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.
Overview
Total assets increased by $191.1 million to $1.4 billion at December 31, 2023, compared to $1.2 billion at December 31, 2022, primarily due to growth in net loans of $112.4 million and growth in
interest-bearing deposits in other banks of $91.1 million, partially offset by a decrease of $12.0 million in investment securities available-for-sale.
Total liabilities increased by $188.7 million to $1.1 billion at December 31, 2023 from $904.6 million at December 31, 2022. The increase in total liabilities during 2023 resulted primarily from
increases in borrowings of $100.0 million from the Bank Fund Term Program, as well as increases of $81.0 million in FHLB advances and $10.0 million in securities sold under agreements to repurchase, offset by a net $4.3 million decrease in total
deposits.
We recorded net income of $4.5 million for the year ended December 31, 2023 or $0.51 per share compared to net income of $5.6 million or $0.62 per share for the year ended December 31, 2022. The
$1.6 million decrease in pretax net income during the year ended December 31, 2023 compared to the prior year was primarily due to a decline in net interest income of $3.4 million and an increase in non-interest expense of $2.4 million, which
were primarily offset by an increase in grant income of $4.2 million.
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 Years Ended December 31,
2023
2022
2021
Return on average assets
0.37
%
0.52
%
(0.54
)%
Return on average equity
1.62
%
2.19
%
(4.46
)%
Average equity to average assets
22.60
%
23.60
%
11.54
%
Comparison of Operating Results for the Years Ended December 31, 2023 and 2022
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 credit 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, 2023, net interest income before provision for credit losses decreased by $3.4 million, or 10.3%, to $29.5 million, compared to $32.9 million for the year ended
December 31, 2022. The decrease resulted from higher interest expense, primarily due to an increase in the cost of borrowings and deposits.
Interest income and fees on loans receivable increased by $8.4 million during the year ended December 31, 2023, compared to the year ended December 31, 2022. This increase was primarily due to an
increase of $134.0 million in the average balance of loans receivable which increased interest income by $6.0 million. In addition, there was an increase in the average loan yield from 4.26% for the year ended December 31, 2022, to 4.59% for the
year ended December 31, 2023, which increased interest income by $2.4 million.
Interest income on securities increased by $3.1 million to $8.7 million for the year ended December 31, 2023, compared to $5.6 million for the year ended December 31, 2022. The increase in interest
income on securities primarily resulted from an increase of $70.5 million in the average balance of securities, which increased interest income by $1.8 million. In addition, we had an increase of 47 basis points in the average interest yield
earned on investment securities during 2023, which reflected the rising interest rate environment and increased interest income by $1.3 million.
Other interest income decreased by $0.6 million in 2023, compared to the same period in 2022, primarily due to a decrease of $133.5 million in the average balances of
interest-earning deposits which was partially offset by a 2.95% increase in the average yield on interest-earning deposits during the year ended December 31, 2023, compared to the year ended December 31, 2022. The
Company also recorded $551 thousand in higher interest income on regulatory stock during 2023, primarily due to an $8.1 million increase in average balances of FRB & FHLB stock.
Interest expense on deposits increased by $5.4 million during calendar 2023, compared to calendar 2022, due to an increase of 99 basis points in the average cost of deposits. The average cost of
deposits increased to 1.30% for 2023, compared to 0.31% for 2022, which increased interest expense by $6.1 million. This increase was offset by a decrease of $104.1 million in the average balance of deposits, which decreased interest expense by
$684 thousand.
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Table of Contents
Interest expense on borrowings increased by $8.9 million to $10.3 million during the year ended December 31, 2023, compared to $1.3 million during the year ended December 31, 2022. The increase was
primarily due to an increase in the average balance of outstanding FHLB advances of $115.7 million, which increased interest expense by $3.8 million, and a 296 basis point increase in the average rate paid on FHLB advances which increased
interest expense by $3.5 million. Further, an increase in the average rate paid on securities sold under agreements to repurchase of 229 basis points compared to the prior year increased interest expense by $1.7 million.
The net interest margin decreased to 2.55% for the year ended 2023 from 3.05% for the year ended 2022, primarily due to the average cost of funds increasing to 2.15% for the year ended 2023 from
0.42% for the year ended 2022 due to rate increases by the Federal Reserve. This increase was partially offset by an improvement of 72 basis points in the average yield earned on average interest-earning assets.
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.
For the Years Ended December 31,
2023
2022
2021
(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
$
14,013
$
573
4.09
%
$
147,482
$
1,677
1.14
%
$
203,493
$
302
0.15
%
Securities
322,764
8,697
2.69
%
252,285
5,596
2.22
%
121,623
1,396
1.15
%
Loans receivable (1)
808,850
37,143
4.59
%
674,837
28,732
(2)
4.26
%
537,872
22,831
(3)
4.24
%
FRB and FHLB stock
11,860
815
6.87
%
3,732
264
7.07
%
3,862
223
5.77
%
Total interest-earning assets
1,157,486
$
47,228
4.08
%
1,078,336
$
36,269
3.36
%
866,850
$
24,752
2.86
%
Non-interest-earning assets
74,138
65,213
51,386
Total assets
$
1,231,624
$
1,143,549
$
918,236
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits
$
126,831
$
4,269
3.37
%
$
192,835
$
1,288
0.67
%
$
159,157
$
660
0.41
%
Savings deposits
59,928
147
0.25
%
66,033
58
0.09
%
67,660
204
0.30
%
Interest checking and other demand deposits
236,244
360
0.15
%
240,380
220
0.08
%
213,286
105
0.05
%
Certificate accounts
154,275
2736
1.77
%
182,050
538
0.30
%
192,795
707
0.37
%
Total deposits
577,278
7,512
1.30
%
681,298
2,104
0.31
%
632,898
1,676
0.26
%
FHLB advances
177,261
8,331
4.70
%
61,593
1,071
1.74
%
100,471
1,968
1.96
%
Junior subordinated debentures
–
–
–
%
–
–
–
%
2,335
60
2.57
%
BTFP borrowing
822
40
4.87
%
–
–
–
%
–
–
–
%
Other borrowings
72,465
1,883
2.60
%
61,106
234
0.38
%
46,836
45
0.10
%
Total borrowings
250,548
10,254
4.09
%
122,699
1,305
1.06
%
149,642
2,073
1.39
%
Total interest-bearing liabilities
827,826
$
17,766
2.15
%
803,997
$
3,409
0.42
%
782,540
$
3,749
0.48
%
Non-interest-bearing liabilities
125,401
115,665
29,767
Stockholders’ equity
278,397
223,887
105,929
Total liabilities and stockholders’ equity
$
1,231,624
$
1,143,549
$
918,236
Net interest rate spread (4)
$
29,462
1.93
%
$
32,860
2.94
%
$
21,003
2.38
%
Net interest rate margin (5)
2.55
%
3.05
%
2.42
%
Ratio of interest-earning assets to interest-bearing liabilities
139.82
%
134.12
%
110.77
%
(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 $102 thousand, reflecting interest recoveries on non‑accrual loans that were paid off for the year ended December 31, 2022.
(3)
Includes non‑accrual interest of $162 thousand, reflecting interest recoveries on non‑accrual loans that were paid off for the year ended December 31, 2021.
(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.
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Table of Contents
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.
Year Ended December 31, 2023
Compared to
Year Ended December 31, 2022
Year Ended December 31, 2022
Compared to
Year Ended December 31, 2021
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
$
(2,536
)
$
1,432
$
(1,104
)
$
(105
)
$
1,480
$
1,375
Securities
1,753
1,348
3,101
2,248
1,952
4,200
Loans receivable, net
6,027
2,384
8,411
5,831
70
5,901
FRB and FHLB stock
559
(8
)
551
(8
)
49
41
Total interest‑earning assets
5,802
5,157
10,959
7,966
3,551
11,517
Interest‑bearing liabilities:
Money market deposits
(580
)
3,561
2,981
162
466
628
Savings deposits
(6
)
95
89
(5
)
(141
)
(146
)
Interest checking and other demand deposits
(4
)
144
140
39
76
115
Certificate accounts
(94
)
2,292
2,198
(38
)
(131
)
(169
)
Total deposits
(684
)
6,092
5,408
158
270
428
FHLB advances
3,807
3,453
7,260
(695
)
(202
)
(897
)
BTFP borrowing
40
-
40
-
-
-
Junior subordinated debentures
–
–
–
(60
)
–
(60
)
Other borrowings
51
1,598
1,649
18
171
189
Total borrowings
3,898
5,051
8,949
(737
)
(31
)
(768
)
Total interest‑bearing liabilities
3,214
11,143
14,357
(579
)
239
(340
)
Change in net interest income
$
2,588
$
(5,986
)
$
(3,398
)
$
8,545
$
3,312
$
11,857
Provision for Credit Losses
During the year ended December 31, 2023, we recorded a provision for credit losses under the Current Expected Credit Loss (“CECL”) methodology of $933 thousand, compared to a loan loss provision
under the previously used incurred loss model of $997 thousand during the same period in 2022. No loan charge-offs were recorded during the year ended December 31, 2023 or 2022. The Bank recorded a recovery of $216 thousand during the fourth
quarter of 2023. See “Allowance for Credit Losses” for additional information.
Non‑Interest Income
For the year ended December 31, 2023, non-interest income totaled $5.4 million, compared to $1.2 million for the year-ended December 31, 2022. The increase of $4.2 million in
non-interest income was primarily the result of non-recurring income of $3.7 million from a special grant from the U.S. Treasury’s Community Development Financial Institutions Fund recognized during 2023 and a $437 thousand recurring
Bank Enterprise Award grant.
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Table of Contents
Non‑Interest Expense
Non-interest expenses totaled $27.4 million for the year ended December 31, 2023, compared to $24.9 million for the year ended December 31, 2022, primarily due to increases in
compensation and benefits expenses of $1.4 million, professional fees of $368 thousand, occupancy expense of $255 thousand and supervisory costs of $200 thousand, partially offset by a decrease in information services expense of $156 thousand.
The increase of $1.4 million in compensation and benefits expense during 2023 compared to 2022 was primarily attributable to additional full-time employees that the Bank hired
over the past twelve months in various production and administrative support positions. These hires were part of the Company’s overall efforts to expand its operational capabilities to strategically grow its balance sheet and fulfill the
intersecting lending objectives of the Company’s mission and the funding received from the Emergency Capital Investment Program of the United States Department of the Treasury. A portion of the increase in compensation expenses during the year
ended December 31, 2023 pertained to recruiting expenses.
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 Washington, D.C. tax rate,
according to the state apportionment calculation as Bank’s operations are conducted in both California and the Washington, D.C. area. The Company recorded an income tax expense of $2.0 million for the year ended December 31, 2023, representing an
effective tax rate of 30.4%, compared to an income tax expense of $2.4 million for the year ended December 31, 2022, representing an effective tax rate of 29.7%. The effective tax rate for each year differs from the 21% federal statutory rate
due to the impact of state taxes as well as various permanent tax differences, vesting of stock-based compensation and other discrete items.
The effective tax rate for 2023 increased from 2022 primarily due to the effect of certain permanent tax differences and discrete items.
Our deferred tax asset totaled $9.5 million at December 31, 2023 and $11.9 million at December 31, 2022. See Note 1 “Summary of Significant Accounting Policies” and Note 14 “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, 2023 and 2022
Securities Available-For-Sale
As of December 31, 2023, we had $317.0 million of investment securities classified as available-for-sale, compared to $328.7 million at December 31, 2022. The decrease during 2023 was primarily due
to $18.4 million of principal payments and maturities, partially offset by a $5.6 million increase in the fair value of investment securities available-for-sale during the year ended December 31, 2023.
Loans Receivable Held for Investment
Loans receivable held for investment, net of the allowance for credit losses, totaled $880.5 million at December 31, 2023, compared to $768.0 million at December 31, 2022. The increase of $112.4
million in loans receivable held for investment during 2023 was primarily due to originations of $162.1 million in new loans, $78.9 million of which were multi-family loans, $40 million of which were construction loans, $26.8 million of which
were commercial loans, and $16.4 million of which were commercial real estate loans. Loan repayments during 2023 totaled $47.2 million.
During 2022, the Bank originated $273.4 million in new loans, $141.6 million of which were multi-family loans, $75.3 million of which were commercial real estate loans, $29.6 million of which
construction loans, and $26.6 million of which were commercial loans.
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Table of Contents
Allowance for Credit Losses
Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans
at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating
expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk
characteristics. The Company measures the ACL for each of its loan segments using the WARM method. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The
Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter.
Our ACL was $7.3 million or 0.83% of our gross loans receivable held for investment at December 31, 2023 compared to $4.4 million, or 0.57% of our gross loans receivable held for investment at
December 31, 2022. The increase was primarily due to the implementation of the CECL methodology adopted by the Bank effective January 1, 2023, which increased the ACL by $1.8 million. In addition, the Bank recorded an additional provision for
credit losses of $935 thousand for the twelve months ended December 31, 2023. CECL methodology includes estimates of expected loss rates in the future, whereas the former ALLL methodology did not.
Our non-performing loans consist of delinquent loans that are 90 days or more past due and other loans, including loans modified in response to a borrower’s financial difficulty, that do not qualify
for accrual status. At December 31, 2023, NPLs totaled $0 compared to $144 thousand (or 0.02% of gross loans) at December 31, 2022. 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, 2023 or 2022. There were no loans that were modified in response to a borrower’s financial difficulty during 2023.
We believe the ACL is adequate to cover expected losses in the loan portfolio as of December 31, 2023, but because of uncertainty regarding the future value of the loan portfolio, there can be no
assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the ACL as an integral part of their examination process. These agencies may require an increase in the ACL based on their
judgments of the information available to them at the time of their examinations.
See Note 1 “Summary of Significant Accounting Policies” to the Company’s Consolidated Financial Statements for further discussion.
Office Properties and Equipment, Net
Net office properties and equipment decreased by $451 thousand to $9.8 million at December 31, 2023 from $10.3 million as of December 31, 2022. Depreciation expense was $385 thousand and $376
thousand for the years 2023 and 2022, respectively.
Goodwill and Core Deposit Intangible
As a result of the Merger, the Company recorded $25.9 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. During the year ended December 31, 2023, the Company recorded no change in
the deferred tax estimate expense related to the goodwill asset.
No impairment charges were recorded during 2023 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 December 31, 2023.
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, 2023, the Company recorded $390 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)
2024
$
336
2025
315
2026
304
2027
291
2028
279
Thereafter
586
$
2,111
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Deposits
Deposits at December 31, 2023 were $682.6 million compared to $686.9 million at December 31, 2022. The decrease in deposits of $4.3 million was primarily caused by some depositors leaving the Bank
for higher interest rates available elsewhere, even after management made reasonable attempts to be responsive to the higher interest rate environment.
Five customer relationships accounted for approximately 28% of our deposit balances at December 31, 2023. We expect to maintain these relationships with these customers for the foreseeable future.
As of December 31, 2023 and 2022, approximately $286.4 million and $212.9 million of our total deposits were not insured by FDIC insurance.
Borrowings
Total borrowings at December 31, 2023 consisted of advances to the Bank from the FHLB of $209.3 million, repurchase agreements of $73.5 million, and borrowings associated with the BTFP borrowing
activities of $100.0 million, compared to advances from the FHLB of $128.3 million and repurchase agreements of $63.5 million at December 31, 2022.
Balances of outstanding FHLB advances increased to $209.3 million at December 31, 2023, from $128.3 million at December 31, 2022, primarily due to $456.1 million in advances
from the FHLB of Atlanta, offset by repayments of $375.1 million of advances from the FHLB of Atlanta. The weighted average rate on FHLB advances was 4.91% at December 31, 2023, compared to 3.74% at December 31,
2022.
Borrowings under the BTFP with the Federal Reserve were $100 million as of December 31, 2023. The interest rate was fixed at 4.84% and the borrowing matures on December 29, 2024. Investment securities with a book
value of $107.3 million and a fair value of $98.3 million were pledged as collateral for this borrowing as of December 31, 2023. There are no prepayment penalties for early payoff. As the BTFP ended on March 11, 2024, no additional borrowings
can be made under the program.
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 Bank’s consolidated statements of financial condition, while the
securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. As
of December 31, 2023, securities sold under agreements to repurchase totaled $73.5 million at an average rate of 2.60%. These agreements mature on a daily basis. The fair value of securities pledged totaled $89.0 million as of December 31, 2023
and included $47.8 million of U.S. Treasuries, $30.2 million of federal agency debt, and $11.0 million of federal agency mortgage-backed securities. As of December 31, 2022, securities sold under agreements to repurchase totaled $63.5 million
at an average rate of 0.38%. The fair value of securities pledged totaled $ 64.4 million as of December 31, 2022 and included $33.3 million of federal agency debt, $19.2 million of U.S. Treasuries and $11.9
million of federal agency mortgage-backed securities.
One customer relationship accounted for 85% of our balance of securities sold under agreements to repurchase. We expect to maintain this relationship 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. This note was paid off during January 2024. The financial statements of CFC 45 are consolidated with those of the Bank and the Company.
Stockholders’ Equity
Stockholders’ equity was $281.9 million, or 20.5% of the Company’s total assets, at December 31, 2023, compared to $279.5 million, or 23.6% of the Company’s total assets, at December 31, 2022. In
2022, the Company sold $150 million in preferred stock to the U.S. Government under the ECIP Program.
During the first quarter of 2022, the Company completed the exchange of all the Series A Fixed Rate Cumulative Redeemable Preferred Stock, with an aggregate liquidation value of $3.0 million, plus
accrued dividends, for 149,164 shares of Class A Common Stock at an exchange price of $2.51 per share of Class A Common Stock.
During December of 2022, the Company issued a $5 million line of credit to the ESOP Plan for the purchase of additional shares. As of December 31, 2023, the trustee for the ESOP had purchased
428,327 shares at a total cost of $3.9 million.
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On October 31, 2023 the Company purchased 244,771 shares of its Class A (voting) Common Stock (adjusted for the 1-for-8 reverse stock split effective November 1, 2023) from the Federal Deposit Insurance Corporation
(“FDIC”), which obtained the shares when it was appointed receiver for First Republic Bank upon its closure earlier in 2023. The purchased shares represented just under 4.0% of the Company’s total voting shares prior to the purchase, and over
2.6% of the Company’s total common equity. The Company purchased the shares at a price of $7.2760 per share (adjusted for the 1-for-8 reverse stock split effective November 1, 2023), which represented the 20-day volume weighted average price for
the Class A shares over the period ended October 24, 2023.
The Company’s book value per common share was $14.65 at December 31, 2023, and its tangible book value per common share was $11.55 at December 31, 2023. 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, and to enhance comparability with banks that have not recorded goodwill and core deposit intangibles in a merger transaction. A reconciliation
between common book value (calculated in accordance with GAAP) and tangible book value per common share December 31, 2023 is shown as follows:
Common
Equity Capital
Shares
Outstanding
Per Share
Amount
(Dollars in thousands)
Common book value
$
131,903
9,001,613
$
14.65
Less:
Goodwill
25,858
Net unamortized core deposit intangible
2,111
Tangible book value
$
103,934
9,001,613
$
11.55
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 16 “Regulatory Matters” of the Notes to Consolidated Financial Statements.
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 $117.0 million
at December 31, 2023 based on pledged collateral. In addition, the Bank had additional lines of credit of $10.0 million with other financial institutions as of that date.
The Bank has a significant concentration of deposits with five long‑time customers that accounted for approximately 28% of its deposits as of December 31, 2023. In addition, the Bank has a
significant concentration of short-term borrowings from one customer that accounted for 85% of out the outstanding balance of securities sold under agreements to repurchase as of December 31, 2023. The Bank expects to maintain these relationships
with the customers for the foreseeable future.
As of December 31, 2023, approximately $286.4 million of our total deposits (including deposits from affiliates) were not insured by FDIC insurance, which represented 37% of total deposits.
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, 2023 consisted
of $105.2 million in cash and cash equivalents and $186.0 million in securities available‑for‑sale that were not pledged, compared to $16.1 million in cash and cash equivalents and $250.3 million in securities available‑for‑sale that were not
pledged at December 31, 2022. 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 preferred stock sold to the U.S. Treasury in 2022 and the private
placements completed in December 2016, and April 2021 and dividends received from the Bank in 2022 and 2023.
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The Company recorded consolidated net cash inflows from operating activities of $7.6 million and $6.3 million during the years ended December 31, 2023 and 2022, respectively. Net cash
inflows from operating activities during 2023 were primarily attributable to net income of $4.5 million and a $2.3 million net increase in accrued expenses and other liabilities . Net cash inflows from
operating activities during 2022 were primarily attributable to net income of $5.7 million and a $1.5 million increase in deferred taxes.
The Company recorded consolidated net cash outflows from investing activities of $100.0 million and $324.0 million during the years ended December 31, 2023 and 2022, respectively. Net
cash outflows from investing activities during 2023 were primarily attributable to $115.3 million of net loan originations. Net cash outflows from investing activities during 2022 were primarily attributable to $215.5 million of
purchases of available-for-sale securities and $120.0 of net loan originations .
The Company recorded consolidated net cash inflows from financing activities of $181.5 million and $102.2 million during the years ended December 31, 2023 and 2022, respectively. Net
cash inflows from financing activities during 2023 were primarily attributable to $456.1 million of proceeds from FHLB advances and $100.0 million of proceeds from the BTFP, partially offset by $375.1 million of FHLB repayments. Net cash inflows from financing activities during 2022 were primarily attributable to $150.0 million from the issuance of preferred stock and $95.5 million of proceeds from FHLB advances, offset by $101.1
million of net outflow of deposits and $53.1 million of FHLB repayments
We believe that the Company’s existing cash, cash equivalents and marketable securities will be sufficient to meet our liquidity requirements and capital expenditure needs over at least the next 12
months.
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.
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, 2023.
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
$
141,705
$
26,002
$
188
$
140
$
168,035
FHLB advances
176,638
32,681
–
–
209,319
Commitments to originate loans
7,560
–
–
–
7,560
Commitments to fund construction loans
42,678
–
–
–
42,678
Commitments to fund unused lines of credit
3,302
–
–
–
3,302
Operating lease obligations
242
423
–
–
665
Total contractual obligations
$
372,125
$
59,106
$
188
$
140
$
431,559
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.
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As a result, the Bank’s performance is influenced by general macroeconomic 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 Estimates
Critical accounting estimates are those that involve a significant level of estimation uncertainty , and which have had or are reasonably likely to have a material impact on the financial condition
or results of operations of the registrant. This discussion highlights those accounting estimates 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 estimates as follows:
Allowance for Credit 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. Effective January 1, 2023, the Company accounts
for the ACL on loans in accordance with ASC 326. ASC 326 requires the Company to recognize estimates for lifetime losses on loans and off-balance sheet loan commitments at the time of origination or acquisition. The recognition of losses at
origination or acquisition represents the Company’s best estimate of the lifetime expected credit loss associated with a loan, given the facts and circumstances associated with the particular loan, and involves the use of significant
management judgment and estimates, which are subject to change based on management’s on-going assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses the weighted-average
remaining maturity (“WARM”) method when determining estimates for the ACL for each of its portfolio segments. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly
basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter.
The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Qualitative adjustments may include,
but are not limited to, factors such as: (i) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; (ii) changes in international, national, regional, and
local conditions; (iii) changes in the nature and volume of the portfolio and terms of loans; (iv) changes in the experience, depth, and ability of lending management; (v) changes in the volume and severity of past due loans and other similar
conditions; (vi) changes in the quality of the organization’s loan review system; (vii) changes in the value of underlying collateral for collateral dependent loans; (viii) the existence and effect of any concentrations of credit and changes in
the levels of such concentrations; and (ix) the effect of other external factors (i.e., competition, legal and regulatory requirements) on the level of estimated credit losses. These qualitative factors incorporate the concept of reasonable and
supportable forecasts, as required by ASC 326.
The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a
substandard or worse internal risk grade, and may consist of loans on nonaccrual status, loans that have recently been modified in response to a borrower’s deteriorating financial condition, loans where the likelihood of foreclosure on
underlying collateral has increased, collateral dependent loans, and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed
to no longer possess risk characteristics similar to other loans in the loan portfolio, because the specific attributes and risks associated with the loan have likely become unique as the credit quality of the loan deteriorates. As such, these
loans may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless
the loan has been deemed collateral dependent. Collateral dependent loans are loans where the repayment of the loan is expected to come from the operation of and/or eventual liquidation of the underlying collateral. The ACL for collateral
dependent loans is determined using estimates of the fair value of the underlying collateral, less estimated selling costs.
The estimation of the appropriate level of the ACL requires significant judgment by management. Although management uses the best
information available to make these estimations, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Changes in management’s estimates of
forecasted net losses could materially change the level of the ACL. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process. Such agencies may
require the Company to recognize additions to the ACL based on judgments different from those of management.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305(e) of Regulation S-K.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements of Broadway Financial Corporation and Subsidiaries below.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.