BROADWAY FINANCIAL CORP \DE\ - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2009

For transition period from                     to                     

BROADWAY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

(323) 634-1700

(Registrant’s telephone number, including area code)

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-Accelerated Filer  ¨    Smaller Reporting Company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨        No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,743,365 shares of the Company’s Common Stock, par value $0.01 per share, were outstanding as of October 31, 2009.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

See accompanying notes to unaudited consolidated financial statements.

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Consolidated Statements of Operations and Comprehensive Earnings

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements

September 30, 2009

NOTE (1) – Basis of Financial Statement Presentation

The accompanying unaudited consolidated financial statements include Broadway Financial Corporation (the “Company”) and its wholly owned subsidiary, Broadway Federal Bank, f.s.b. (the “Bank”). Also included in the unaudited consolidated financial statements is Broadway Service Corporation, a wholly owned subsidiary of the Bank. 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 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, 2008 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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

These consolidated financial statements consider events that occurred through November 13, 2009, the date the consolidated financial statements were issued.

Some items in the prior period consolidated financial statements were reclassified to conform to the current presentation.

NOTE (2) – Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - A Replacement of FASB Statement No. 162, codified under “Generally Accepted Accounting Principles” Topic of the FASB Accounting Standards Codification (“ASC”). The Statement designates ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). ASC does not change GAAP. Instead, it reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant Securities and Exchange Commission (“SEC”) guidance that follows the same topical structure in separate sections in the Codification. Accounting literature included in ASC is referenced by Topic, Subtopic, Section, and Paragraph. Financial statements issued for all interim and annual periods ending after September 15, 2009 need to reference accounting guidance embodied in ASC as opposed to referencing the previously authoritative pronouncements.

In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations, codified under the “Business Combinations” Topic of the ASC, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The provisions are effective for fiscal years beginning after December 15, 2008. The impact of adoption of this standard is dependent on future business combinations the Company may enter into.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51, codified under the “Consolidation” Topic of the ASC, which requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Additionally, the provisions require that transactions between an entity and noncontrolling interests be treated as equity transactions. The provisions are effective for fiscal years beginning after December 15, 2008. The impact of adoption on January 1, 2009 was not material to the Company’s consolidated financial condition or results of operations.

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133, codified under the “Derivatives and Hedging” Topic of the ASC. The guidance requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The provisions are effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. The impact of adoption on January 1, 2009 was not material to the Company’s consolidated financial condition or results of operations.

In April 2009, the FASB issued Staff Position No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, codified under the “Investments” Topic of the ASC, which modifies and expands other-than-temporary impairment guidance for debt securities. This guidance addresses the unique features of debt securities and clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Additionally, it requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. The guidance also expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The impact of adoption on April 1, 2009 was not material to the Company’s consolidated financial condition or results of operations.

In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, codified under the “Fair Value Measurements and Disclosures” Topic of the ASC, to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. Additionally, it includes guidance on identifying circumstances that indicate a transaction is not orderly. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The guidance also requires increased disclosures. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The impact of adoption on April 1, 2009 was not material to the Company’s consolidated financial condition or results of operations.

In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, codified under the “Financial Instruments” Topic of the ASC, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The impact of adoption at June 30, 2009 was not material to the Company’s consolidated financial condition or results of operations as it only requires disclosures which are included in Note 6.

In May 2009, the FASB issued Statement No. 165, Subsequent Events, codified under the “Subsequent Events” Topic of the ASC, which establishes the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements and the circumstances under which an entity shall recognize events or transactions that occur after the balance sheet date. This guidance also requires disclosure of the date through which subsequent events have been evaluated. The new standard is effective for interim and annual periods ending after June 15, 2009. The impact of adoption was not material to the Company’s consolidated financial condition or results of operations.

In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets - An Amendment of FASB Statement No. 140, and Statement No. 167, Amendments to FASB Interpretation No. 46(R), codified under the “Transfers and Servicing” Topic of the ASC. These Statements change the way entities account for securitizations and

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

special-purpose entities. They will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. They also eliminate the concept of a “qualifying special-purpose entity,” and change the requirements for derecognizing financial assets, and require additional disclosures. They further change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new standards will require a number of new disclosures about a company’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A company will also be required to disclose how its involvement with a variable interest entity affects the company’s financial statements. The statements also enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred financial assets. The Statements are effective for fiscal years beginning after November 15, 2009. Adoption of these Statements is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

NOTE (3) – Earnings Per Common Share

Basic earnings per common share is computed by dividing earnings available to common shareholders by the weighted average number of shares of Common Stock outstanding for the period. Diluted earnings per common share is computed by dividing earnings available to common shareholders by the weighted average number of shares of Common Stock outstanding for the period, increased for the dilutive effect of Common Stock equivalents.

The following table shows how we computed basic and diluted earnings per common share for the three and nine months ended September 30, 2009 and 2008.

Stock options and warrant for 401,500 and 377,688 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2009 and for 43,698 and 45,482 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2008 because they were anti-dilutive.

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

NOTE (4) – Securities

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at September 30, 2009 and December 31, 2008 and the corresponding amounts of unrealized gains and losses therein:

At September 30, 2009 and December 31, 2008, securities with carrying amounts of $1.9 million and $2.3 million were pledged to secure public deposits and $15.7 million and $20.5 million were pledged as collateral for FHLB advances. At September 30, 2009 and December 31, 2008, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. There were no sales of securities during the nine months ended September 30, 2009 and 2008.

The amortized cost and fair value of debt securities at September 30, 2009 by contractual maturity were as follows. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

We evaluate securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer; the length of time and the extent to which the fair value has been less than the cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

There were no securities with unrealized losses at September 30, 2009. Securities with unrealized losses at December 31, 2008, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

NOTE (5) – Allowance for Loan Losses and Loans Held for Sale

Activity in the allowance for loan losses was as follows:

The following is a summary of the Bank’s non-accrual loans by loan type at September 30, 2009 and December 31, 2008:

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

Individually impaired loans were as follows:

From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. At September 30, 2009, loans modified in a troubled debt restructuring (“TDR”) totaled $24.6 million, including $20.5 million included in the impaired loans disclosed above and $4.1 million included in loans receivable held for sale, with a specific valuation allowance of $233 thousand. All modified loans were on accrual status, as the loans are expected to fully perform under the modified loan terms. The net carrying value of TDRs is evaluated on at least a quarterly basis and valuation allowances are adjusted for changes in the estimated present value of the expected future cash flows discounted at the loan’s effective interest rate. At December 31, 2008, one loan for $0.8 million was modified in a troubled debt restructuring. As of September 30, 2009 and December 31, 2008, the Company did not have any outstanding commitments to extend additional funds to these borrowers.

At September 30, 2009, three loans held for sale totaling $2.6 million were on non-accrual and required a specific valuation allowance of $644 thousand. At December 31, 2008, two loans held for sale totaling $1.2 million were on non-accrual and required a specific valuation allowance of $260 thousand.

NOTE (6) – Fair Value

FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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 other 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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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 widely used in the industry 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).

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

The fair values of loans receivable held for sale, net are based upon binding quotes from 3rd party investors, if available, and if not available, the fair values are based on discounted cash flows using current market rates applied to the estimated life and credit risk.

The fair value of impaired loans with specific allocations of the allowance for loan losses and real estate owned is generally based on 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below:

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

Impairment charges recognized during the three and nine months ended September 30, 2009 and 2008 for assets measured at fair value on a non-recurring basis are discussed below.

Loans held for sale, which are carried at lower of cost or fair value, were written down to fair value of $21.1 million, with a valuation allowance of $877 thousand at September 30, 2009, $23.1 million, with a valuation allowance of $610 thousand at June 30, 2009 and $24.6 million, with a valuation allowance of $260 thousand at December 31, 2008, resulting in a provision for loan losses on loans held for sale of $267 thousand and $617 thousand for the three and nine months ended September 30, 2009.

Impaired loans with specific loss allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $9.5 million, with a valuation allowance of $2.4 million at September 30, 2009, a carrying amount of $6.5 million, with a valuation allowance of $1.9 million at June 30, 2009, and a carrying amount of $344 thousand, with a valuation allowance of $344 thousand at December 31, 2008, resulting in an additional provision for loan losses of $507 thousand and $2.0 million for the three and nine months ended September 30, 2009.

Impaired loans with specific loss allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans had a carrying amount of $1.2 million, with a valuation allowance of $568 thousand at September 30, 2008, a carrying amount of $144 thousand, with a valuation allowance of $144 thousand at June 30, 2008, and a carrying amount of $34 thousand, with a valuation allowance of $34 thousand at December 31, 2007, resulting in an additional provision for loan losses of $424 thousand and $534 thousand for the three and nine months ended September 30, 2008.

Real estate owned carried at estimated fair value, less estimated costs to sell, totaled $1.1 million at September 30, 2009 and $-0- at June 30, 2009 and December 31, 2008. There was no allowance for loss on such properties held at September 30, 2009 and no impairment charges were recognized for the three and nine months ended September 30, 2009.

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Notes to Unaudited Consolidated Financial Statements (continued)

September 30, 2009

Fair Values of Financial Instruments

The following table summarizes the carrying amounts and estimated fair values of our financial instruments.