Form 10-Q BROADWAY FINANCIAL CORP For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2022
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For transition period from__________ to___________
Commission file number 001-39043
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(323 ) 634-1700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class:
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Trading Symbol(s)
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Name of each exchange on which registered:
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||
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(including attached preferred stock purchase rights)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, a smaller reporting company, or an emerging growth company. See the
definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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☒
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 8, 2022, 48,026,435 shares of the Registrant’s Class A voting common stock, 11,404,618 shares of the Registrant’s Class B non-voting common stock and 16,689,775 shares of the Registrant’s Class C non-voting common stock were outstanding.
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TABLE OF CONTENTS
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Page
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PART I.
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FINANCIAL STATEMENTS
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Item 1.
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Consolidated Financial Statements (Unaudited)
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||
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1
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2
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3
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4
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| Notes to Consolidated Financial Statements | 6 |
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Item 2.
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26 | ||
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Item 3.
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39 | ||
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Item 4.
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39
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PART II.
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OTHER INFORMATION
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Item 1.
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40 | ||
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Item 1A.
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40 | ||
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Item 2.
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40 | ||
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Item 3.
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40
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Item 4.
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40
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Item 5.
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40
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Item 6.
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40
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| 41 | |||
Consolidated
Statements of Financial Condition
(In thousands, except share and per share amounts)
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June 30, 2022
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December 31, 2021
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|||||||
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(Unaudited)
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||||||||
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Assets:
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||||||||
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Cash and due from banks
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$
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$
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||||
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Interest-bearing deposits in other banks
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Cash and cash equivalents
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||||||
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Securities available-for-sale, at fair value
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Loans receivable held for investment, net of allowance of $
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Accrued interest receivable
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||||||
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Federal Home Loan Bank (FHLB) stock
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||||||
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Federal Reserve Bank (FRB) stock
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Office properties and equipment, net
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Bank owned life insurance
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Deferred tax assets, net
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Core deposit intangible, net
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Goodwill
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||||||||
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Other assets
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||||||
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Total assets
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$
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$
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||||
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Liabilities and stockholders’ equity
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||||||||
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Liabilities:
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||||||||
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Deposits
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$
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$
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||||
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Securities sold under agreements to repurchase
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||||||||
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FHLB advances
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|
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||||||
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Notes payable
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||||||||
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Accrued expenses and other liabilities
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Total liabilities
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Cumulative Perpetual Preferred stock, Series A; authorized
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Non-Cumulative Redeemable Perpetual Preferred stock, Series C;
authorized
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Common stock, Class A, $
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||||||
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Common stock, Class B, $
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||||||||
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Common stock, Class C, $
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||||||
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Additional paid-in capital
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||||||
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Retained earnings
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||||||
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Unearned Employee Stock Ownership Plan (ESOP) shares
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(
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)
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(
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)
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||||
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Accumulated other comprehensive loss, net of tax
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(
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)
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(
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)
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Treasury stock-at cost,
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(
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)
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(
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)
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||||
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Total Broadway Financial Corporation and Subsidiary stockholders’ equity
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||||||
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Non-controlling interest
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||||||||
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Total liabilities and stockholders’ equity
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$
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$
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||||
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
June 30,
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Six
Months Ended
June 30,
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|||||||||||||||
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2022
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2021
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2022
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2021
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|||||||||||||
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Interest income:
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||||||||||||||||
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Interest and fees on loans receivable
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$
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$
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$
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$
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Interest on available-for-sale securities
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||||||||||||
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Other interest income
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Total interest income
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Interest expense:
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Interest on deposits
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Interest on borrowings
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Total interest expense
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Net interest income
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Loan loss provision (recapture)
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(
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)
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(
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)
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Net interest income after loan loss provision (recapture)
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Non-interest income:
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Service charges
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CDFI Grant
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Other
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Total non-interest income
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Non-interest expense:
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Compensation and benefits
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Occupancy expense
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Information services
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Professional services
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Supervisory costs
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Office services and supplies
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Corporate insurance
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Amortization of core deposit intangible
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Other
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||||||||||||
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Total non-interest expense
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||||||||||||
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Income (loss) before income taxes
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(
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)
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|||||||||||
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Income tax expense (benefit)
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(
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)
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|||||||||||
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Net income (loss)
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$
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$
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$
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$
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(
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)
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|||||||
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Less: Net income (loss) attributable to non-controlling interest
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(
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)
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|||||||||||
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Net income (loss) attributable to Broadway Financial Corporation
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$
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$
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$
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$
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(
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)
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|||||||
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Other comprehensive income, net of tax:
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||||||||||||||||
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Unrealized gains (losses) on securities available-for-sale arising during the period
|
$
|
(
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)
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$
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$
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(
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)
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$
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|
||||||
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Income tax (benefit) expense
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(
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)
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(
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)
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||||||||||
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Other comprehensive income (loss), net of tax
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(
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)
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(
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)
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||||||||||
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Comprehensive income (loss)
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$
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(
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)
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$
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$
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(
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)
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$
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(
|
)
|
|||||
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Earnings (loss) per common share-basic
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$
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$
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$
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$
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(
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)
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|||||||
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Earnings (loss) per common share-diluted
|
$
|
|
$
|
|
$
|
|
$
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(
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)
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|||||||
Consolidated Statements of Cash Flows
(Unaudited)
|
Six Months Ended
June 30, |
||||||||
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2022
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2021
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|||||||
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(In thousands)
|
||||||||
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Cash flows from operating activities:
|
||||||||
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Net income (loss)
|
$
|
|
$
|
(
|
)
|
|||
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Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
||||||||
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Loan loss (recapture) provision
|
(
|
)
|
|
|||||
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Depreciation
|
|
|
||||||
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Net change in amortization of deferred loan origination costs
|
(
|
)
|
|
|||||
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Net amortization of premiums on available-for-sale securities
|
|
|
||||||
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Amortization of investment in affordable housing limited
partnership
|
|
|
||||||
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Amortization of purchase accounting marks on loans
|
(
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)
|
|
|||||
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Amortization of core deposit intangible
|
|
|
||||||
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Director compensation expense-common stock
|
|
|
||||||
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Accretion of premium on FHLB advances
|
(
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)
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(
|
)
|
||||
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Stock-based compensation expense
|
|
|
||||||
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Valuation allowance on deferred tax asset
|
|
|
||||||
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ESOP compensation expense
|
|
|
||||||
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Change in deferred taxes on goodwill
|
|
|
||||||
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Earnings on bank owned life insurance
|
(
|
)
|
(
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)
|
||||
|
Change in assets and liabilities:
|
||||||||
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Net change in deferred taxes
|
|
(
|
)
|
|||||
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Net change in accrued interest receivable
|
||||||||
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Net change in other assets
|
(
|
)
|
(
|
)
|
||||
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Net change in accrued expenses and other liabilities
|
(
|
)
|
(
|
)
|
||||
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Net cash used in operating activities
|
(
|
)
|
(
|
)
|
||||
|
Cash flows from investing activities:
|
||||||||
|
Cash acquired in merger
|
|
|
||||||
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Net change in loans receivable held for investment
|
|
(
|
)
|
|||||
|
Principal payments on available-for-sale securities
|
|
|
||||||
|
Purchase of available-for-sale securities
|
(
|
)
|
(
|
)
|
||||
|
Purchase of FHLB stock
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from redemption of FHLB stock
|
|
|
||||||
|
Purchase of office properties and equipment
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from disposals of office properties and equipment
|
|
|
||||||
|
Net cash (used in) provided by investing activities
|
(
|
)
|
|
|||||
|
Cash flows from financing activities:
|
||||||||
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Net change in deposits
|
|
|
||||||
|
Net increase in securities sold under agreements to repurchase
|
|
|
||||||
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Proceeds from sale of stock (net of costs)
|
|
|
||||||
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Proceeds from issuance of preferred stock
|
|
|
||||||
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Dividends paid on preferred stock
|
(
|
)
|
|
|||||
|
Distributions to non-controlling interest
|
|
(
|
)
|
|||||
|
Proceeds from FHLB advances
|
|
|
||||||
|
Repayments of FHLB advances
|
(
|
)
|
(
|
)
|
||||
|
Stock cancelled for income tax withholding
|
|
(
|
)
|
|||||
|
Repayments of junior subordinated debentures
|
|
(
|
)
|
|||||
|
Net cash provided by financing activities
|
|
|
||||||
|
Net change in cash and cash equivalents
|
|
|
||||||
|
Cash and cash equivalents at beginning of the period
|
|
|
||||||
|
Cash and cash equivalents at end of the period
|
$
|
|
$
|
|
||||
|
Supplemental disclosures of cash flow
information:
|
||||||||
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Cash paid for interest
|
$
|
|
$
|
|
||||
|
Cash paid for income taxes
|
|
|
||||||
|
Assets acquired (liabilities assumed) in
acquisition:
|
||||||||
|
Securities available-for-sale, at fair value
|
$
|
|
$
|
|
||||
|
Loans receivable
|
|
|
||||||
|
Accrued interest receivable
|
|
|
||||||
|
FHLB and FRB stock
|
|
|
||||||
|
Office property and equipment
|
|
|
||||||
|
Goodwill
|
|
|
||||||
|
Core deposit intangible
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Deposits
|
|
(
|
)
|
|||||
|
FHLB advances
|
|
(
|
)
|
|||||
|
Securities sold under agreements to repurchase
|
|
(
|
)
|
|||||
|
Other borrowings
|
|
(
|
)
|
|||||
|
Deferred taxes
|
|
(
|
)
|
|||||
|
Accrued expenses and other liabilities
|
|
(
|
)
|
|||||
|
Preferred stock
|
|
(
|
)
|
|||||
|
Common stock
|
|
(
|
)
|
|||||
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
|
Three-Month Period Ended June 30, 2022 and 2021
|
||||||||||||||||||||||||||||||||||||||||
|
Preferred Stock Non-Voting
|
Common
Stock Voting |
Common
Stock Non-Voting |
Additional
Paid‑in Capital |
Accumulated Other Comprehensive Income
|
Retained Earnings
|
Unearned
ESOP Shares |
Treasury
Stock |
Non-Controlling Interest
|
Total
Stockholders’ Equity |
|||||||||||||||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Balance at April 1, 2022
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||
|
Net income for the three months ended June 30, 2022
|
|
|
|
|
|
|
|
|
( |
) | ||||||||||||||||||||||||||||||
|
Preferred shares issued
|
||||||||||||||||||||||||||||||||||||||||
|
Release of unearned ESOP shares
|
||||||||||||||||||||||||||||||||||||||||
|
Restricted stock compensation expense
|
||||||||||||||||||||||||||||||||||||||||
|
Conversion of non-voting shares into voting shares
|
( |
) | ||||||||||||||||||||||||||||||||||||||
|
Other comprehensive loss, net of tax
|
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2022
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||
|
Balance at April 1, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||||
|
Net income for the three months ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Preferred shares issued in business combination
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
|
Common shares issued in business combination
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Shares transferred from voting to non-voting after business combination
|
( |
) |
|
|||||||||||||||||||||||||||||||||||||
|
Common shares issued in private placement
|
||||||||||||||||||||||||||||||||||||||||
|
Release of unearned ESOP shares
|
||||||||||||||||||||||||||||||||||||||||
|
Common stock cancelled for payment of tax withholding
|
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
|
Payment to non-controlling interest
|
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax
|
||||||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$ |
$
|
|
|||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
|
Six-Month Period Ended June 30, 2022 and 2021
|
||||||||||||||||||||||||||||||||||||||||
|
Preferred Stock Non-Voting
|
Common
Stock Voting |
Common
Stock Non-Voting |
Additional
Paid‑in Capital |
Accumulated Other Comprehensive Income
|
Retained Earnings
|
Unearned ESOP Shares
|
Treasury
Stock |
Non-Controlling Interest
|
Total
Stockholders’ Equity |
|||||||||||||||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Balance at January 1, 2022
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||
|
Net income for the six months ended June 30, 2022
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Preferred shares issued
|
||||||||||||||||||||||||||||||||||||||||
|
Release of unearned ESOP shares
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Restricted stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Stock awarded to directors
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Conversion of preferred shares to common shares
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Conversion of non-voting shares into voting shares
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Dividends paid on preferred stock
|
( |
) |
( |
) | ||||||||||||||||||||||||||||||||||||
|
Other comprehensive loss, net of tax
|
|
|
|
|
(
|
)
|
|
|
|
|
(
|
)
|
||||||||||||||||||||||||||||
|
Balance at June 30, 2022
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||
|
Balance at January 1, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$ |
$
|
|
|||||||||||||||||||
|
Net income (loss) for the six months ended June 30, 2021
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||||||||||||
|
Preferred shares issued in business combination
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Common shares issued in business combination
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Shares transferred from voting to non-voting after business
combination
|
|
(
|
)
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Common shares issued in private placement
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
Release of unearned ESOP shares
|
||||||||||||||||||||||||||||||||||||||||
|
Restricted stock compensation expense
|
||||||||||||||||||||||||||||||||||||||||
|
Stock awarded to directors
|
||||||||||||||||||||||||||||||||||||||||
|
Stock option compensation expense
|
||||||||||||||||||||||||||||||||||||||||
|
Common stock cancelled for payment of tax withholding
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
|
Payment to non-controlling interest
|
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax
|
||||||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$ |
$
|
|
|||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
NOTE (1) – Basis of
Financial Statement Presentation
The accompanying unaudited consolidated
financial statements include Broadway Financial Corporation (the “Company”) and its wholly owned subsidiary, City First Bank, National Association (the “Bank” and, together with the Company, “City First Broadway”).
Also included in the unaudited consolidated financial statements are the following subsidiaries of City First Bank: 1432 U Street LLC, Broadway Service Corporation, City First Real Estate LLC, City First Real Estate II
LLC, City First Real Estate III LLC, City First Real Estate IV LLC, and CF New Markets Advisors, LLC (“CFNMA”). In addition, CFNMA also consolidates CFC Fund Manager II, LLC; City First New Markets Fund II, LLC; City
First Capital IX, LLC; and City First Capital 45, LLC (“CFC 45”) into its financial results. All significant intercompany balances and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and with the instructions for quarterly reports on Form 10-Q. These unaudited consolidated financial statements
do not include all disclosures associated with the Company’s consolidated annual financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) and, accordingly,
should be read in conjunction with such audited consolidated financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair
presentation have been included. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Subsequent events have been evaluated through August 15, 2022, which is the date
these financial statements were issued.
Except as discussed below, our accounting policies are described in
Note 1 – Summary of Significant Accounting Policies of our audited consolidated financial statements included in the 2021 Form 10-K.
Accounting Pronouncements Yet to Be Adopted
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current
expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and
reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments)
and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment, the guidance will be applied prospectively. Existing purchase credit impaired (“PCI”) assets will be
grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption
and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance.
For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective.
On October 16, 2019, the FASB voted to affirm the proposed amended effective date
for ASU 2016-13 for smaller reporting companies (“SRCs”) as defined by the SEC. The final ASU, which was issued in November 2019, delays the implementation date for ASU 2016-13 to fiscal years beginning after December
15, 2022. SRCs are defined as companies with less than $250 million of public float or less than $100 million in annual revenues for the previous year and no public float or public float of less than $700 million. The
Company qualifies as an SRC, and management will implement ASU 2016-13 in the first quarter of 2023. The Company has selected a vendor model, formed an implementation committee and is in the process of refining the
model. The estimated financial impact has not yet been determined.
In April 2019, the FASB issued ASU No.
2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU clarifies the scope of the credit losses
standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. The amendments to Topic 326 have the same effective dates as ASU
2016-13. This guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In May 2019, the FASB issued ASU No.
2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial
assets measured at amortized cost basis upon adoption of the credit loss standards. The effective date for this ASU is the same as for ASU 2016-13. Management will evaluate this ASU in conjunction with ASU 2016-13 to
determine whether the fair value option will be elected for any eligible financial assets.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit
Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This new accounting standard pertains to eliminating certain existing accounting guidance for troubled debt restructurings (“TDRs”) by creditors
and adding additional disclosures related to the nature and characteristics of modifications of loans to borrowers experiencing financial difficulties and vintage disclosures for gross write-offs. The amendments to
Topic 326 have the same effective dates as ASU 2016-13. This guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
NOTE (2) – Business Combination
The Company completed its merger with CFBanc Corporation (“CFBanc”) on April 1, 2021, with the Company
continuing as the surviving entity (the “CFBanc Merger”). Immediately following this merger, Broadway Federal Bank, f.s.b., 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). As of the acquisition date,
CFBanc had $471.0 million in total assets, $227.7 million in gross loans, and $353.7
million of total deposits.
On April 1,
2021, (1) each share of CFBanc’s Class A Common Stock, par value $0.50 per share, and Class B Common Stock,
par value $0.50 per share, issued and outstanding immediately prior to the CFBanc Merger was converted into 13.626 validly issued, fully paid and nonassessable shares, respectively, of the voting common stock of the Company, par
value $0.01 per share, which were renamed Class A Common Stock, and a new class of non-voting common stock of
the Company, par value $0.01 per share, which was named Class B Common Stock, and (2) each share of Fixed
Rate Cumulative Redeemable Perpetual Preferred Stock, Series B, par value $0.50 per share, of CFBanc (“CFBanc
Corporation Preferred Stock”) issued and outstanding immediately prior to the effective time of the CFBanc Merger was converted into one validly issued, fully paid and non-assessable share of a new series of preferred stock of the Company, which was designated as the Company’s Fixed Rate
Cumulative Redeemable Perpetual Preferred Stock, Series A, with such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, which taken as a whole, are not materially less favorable
to the holders of CFBanc Corporation Preferred Stock than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof of CFBanc Corporation Preferred Stock. The total value of the
consideration transferred to CFBanc shareholders was approximately $66.3 million, which was based on the
closing price of the Company’s common stock on March 31, 2021, the last trading day prior to the consummation of the merger.
The Company
accounted for the CFBanc Merger under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The
Company determined the fair value of the acquired assets and assumed liabilities with the assistance of third-party valuation firms. Goodwill in the amount of $26.0 million was recognized in the CFBanc Merger. Goodwill represents the future economic benefits arising 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 is not amortized for financial reporting purposes; rather,
it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. Goodwill
recognized in this transaction is not deductible for income tax purposes.
The
following table represents the assets acquired and liabilities assumed in the CFBanc Merger as of April 1, 2021, and the fair value adjustments and amounts recorded by the Company as of the same date under the
acquisition method of accounting:
|
CFBanc
Book
Value
|
Fair Value
Adjustments
|
Fair Value
|
||||||||||
|
Assets acquired
|
(In thousands) |
|||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
||||||
|
Securities available-for-sale
|
|
(
|
)
|
|
||||||||
|
Loans receivable held for investment:
|
||||||||||||
|
Gross loans receivable held for investment
|
|
(
|
)
|
|
||||||||
|
Deferred fees and costs
|
(
|
)
|
|
|
||||||||
|
Allowance for loan losses
|
(
|
)
|
|
|
||||||||
|
|
|
|
||||||||||
|
Accrued interest receivable
|
|
|
|
|||||||||
|
FHLB and FRB stock
|
|
|
|
|||||||||
|
Office properties and equipment
|
|
|
|
|||||||||
|
Deferred tax assets, net
|
|
(
|
)
|
(
|
)
|
|||||||
|
Core deposit intangible
|
|
|
|
|||||||||
|
Other assets
|
|
|
|
|||||||||
|
Total assets
|
$
|
|
$
|
|
$
|
|
||||||
|
Liabilities assumed
|
||||||||||||
|
Deposits
|
$
|
|
$
|
|
$
|
|
||||||
| Securities sold under
agreements to repurchase |
||||||||||||
|
FHLB advances
|
|
|
|
|||||||||
|
Notes payable
|
|
|
|
|||||||||
|
Accrued expenses and other liabilities
|
|
|
|
|||||||||
|
Total liabilities
|
$
|
|
$
|
|
$
|
|
||||||
|
Excess of assets acquired over liabilities assumed
|
$
|
|
$
|
|
$
|
|
||||||
|
Consideration paid
|
$
|
|
||||||||||
|
Goodwill recognized
|
$
|
|
||||||||||
The contractual amounts due, expected cash flows to be collected, the interest component, and the fair value of
loans acquired from CFBanc as of the acquisition date were as follows (in thousands):
|
Contractual amounts due
|
$
|
|
||
|
Cash flows not expected to be collected
|
(
|
)
|
||
|
Expected cash flows
|
|
|||
|
Interest component of expected cash flows
|
(
|
)
|
||
|
Fair value of acquired loans
|
$
|
|
A component of total loans acquired from CFBanc were loans that were considered to be purchased credit
impaired loans (“PCI loans”). Refer to Note 5 for additional information regarding PCI loans. The following table presents the amounts that comprise the fair value of PCI loans (in
thousands):
|
Contractual amounts due
|
$
|
|
||
|
Nonaccretable difference (cash flows not expected to be collected)
|
(
|
)
|
||
|
Expected cash flows
|
|
|||
|
Accretable yield
|
(
|
)
|
||
|
Fair value of acquired loans
|
$
|
|
In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses
that had been previously recorded on loans by CFBanc.
The following table presents the net interest income, net income, and earnings per share as if the CFBanc Merger was
effective as of January 1, 2021. The unaudited pro forma financial information included in the table below is based on various estimates and is presented for informational purposes only and does not indicate the
financial condition or results of operations of the combined Company that would have been achieved for the periods presented had the transactions been completed as of the date indicated or that may be achieved in the
future.
| Three Months Ended | Six Months Ended |
|||||||
| June 30, 2021 |
June 30, 2021 |
|||||||
|
|
(Dollars in thousands except per share amounts)
|
|||||||
|
Net interest income
|
$
|
|
$
|
|
||||
|
Net income (loss)
|
|
(
|
)
|
|||||
|
|
||||||||
|
Basic earnings per share
|
$
|
|
$
|
(
|
)
|
|||
|
Diluted earnings per share
|
$
|
|
$
|
(
|
)
|
|||
NOTE (3) – Earnings Per Share of Common Stock
Basic earnings per
share of common stock is computed pursuant to the two-class method by dividing net income available to common stockholders less dividends paid on participating securities (unvested shares of restricted common stock) and any undistributed earnings
attributable to participating securities by the weighted average common shares outstanding during the period. The weighted average common shares outstanding includes the weighted average number of shares of common stock outstanding less the
weighted average number of unvested shares of restricted common stock. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per share of common stock includes the dilutive effect of unvested stock awards
and additional potential common shares issuable under stock options.
|
For the three months ended
June 30,
|
For the six months ended
June 30,
|
|||||||||||||||
|
2022
|
2021
|
2022 | 2021 | |||||||||||||
|
(Dollars in thousands, except per share)
|
||||||||||||||||
|
Net income (loss) attributable to Broadway Financial Corporation
|
$
|
|
$
|
|
$ | $ | ( |
) | ||||||||
|
Less net income (loss) attributable to participating securities
|
|
|
||||||||||||||
|
Income (loss) available to common stockholders
|
$
|
|
$
|
|
$ | $ | ( |
) | ||||||||
|
Weighted average common shares outstanding for basic earnings (loss) per common share
|
|
|
||||||||||||||
|
Add: dilutive effects of unvested restricted stock awards
|
|
|
||||||||||||||
| Add: dilutive effects of assumed exercise of stock options |
||||||||||||||||
|
Weighted average common shares outstanding for diluted earnings (loss) per common share
|
|
|
||||||||||||||
|
Earnings (loss) per common share - basic
|
$
|
|
$
|
|
$ | $ | ( |
) | ||||||||
|
Earnings (loss) per common share - diluted
|
$
|
|
$
|
|
$ | $ | ( |
) | ||||||||
NOTE (4) – Securities
The
following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolios as of the dates indicated and the corresponding amounts of unrealized gains and losses which were recognized in accumulated
other comprehensive income (loss):
|
Amortized
Cost |
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
June 30, 2022:
|
||||||||||||||||
|
Federal agency mortgage-backed securities
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
Federal agency collateralized mortgage obligations (“CMO”)
|
( |
) | ||||||||||||||
|
Federal agency debt
|
|
|
(
|
)
|
|
|||||||||||
|
Municipal bonds
|
|
|
(
|
)
|
|
|||||||||||
|
U.S. Treasuries
|
|
|
(
|
)
|
|
|||||||||||
|
SBA pools
|
|
|
(
|
)
|
|
|||||||||||
|
Total available-for-sale securities
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
December 31, 2021:
|
||||||||||||||||
|
Federal agency mortgage-backed securities
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
| Federal agency CMOs |
( |
) | ||||||||||||||
|
Federal agency debt
|
|
|
(
|
)
|
|
|||||||||||
|
Municipal bonds
|
|
|
(
|
)
|
|
|||||||||||
| U.S. Treasuries |
( |
) | ||||||||||||||
|
SBA pools
|
( |
) | ||||||||||||||
|
Total available-for-sale securities
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
The Bank held 175 securities with unrealized losses of $14.1 million at June 30, 2022. Thirty-one , 31 , of these securities had aggregate unrealized losses of $200 thousand and been in a loss position for greater than one year. The Bank’s securities were primarily issued by the federal government or its agencies. The unrealized gains or losses
on our available-for-sale securities as of June 30, 2022, were primarily caused by movements in market interest rates subsequent to the purchase of such securities.
The Bank held 129 securities with unrealized losses of $1.0
million at December 31, 2021. None
of these securities has been in a loss position for greater than one year. The Bank’s securities were primarily issued by the federal government or its agencies. The unrealized gains or losses on our available-for-sale securities at December
31, 2021 were primarily caused by movements in market interest rates subsequent to the purchase of such securities.
Securities with a market value of $72.7 million were pledged as collateral for
securities sold under agreements to repurchase as of June 30, 2022, and included $35.1 million of U.S. Government Agency securities, $27.6 million of mortgage-backed securities, $6.2
million of SBA pool securities and $3.8 million of federal agency CMO. Securities with a market value of $53.2 million were pledged as collateral for securities sold under agreements to repurchase as of December 31, 2021, and included $25.9 million of federal agency mortgage-backed securities, $13.3 million of federal agency debt, $9.8 million of SBA pool securities,
and $4.2 million of federal agency CMO. (See Note 8 – Borrowings). There were no
At June 30, 2022, and December 31, 2021, there were no
The amortized cost and estimated fair value of all investment securities available-for-sale at June 30, 2022, by contractual maturities are shown
below. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
Amortized
Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Due in one year or less
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
Due after one year through five years
|
|
|
(
|
)
|
|
|||||||||||
|
Due after five years through ten years
|
|
|
(
|
)
|
|
|||||||||||
|
Due after ten years (1)
|
|
|
(
|
)
|
|
|||||||||||
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
|
(1)
|
|
At
June 30, 2022 and December 31, 2021, there were no
NOTE (5) – Loans Receivable Held for Investment
Loans receivable held for investment were as follows as of the dates indicated:
|
June 30,
2022
|
December 31, 2021
|
|||||||
|
(In thousands)
|
||||||||
|
Real estate:
|
||||||||
|
Single family
|
$
|
|
$
|
|
||||
|
Multi-family
|
|
|
||||||
|
Commercial real estate
|
|
|
||||||
|
Church
|
|
|
||||||
|
Construction
|
|
|
||||||
|
Commercial – other
|
|
|
||||||
| SBA loans (1) |
||||||||
|
Consumer
|
|
|
||||||
|
Gross loans receivable before deferred loan costs and premiums
|
|
|
||||||
|
Unamortized net deferred loan costs and premiums
|
|
|
||||||
|
Gross loans receivable
|
|
|
||||||
|
Credit and interest marks on purchased loans, net
|
( |
) | ( |
) | ||||
| Allowance for loan losses | ( |
) | ( |
) | ||||
|
Loans receivable, net
|
$
|
|
$
|
|
||||
|
(1)
|
|
As of June 30, 2022 and December 31, 2021, the commercial loan category above included $3.6 million and $18.0 million, respectively, of
loans issued under the SBA’s Paycheck Protection Program (PPP). PPP loans have terms of to five years and earn interest at 1 %. PPP loans are fully guaranteed by the SBA and have virtually no risk of loss. The Bank expects the vast majority of the PPP loans to be fully forgiven by the
SBA.
As
part of the CFBanc Merger, the Company acquired loans for which there was, at acquisition, evidence of credit
deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. Prior to the CFBanc Merger, there were no such acquired loans. The carrying amount of those loans as of
June 30, 2022, and December 31, 2021, was as follows:
|
|
June 30, 2022
|
December 31, 2021 | ||||||
|
|
(In thousands)
|
|||||||
|
Real estate:
|
||||||||
|
Single family
|
$
|
|
$ | |||||
|
Commercial real estate
|
|
|||||||
|
Commercial – other
|
|
|||||||
|
$
|
|
$ | ||||||
On
the acquisition date, the amount by which the undiscounted expected cash flows of the PCI loans exceeded the estimated fair value of the loan is the accretable yield. The accretable yield is measured at each financial
reporting date and represents the difference between the remaining undiscounted cash flows and the current carrying value of the PCI
loan. At June 30, 2022, and December 31, 2021, none
The
following table summarizes the accretable yield on the PCI loans for the three and six months ended June 30, 2022 and June 30, 2021:
|
Three months ended
June 30, 2022
|
Six months
ended
June 30, 2022
|
|||||||
|
(In thousands)
|
||||||||
|
Balance at the beginning of the period
|
$
|
|
$
|
|
||||
|
Deduction due to payoffs
|
|
(
|
)
|
|||||
|
Accretion
|
|
|
||||||
|
Balance at the end of the period
|
$
|
|
$
|
|
||||
|
|
Three months ended
June 30, 2021
|
Six months
ended
June 30, 2021
|
||||||
|
(In thousands)
|
||||||||
|
Balance at the beginning of the period
|
$ | $ | ||||||
|
Additions
|
|
|
||||||
|
Accretion
|
|
|
||||||
|
Balance at the end of the period
|
$
|
|
$
|
|
||||
The following
tables present the activity in the allowance for loan losses by loan type for the periods indicated:
|
For the three months ended June 30, 2022
|
||||||||||||||||||||||||||||||||
|
Real Estate
|
||||||||||||||||||||||||||||||||
|
Single
Family
|
Multi-
Family
|
Commercial
Real Estate
|
Church
|
Construction
|
Commercial - Other
|
Consumer
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
Provision for (recapture of) loan losses
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||
|
Recoveries
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Loans charged off
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Ending balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
For the three months ended June 30,
2021
|
||||||||||||||||||||||||||||||||
|
Real Estate
|
||||||||||||||||||||||||||||||||
|
Single
Family |
Multi-
Family
|
Commercial Real Estate
|
Church
|
Construction
|
Commercial - Other
|
Consumer
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
Provision for (recapture
of) loan losses
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|
|
|||||||||||||||||||||
|
Recoveries
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Loans charged off
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Ending balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
For the six months
ended June 30, 2022
|
||||||||||||||||||||||||||||||||
|
Real Estate
|
||||||||||||||||||||||||||||||||
|
Single
Family
|
Multi-
Family
|
Commercial Real Estate
|
Church
|
Construction
|
Commercial - Other
|
Consumer
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
Provision for (recapture of) loan losses
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||
|
Recoveries
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Loans charged off
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Ending balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
For the six months
ended June 30, 2021
|
||||||||||||||||||||||||||||||||
|
Real Estate
|
||||||||||||||||||||||||||||||||
|
Single
Family
|
Multi-
Family
|
Commercial Real Estate
|
Church
|
Construction
|
Commercial - Other
|
Consumer
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
Provision for (recapture of) loan losses
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|||||||||||||||||||||
|
Recoveries
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Loans charged off
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Ending balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
The following tables present the balance in the allowance for loan losses and the recorded investment (unpaid contractual principal balance less charge-offs, less interest applied to principal, plus
unamortized deferred costs and premiums) by loan type and based on impairment method as of the dates indicated:
|
June 30,
2022
|
||||||||||||||||||||||||||||||||
|
Real Estate
|
||||||||||||||||||||||||||||||||
|
Single
Family
|
Multi-
Family
|
Commercial
Real Estate
|
Church
|
Construction
|
Commercial - Other
|
Consumer |
Total
|
|||||||||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||||||||||||||
| Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
|
Collectively evaluated for impairment
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total ending allowance balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||
|
Loans individually evaluated for impairment
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
|
Loans collectively evaluated for impairment
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Subtotal |
||||||||||||||||||||||||||||||||
|
Loans acquired in the Merger
|
||||||||||||||||||||||||||||||||
|
Total ending loans balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
|
Real Estate
|
||||||||||||||||||||||||||||||||
|
Single
Family
|
Multi-
Family |
Commercial
Real Estate
|
Church
|
Construction
|
Commercial - Other
|
SBA
|
Total
|
|||||||||||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||||||||||||||
| Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | $ |
$
|
|
||||||||||||||||||
|
Collectively evaluated for impairment
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total ending allowance balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||
|
Loans individually evaluated for impairment
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
|
Loans collectively evaluated for impairment
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Subtotal | ||||||||||||||||||||||||||||||||
|
Loans acquired in the Merger
|
||||||||||||||||||||||||||||||||
|
Total ending loans balance
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||||||||||
The following
table presents information related to loans individually evaluated for impairment by loan type as of the dates indicated:
|
June 30,
2022
|
December 31, 2021
|
|||||||||||||||||||||||
|
Unpaid
Principal
Balance |
Recorded
Investment
|
Allowance
for Loan
Losses
Allocated
|
Unpaid
Principal Balance |
Recorded
Investment
|
Allowance
for Loan
Losses
Allocated
|
|||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||||||||||
|
Multi-family
|
$ |
|
$ |
|
$ |
-
|
$ |
|
$ |
|
$ |
-
|
||||||||||||
|
Church
|
|
|
-
|
|
|
-
|
||||||||||||||||||
|
With an allowance recorded:
|
||||||||||||||||||||||||
|
Single family
|
|
|
|
|
|
|
||||||||||||||||||
|
Church
|
|
|
|
|
|
|
||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
The recorded investment in loans excludes accrued interest receivable due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.
The following tables present the monthly average of loans individually evaluated for impairment by loan type and the related interest income for the periods indicated:
|
Three Months Ended June 30, 2022
|
Three Months Ended June 30, 2021
|
|||||||||||||||
|
Average
Recorded
Investment
|
Cash Basis
Interest
Income
Recognized
|
Average
Recorded
Investment
|
Cash Basis
Interest
Income
Recognized
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Single family
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Multi-family
|
|
|
|
|
||||||||||||
|
Church
|
|
|
|
|
||||||||||||
|
Commercial - other
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Six
Months Ended June 30, 2022
|
Six
Months Ended June 30, 2021
|
|||||||||||||||
|
Average
Recorded Investment
|
Cash Basis
Interest
Income
Recognized
|
Average
Recorded
Investment
|
Cash Basis
Interest
Income
Recognized |
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Single family
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Multi-family
|
|
|
|
|
||||||||||||
|
Church
|
|
|
|
|
||||||||||||
|
Commercial - other
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans and interest recoveries on non-accrual loans that were paid off. Interest payments
collected on non-accrual loans are characterized as payments of principal rather than payments of the outstanding accrued interest on the loans until the remaining principal on the non-accrual loans is considered to be fully
collectible or paid off. When a loan is returned to accrual status, the interest payments that were previously applied to principal are deferred and amortized over the remaining life of the loan. Foregone interest income
that would have been recognized had loans performed in accordance with their original terms amounted to $23
thousand and $19 thousand for the three months ended June 30, 2022 and 2021, respectively, and $54 thousand and $38 thousand for the
six months ended June 30, 2022 and 2021,
respectively, and were not included in the consolidated results of operations.
The following tables present the aging of the recorded investment in
past due loans by loan type as of the dates indicated:
|
June 30,
2022
|
||||||||||||||||||||||||
|
30-59
Days
Past Due
|
60-89
Days
Past Due
|
Greater
than
90 Days
Past Due
|
Total
Past Due
|
Current
|
Total
|
|||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||
|
Loans receivable held for investment:
|
||||||||||||||||||||||||
|
Single family
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Multi-family
|
|
|
|
|
|
|
||||||||||||||||||
|
Commercial real estate
|
|
|
|
|
|
|
||||||||||||||||||
|
Church
|
|
|
|
|
|
|
||||||||||||||||||
|
Construction
|
|
|
|
|
|
|
||||||||||||||||||
|
Commercial - other
|
|
|
|
|
|
|
||||||||||||||||||
| SBA loans | ||||||||||||||||||||||||
|
Consumer
|
|
|
|
|
|
|
||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
December 31, 2021
|
||||||||||||||||||||||||
|
30-59
Days
Past Due
|
60-89
Days
Past Due
|
Greater
than
90 Days
Past Due
|
Total
Past Due
|
Current
|
Total
|
|||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||
|
Loans receivable held for investment:
|
||||||||||||||||||||||||
|
Single family
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Multi-family
|
|
|
|
|
|
|
||||||||||||||||||
|
Commercial real estate
|
|
|
|
|
|
|
||||||||||||||||||
|
Church
|
|
|
|
|
|
|
||||||||||||||||||
|
Construction
|
|
|
|
|
|
|
||||||||||||||||||
|
Commercial - other
|
|
|
|
|
|
|
||||||||||||||||||
|
Consumer
|
|
|
|
|
|
|
||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
The following table presents the recorded investment in non-accrual loans by loan type as of the dates indicated:
|
June 30,
2022
|
December 31, 2021
|
|||||||
|
(In thousands)
|
||||||||
|
Loans receivable held for investment:
|
||||||||
|
Church
|
$ |
|
$ |
|
||||
|
Total non-accrual loans
|
$
|
|
$
|
|
||||
There were no None
Troubled Debt Restructurings (TDRs)
At June 30, 2022, loans classified as TDRs totaled $2.0 million, of which $164 thousand were included in non-accrual loans and $1.9 million were on accrual status. At December 31, 2021, loans classified as TDRs totaled $1.8 million, of which $188 thousand were
included in non-accrual loans and $1.6 million were on accrual status. The Company has allocated $7 six months of timely payments, as modified. A well-documented credit analysis that supports a return to accrual status based on
the borrower’s financial condition and prospects for repayment under the revised terms is also required. As of June 30, 2022 and December 31, 2021, the Company had no No
Credit Quality
Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience,
credit documentation, public information, and current economic trends, among other factors. For single family residential, consumer and other smaller balance homogenous loans, a credit grade is established at inception, and
generally only adjusted based on performance. Information about payment status is disclosed elsewhere herein. The Company analyzes all other loans individually by classifying the loans as to credit risk. This analysis is
performed at least on a quarterly basis. The Company uses the following definitions for risk ratings:
| ● |
Watch. Loans classified as watch exhibit
weaknesses that could threaten the current net worth and paying capacity of the obligors. Watch graded loans are generally performing and are not more than 59 days past due. A watch rating is used when a material
deficiency exists, but correction is anticipated within an acceptable time frame.
|
| ● |
Special Mention. Loans classified as
special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
institution’s credit position at some future date.
|
| ● |
Substandard. Loans classified as
substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
|
| ● |
Doubtful. Loans classified as doubtful
have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions,
and values, highly questionable and improbable.
|
| ● |
Loss. Loans classified as loss are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.
|
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Pass rated loans are
generally well protected by the current net worth and paying capacity of the obligor and/or by the value of the underlying collateral. Pass rated loans are not more than 59 days past due and are generally performing in
accordance with the loan terms. Based on the most recent analysis performed, the risk categories of loans by loan type as of the dates indicated were as follows:
|
June 30,
2022
|
||||||||||||||||||||||||||||
|
Pass
|
Watch
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Total | ||||||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||||||
|
Single family
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||||
|
Multi-family
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Commercial real estate
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Church
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Construction
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Commercial - others
|
|
|
|
|
|
|
||||||||||||||||||||||
|
SBA
|
||||||||||||||||||||||||||||
|
Consumer
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||||
|
|
December 31,
2021
|
|||||||||||||||||||||||||||
|
|
Pass
|
Watch
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Total | |||||||||||||||||||||
|
|
(In thousands)
|
|||||||||||||||||||||||||||
|
Single family
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||||
|
Multi-family
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Commercial real estate
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Church
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Construction
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Commercial - other
|
|
|
|
|
|
|
||||||||||||||||||||||
|
SBA
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||||
NOTE (6) – Goodwill and Intangible Assets
In connection with the CFBanc Merger (see Note 2 – Business Combination), the Company
recognized goodwill of $26.0 million and a core deposit intangible of $3.3 million. As the Company’s stock recently trading at a steep discount to tangible book value, an assessment of goodwill impairment was performed as of
June 30, 2022, in which no impairment was determined. The following table presents the
changes in the carrying amounts of goodwill for the six-month period ended June 30, 2022:
| Goodwill |
Core Deposit
Intangible
|
|||||||
| (In thousands) |
||||||||
|
Balance at the beginning of the period
|
$
|
|
$
|
|
||||
|
Additions
|
|
|||||||
|
Change in deferred tax estimate
|
( |
) |
|
|||||
|
Amortization
|
(
|
)
|
||||||
|
Balance at the end of the period
|
$ |
$
|
|
|||||
The carrying amount of the core deposit intangible consisted of the following at June 30, 2022 (in thousands):
|
Core deposit intangible acquired
|
$
|
|
||
| Less: accumulated amortization | ( |
) | ||
|
|
$
|
|
The following table outlines the
estimated amortization expense for the core deposit intangible during the next five fiscal years (in thousands):
|
2022
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
Thereafter
|
|
|||
|
$
|
|
NOTE (7) – Borrowings
The Bank enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Bank may transfer
legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Bank to repurchase the assets. As a result, these repurchase agreements are accounted
for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Banks’s
consolidated statements of financial condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or
netting of the investment securities assets with the repurchase agreement liabilities. These agreements mature on a daily basis. As of June 30, 2022 securities sold under agreements to repurchase totaled $67.3 at an average rate of 0.22 %.
The market value of pledged totaled $72.7 million as of June 30, 2022, and included $35.1 million of U.S. Government Agency securities, $27.6 million of mortgage-backed securities, $6.2
million of SBA pool securities and $3.8 million of federal agency CMO. As of December 31, 2021, securities
sold under agreements to repurchase totaled $52.0 million at an average rate of 0.10 %. The market value of securities pledged totaled $53.2 million as of December 31, 2021, and included $13.3
million of U.S. Government Agency securities and $39.9 million of mortgage-backed securities.
At June 30, 2022 and December 31, 2021, the Bank had
outstanding advances from the FHLB totaling $32.9 million and $86.0 million, respectively. The weighted interest rate was 1.34 % and 1.85 % as of June 30, 2022 and December 31, 2021, respectively. The weighted average
contractual maturity was 32 months and 22 months as of June 30, 2022 and December 31, 2021, respectively. The advances were collateralized by loans with a market value of $63.4 million at June 30, 2022 and $165.0
million at December 31, 2021. 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. Based on collateral pledged and FHLB stock as of June 30, 2022, the Company was eligible to borrow an additional $13.8 million as of June 30, 2022.
In connection with the New Market Tax Credit activities of the Bank, CFC 45
is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. This community development entity (“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 Qualified Active Low-Income
Business (“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.
There are two notes for CFC 45. Note A is in the amount of $9.9
million with a fixed interest rate of 5.2 % per annum. Note B is in the amount of $4.1 million with a fixed interest rate of 0.24 % per annum. Quarterly interest only payments commenced in March 2016 and will continue through March 2023 for Notes A and B. Beginning in
September 2023, quarterly principal and interest payments will be due for Notes A and B. Both notes will mature on December 1, 2040
NOTE (8) – Fair Value
The Company used the following methods and significant assumptions to estimate fair value:
The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a
mathematical technique to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level
2 inputs).
The fair value of impaired loans that are collateral dependent is generally based upon the fair value of the collateral, which is obtained from recent real estate appraisals. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust
for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans
are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Assets acquired through or by transfer in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are
subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated every nine months. These appraisals may
utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned
properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Appraisals for collateral-dependent impaired loans and assets acquired through or by transfer of in lieu of foreclosure are performed by certified general appraisers (for commercial properties)
or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, an independent third-party licensed appraiser reviews the
appraisals for accuracy and reasonableness, reviewing the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market
data or industry-wide statistics.
Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:
|
Fair Value Measurement
|
||||||||||||||||
|
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
At June 30, 2022:
|
||||||||||||||||
|
Securities available-for-sale:
|
||||||||||||||||
|
Federal agency mortgage-backed
|
$
|
|
$ |
$
|
|
$ | ||||||||||
|
Federal agency CMO
|
|
|
||||||||||||||
|
Federal agency debt
|
|
|
||||||||||||||
|
Municipal bonds
|
|
|
||||||||||||||
|
U.S. Treasuries
|
|
|
||||||||||||||
|
SBA pools
|
|
|
||||||||||||||
|
At December 31, 2021:
|
||||||||||||||||
|
Securities available-for-sale:
|
||||||||||||||||
|
Federal agency mortgage-backed
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Federal agency CMO
|
|
|
|
|
||||||||||||
|
Federal agency debt
|
|
|
|
|
||||||||||||
|
Municipal bonds
|
|
|
|
|
||||||||||||
|
U.S. Treasuries
|
|
|
|
|
||||||||||||
|
SBA pools
|
|
|
|
|
||||||||||||
There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2022 and 2021.
Assets Measured on
a Non-Recurring Basis
Assets are considered to be reflected at fair value on a non-recurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the
statements of financial condition. Generally, a non-recurring valuation is the result of the application of other accounting pronouncements that require assets to be assessed for impairment or recorded at the lower of
cost or fair value.
As of June 30, 2022 and December 31, 2021, the Bank did no
Fair Values of Financial Instruments
The following tables present the carrying amount, fair value, and placement in the fair value
hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of June 30, 2022 and December 31, 2021. For short-term financial assets such as cash and due from banks,
interest-bearing deposits in other banks, and accrued interest receivable/payable, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument
and its expected realization. For non-marketable equity securities such as Federal Home Loan Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at
their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and
savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
|
Fair Value Measurements at June 30,
2022
|
||||||||||||||||||||
|
Carrying
Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||
|
Financial Assets:
|
||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities available-for-sale |
||||||||||||||||||||
|
Loans receivable held for investment
|
|
|
|
|
|
|||||||||||||||
| Accrued interest receivables |
||||||||||||||||||||
| Bank owned life insurance |
||||||||||||||||||||
|
Financial Liabilities:
|
||||||||||||||||||||
|
Deposits
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Federal Home Loan Bank advances
|
||||||||||||||||||||
| Securities sold under agreements to repurchase |
|
|
|
|
|
|||||||||||||||
| Note payable |
||||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
|
Fair Value Measurements at December 31, 2021
|
||||||||||||||||||||
|
Carrying
Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||
|
Financial Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Securities available-for-sale
|
|
|
|
|
|
|||||||||||||||
|
Loans receivable held for investment
|
|
|
|
|
|
|||||||||||||||
|
Accrued interest receivables
|
|
|
|
|
|
|||||||||||||||
|
Bank owned life insurance
|
|
|
|
|
|
|||||||||||||||
|
Financial Liabilities:
|
||||||||||||||||||||
|
Deposits
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Federal Home Loan Bank advances
|
|
|
|
|
|
|||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||
|
Note payable
|
|
|
|
|
|
|||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
In accordance with ASU No. 2016-01, the fair value of financial assets and liabilities was measured using an exit price notion. Although the exit price notion represents the value that would be
received to sell an asset or paid to transfer a liability, the actual price received for a sale of assets or paid to transfer liabilities could be different from exit price disclosed.
NOTE (9) –
Stock-based Compensation
The Long-Term Incentive Plan, which was adopted by the Company and approved by the stockholders in 2018 (the “LTIP”), permits the grant of non-qualified and incentive stock options, stock
appreciation rights, full value awards and cash incentive awards. The plan is in effect for ten years . The
maximum number of shares that can be awarded under the plan is 1,293,109 shares of common stock as of
December 31, 2018. As of June 30,
2022, 949,362 shares had been awarded and 343,747 shares are available under the LTIP.
During February of 2022 and 2021, the Company issued 47,187 20,736 0
and $84 thousand of compensation expense during the three and six months ended June 30, 2022, respectively,
based on the fair value of the stock, which was determined using the fair value of the stock on the date of the award. During the three and six months ended June 30, 2021, the Company recorded $0 and $45
thousand of stock compensation expense.
During March of 2022, the Company issued 495,262 shares to its officers and employees under the 2018 LTIP. Each restricted stock award is valued based on the fair value of the stock on
the date of the award. These awarded shares of restricted stock fully vest over periods ranging from 36
months to 60 months from their respective dates of grant. Stock based compensation is recognized on a
straight-line basis over the vesting period. There were no shares issued to officers and employees
during 2021. During the three- and six-month periods ending June 30, 2022, the company recorded $43
thousand and $58 thousand of stock-based compensation expense, respectively. During the three- and
six-month periods ending June 30, 2021, the company recorded $0 thousand and $162 thousand of stock-based compensation expense, respectively, related to awards granted prior to 2021.
The following table summarizes stock option activity during the six months ended June 30, 2022 and 2021:
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||||
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Outstanding at beginning of period
|
|
$
|
|
|
$
|
|
||||||||||
|
Granted during period
|
|
|
|
|
||||||||||||
|
Exercised during period
|
|
|
|
|
||||||||||||
|
Forfeited or expired during period
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Outstanding at end of period
|
|
$
|
|
|
$
|
|
||||||||||
|
Exercisable at end of period
|
|
$
|
|
|
$
|
|
||||||||||
The Company did no 0 and $7
thousand expense related to stock options, respectively.
Options
outstanding and exercisable at June 30, 2022 were as follows:
|
Outstanding
|
Exercisable
|
||||||||||||||||||||||
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|||||||||||||||||
|
|
|
$
|
|
|
$
|
|
|||||||||||||||||
|
|
|
$
|
|
$
|
|
|
$
|
|
$
|
|
|||||||||||||
NOTE (10) – ESOP Plan
Employees
participate in an Employee Stock Option Plan (“ESOP”) after attaining certain age and service requirements. In December 2016, the ESOP purchased 1,493,679
shares of the Company’s common stock at $1.59 per share, for a total cost of $2.4 million, of which $1.2 million was funded with a loan from the Company. The
loan will be repaid from the Bank’s annual discretionary contributions to the ESOP, net of dividends paid, over a period of 20 years .
Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. When loan payments are made, shares are allocated to each eligible participant based on the ratio of each such
participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from the suspense account, the Company recognizes compensation expense equal to the fair value of
the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to equity as additional
paid-in capital. Any dividends on allocated shares increase participant accounts. Any dividends on unallocated shares will be used to repay the loan. Participants will receive shares for their vested balance at the end of their employment.
Compensation expense related to the ESOP was $27 thousand and $25 thousand for the three months ended June 30, 2022 and 2021, respectively, and $45
thousand and $47 thousand for the six months ended June 30, 2022 and 2021, respectively.
Shares held by the ESOP
were as follows:
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
(Dollars in thousands)
|
||||||||
|
Allocated to participants
|
|
|
||||||
|
Committed to be released
|
|
|
||||||
|
Suspense shares
|
|
|
||||||
|
Total ESOP shares
|
|
|
||||||
|
Fair value of unearned shares
|
$
|
|
$
|
|
||||
Unearned
shares, which are reported as Unearned ESOP shares in the equity section of the consolidated statements of financial condition, were $797
thousand and $829 thousand at June 30, 2022 and December 31, 2021, respectively.
NOTE (11) –
Stockholders’ Equity and Regulatory Matters
On June 7, 2022, the Company issued 150,000 shares of Senior Non-Cumulative Perpetual Preferred stock, Series C (“Series C Preferred Stock”), for the capital investment of $150.0 million from the U.S. Treasury under the Emergency Capital Investment Program (“ECIP”). ECIP investment is
treated as Tier 1 Capital for the regulatory capital treatment.
The Series C Preferred stock may be redeemed at the option of the Company on or after the fifth
anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator in accordance with the federal banking agencies’
regulatory capital regulations.
The initial dividend rate of the Series C Preferred Stock is zero percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50 % and the
ceiling dividend rate is 2.00 %.
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
rate of $3 million, plus accrued dividends, for 1,193,317 shares of Class A Common Stock at an exchange price of $2.51 per share of Class A Common Stock.
The Bank’s capital requirements are administered by the Office of the Comptroller of the Currency (“OCC”) and involve quantitative measures of assets, liabilities, and certain off-balance
sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OCC. Failure to meet capital requirements can result in regulatory
action.
As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have developed a “Community Bank Leverage Ratio” (“CBLR”) (the ratio of a
bank’s tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with
all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies have set the Community Bank
Leverage Ratio at 9%. The CARES Act temporarily lowered this ratio to 8% beginning in the three months ended March 31, 2020. The ratio then rose to 8.5 % for 2021 and was reestablished at 9 %
on January 1, 2022. City First Bank, N.A. elected to adopt the CBLR option on April 1, 2020, as reflected in its March 31, 2020 Call Report.
Actual and required capital amounts and ratios as of the dates indicated are presented below.
|
Actual
|
Minimum Required to
Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
June 30,
2022:
|
||||||||||||||||
|
Community Bank Leverage Ratio
|
$
|
|
|
% |
$
|
|
|
% | ||||||||
|
December 31,
2021:
|
||||||||||||||||
|
Community Bank Leverage Ratio
|
$
|
|
|
%
|
$
|
|
|
% | ||||||||
At June 30, 2022, the Company and the Bank met all the capital adequacy requirements to which they were subject. In addition, the Bank was “well
capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since June 30, 2022 that would materially adversely change the Bank’s capital
classifications. From time to time, the Bank may need to raise additional capital to support its further growth and to maintain its “well capitalized” status.
NOTE (12) – Income
Taxes
The Company and its subsidiary are subject to U.S. federal and state income taxes. Income tax expense is the total of the
current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be
realized. In assessing the realization of deferred tax assets, management evaluated both positive and negative evidence, including the existence of cumulative losses in the current year and the prior two years , the amount of taxes paid in available carry-back years, the forecasts of future income and tax planning
strategies.
At June 30, 2022, the Company maintained a $369 thousand valuation allowance on its deferred tax assets because the number of shares sold in the private placements
completed on April 6, 2021 triggered limitations on the use of certain tax attributes under the Section 382 of the federal tax code. The ability to use net operating losses (“NOLs”) to offset future taxable income will
be restricted and these NOLs could expire or otherwise be unavailable. In general, under Section 382 of the Code and corresponding provisions of state law, a corporation that undergoes an “ownership change” is subject
to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or
groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period.
NOTE (13) –
Concentration of Credit Risk
The Bank has a significant concentration of deposits with one customer that
accounted for approximately 16 % of its deposits as of
June 30, 2022. The Bank also has a significant concentration of short-term borrowings from one customer that accounted for 80 % of the
outstanding balance of securities sold under agreements to repurchase as of June 30, 2022. The Bank expects to maintain the relationships with these
customers for the foreseeable future.
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 certain other factors that may affect our future results. Our MD&A should be read in conjunction with the Consolidated Financial
Statements and related Notes included in Part I “Item 1, Financial Statements,” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021. Certain statements herein are forward-looking
statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the U.S. Securities Act of 1933, as amended that reflect our current views with respect to future events
and financial performance. Forward-looking statements typically include words such as “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” and other similar expressions. These forward-looking statements are
subject to risks and uncertainties, which could cause actual future results to differ materially from historical results or from those anticipated or implied by such statements. Readers should not place undue reliance on these forward-looking
statements, which speak only as of their dates or, if no date is provided, then as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except to the extent required by law.
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to
have a material impact on our financial condition or results of operations 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 in our 2021 Form 10-K 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 (“ALLL”) 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.
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 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.
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.
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 8 of the Notes to Consolidated Financial Statements of this
Quarterly Report on Form 10-Q. 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.
Overview
Broadway Financial Corporation (the “Company”) merged with CFBanc Corporation (“CFBanc”) on April 1, 2022, with Broadway Financial Corporation continuing as the surviving entity
(the “CFBanc Merger”). Immediately following the CFBanc Merger, Broadway Federal Bank, f.s.b. 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). The results for the three months ended June 30, 2022 reflect the contribution of the consolidated operations of CFBanc Corporation. Accordingly, results for the
three- and six-month periods ending June 30, 2022 and for the three months ended June 30, 2021, include the operations of Broadway Financial Corporation and its subsidiary, City First Bank, National Association (the “Bank”), whereas results for
the six months ending June 30, 2021 include the results of Broadway Financial Corporation and its former subsidiary, Broadway Federal Bank, f.s.b., which was merged into City First Bank of D.C., National Association on April 1, 2022.
The Company closed a private placement of shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”),
pursuant to a Purchase Agreement with the United States Department of the Treasury (the “Purchaser”) as part of the Emergency Capital Investment Program (“ECIP”), which has provided funding to Minority Depository Institutions and Community
Development Financial Institutions to increase access to capital for underserved communities that may have been disproportionately impacted by the economic effects of the COVID-19 pandemic. The Series C Preferred Stock will be classified
within stockholders’ equity of the statement of financial condition. Pursuant to the Purchase Agreement, the Purchaser acquired an aggregate of 150,000 shares of Series C Preferred Stock for an aggregate purchase price equal to $150.0
million in cash, which is intended to qualify as Tier 1 Capital. The initial dividend rate of the Series C Preferred Stock is zero percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50% and the
ceiling dividend rate is 2.00%. The dividend rate is based on annual change in actual qualified lending relative to a baseline level of qualified lending. The Series C Preferred stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate
federal banking regulator in accordance with the federal banking agencies’ regulatory capital regulations.
Total assets increased by $130.7 million during the first six months of 2022 to $1.224 billion at June 30, 2022, primarily due to growth in cash and cash equivalents of $48.6
million, growth in investment securities available-for-sale of $81.9 million, and a net increase in the deferred tax asset of $2.9 million. This was partially offset by decreases of $1.6 million in loans and $1.1 million in FHLB stock.
Total liabilities decreased by $12.9 million to $939.5 million at June 30, 2022 from $952.4 million at December 31, 2021. The decrease in total liabilities primarily consisted of
decreases of $53.0 in FHLB advances and $3.4 million in other liabilities, which were partially offset by net increases in securities sold under agreements to repurchase of $15.3 million and $28.1 million in deposits.
During the second quarter of 2022, we recorded net interest income increased by $2.2 million or 38.1% compared to the second quarter of 2021. This increase
resulted from an increase in the average balance of interest-earning assets, primarily from the investment of funds from the Bank’s general liquidity. Interest income was also positively impacted by an increase in the average rates
earned on interest-earning assets. The Company contributed $75 million of the proceeds from the sale of the Series C Preferred Stock to Bank which reduced the Bank’s multi-family and commercial real estate loan
concentration levels. This also reduced the risk associated with the qualitative factors used to estimate the required ALLL as of June 30, 2022. As a result, the Bank recorded a loan loss provision recapture of $577 thousand for the second quarter of 2022.
Partially offsetting these improvements were a decrease in non-interest income of $1.9 million and an increase in non-interest expenses of $892 thousand during the three months
ended June 30, 2022, compared to the same period in 2021. Non-interest income for the second quarter of 2021 included a non-recurring benefit of $1.8 million from a grant from the United States Department of the Treasury’s Community Development
Financial Institution (“CDFI”) Fund. Non-interest expenses increased during the second quarter of 2022 compared to the second quarter of 2021 primarily due to higher compensation and benefits costs, professional services costs, and information
services costs.
For the six months ended June 30, 2022, the Company reported net income of $2.8 million compared to a net loss of $2.8 million for the six months ended June 30, 2021.
Merger-related costs of $5.6 million were recorded during the six months ended June 30, 2021, which significantly impacted the results. The Company’s results for the first six months of 2021 reflect the consolidated operations of CFB after the
Merger on April 1, 2021.
Results of Operations
Net Interest Income
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Net interest income before loan loss provision for the second quarter of 2022 totaled $8.0 million, representing an increase of $2.2 million, or 38.1%, over net interest income
before loan loss provision of $5.8 million for the second quarter of 2021. The increase resulted from additional interest income, primarily generated from growth of $69.3 million in average interest-earning assets during the second quarter of
2022, compared to the second quarter of 2021. Net interest income in the second quarter of 2022 also benefited from a reduction in the overall rates paid on interest-bearing liabilities of 30 basis points.
Interest income and fees on loans receivable increased by $579 thousand, or 9.2%, to $6.9 million for the second quarter of 2022, from $6.3 million for the second quarter of 2021
due to an increase of $45.9 million in the average balance of loans receivable, which increased interest income by $480 thousand, and an increase of 6 basis points in the average yield on loans, which increased interest income by $99 thousand.
Interest income on securities increased by $394 thousand, or 89.5%, for the second quarter of 2022, compared to the second quarter of 2021. The increase in interest income on securities
primarily resulted from an increase of 56 basis points in the average interest rate earned on securities, which increased interest income by $261 thousand, and an increase of $40.9 million in the average balance of securities, which increased
interest income by $133 thousand.
Other interest income increased by $644 thousand, or 447.2%, during the second quarter of 2022 compared to the second quarter of 2021. Interest income on interest-earning cash in
other banks increased by $679 thousand primarily due to an increase of 130 basis points in the average interest rate earned on cash deposits, which increased interest income by $684 thousand, and was partially offset by a decrease of $16.1
million in average cash deposits, which decreased interest income by $5 thousand. This net increase was partially offset by a decrease of $35 thousand in dividend income on Federal Home Loan Bank (“FHLB”) and Federal Reserve Board (“FRB”) stock
between the two periods.
Interest expense on deposits decreased by $128 thousand, or 26.8%, for the second quarter of 2022, compared to the second quarter of 2021.
The decrease was attributable to a decrease of 11 basis points in the average rate paid on deposits due to increases in non-interest bearing and lower rate deposits, which caused interest expense on deposits to decrease by $203 thousand. This
decrease was partially offset by an increase of $114.1 million in the average balance of deposits, which increased interest expense by $75 thousand.
Interest expense on borrowings decreased by $472 thousand, or 80.5%, for the second quarter of 2022, compared to the second quarter of 2021. Interest expense on FHLB advances
decreased by $464 thousand between the two periods due to a decrease of $71.5 million in the average balance of FHLB advances, which decreased interest expense by $247 thousand, and a decrease of 112 basis points in the average rate paid, which
decreased interest expense by $217 thousand. Interest expense on the Company’s junior subordinated debentures decreased by $21 thousand between the two periods because the Company paid off its junior subordinated debentures in the third quarter
of 2021. The debentures averaged $3.1 million during the second quarter of 2021 at an average rate of 2.67%. Interest expense on other borrowings increased by $13 thousand between the two periods. The average rate on other borrowings increased
by 8 basis points, which increased interest expense by $14 thousand, while the average balance decreased by $5.8 million, which decreased interest expense by $1 thousand.
The net interest margin increased to 3.00% for the second quarter of 2022 from 2.33% for the second quarter of 2021.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Net interest income before loan loss provision for the six months ended June 30, 2022, totaled $15.2 million, representing an increase of $6.5 million, or 75.5%, over net interest
income before loan loss provision of $8.7 million for the six months ended June 30, 2021. Results for the first half of 2021 reflect the consolidated operations of CFB after the Merger on April 1, 2021. The increase resulted from additional
interest income, primarily generated from growth of $316.6 million in average interest-earning assets for the year-to-date period ending June 30, 2022, compared to the period ending June 30, 2021, due to the addition of loans, securities, and
cash equivalents in the Merger, and organic growth subsequent to the Merger. Net interest income in the first six months of 2022 also benefited from a reduction of 36 basis points in the overall rates paid on interest-bearing liabilities.
Interest income and fees on loans receivable increased by $4.1 million, or 41.6%, to $14.1 million for the first six months of 2022, from $9.9 million for the first six months of
2021 due to an increase of $168.9 million in the average balance of loans receivable, which increased interest income by $3.6 million, and an increase of 21 basis points in the average yield on loans, which increased interest income by $531
thousand. The increase in the average balance of loans receivable was primarily the result of the addition of loans in the Merger as well as organic loan growth. In addition, the increase in the average yield on loans receivable for the first
six months of 2022 was primarily the result of higher yields earned on the commercial loan portfolio and, to a lesser extent, higher yields on multi-family loans.
Interest income on securities increased by $929 thousand, or 187.3%, for the first six months of 2022 to $1.4 million, compared to $496
thousand in the first six months of 2021. There was an increase of $95.7 million in the average balance of securities which increased interest income by $711 thousand, and an increase in the average interest rate earned on securities of 41
basis points, which increased interest income by $218 thousand. The increase in securities resulted from securities acquired in the Merger and management’s efforts to invest excess liquidity in longer-term securities to improve yields.
Other interest income increased by $651 thousand, or 294.6%, during the first six months of 2022, compared to the first six months of 2021, primarily due to an increase in the
average rate earned on short term investments of 61 basis points, which increased interest income by $643 thousand, and an increase of $53.0 million in the average balance of interest-earning deposits and other short-term investments, which
increased interest income by $45 thousand. This increase was partially offset by a decrease of $37 thousand in the dividend income on Federal Home Loan Bank (“FHLB”) and Federal Reserve Board (“FRB”) stock between the two periods.
Total interest expense for the first six months of 2022 decreased by $825 thousand, or 41.4%, to $1.2 million, compared to $2.0 million during the first six months of 2021, due to
a decrease of 36 basis points in the Company’s cost of interest-bearing liabilities. The lower rates paid offset the impact of an increase of $227.6 million in average interest-bearing liabilities, due to an increase of $251.8 million of
interest-bearing deposits, primarily due to the Merger, and an increase of $31.1 million in short term borrowings, partially offset by a decrease of $52.1 million of FHLB advances.
Interest expense on deposits decreased by $161 thousand, or 18.7%, for the six months ended June 30, 2022, compared to the same period in
2021. The decrease was primarily attributable to a decrease of 17 basis points in the average rate paid on deposits due to increases in non-interest bearing and lower rate deposits, which caused interest expense on deposits to decrease by $502
thousand. This decrease was partially offset by the effects of an increase of $251.8 million in the average balance of deposits, primarily because of the Merger, which increased interest expense by $341 thousand.
Interest expense on borrowings decreased by $664 thousand, or 58.5%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The decrease was
attributable to a decrease of 76 basis points in the average borrowing rate, which decreased interest expense by $505 thousand, and a decrease in average borrowings of $24.2 million during the period, which decreased interest expense by $159
thousand. The decrease in the average balance of borrowings was due to a decrease of $52.1 million in average borrowings from the FHLB and a decrease of $3.2 million in the average balance of the Company’s junior subordinated debentures, which
were paid off in the third quarter of 2021, partially offset by an increase of $31.1 million in the average balance of short-term borrowings (primarily securities sold under agreements to repurchase assumed in the Merger).
The net interest margin increased to 2.89% for the six-month period ended June 30, 2022 from 2.35% for the six-month period ended June 30, 2021, primarily due to an increase in
the volume of interest-earning assets (mainly due to an increase in the average balance of loans receivable), the contribution of higher loan yields earned on the commercial loan portfolio, and a decrease in the average rate paid on
interest-bearing liabilities of 36 basis points.
The following tables set forth the average balances, average yields and costs, and certain other information for the periods indicated. All average balances are daily average
balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status, but the balance of
these loans is included in the total average balance of loans receivable, which has the effect of reducing average loan yields.
|
For the three months ended
|
||||||||||||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||||||||||||
|
(Dollars in Thousands)
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Interest-earning deposits
|
$
|
210,978
|
$
|
788
|
1.49
|
%
|
$
|
227,043
|
$
|
71
|
0.13
|
%
|
||||||||||||
|
Securities
|
199,472
|
796
|
1.60
|
%
|
158,608
|
440
|
1.11
|
%
|
||||||||||||||||
|
Loans receivable (1)
|
657,026
|
6,879
|
4.19
|
%
|
611,092
|
6,300
|
4.12
|
%
|
||||||||||||||||
|
FRB and FHLB stock
|
2,668
|
38
|
5.70
|
%
|
4,087
|
73
|
7.14
|
%
|
||||||||||||||||
|
Total interest-earning assets
|
1,070,144
|
$
|
8,501
|
3.18
|
%
|
1,000,830
|
$
|
6,884
|
2.75
|
%
|
||||||||||||||
|
Non-interest-earning assets
|
107,532
|
33,296
|
||||||||||||||||||||||
|
Total assets
|
$
|
1,177,675
|
$
|
1,034,126
|
||||||||||||||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Money market deposits
|
$
|
197,751
|
$
|
194
|
0.39
|
%
|
$
|
178,819
|
$
|
223
|
0.50
|
%
|
||||||||||||
|
Passbook deposits
|
62,458
|
13
|
0.08
|
%
|
69,401
|
57
|
0.33
|
%
|
||||||||||||||||
|
NOW and other demand deposits
|
292,248
|
42
|
0.06
|
%
|
190,734
|
40
|
0.08
|
%
|
||||||||||||||||
|
Certificate accounts
|
199,043
|
100
|
0.20
|
%
|
198,403
|
157
|
0.32
|
%
|
||||||||||||||||
|
Total deposits
|
751,500
|
349
|
0.19
|
%
|
637,357
|
477
|
0.30
|
%
|
||||||||||||||||
|
FHLB advances
|
39,628
|
85
|
0.86
|
%
|
111,120
|
549
|
1.98
|
%
|
||||||||||||||||
|
Junior subordinated debentures
|
-
|
-
|
-
|
3,144
|
21
|
2.67
|
%
|
|||||||||||||||||
|
Other borrowings
|
68,352
|
29
|
0.17
|
%
|
74,136
|
16
|
0.09
|
%
|
||||||||||||||||
|
Total interest-bearing liabilities
|
859,980
|
$
|
463
|
0.22
|
%
|
825,757
|
$
|
1,063
|
0.51
|
%
|
||||||||||||||
|
Non-interest-bearing liabilities
|
107,771
|
66,279
|
||||||||||||||||||||||
|
Stockholders’ Equity
|
210,424
|
142,090
|
||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$
|
1,177,675
|
$
|
1,034,126
|
||||||||||||||||||||
|
Net interest rate spread (2)
|
$
|
8,038
|
2.96
|
%
|
$
|
5,821
|
2.24
|
%
|
||||||||||||||||
|
Net interest rate margin (3)
|
3.00
|
%
|
2.33
|
%
|
||||||||||||||||||||
|
Ratio of interest-earning assets to interest-bearing liabilities
|
124.51
|
%
|
121.20
|
%
|
||||||||||||||||||||
| (1) |
Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs and loan premiums.
|
| (2) |
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
| (3) |
Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
|
|
For the six months ended
|
||||||||||||||||||||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||||||||||||
|
(Dollars in Thousands)
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
Average
Balance
|
Interest
|
Average
Yield/
Cost
|
||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Interest-earning deposits
|
$
|
215,622
|
$
|
872
|
0.81
|
%
|
$
|
162,630
|
$
|
106
|
0.13
|
%
|
||||||||||||
|
Securities
|
180,220
|
1,347
|
1.49
|
%
|
84,509
|
496
|
1.17
|
%
|
||||||||||||||||
|
Loans receivable (1)
|
655,260
|
14,083
|
4.30
|
%
|
486,317
|
9,944
|
4.09
|
%
|
||||||||||||||||
|
FRB and FHLB stock
|
2,668
|
78
|
5.85
|
%
|
3,759
|
115
|
6.12
|
%
|
||||||||||||||||
|
Total interest-earning assets
|
1,053,769
|
$
|
16,380
|
3.11
|
%
|
737,215
|
$
|
10,661
|
2.89
|
%
|
||||||||||||||
|
Non-interest-earning assets
|
95,849
|
22,425
|
||||||||||||||||||||||
|
Total assets
|
$
|
1,149,618
|
$
|
759,640
|
||||||||||||||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Money market deposits
|
$
|
202,414
|
$
|
383
|
0.38
|
%
|
$
|
127,807
|
$
|
304
|
0.48
|
%
|
||||||||||||
|
Passbook deposits
|
64,641
|
21
|
0.06
|
%
|
66,800
|
114
|
0.34
|
%
|
||||||||||||||||
|
NOW and other demand deposits
|
261,354
|
81
|
0.06
|
%
|
122,712
|
47
|
0.08
|
%
|
||||||||||||||||
|
Certificate accounts
|
200,244
|
214
|
0.21
|
%
|
159,572
|
395
|
0.50
|
%
|
||||||||||||||||
|
Total deposits
|
728,653
|
699
|
0.19
|
%
|
476,891
|
860
|
0.36
|
%
|
||||||||||||||||
|
FHLB advances
|
58,738
|
427
|
1.45
|
%
|
110,803
|
1,076
|
1.94
|
%
|
||||||||||||||||
|
Junior subordinated debentures
|
-
|
-
|
-
|
3,209
|
43
|
2.68
|
%
|
|||||||||||||||||
|
Other borrowings
|
68,185
|
44
|
0.13
|
%
|
37,068
|
16
|
0.09
|
%
|
||||||||||||||||
|
Total interest-bearing liabilities
|
855,576
|
$
|
1,170
|
0.27
|
%
|
627,971
|
$
|
1,995
|
0.64
|
%
|
||||||||||||||
|
Non-interest-bearing liabilities
|
106,760
|
36,030
|
||||||||||||||||||||||
|
Stockholders’ Equity
|
187,282
|
95,639
|
||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$
|
1,149,618
|
$
|
759,640
|
||||||||||||||||||||
|
Net interest rate spread (2)
|
$
|
15,210
|
2.84
|
%
|
$
|
8,666
|
2.26
|
%
|
||||||||||||||||
|
Net interest rate margin (3)
|
2.89
|
%
|
2.35
|
%
|
||||||||||||||||||||
|
Ratio of interest-earning assets to interest-bearing liabilities
|
123.16
|
%
|
117.40
|
%
|
||||||||||||||||||||
| (1) |
Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs and loan premiums.
|
| (2) |
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
| (3) |
Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
|
Loan loss provision
The Company recorded a loan loss provision recapture of $577 thousand for the three months
ended June 30, 2022 and a loan loss provision of $81 thousand for the three-month period ended June 30, 2021. For the six months ended June 30, 2022 and 2021, the Company recorded a loan loss provision recapture of $429 thousand and a loan
loss provision of $81 thousand, respectively. The $75 million of capital contributed by the Company to the Bank reduced multi-family and commercial real estate loan concentration levels. This reduced the risk associated with the qualitative
factors used to estimate the required ALLL. No loan charge-offs were recorded during the three- or six-month periods ended June 30, 2022 or 2021. The ALLL decreased to $3.0 million as of June 30, 2022, compared to $3.4 million as of December
31, 2021.
Non-interest Income
Non-interest income for the three months ended June 30, 2022 totaled $261 thousand compared to $2.2 million for the three months ended June 30, 2021. The decrease of $1.9 million
in non-interest income was primarily due to a nonrecurring benefit of $1.8 million from a grant from the United States Department of the Treasury’s CDFI Fund during the three months ended June 30, 2021.
For the six months ended June 30, 2022, non-interest income totaled $542 thousand compared to $2.3 million for the same period in the prior year. The decrease of $1.8 million in
non-interest income was primarily due to the non-recurring grant received during the three months ended June 30, 2021.
Non-interest Expense
Total non-interest expense was $6.3 million for the second quarter of 2022, compared to $5.4 million for the second quarter of 2021. The increase in non-interest expenses was mainly due to
increases of $488 thousand in compensation and benefits expenses and $445 thousand in professional services expenses. The $488 thousand increase in compensation and benefits expenses during the three months ended June 30, 2022 was due to
increases in temporary help expense, employee benefit costs, and director expenses. The increase of $445 thousand in professional services expenses during the three months ended June 30, 2022 was primarily the result of $210 thousand in
regulatory consulting fees, $146 thousand in auditor fees, $75 thousand in legal fees and $67 thousand in board search fees.
For the first six months of 2022, non-interest expense totaled $12.2 million, compared to $14.0 million for the same period in the prior year. The decrease of $1.8 million between the periods
primarily resulted from decreases in compensation and benefits expenses of $1.3 million and professional services expenses of $1.1 million, and to a lesser extent, decreases in insurance and occupancy expenses. These decreases were partially
offset by increases in information services expenses of $825 thousand and various other costs, including amortization of the core deposit intangible that was recorded in connection with the Merger. The net decrease compared to the prior year was
largely associated with Merger-related expenses incurred during the first quarter of 2021. The Company’s results for the first six months of 2021 reflect the consolidated operations of CFB since the Merger on April 1, 2021.
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 Company’s operations are conducted in the Washington, D.C. area. The Company recorded income tax expense of $757 thousand for the second quarter of 2022 and $1.8 million for the second quarter
of 2021. The effective tax rate for the three-month periods ended June 30, 2022 and 2021, was 29.38% and 71.31%, respectively. The high effective income tax for the second quarter of 2021 reflects changes in
the assumptions used to estimate the Company’s annual income tax expense. Income tax expense for the three months ended June 30, 2021 also included an increase of $370 thousand in the valuation allowance on the Company’s deferred tax assets to
record an allowance against net operating loss carryforwards for the State of California, net of federal tax benefit.
For the six months ended June 30, 2022, income tax expense was $1.1 million, compared to an income tax benefit of $348 thousand for the six months ended June 30, 2021.
Financial Condition
Total Assets
Total assets increased by $130.7 million to $1.224 billion at June 30, 2022 from $1.094 billion at December 31, 2021. The increase in total assets was primarily due to growth in
cash and cash equivalents of $48.6 million and growth in $81.9 million in investment securities.
Securities Available-For-Sale
Securities available-for-sale totaled $238.3 million at June 30, 2022, compared with $156.4 million at December 31, 2021. The $81.9 million
of increase in securities available-for-sale during the six months ended June 30, 2022 was primarily due to the deployment of $15.0 million of the $150.0 million ECIP funds into securities in June. The remainder of the increase was due to
investing liquidity dollars into higher-yielding short-term securities. This increase was partially offset by an increase in accumulated other comprehensive loss of $9.4 million since the end of 2021 due to a decline in the fair value of
investment securities available-for-sale, net of taxes. These decreases in the fair values of available-for-sale investment securities during 2022 were the result of increases in market interest rates, which caused the fair value of the
Company’s fixed rate investments to decrease. The declines in fair value were not the result of a change in the creditworthiness of any of the issuers of those securities.
Loans Receivable
Loans receivable decreased by $1.6 million during first six months of 2022 primarily due to loan payoffs in excess of originations. During the first six
months of 2022, the Bank originated $33.0 million multi-family loans and $16.2 million of commercial real estate loans and commercial loans. Loan advances on pre-existing construction loans totaled $2.8 million
during the same period. Loan payoffs and repayments totaled $49.8 million during the first six months of 2022.
Allowance for Loan Losses
As a smaller reporting company as defined by the SEC, the Company is not required to adopt the current expected credit losses (“CECL”)
accounting standard until 2023; consequently, the Bank’s ALLL is based on probable incurred losses at the date of the consolidated balance sheet, rather than projections of future economic conditions over the life of the loans. In determining
the adequacy of the ALLL, management has considered the historical and current performance of the Company’s portfolio, as well as various measures of the quality and safety of the portfolio, such as debt servicing and loan-to-value ratios.
Management is continuing to monitor the loan portfolio and regularly communicating with borrowers to determine the continuing adequacy of the ALLL.
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 conduct an assessment of 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.
The ALLL was $3.0 million or 0.46% of gross loans held for investment at June
30, 2022, compared to $3.4 million, or 0.52% of gross loans held for investment, at December 31, 2021. The Company contributed $75 million of the
proceeds from the sale of the Series C Preferred Stock to the Bank which reduced the Bank’s multi-family and commercial real estate loan concentration levels. This also reduced the risk associated with the qualitative factors used to
estimate the required ALLL as of June 30, 2022. As a result, the Bank recorded a loan loss provision recapture of $577 thousand for the second
quarter of 2022.
As of June 30, 2022, there were no loan delinquencies greater than 30 days compared to $2.4 million at December 31, 2021.
Non-performing loans (“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 June 30, 2022, NPLs totaled $627 thousand, compared to $684 thousand at December 31, 2021. The decrease of $57 thousand in NPLs was due to repayments.
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 June 30, 2022 and December 31, 2021, all our non-performing loans were current in their payments. Also,
in determining the ALLL, we considered the ratio of the ALLL to NPLs, which was 472.57% at June 30, 2022 compared to 495.8% at December 31, 2021.
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 have been no loan charge-offs
since 2015. In determining charge-offs, we update our estimates of collateral values on NPLs by obtaining new appraisals at least every twelve 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, certain 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.
There were no recoveries or charge-offs recorded during either the three- or six-month periods ending June 30, 2022 or 2021.
Impaired loans at June 30, 2022 were $2.2 million, compared to $2.3 million at December 31, 2021. The decrease of $209 thousand
in impaired loans was primarily due to paydowns. Specific reserves for impaired loans were $7 thousand, or 0.28% of the aggregate impaired loan amount at June 30, 2022, compared to $7 thousand, or
0.30% of the aggregate impaired loan amount at December 31, 2021.
We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of June 30, 2022, but because of the ongoing uncertainties posed by the COVID-19
Pandemic, there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the Federal Deposit Insurance Corporation (“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.
Goodwill and Intangible Assets
As a result of the Merger, the Company recorded $26.0 million of goodwill and $3.3 million of core deposit 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 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 three and six months ended June 30, 2022, the Company recorded $108 thousand and $217 thousand, respectively, of amortization expense related to the
core deposit intangible. During the three- and six-month periods ending June 30, 2021, the Company recorded $131 thousand of amortization expense related to the core deposit intangible.
No impairment charges were recorded during 2022 or 2021 for goodwill or the core deposit intangible.
Total Liabilities
Total liabilities decreased by $12.9 million to $939.5 million at June 30, 2022 from $952.4 million at December 31, 2021, largely due to a decrease in FHLB
borrowings which was partially offset by an increase in deposits.
Deposits
Deposits increased to $816.2 million at June 30, 2022 from $788.1 million at December 31, 2021, which consisted of increases of
$76.1 million in ICS deposits (ICS deposits are the Bank’s own money market accounts in excess of FDIC insured limits whereby the Bank makes reciprocal arrangements for insurance with other banks), $12.7 million in CDARS deposits (CDARS
deposits are similar to ICS deposits, but involve certificates of deposit instead of money market accounts), decreases of $28.7 million in liquid deposits (NOW, demand, money market, and passbook accounts) and decreases of $6.6 million in other
certificates of deposit accounts. Five customer relationships accounted for approximately 38% of our deposits at June 30, 2022. We expect to maintain these relationships for the foreseeable future.
Borrowings
Total borrowings at June 30, 2022 consisted of advances to the Bank from the FHLB of $32.9 million, repurchase agreements of $67.3 million, and borrowings associated with our
Qualified Active Low-Income Business lending activities of $14.0 million compared to 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 as of December 31, 2021.
Balances of outstanding FHLB advances decreased to $32.9 million at June 30, 2022, compared to $86.0 million at December 31,
2021 due to the early payoff of $40.0 million in higher rate advances during the year. The weighted average rate on FHLB advances decreased to 1.22% at June 30,
2022, compared to 1.85% at December 31, 2021 due to the payoff of higher rate advances.
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 $67.3 million and $52.0 million as of June 30, 2022 and December 31, 2021, respectively, and the interest rate was 0.22% and 0.10%, respectively. These agreements mature on a daily basis. As of June 30, 2022, securities with a market value of $72.7 million were pledged as collateral for securities sold under agreements to repurchase and included $35.1 million of U.S. Government
Agency securities, $27.6 million of mortgage-backed securities, $3.8 million of federal agency CMO and $6.2 million of SBA Pool
securities. 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.
One relationship accounted for 80% of our balance of securities sold under agreements to repurchase as of June 30, 2022. We expect to maintain this relationship for the
foreseeable future.
In connection with the New Market Tax Credit activities of the Bank, CFC 45 is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. 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.
Stockholders’ Equity
Stockholders’ equity was $284.6 million, or 23.3%, of the Company’s total assets, at June 30, 2022, compared to $141.0 million, or 12.9% of the Company’s total assets at December 31, 2021. The increase in total stockholders’ equity is primarily due to the closing of the private placement of the Series C Preferred Stock, which increased stockholders’ equity by $150.0 million during the second quarter of
2022. This increase was partially offset by a decrease in accumulated other comprehensive income of $9.4 million since the end of 2021 due to a decline in the fair value of investment securities available-for-sale, net of taxes. These
decreases in the fair values of available-for-sale investment securities during 2022 were the result of increases in market interest rates, which caused the fair value of the Company’s fixed rate investments to decrease; the declines in fair
value were not the result of a change in the creditworthiness of any of the issuers of those securities.
Subsequent to the closing of the private placement of the Series C Preferred Stock, the Company contributed $75.0 million of the proceeds to the Bank. As a result, the Bank’s Community Bank
Leverage Ratio (“CBLR”) increased to 15.87% at June 30, 2022, compared to 9.45% at March 31, 2022, and 9.32% at December 31, 2021.
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
million, plus accrued dividends, for 1,193,317 shares of Class A Common Stock at an exchange price of $2.51 per share of Class A Common Stock. In addition, during the quarter the Company issued 542,449 shares of Class A Common Stock to
directors, executive officers, and certain employees, including 495,262 shares of restricted stock to executive officers and certain employees, which vest over periods ranging from 36 months to 60 months, and 47,187 shares of unrestricted stock
to directors which vested immediately.
The Company’s book value per share was $1.83 per share as of June 30, 2022 compared to $1.92 per share as of December 31, 2021. The decrease in book value per share during the second quarter of 2022 is due to the decrease in equity related to the $9.4 million unrealized losses in the investment portfolio.
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 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)
|
||||||||||||
|
June 30, 2022:
|
||||||||||||
|
Common book value
|
$
|
134,634
|
73,484,082
|
$
|
1.83
|
|||||||
|
Less:
|
||||||||||||
|
Goodwill
|
25,858
|
|||||||||||
|
Net unamortized core deposit intangible
|
2,719
|
|||||||||||
|
Tangible book value
|
$
|
106,057
|
73,484,082
|
$
|
1.44
|
|||||||
|
December 31, 2021:
|
||||||||||||
|
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
|
||||||
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 $279.3 million at June 30, 2022 with sufficient 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 in federal funds with the Federal Reserve Bank or in money market accounts with other financial
institutions. The Bank’s liquid assets at June 30, 2022 consisted of $280.1 million in cash and cash equivalents and $165.6 million in securities available-for-sale that were not pledged, compared to
$231.5 million in cash and cash equivalents and $52.4 million in securities available-for-sale that were not pledged at December 31, 2021. Currently, we believe that the Bank has sufficient liquidity to support growth over the foreseeable
future. The increase in liquid assets during the second quarter of 2022 primarily resulted from the proceeds from the preferred stock issued during June of 2022.
The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the private placement
completed in June of 2022 and previous private placements including in April of 2021. The Bank is currently under no prohibition to pay dividends to the Company, but is subject to restrictions as to the amount of the dividends based on normal
regulatory guidelines.
On a consolidated basis, the Company recorded net cash outflows from operating activities of $359 thousand during the six months ended June 30, 2022, compared to consolidated net cash outflows from operating activities of $2.6
million during the six months ended June 30, 2021. Net cash outflows from operating activities during the six months ended June 30, 2022 were
primarily attributable to decreases in other assets and other liabilities. Net cash outflows from operating activities during the six months ended
June 30, 2021 were primarily attributable to the Company’s net loss.
The Company recorded consolidated net cash outflows from investing activities of $91.5 million during the six months ended
June 30, 2022, compared to consolidated net cash inflows from investing activities of $58.4 million during the six months ended June 30, 2021. Net cash outflows from investing activities for the six months ended June 30, 2022 were primarily
due to the purchase of $104.7 million of available-for-sale securities, offset by net loan repayments of $3.4 million. Net cash inflows from investing activities during the six months ended June 30, 2021, were primarily due to net cash
acquired in the merger with City First Bank N.A. of $84.7 million, offset by cash used to fund new loans receivable held for investment of $29.7 million.
The Company recorded consolidated net cash inflows from financing activities of $140.4 million during the six months ended June 30, 2022, compared to consolidated net cash inflows of $58.5 million during the six
months ended June 30, 2021. Net cash inflows from investing activities during the six months ended June 30, 2022 were primarily due to cash
received from the closing of the $150 million private placement of Series C Preferred Stock along with increases in cash provided by increased deposits of $28.1 million and other borrowings of $15.3 million offset by cash used to repay FHLB
advances of $53.0 million. Net cash inflows from investing activities during the six months ended June 30, 2021 were primarily attributable to a net
increase in deposits of $35.9 million and proceeds from the sale of stock of $30.8 million, offset by repayments of FHLB advances of $22.5 million.
Capital Resources and Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of June 30, 2022 and December 31, 2021, the Bank exceeded all capital adequacy requirements to which
it is subject and meets the qualifications to be considered “well capitalized.” (See Note 11 – Regulatory Matters.)
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not Applicable
| ITEM 4. |
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the
reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures, and is
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. There is no assurance that our disclosure controls and procedures will operate effectively under all circumstances. An evaluation of
the effectiveness of the design and operation of the Company’s disclosure controls and procedures was performed under the supervision of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as of June 30, 2022. Based
on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
three months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our
disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions, and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II. OTHER INFORMATION
| Item 1. |
LEGAL PROCEEDINGS
|
None
| Item 1A. |
RISK FACTORS
|
Not Applicable
| Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None
| Item 3. |
DEFAULTS UPON SENIOR SECURITIES
|
None
| Item 4. |
MINE SAFETY DISCLOSURES
|
Not Applicable
| Item 5. |
OTHER INFORMATION
|
None
| Item 6. |
EXHIBITS
|
|
Exhibit
Number*
|
|
|
Amended and Restated Certificate of Incorporation of Broadway Financial Corporation effective as of April 1, 2022 (Exhibit 3.1 to Form 8-K filed by Registrant on April 5, 2021)
|
|
|
Bylaws of Registrant (Exhibit 3.2 to Form 8-K filed by Registrant on August 24, 2020)
|
|
|
Certificate of Designations of Senior Non-Cumulative Perpetual Preferred Stock, Series C (Exhibit 3.1 to Form 8-K filed by Registrant on June 8, 2022)
|
|
|
Registration Rights Agreement (Exhibit 10.2 to Form 8-K filed by Registrant on June 8, 2022)
|
|
|
Letter Agreement and Securities Purchase Agreement, date June 7, 2022 (Exhibit 10.1 to Form 8-K filed by Registrant on June 8, 2022)
|
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
101.INS
|
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
XBRL Taxonomy Extension Definitions Linkbase Document
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
*
|
Exhibits followed by a parenthetical reference are incorporated by reference herein from the document filed by the Registrant with the SEC described therein. Except as otherwise
indicated, the SEC File No. for each incorporated document is 000-27464.
|
|
**
|
Management contract or compensatory plan or arrangement
|
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Date: August 15, 2022
|
By:
|
/s/ Brian Argrett
|
|
|
|
Brian Argrett
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
Date: August 15, 2022
|
By:
|
/s/ Brenda J. Battey
|
|
|
|
Brenda J. Battey
|
|
|
Chief Financial Officer
|
41
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Brian Argrett, certify that:
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Broadway Financial Corporation;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
|
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
5.
|
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
|
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
Date:
|
August 15, 2022
|
By:
|
/s/ Brian Argrett
|
|
Brian Argrett
|
|||
|
Chief Executive Officer
|
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Brenda J. Battey, certify that:
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Broadway Financial Corporation;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
5.
|
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
|
Date:
|
August 15, 2022
|
By:
|
/s/ Brenda J. Battey
|
|
Brenda J. Battey
|
|||
|
Chief Financial Officer
|
Exhibit 32.1
SECTION 906 CERTIFICATION
The following statement is provided by the undersigned to accompany the foregoing Report on Form 10-Q pursuant to Title 18, Chapter 63, Section 1350 of
the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed filed pursuant to any provision of the Securities Exchange Act of 1934 or any other securities law.
The undersigned certifies that the foregoing Report on Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Broadway Financial Corporation at the dates and for the periods indicated.
|
Date:
|
August 15, 2022
|
By:
|
/s/ Brian Argrett
|
|
Brian Argrett
|
|||
|
Chief Executive Officer
|
Exhibit 32.2
SECTION 906 CERTIFICATION
The following statement is provided by the undersigned to accompany the foregoing Report on Form 10-Q pursuant to Title 18, Chapter 63, Section 1350 of
the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed filed pursuant to any provision of the Securities Exchange Act of 1934 or any other securities law.
The undersigned certifies that the foregoing Report on Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Broadway Financial Corporation at the dates and for the periods indicated.
|
Date:
|
August 15, 2022
|
By:
|
/s/ Brenda J. Battey
|
|
|
|
Brenda J. Battey
|
|
|
|
|
Chief Financial Officer
|
|
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