxable income, it is more likely than not that some or all the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and
negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry‑back years, forecasts of future income and available tax planning strategies. This analysis
is updated quarterly. See Note 17 “Income Taxes” of the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
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Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Fair values are estimated using relevant market information and other assumptions, as more fully disclosed in Note 10 of the Notes to Consolidated Financial Statements. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for items. Changes in assumptions or in market conditions could significantly affect the estimates.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements of Broadway Financial Corporation and Subsidiaries.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.