BROADWAY FINANCIAL CORPORATION
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. 26
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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 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 selectedNovember 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 carryback 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. 27
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Overview
Broadway Financial Corporation (the "Company") merged withCFBanc Corporation ("CFBanc") onApril 1, 2022 , withBroadway Financial Corporation continuing as the surviving entity (the "CFBanc Merger"). Immediately following the CFBanc Merger,Broadway Federal Bank , f.s.b. merged with and intoCity First Bank of D .C, National Association withCity First Bank of D.C ., National Association continuing as the surviving entity (which concurrently changed its name toCity First Bank , National Association). The results for the three months endedJune 30, 2022 reflect the contribution of the consolidated operations ofCFBanc Corporation . Accordingly, results for the three- and six-month periods endingJune 30, 2022 and for the three months endedJune 30, 2021 , include the operations ofBroadway Financial Corporation and its subsidiary, City FirstBank, National Association (the "Bank"), whereas results for the six months endingJune 30, 2021 include the results ofBroadway Financial Corporation and its former subsidiary,Broadway Federal Bank , f.s.b., which was merged intoCity First Bank of D.C ., National Association onApril 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 theUnited 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 atJune 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 atJune 30, 2022 from$952.4 million atDecember 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 ofJune 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 endedJune 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 theUnited 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. 28
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For the six months endedJune 30, 2022 , the Company reported net income of$2.8 million compared to a net loss of$2.8 million for the six months endedJune 30, 2021 . Merger-related costs of$5.6 million were recorded during the six months endedJune 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 onApril 1, 2021 .
Results of Operations
Net Interest Income
Three Months Ended
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 onFederal Home Loan Bank ("FHLB") andFederal 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.
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Six Months Ended
Net interest income before loan loss provision for the six months endedJune 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 endedJune 30, 2021 . Results for the first half of 2021 reflect the consolidated operations of CFB after the Merger onApril 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 endingJune 30, 2022 , compared to the period endingJune 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 onFederal Home Loan Bank ("FHLB") andFederal 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 endedJune 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
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). 30
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The net interest margin increased to 2.89% for the six-month period endedJune 30, 2022 from 2.35% for the six-month period endedJune 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
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest 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.
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For the six months ended
June 30, 2022 June 30, 2021
Average Average
(Dollars in Average Yield/ Average Yield/
Thousands) Balance Interest Cost Balance Interest 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 endedJune 30, 2022 and a loan loss provision of$81 thousand for the three-month period endedJune 30, 2021 . For the six months endedJune 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
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Non-interest Income
Non-interest income for the three months ended
The
decrease of
For the six months ended
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 endedJune 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 endedJune 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 onApril 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 theState of California tax rate and apportioned based on an allocation schedule to reflect that a portion of the Company's operations are conducted in theWashington, 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 endedJune 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 endedJune 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 theState of California , net of federal tax benefit. For the six months endedJune 30, 2022 , income tax expense was$1.1 million , compared to an income tax benefit of$348 thousand for the six months endedJune 30, 2021 . Financial Condition Total Assets Total assets increased by$130.7 million to$1.224 billion atJune 30, 2022 from$1.094 billion atDecember 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. 33
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Securities Available-For-Sale
Securities available-for-sale totaled$238.3 million atJune 30, 2022 , compared with$156.4 million atDecember 31, 2021 . The$81.9 million of increase in securities available-for-sale during the six months endedJune 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 theSEC , 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 atJune 30, 2022 , compared to$3.4 million , or 0.52% of gross loans held for investment, atDecember 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 ofJune 30, 2022 . As a result, the Bank recorded a loan loss provision recapture of$577 thousand for the second quarter of 2022.
As of
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.
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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 ofJune 30, 2022 andDecember 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% atJune 30, 2022 compared to 495.8% atDecember 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
Impaired loans at
We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as ofJune 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 theFederal 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.
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 endedJune 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 endingJune 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
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Deposits
Deposits increased to$816.2 million atJune 30, 2022 from$788.1 million atDecember 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 ofFDIC 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 atJune 30, 2022 . We expect to maintain these relationships for the foreseeable future. Borrowings Total borrowings atJune 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 ofDecember 31, 2021 . Balances of outstanding FHLB advances decreased to$32.9 million atJune 30, 2022 , compared to$86.0 million atDecember 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% atJune 30, 2022 , compared to 1.85% atDecember 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 ofJune 30, 2022 andDecember 31, 2021 , respectively, and the interest rate was 0.22% and 0.10%, respectively. These agreements mature on a daily basis. As ofJune 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 ofU.S. Government Agency securities,$27.6 million of mortgage-backed securities,$3.8 million of federal agency CMO and$6.2 million ofSBA Pool securities. The market value of securities pledged totaled$53.2 million as ofDecember 31, 2021 and included$13.3 million ofU.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
In connection with the New Market Tax Credit activities of the Bank, CFC 45 is a partnership whose members includeCFNMA 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. InDecember 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, atJune 30, 2022 , compared to$141.0 million , or 12.9% of the Company's total assets atDecember 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. 36
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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% atJune 30, 2022 , compared to 9.45% atMarch 31, 2022 , and 9.32% atDecember 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 ofJune 30, 2022 compared to$1.92 per share as ofDecember 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$9.4 million unrealized losses in the investment portfolio. Tangible book value per common share is a non-GAAP measurement that excludes goodwill and the net unamortized core deposit intangible asset, which were both originally recorded in connection with the Merger. The Company uses this non-GAAP financial measure to provide supplemental information regarding the Company's financial condition and operational performance. A reconciliation between book value and tangible book value per common share is shown as follows: Common Equity Shares Per Share Capital Outstanding Amount (Dollars in thousands) June 30, 2022: Common book value$ 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 ofAtlanta 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 atJune 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. 37
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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 theFederal Reserve Bank or in money market accounts with other financial institutions. The Bank's liquid assets atJune 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 atDecember 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 endedJune 30, 2022 , compared to consolidated net cash outflows from operating activities of$2.6 million during the six months endedJune 30, 2021 . Net cash outflows from operating activities during the six months endedJune 30, 2022 were primarily attributable to decreases in other assets and other liabilities. Net cash outflows from operating activities during the six months endedJune 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 endedJune 30, 2022 , compared to consolidated net cash inflows from investing activities of$58.4 million during the six months endedJune 30, 2021 . Net cash outflows from investing activities for the six months endedJune 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 endedJune 30, 2021 , were primarily due to net cash acquired in the merger withCity 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 endedJune 30, 2022 , compared to consolidated net cash inflows of$58.5 million during the six months endedJune 30, 2021 . Net cash inflows from investing activities during the six months endedJune 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 endedJune 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 .
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 ofJune 30, 2022 andDecember 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.) 38
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