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BROADWAY FINANCIAL CORP \DE\ - Quarter Report: 2021 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from__________ to___________

Commission file number      001-39043

BROADWAY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
95-4547287
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

5055 Wilshire Boulevard, Suite 500
Los Angeles, California
 
90036
(Address of principal executive offices)
 
(Zip Code)

(323) 634-1700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:
 
Trading Symbol(s)
 
Name of each exchange on which registered:
Common Stock, par value $0.01 per share
(including attached preferred stock purchase rights)
 
BYFC
 
The Nasdaq Stock Market LLC

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.

Large accelerated filer
Accelerated filer
       
Non-accelerated filer
Smaller reporting company

   
Emerging growth company


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 November 12, 2021, 43,674,026 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.




TABLE OF CONTENTS
   
Page
PART I.
FINANCIAL STATEMENTS
 (to be updated)
       
 
Item 1.
Consolidated Financial Statements (Unaudited)
 
       
   
1
       
   
2
       
   
3
       
   
4
       
    Notes to Consolidated Financial Statements 6
       
 
Item 2.
30
       
 
Item 3.
42
       
 
Item 4.
42
       
PART II.
OTHER INFORMATION
 
       
 
Item 1.
44
       
 
Item 1A.
44
       
 
Item 2.
44
       
 
Item 3.
44
       
 
Item 4.
44
       
 
Item 5.
44
       
 
Item 6.
44
       
 
45

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands, except share and per share amounts)

   
September 30, 2021
   
December 31, 2020
 
   
(Unaudited)
       
Assets:
           
Cash and due from banks
 
$
39,705
   
$
71,110
 
Interest-bearing deposits in other banks
   
168,982
     
24,999
 
Cash and cash equivalents
   
208,687
     
96,109
 
Securities available-for-sale, at fair value
   
157,628
     
10,698
 
Loans receivable held for investment, net of allowance of $3,661 and $3,215
   
642,198
     
360,129
 
Accrued interest receivable
   
2,565
     
1,202
 
Federal Home Loan Bank (“FHLB”) stock
   
2,708
     
3,431
 
Federal Reserve Bank (FRB) stock
    693
      -
 
Office properties and equipment, net
   
9,221
     
2,540
 
Bank owned life insurance
   
3,179
     
3,147
 
Deferred tax assets, net
   
5,645
     
5,633
 
Core deposit intangible, net
    3,067
      -
 
Goodwill
    25,996
      -
 
Other assets
   
1,974
     
489
 
Total assets
 
$
1,063,561
   
$
483,378
 
                 
Liabilities and stockholders’ equity
               
Liabilities:
               
Deposits
 
$
749,645
   
$
315,630
 
Securities sold under agreements to repurchase
    52,876       -  
FHLB advances
   
91,070
     
110,500
 
Junior subordinated debentures
   
-
     
3,315
 
Notes payable
    14,000
      -
 
Accrued expenses and other liabilities
   
12,591
     
5,048
 
Total liabilities
   
920,182
   

434,493
 
Cumulative Redeemable Perpetual Preferred stock, Series A, authorized 3,000 shares at September 30, 2021 and none at December 31, 2020; issued and outstanding 3,000 shares at September 30, 2021 and none at December 31, 2020, liquidation value $1,000 per share
   
3,000
     
-
 
Common stock, Class A, $0.01 par value, voting, authorized 75,000,000 shares at September 30, 2021 and 50,000,000 shares at December 31, 2020; issued 46,291,852 shares at September 30, 2021 and 21,899,584 shares at December 31, 2020; outstanding 43,674,026 shares at September 30, 2021 and 19,281,758 shares at December 31, 2020
   
463
     
219
 
Common stock, Class B, $0.01 par value, non-voting, authorized 15,000,000 shares at September 30, 2021 and none at December 31, 2020; issued and outstanding 11,404,618 shares at September 30, 2021 and none at December 31, 2020
    114
      -
 
Common stock, Class C, $0.01 par value, non-voting, authorized 25,000,000 shares at September 30, 2021 and December 31, 2020; issued and outstanding 16,689,775 at September 30, 2021 and 8,756,396 shares at December 31, 2020
   
167
     
87
 
Additional paid-in capital
   
140,275
     
46,851
 
Retained earnings
   
5,149
     
7,783
 
Unearned Employee Stock Ownership Plan (ESOP) shares
   
(844
)
   
(893
)
Accumulated other comprehensive income, net of tax
   
325
     
164
 
Treasury stock-at cost, 2,617,826 shares at September 30, 2021 and at December 31, 2020
   
(5,326
)
   
(5,326
)
Total Broadway Financial Corporation and Subsidiary stockholders’ equity
   
143,323
     
48,885
 
Non-controlling interest
    56       -  
Total liabilities and stockholders’ equity
 
$
1,063,561
   
$
483,378
 

See accompanying notes to unaudited consolidated financial statements.


BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations and Comprehensive Income (Loss)
 (Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2021
   
2020
   
2021
   
2020
 
   
(In thousands, except per share)
 
                         
Interest income:
                       
Interest and fees on loans receivable
 
$
6,296
   
$
4,438
   
$
16,240
   
$
13,226
 
Interest on available for sale securities
   
457
     
59
     
953
     
194
 
Other interest income
   
156
     
77
     
377
     
293
 
Total interest income
   
6,909
     
4,574
     
17,570
     
13,713
 
                                 
Interest expense:
                               
Interest on deposits
   
446
     
631
     
1,306
     
2,653
 
Interest on borrowings
   
472
     
566
     
1,607
     
1,754
 
Total interest expense
   
918
     
1,197
     
2,913
     
4,407
 
                                 
Net interest income
   
5,991
     
3,377
     
14,657
     
9,306
 
Loan loss provision
   
365
     
-
     
446
     
29
 
Net interest income after loan loss provision
   
5,626
     
3,377
     
14,211
     
9,277
 
                                 
Non-interest income:
                               
Service charges
   
76
     
93
     
205
     
331
 
Gain on sale of loans
   
-
     
76
     
-
     
199
 
CDFI Grant
   
217
     
-
     
2,043
     
-
 
Other
   
316
     
37
     
676
     
115
 
Total non-interest income
   
609
     
206
     
2,924
     
645
 
                                 
Non-interest expense:
                               
Compensation and benefits
   
3,334
     
1,909
     
11,543
     
5,947
 
Occupancy expense
   
392
     
332
     
1,327
     
967
 
Information services
   
787
     
242
     
1,594
     
700
 
Professional services
   
616
     
840
     
3,068
     
1,675
 
Supervisory costs
    139       -       386       -  
Office services and supplies
   
65
     
97
     
219
     
260
 
Corporate insurance
   
47
     
30
     
301
     
94
 
Amortization of core deposit intangible
    131      
-
      262      
-
 
Other
   
467
     
282
     
1,279
     
640
 
Total non-interest expense
   
5,978
     
3,732
     
19,979
     
10,283
 
                                 
Income (loss) before income taxes
   
257
     
(149
)
   
(2,844
)
   
(361
)
Income tax expense (benefit)
   
51
     
95
     
(297
)
   
(300
)
Net income (loss)
 
$
206
   
$
(244
)
 
$
(2,547
)
 
$
(61
)
Less: Net income attributable to non-controlling interest
    24       -       57       -  
Net Income (loss) Attributable to Broadway Financial Corporation
  $ 182     $ (244 )   $ (2,604 )   $ (61 )

                               
Other comprehensive (loss) income, net of tax:
                               
Unrealized (loss) gain on securities available-for-sale arising during the period
 
$
(640
)
 
$
(40
)
 
$
224
   
$
290
 
Income tax (benefit) expense
   
(180
)
   
(12
)
   
63
     
86
 
Other comprehensive (loss) income, net of tax
   
(460
)
   
(28
)
   
161
     
204
 
                                 
Comprehensive (loss) income
 
$
(278
)
 
$
(272
)
 
$
(2,443
)
 
$
143
 
                                 
Earnings (loss) per common share-basic   $ 0.00    
$
(0.01
)
  $ (0.05 )   $ 0.00  
Earnings (loss) per common share-diluted   $ 0.00     $ (0.01 )   $ (0.05 )   $ 0.00  

See accompanying notes to unaudited consolidated financial statements.


BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)

   
Nine Months Ended September 30,
 
   
2021
   
2020
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net loss
 
$
(2,547
)
 
$
(61
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Loan loss provision
   
446
     
29
 
Depreciation
   
198
     
170
 
Net amortization of deferred loan origination costs
   
457
     
183
 
Net amortization of premiums on available for sale securities
   
705
     
30
 
Amortization of investment in affordable housing limited partnership
    39
      79
 
Amortization of core deposit intangible
    262       -  
Director compensation expense-common stock
   
45
     
45
 
Accretion of premium on FHLB advances
    (26 )     -  
Stock-based compensation expense
   
369
     
279
 
Write down of deferred tax asset
    370       -  
ESOP compensation expense
   
81
     
50
 
Earnings on bank owned life insurance
   
(32
)
   
(35
)
Originations of loans receivable held for sale
   
-
     
(118,626
)
Proceeds from sales of loans receivable held for sale
   
-
     
77,642
 
Repayments on loans receivable held for sale
    -
      530
 
Gain on sale of loans receivable held for sale
   
-
     
(199
)
Change in assets and liabilities:
               
Net change in deferred taxes
   
(1,162
)
   
(175
)
Net change in accrued interest receivable
   
274
     
(102
)
Net change in other assets
   
765
     
15
 
Net change in advance payments by borrowers for taxes and insurance
   
310
     
508
 
Net change in accrued expenses and other liabilities
   
3,359
     
(125
)
Net cash provided by (used in) operating activities
   
3,913
     
(39,763
)
 
               
Cash flows from investing activities:
               
Cash acquired in merger
    84,745       -  
Net change in loans receivable held for investment
   
(57,087
)
   
35,843
 
Principal payments on available-for-sale securities
   
12,662
     
1,744
 
Purchase of available-for-sale securities
    (10,098 )     (850 )
Purchase of FHLB stock
   
(152
)
   
(670
)
Proceeds from redemption of FHLB stock
    1,243
      -
 
Purchase of office properties and equipment
   
(119
)
   
(501
)
Proceeds from disposals of office property and equipment     3       -  
Net cash provided by investing activities
   
31,197
     
35,566
 
                 
Cash flows from financing activities:
               
Net change in deposits
   
80,294
     
27,612
 
Net increase in securities sold under agreements to repurchase
    (7,069 )     -  
Proceeds from sale of stock (net of costs)     30,837       -  
Distributions to non-controlling interest     (165 )     -  
Dividends paid on preferred stock
    (30 )     -  
Proceeds from FHLB advances
   
5,000
     
66,000
 
Repayments of FHLB advances
   
(27,570
)
   
(34,500
)
Stock cancelled for income tax withholding
    (514 )     -  
Repayments of junior subordinated debentures
   
(3,315
)
   
(765
)
Net cash provided by financing activities
   
77,468
     
58,347
 
Net change in cash and cash equivalents
   
112,578
     
54,150
 
Cash and cash equivalents at beginning of the period
   
96,109
     
15,566
 
Cash and cash equivalents at end of the period
 
$
208,687
   
$
69,716
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
2,424
   
$
4,530
 
Cash paid for income taxes
   
454
     
8
 
Assets acquired (liabilities assumed) in acquisition:
               
Securities available for sale, at fair value
  $ 149,975     $ -  
Loans receivable
    225,885
      -
 
Accrued interest receivable
    1,637
      -
 
FHLB and FRB stock
    1,061
      -
 
Office property and equipment
    6,953
      -
 
Goodwill
    25,966
      -
 
Core deposit intangible     3,329       -  
Other assets     2,290       -  
Deposits     (353,722 )     -  
FHLB advances     (3,166 )     -  
Securities sold under agreements to repurchase     (59,945 )     -  
Other borrowings     (14,000 )     -  
Deferred taxes     (717 )     -  
Accrued expenses and other liabilities     (4,063 )     -  
Preferred stock     (3,000 )     -  
Common stock     (63,257 )     -  

See accompanying notes to unaudited consolidated financial statements.


BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)


                             
         
Three-Month Period Ended September 30, 2021 and 2020
                   
   
Preferred Stock Non-Voting
   
Common
Stock
Voting
   
Common
Stock Non-Voting
   
Additional
Paid‑in
Capital
   
Accumulated Other Comprehensive Income
   
Retained Earnings (Substantially Restricted)
   
Unearned
ESOP Shares
   
Treasury
Stock
   
Non-controlling Interest
   
Total
Stockholders’
Equity
 
                           
(In thousands)
                               
Balance at June 30, 2021
 
$
3000
   
$
462
   
$
281
   
$
140,125
   
$
785
   
$
4,997
   
$
(861
)
 
$
(5,326
)
 
$
32
   
$
143,495
 
Net income for the three months ended September 30, 2021
   
-
     
-
     
-
     
-
     
-
     
182
     
-
     
-
      24
      206
 
Release of unearned ESOP shares
    -
      -
      -
      17
      -
      -
      17
      -
      -
      34
 
Dividends paid on preferred stock
    -       -       -       -       -       (30 )     -       -       -       (30 )
Common stock cancelled for payment of tax withholdings
    -
      -
      -
      (66 )     -
      -
      -
      -
      -
      (66 )
Restricted stock compensation expense
    -
      1
      -
      199
      -
      -
      -
      -
      -
      200
 
Other comprehensive loss, net of tax
    -
      -
      -
      -
      (460 )     -
      -
      -
      -
      (460 )
Balance at September 30, 2021
 
$
3,000
   
$
463
   
$
281
   
$
140,275
   
$
325
   
$
5,149
   
$
(844
)
 
$
(5,326
)
 
$
56
   
$
143,379
 
                                                                                 
Balance at June 30, 2020
 
$
-
   
$
219
   
$
87
   
$
46,650
   
$
209
   
$
8,608
   
$
(927
)
 
$
(5,326
)
 
$
-
   
$
49,520
 
Net loss for the three months ended September 30, 2020
   
-
     
-
     
-
     
-
     
-
     
(244
)
   
-
     
-
      -
     
(244
)
Release of unearned ESOP shares
   
-
     
-
     
-
     
-
     
-
     
-
     
18
     
-
      -
     
18
 
Restricted stock Compensation expense
   
-
     
-
     
-
     
90
     
-
     
-
     
-
     
-
      -
     
90
 
Stock option compensation expense
   
-
     
-
     
-
     
10
     
-
     
-
     
-
     
-
      -
     
10
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
(28
)
   
-
     
-
     
-
      -
     
(28
)
Balance at September 30, 2020
 
$
-
   
$
219
   
$
87
   
$
46,750
   
$
181
   
$
8,364
   
$
(909
)
 
$
(5,326
)
  $ -    
$
49,366
 

See accompanying notes to unaudited consolidated financial statements.

         
Nine-Month Period Ended September 30, 2021 and 2020
                   
   
Preferred Stock Non-Voting
   
Common
Stock
Voting
   
Common
Stock Non-Voting
   
Additional
Paid‑in
Capital
   
Accumulated Other Comprehensive Income
   
Retained Earnings (Substantially Restricted)
   
Unearned
ESOP Shares
   
Treasury
Stock
   
Non-controlling interest
   
Total
Stockholders’
Equity
 
                           
(In thousands)
                               
Balance at December 31, 2020
 
$
-
   
$
219
   
$
87
   
$
46,851
   
$
164
   
$
7,783
   
$
(893
)
 
$
(5,326
)
 
$
-
   
$
48,885
 
Net (loss) income for the nine months ended September 30, 2021
   
-
     
-
     
-
     
-
     
-
     
(2,604
)
   
-
     
-
     
57
     
(2,547
)
Preferred shares issued in business combination
   
3,000
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
3,000
 
Dividends paid on preferred stock
    -       -       -       -       -       (30 )     -       -       -       (30 )
Common shares issued in business combination
   
-
     
140
     
114
     
62,839
     
-
     
-
     
-
     
-
     
164
     
63,257
 
Shares transferred from voting to non-voting after business combination
   
-
     
(7
)
   
7
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Common shares issued in private placement
   
-
     
112
     
73
     
30,652
     
-
     
-
     
-
     
-
     
-
     
30,837
 
Release of unearned ESOP shares
   
-
     
-
     
-
     
32
     
-
     
-
     
49
     
-
     
-
     
81
 
Restricted stock compensation expense
   
-
     
1
     
-
     
361
     
-
     
-
     
-
     
-
     
-
     
362
 
Stock awarded to directors
   
-
     
-
     
-
     
45
     
-
     
-
     
-
     
-
     
-
     
45
 
Stock option compensation expense
   
-
     
-
     
-
     
7
     
-
     
-
     
-
     
-
     
-
     
7
 
Common stock cancelled for payment of tax withholdings
   
-
     
(2
)
   
-
     
(512
)
   
-
     
-
     
-
     
-
     
-
     
(514
)
Payment to non-controlling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(165
)
   
(165
)
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
161
     
-
     
-
     
-
     
-
     
161
 
Balance at September 30, 2021
 
$
3,000
   
$
463
   
$
281
   
$
140,275
   
$
325
   
$
5,149
   
$
(844
)
 
$
(5,326
)
 
$
56
   
$
143,379
 
                                                                                 
Balance at December 31, 2019
 
$
-
   
$
218
   
$
87
   
$
46,426
   
$
(23
)
 
$
8,425
   
$
(959
)
 
$
(5,326
)
  $ -    
$
48,848
 
Net loss for the nine months ended September 30, 2020
   
-
     
-
     
-
     
-
     
-
     
(61
)
   
-
     
-
      -
     
(61
)
Release of unearned ESOP shares
   
-
     
-
     
-
     
-
     
-
     
-
     
50
     
-
      -
     
50
 
Restricted stock compensation expense
   
-
     
1
     
-
     
250
     
-
     
-
     
-
     
-
      -
     
251
 
Stock awarded to directors
   
-
     
-
     
-
     
45
     
-
     
-
     
-
     
-
      -
     
45
 
Stock option compensation expense
   
-
     
-
     
-
     
29
     
-
     
-
     
-
     
-
      -
     
29
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
204
     
-
     
-
     
-
      -
     
204
 
Balance at September 30, 2020
 
$
-
   
$
219
   
$
87
   
$
46,750
   
$
181
   
$
8,364
   
$
(909
)
 
$
(5,326
)
  $ -    
$
49,366
 

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
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. The results of Broadway Service Corporation, a wholly owned subsidiary of the Bank, are also included in the unaudited consolidated financial statements. 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, 2020 (“2020 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 nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.


Subsequent events have been evaluated through November 15, 2021, 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 “2020 Form 10-K”).

Purchased Credit Impaired Loans


As part our recent merger, see Note 2 – Business Combination, the Company acquired certain loans that have shown evidence of credit deterioration since origination; these loans are referred to as purchased credit impaired loans (“PCI loans”). These PCI loans are recorded at their fair value at acquisition, such that there is no carryover of the seller’s allowance for loan losses. Such PCI loans are accounted for individually. 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. If the timing and amount of cash flows is uncertain, then cash payments received will be recognized as a reduction of the recorded investment.

Business Combinations


Business combinations are accounted for using the acquisition accounting method. Under the purchase accounting 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. See Note 2 - Business Combination and Note 7 - Goodwill and Intangible Assets for further information.

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Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

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.



Core deposit intangible assets arising from mergers and acquisitions are 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.

Variable Interest Entities (“VIE”)
 

An entity is considered to be a VIE when it does not have sufficient equity investment at risk, the equity investors as a group lack the characteristics of a controlling financial interest, or the entity is structured with disproportionate voting rights and substantially all of the entity’s activities are conducted on behalf of an investor with disproportionately few voting rights. The Company is required to consolidate a VIE when it holds a variable interest in the VIE and is also the primary beneficiary of the VIE. CFC 45 is a Community Development Entity (“CDE”), and is considered to be a VIE. The Company is the primary beneficiary because it has the power to direct activities that most significantly affect the economic performance of CFC 45 and has the obligation to absorb the majority of the losses or benefits of its financial performance.

Noncontrolling Interests


For consolidated subsidiaries that are less than wholly-owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for such subsidiaries is presented as net income applicable to noncontrolling interests on the consolidated statements of operations and comprehensive income, and the portion of the stockholders’ equity of such subsidiaries is presented as noncontrolling interests on the consolidated statements of financial condition and consolidated statements of changes in stockholders’ equity.

Recent Accounting Guidance
 

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions regarding the accounting related to the modifications of certain contracts, relationships and other transactions that are affected by reference rate reform related to contracts that reference LIBOR or other reference rates that could be discontinued due to reference rate reform.  This guidance was effective immediately and the amendments may be applied prospectively through December 31, 2022.  The estimated financial impact has not yet been determined.


In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments in this ASU are intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments are also intended to improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance did not have a significant impact on the Company’s consolidated financial statements.

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Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
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 purchased credit impaired 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 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 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 is effective January 1, 2020 and 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 did not 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. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.

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 Corporation 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 Corporation’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 Corporation (“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 Corporation 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.


8

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

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 are 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
 
$
84,745
   
$
-
   
$
84,745
 
Securities available-for-sale
   
150,052
     
(77
)
   
149,975
 
Loans receivable held for investment:
                       
Gross loans receivable held for investment
   
227,669
     
(1,784
)
   
225,885
 
Deferred fees and costs
   
(315
)
   
315
     
-
 
Allowance for loan losses
   
(2,178
)
   
2,178
     
-
 
     
225,176
     
709
     
225,885
 
Accrued interest receivable
   
1,637
     
-
     
1,637
 
FHLB and FRB stock
   
1,061
     
-
     
1,061
 
Office properties and equipment
   
5,152
     
1,801
     
6,953
 
Deferred tax assets, net
   
890
     
(1,608
)
   
(718
)
Core deposit intangible
   
-
     
3,329
     
3,329
 
Other assets
   
2,290
     
-
     
2,290
 
Total assets
 
$
471,003
   
$
4,154
   
$
475,157
 
                         
Liabilities assumed
                       
Deposits
  $
353,671
    $
51
    $
353,722
 
Securities sold under agreements to repurchase
    59,945
      -
      59,945
 
FHLB advances
   
3,057
     
109
     
3,166
 
Notes payable
   
14,000
     
-
     
14,000
 
Accrued expenses and other liabilities
   
4,063
     
-
     
4,063
 
Total liabilities
  $
434,736
    $
160
    $
434,896
 
                         
Excess of assets acquired over liabilities assumed
 
$
36,267
   
$
3,994
   
$
40,261
 
Consideration paid
                 
$
66,257
 
Goodwill recognized
                 
$
25,996
 


9

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

The fair values are preliminary estimates and are subject to adjustment for up to one year after the merger date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. These changes could differ materially from what is presented above.


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:

   
Acquired Loans
 
   
(In thousands)
 
         
Contractual amounts due
 
$
231,432
 
Cash flows not expected to be collected
   
(3,666
)
Expected cash flows
   
227,766
 
Interest component of expected cash flows
   
(1,881
)
Fair value of acquired loans
 
$
225,885
 



A component of total loans acquired from CFBanc were loans that were considered to be PCI loans. Refer to Note 6 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
 
$
1,825
 
Non-accretable difference (cash flows not expected to be collected)
   
(634
)
Expected cash flows
   
1,191
 
Accretable yield
   
(346
)
Fair value of acquired loans
 
$
845
 



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.

10

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

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, 2020. 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
   
Nine Months Ended
 
 
September 30,
2021
   
September 30,
2020
   
September 30, 2021
   
September 30,
2020
 
 
(Dollars in thousands except per share amounts)
 
Net interest income
 
$
5,978
   
$
5,738
   
$
16,988
   
$
16,068
 
Net income (loss)
   
191
     
(343
)
   
(3,348
)
   
(157
)
                                 
Basic earnings per share
 
$
0.00
   
$
(0.01
)
 
$
(0.05
)
 
$
0.00
 
Diluted earnings per share
 
$
0.00
   
$
(0.01
)
 
$
(0.05
)
 
$
0.00
 

NOTE (3)Capital Raise



On April 6, 2021, the Company completed the sale of 18,474,000 shares of Broadway Financial Corporation common stock in private placements to institutional and accredited investors at a purchase price of $1.78 per share for an aggregate purchase price of $32.9 million (net of expenses).


The following table shows the common stock issued on April 1, 2021 as a result of the merger and on April 6, 2021 as a result of the private placements by class:

   
Common Shares Outstanding
 
   
Voting
Class A
   
Nonvoting
Class B
   
Nonvoting
Class C
   
Total
Shares
 
                         
Shares outstanding March 31, 2021:
   
19,142,498
     
-
     
8,756,396
     
27,898,894
 
                                 
Shares issued in merger
   
13,999,870
     
11,404,621
     
-
     
25,404,491
 
Shares exchanged post-merger
   
(681,300
)
   
-
     
681,300
     
-
 
Shares cancelled
   
(52,105
)
   
-
     
-
     
(52,105
)
Shares issued in private placements
   
11,221,921
     
-
     
7,252,079
     
18,474,000
 
                                 
Shares outstanding April 6, 2021:
   
43,630,884
     
11,404,621
     
16,689,775
     
71,725,280
 

  NOTE (4) 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.


11

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

 The following table shows how the Company computed basic and diluted earnings (loss) per share of common stock for the periods indicated: 

   
For the three months ended
September 30,
   
For the nine months ended
September 30,
 
   
2021
   
2020
    2021     2020  
   
(Dollars in thousands, except per share )
 
                         
Net income (loss) attributable to Broadway Financial Corporation
 
$
182
   
$
(244
)
  $ (2,604 )   $ (61 )
Less net income attributable to participating securities
   
-
     
(2)
      -       (1)  
Income (loss) available to common stockholders
 
$
182
   
$
(242
)
  $ (2,604 )   $ (61 )
                                 
Weighted average common shares outstanding for basic earnings (loss) per common share
   
71,222,869
     
27,224,344
      56,403,545       27,114,022  
Add: dilutive effects of unvested restricted stock awards
   
228,082
     
-
      -       -  
Weighted average common shares outstanding for diluted earnings (loss) per common share
   
71,450,951
     
27,224,344
      56,403,545       27,114,022  
                                 
Earnings (loss) per common share - basic
 
$
0.00
   
$
(0.01
)
  $ (0.05 )   $ 0.00  
Earnings (loss) per common share - diluted
 
$
0.00
   
$
(0.01
)
  $ (0.05 )   $ 0.00  
  

Stock options for 450,000 shares of common stock for the nine months ended September 30, 2021 were not considered in computing diluted earnings per common share for three months ended September 30, 2020, the nine months ended September 30, 2021 or the nine months ended September 30, 2020 because they were anti-dilutive due to the net loss. There were no unvested restricted stock awards outstanding during the three months ended September 30, 2021.

NOTE (5) – Securities

 

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolios as of the periods indicated and the corresponding amounts of unrealized gains and losses that were recognized in accumulated other comprehensive income (loss):


 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
 
(In thousands)
 
September 30, 2021:
   
Federal agency mortgage-backed securities
 
$
81,943
   
$
506
   
$
(84
)
 
$
82,365
 
Federal agency CMO
    5,509       -       (31 )     5,478  
Federal agency debt
   
35,724
     
348
     
(11
)
   
36,061
 
Municipal bonds
   
4,906
     
33
     
(6
)
   
4,933
 
U. S. Treasuries
   
18,180
     
-
     
(13
)
   
18,167
 
SBA pools
   
10,676
     
40
     
(92
)
   
10,624
 
       Total available-for-sale securities
 
$
156,938
   
$
927
   
$
(237
)
 
$
157,628
 
December 31, 2020:
   
Federal agency mortgage-backed securities
 
$
5,550
   
$
257
   
$
-
   
$
5,807
 
Federal agency debt
   
2,682
     
190
     
-
     
2,872
 
Municipal bonds
   
2,000
     
19
     
-
     
2,019
 
       Total available-for-sale securities
 
$
10,232
   
$
466
   
$
-
   
$
10,698
 

12

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

At September 30, 2021, the Bank had thirteen (13) federal agency debt securities with a total amortized cost of $35.7 million, estimated total fair value of $36.1 million and an estimated average remaining life of 6.1 years; ninety-nine (99) federal agency mortgage-backed securities with a total amortized cost of $81.9 million, estimated total fair value of $82.4 million and an estimated average remaining life of 4.8 years; eight (8) federal agency mortgage-backed securities with a total amortized cost of $5.5 million, estimated total fair value of $5.5 million and an estimated average remaining life of 3.7 years; nine (9) U.S. treasury securities with a total amortized cost of $18.2 million, estimated total fair value of $18.2 million and an estimated average remaining life of 3.8 years; five (5) SBA pools securities with a total amortized cost of $10.7 million, estimated total fair value of $10.6 million and an estimated average remaining life of 5.8 years; nine (9) municipal bonds with a total amortized cost of $4.9 million, estimated total fair value of $4.9 million and an estimated average remaining life of 7.0 years. The entire securities portfolio at September 30, 2021, consisted of one hundred forty-five securities (145) with an estimated average remaining life of 4.0 years.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.



The amortized cost and estimated fair value of all investment securities available-for-sale at September 30, 2021, 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
 
$
1,019
   
$
1
   
$
(11
)
 
$
1,009
 
Due after one year through five years
   
30,034
     
128
     
(13
)
   
30,149
 
Due after five years through ten years
   
20,453
     
166
     
(6
)
   
20,613
 
Due after ten years (1)
   
105,432
     
632
     
(207
)
   
105,857
 
   
$
156,938
   
$
927
   
$
(237
)
 
$
157,628
 

(1)
Mortgage-backed securities, collateralized mortgage obligations and SBA pools do not have a single stated maturity date and therefore have been included in the “Due after ten years” category.

The Bank held 58 securities with unrealized losses of $237 thousand at September 30, 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 September 30, 2021 were primarily caused by movements in market interest rates subsequent to the purchase of such securities.


Securities with a market value of $71.4 million were pledged as collateral for securities sold under agreements to repurchase as of September 30, 2021 and included $23.4 million of U.S. Government Agency securities, $43.8 million of mortgage-backed securities, and $4.2 million of collateralized mortgage obligations. (See Note 9 – Borrowings.) There were no securities pledged as collateral for securities sold under agreements to repurchase as December 31, 2020. There were no securities pledged to secure public deposits at September 30, 2021 or December 31, 2020.


At September 30, 2021 and December 31, 2020, there were no holdings of securities by 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 three and nine months ended September 30, 2021 and 2020.

13

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
  NOTE (6) Loans Receivable Held for Investment


Loans receivable held for investment were as follows as of the dates indicated:
  
   
September 30, 2021
   
December 31, 2020
 
   
(In thousands)
 
Real estate:
           
Single family
 
$
50,880
   
$
48,217
 
Multi-family
   
383,401
     
272,387
 
Commercial real estate
   
98,411
     
24,289
 
Church
   
15,057
     
16,658
 
Construction
   
21,076
     
429
 
Commercial – other
   
47,306
     
57
 
SBA loans (1)
    28,873       -  
Consumer
   
12
     
7
 
Gross loans receivable before deferred loan costs and premiums
   
645,016
     
362,044
 
Unamortized net deferred loan costs and premiums
   
843
     
1,300
 
Gross loans receivable
   
645,859
     
363,344
 
Allowance for loan losses     (3,661 )     (3,215 )
Loans receivable, net
 
$
642,198
   
$
360,129
 
  
    (1)          Including Paycheck Protection Program (PPP) loans.
 

Purchased Credit Impaired (PCI) Loans


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 September 30, 2021, was as follows:

 
 
September 30, 2021
 
 
 
(In thousands)
 
Real estate:
     
Single family
 
$
558
 
Commercial real estate
   
221
 
Commercial - other
   
104
 
   
$
883
 


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 September 30, 2021, none of the Company’s PCI loans were classified as nonaccrual.

14

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

The following table summarizes the accretable yield on the PCI loans for the three and nine months ended September 30, 2021:

 
 
Three Months Ended
September 30, 2021
   
Nine Months Ended
September 30, 2021
 
 
 
(In thousands)
 
Balance at the beginning of the period
 
$
327
   
$
-
 
Additions
   
-
     
346
 
Accretion
   
(19
)
   
(38
)
Balance at the end of the period
 
$
308
   
$
308
 


The following tables present the activity in the allowance for loan losses by loan type for the periods indicated:
 
   
Three Months Ended September 30, 2021
 
   
Real Estate
                         
   
Single
family
   
Multi-
family
   
Commercial
real estate
   
Church
   
Construction
   
Commercial - other
   
SBA
Loans
   
Consumer
   
Total
 
   
(In thousands)
             
Beginning balance
 
$
170
   
$
2,606
   
$
227
   
$
208
   
$
81
   
$
4
    $ -    
$
-
   
$
3,296
 
Provision for (recapture of) loan losses
   
(10
)
   
325
     
32
     
(18
)
   
35
     
-
    -      
1
     
365
 
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
      -      
-
     
-
 
Loans charged off
   
-
     
-
     
-
     
-
     
-
     
-
      -      
-
     
-
 
Ending balance
 
$
160
   
$
2,931
   
$
259
   
$
190
   
$
116
   
$
4
    $ -    
$
1
   
$
3,661
 
   
   
Three Months Ended September 30, 2020
 
   
Real Estate
                         
   
Single
family
   
Multi-
family
   
Commercial real estate
   
Church
   
Construction
   
Commercial - other
   
SBA
Loans
   
Consumer
   
Total
 
   
(In thousands)
       
Beginning balance
 
$
312
   
$
2,424
   
$
169
   
$
282
   
$
22
   
$
6
    $ -    
$
-
   
$
3,215
 
Provision for (recapture of) loan losses
   
9
     
1
     
17
     
(28
)
   
-
   
(1
)
    -      
2
   
-
 
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
      -      
-
     
-
 
Loans charged off
   
-
     
-
     
-
     
-
     
-
     
-
      -      
-
     
-
 
Ending balance
 
$
321
   
$
2,425
   
$
186
   
$
254
   
$
22
   
$
5
    $
-    
$
2
   
$
3,215
 
 
   
Nine Months Ended September 30, 2021
 
   
Real Estate
                         
   
Single family
   
Multi-family
   
Commercial real estate
   
Church
   
Construction
   
Commercial - other
   
SBA
Loans
   
Consumer
   
Total
 
         
(In thousands)
 
Beginning balance
 
$
296
   
$
2,433
   
$
222
   
$
237
   
$
22
   
$
4
   
$
-
   
$
1
   
$
3,215
 
Provision for (recapture of) loan losses
   
(136
)
   
498
     
37
     
(47
)
   
94
     
-
     
-
     
-
   
446
 
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loans charged off
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Ending balance
 
$
160
   
$
2,931
   
$
259
   
$
190
   
$
116
   
$
4
   
$
-
   
$
1
   
$
3,661
 


15

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
   
Nine Months Ended September 30, 2020
 
   
Real Estate
                         
   
Single family
   
Multi-family
   
Commercial real estate
   
Church
   
Construction
   
Commercial - other
   
SBA
Loans
   
Consumer
   
Total
 
         
(In thousands)
 
Beginning balance
 
$
312
   
$
2,319
   
$
133
   
$
362
   
$
48
   
$
7
   
$
-
   
$
1
   
$
3,182
 
Provision for (recapture of) loan losses
   
5
   
106
     
53
     
(108
)
   
(26
)
   
(2
)
   
-
     
1
   
29
 
Recoveries
   
4
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
4
 
Loans charged off
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Ending balance
 
$
321
   
$
2,425
   
$
186
   
$
254
   
$
22
   
$
5
   
$
-
   
$
2
   
$
3,215
 

 

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:
   
   
September 30, 2021
 
   
Real Estate
                         
   
Single
family
   
Multi-
family
   
Commercial
real estate
   
Church
   
Construction
   
Commercial - other
    SBA
Loans
   
Consumer
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                     
Ending allowance balance attributable to loans:                                                                        
Individually evaluated for impairment
 
$
3
   
$
-
   
$
-
   
$
27
   
$
-
   
$
-
     $ -    
$
-
   
$
30
 
Collectively evaluated for impairment
   
157
     
2,931
     
259
     
163
     
116
     
4
      -      
1
     
3,631
 
Total ending allowance balance
 
$
160
   
$
2,931
   
$
259
   
$
190
   
$
116
   
$
4
     $ -    
$
1
   
$
3,661
 
Loans:
                                                                       
Loans individually evaluated for impairment
 
$
65
   
$
286
   
$
-
   
$
3,357
   
$
-
   
$
-
     $ -    
$
-
   
$
3,708
 
Loans collectively evaluated for impairment
   
50,922
     
384,959
     
98,384
     
11,371
     
20,907
     
47,306
      28,290      
12
     
642,151
 
Total ending loans balance
 
$
50,987
   
$
385,245
   
$
98,384
   
$
14,728
   
$
20,907
   
$
47,306
     $ 28,290    
$
12
   
$
645,859
 
   
    December 31, 2020  
   
Real Estate
                           
   
Single
family
   
Multi-
family
   
Commercial
real estate
   
Church
   
Construction
   
Commercial - other
     
 SBA
Loans
   
Consumer
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                       
Ending allowance balance attributable to loans:                                                                        
Individually evaluated for impairment
 
$
89
   
$
-
   
$
-
   
$
52
   
$
-
   
$
-      $ -    
$
-
   
$
141
 
Collectively evaluated for impairment
   
207
     
2,433
     
222
     
185
     
22
     
4
      -      
1
     
3,074
 
Total ending allowance balance
 
$
296
   
$
2,433
   
$
222
   
$
237
   
$
22
   
$
4
     $ -    
$
1
   
$
3,215
 
Loans:
                                                                       
Loans individually evaluated for impairment
 
$
573
   
$
298
   
$
-
   
$
3,813
   
$
-
   
$
47
     $ -    
$
-
   
$
4,731
 
Loans collectively evaluated for impairment
   
47,784
     
273,566
     
24,322
     
12,495
     
430
     
9
      -      
7
     
358,613
 
Total ending loans balance
 
$
48,357
   
$
273,864
   
$
24,322
   
$
16,308
   
$
430
   
$
56
     $ -    
$
7
   
$
363,344
 
 
16

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

The following table presents information related to loans individually evaluated for impairment by loan type as of the dates indicated:
  
   
September 30, 2021
   
December 31, 2020
 
   
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:
                                   
Single family
 
$
-
   
$
-
   
$
-
   
$
2
   
$
1
   
$
-
 
Multi-family
 
286
   
286
   
-
     
298
     
298
     
-
 
Church
 
2,468
   
1,879
   
-
     
2,527
     
1,970
     
-
 
With an allowance recorded:
                                               
Single family
   
65
     
65
     
3
     
573
     
573
     
88
 
Church
   
1,478
     
1,478
     
27
     
1,842
     
1,842
     
52
 
Commercial - other
   
-
     
-
     
-
     
47
     
47
     
1
 
Total
 
$
4,297
   
$
3,708
   
$
30
   
$
5,289
   
$
4,731
   
$
141
 
 
 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 September 30, 2021
   
Three Months Ended September 30, 2020
 
   
Average
Recorded
Investment
   
Cash Basis
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Cash Basis
Interest
Income
Recognized
 
   
(In thousands)
 
Single family
 
$
65
   
$
4
   
$
589
   
$
7
 
Multi-family
   
288
     
5
     
305
     
5
 
Church
   
3,614
     
64
     
3,938
     
67
 
Commercial - other
   
-
     
-
     
50
     
1
 
Total
 
$
3,967
   
$
73
   
$
4,882
   
$
80
 

   
Nine Months Ended September 30, 2021
   
Nine Months Ended September 30, 2020
 
   
Average
Recorded Investment
   
Cash Basis
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Cash Basis
Interest
Income
Recognized
 
   
(In thousands)
 
Single family
 
$
318
   
$
14
   
$
596
   
$
22
 
Multi-family
   
292
     
15
     
308
     
16
 
Church
   
3,710
     
190
     
4,094
     
376
 
Commercial - other
   
18
     
1
     
57
     
3
 
Total
 
$
4,338
   
$
220
   
$
5,055
   
$
417
 

17

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

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 $19 thousand and $22 thousand for the three months ended September 30, 2021 and 2020, respectively, and $38 thousand and $67 thousand for the nine months ended September 30, 2021 and 2020, respectively, and were not included in the consolidated results of operations.


As of September 30, 2021, the Bank had $249 thousand of loans delinquent 30 to 89 days, and no loans were past due 90 days or more. The following tables present the aging of the recorded investment in past due loans by loan type as of the periods indicated:

   
September 30, 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
 
$
-
   
$
-
   
$
-
   
$
-
   
$
50,987
   
$
50,987
 
Multi-family
   
249
     
-
     
-
     
249
     
384,996
     
385,245
 
Commercial real estate
   
-
     
-
     
-
     
-
     
98,384
     
98,384
 
Church
   
-
     
-
     
-
     
-
     
14,728
     
14,728
 
Construction
   
-
     
-
     
-
     
-
     
20,907
     
20,907
 
Commercial - other
   
-
     
-
     
-
     
-
     
47,306
     
47,306
 
 SBA loans     -
      -
      -       -       28,290
      28,290
 
Consumer
   
-
     
-
     
-
     
-
     
12
     
12
 
Total
 
$
249
   
$
-
   
$
-
   
$
249
   
$
645,610
   
$
645,859
 
   
   
December 31, 2020
 
   
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
 
$
-
   
$
-
   
$
-
   
$
-
   
$
48,357
   
$
48,357
 
Multi-family
   
-
     
-
     
-
     
-
     
273,864
     
273,864
 
Commercial real estate
   
-
     
-
     
-
     
-
     
24,322
     
24,322
 
Church
   
-
     
-
     
-
     
-
     
16,308
     
16,308
 
Construction
   
-
     
-
     
-
     
-
     
430
     
430
 
Commercial - other
   
-
     
-
     
-
     
-
     
56
     
56
 
Consumer
   
-
     
-
     
-
     
-
     
7
     
7
 
Total
 
$
-
   
$
-
   
$
-
   
$
-
   
$
363,344
   
$
363,344
 


The following table presents the recorded investment in non-accrual loans by loan type as of the periods indicated:
   
   
September 30, 2021
   
December 31, 2020
 
   
(In thousands)
 
Loans receivable held for investment:
           
Single-family residence
 
$
-
   
$
1
 
Church
 
709
     
786
 
Total non-accrual loans
 
$
709
   
$
787
 

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

There were no loans 90 days or more delinquent that were accruing interest as of September 30, 2021 or December 31, 2020. None of the church non-accrual loans were delinquent, but none qualified for accrual status as of the periods indicated.
   
Troubled Debt Restructurings (TDRs)


In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other insignificant payment delays, are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months or less is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented.  The guidance also provides that these modified loans generally will not be classified as non-accrual loans during the term of the modification.



The Bank has implemented a loan modification program for the effects of COVID-19 on its borrowers. At the date of this filing, no borrowers have requested loan modifications. To date, no modifications have been granted.
 

At September 30, 2021, loans classified as TDRs totaled $3.7 million, of which $405 thousand were included in non-accrual loans and $3.3 million were on accrual status.  At December 31, 2020, loans classified as TDRs totaled $4.2 million, of which $232 thousand were included in non-accrual loans and $4.0 million were on accrual status.  The Company has allocated $30 thousand and $141 thousand of specific reserves for accruing TDRs as of September 30, 2021 and December 31, 2020, respectively.  TDRs on accrual status are comprised of loans that were accruing at the time of restructuring or loans that have complied with the terms of their restructured agreements for a satisfactory period of time and for which the Bank anticipates full repayment of both principal and interest.  TDRs that are on non-accrual status can be returned to accrual status after a period of sustained performance, generally determined to be 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 September 30, 2021 and December 31, 2020, the Company had no commitment to lend additional amounts to customers with outstanding loans that are classified as TDRs.  No loans were modified during the three or nine months ended September 30, 2021 and 2020.
   
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 within this footnote.  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.
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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements


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 periods indicated were as follows:
   
   
September 30, 2021
 
   
Pass
   
Watch
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
 
   
(In thousands)
 
Single family
 
$
50,987
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Multi-family
   
384,897
     
-
     
-
     
348
     
-
     
-
 
Commercial real estate
   
96,918
     
-
     
-
     
1,466
     
-
     
-
 
Church
   
13,045
     
641
     
-
     
1,042
     
-
     
-
 
Construction
   
20,907
     
-
     
-
     
-
     
-
     
-
 
Commercial - other
   
47,306
     
-
     
-
     
-
     
-
     
-
 
SBA loans
    28,290
      -
      -
      -
      -
      -
 
Consumer
   
12
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
642,362
   
$
641
   
$
-
   
$
2,856
   
$
-
   
$
-
 

 
 
 
December 31, 2020
 
 
 
Pass
   
Watch
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
 
 
 
(In thousands)
 
Single family
 
$
48,357
   
$
-
   
$
-
   
$
1
   
$
-
   
$
-
 
Multi-family
   
273,501
     
-
     
-
     
362
     
-
     
-
 
Commercial real estate
   
22,834
     
1,488
     
-
     
-
     
-
     
-
 
Church
   
12,899
     
657
     
-
     
2,752
     
-
     
-
 
Construction
   
430
     
-
     
-
     
-
     
-
     
-
 
Commercial - other
   
9
     
-
     
-
     
47
     
-
     
-
 
Consumer
   
7
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
358,037
   
$
2,145
   
$
-
   
$
3,162
   
$
-
   
$
-
 
  

In 2015, CFC 45 was formed to, in effect, act as a pass-through entity for a Merrill Lynch NMTC Corp. (“Merrill Lynch”) allocation of funds in connection with the Bank’s participation in the New Markets Tax Credit (“NMTC”) Program totaling $14.0 million. (See Note 9 - Borrowings.) The financial statements for CFC 45 are consolidated with those of the Company, and as such the Company has reflected a $14.0 million loan made by CFC 45 to a Qualified Active Low Income Business in gross loans above as of September 30, 2021, in connection with the NMTC Program.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE (7) – Leases

Effective October 1, 2021, the Bank entered into an operating lease for its administrative offices in Los Angeles.  The ROU asset and operating lease liability will be recorded in fixed assets and other liabilities, respectively, in the consolidated statements of financial condition as of that date.
The ROU asset represents our right to use the underlying asset during the lease term. Operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the date of implementation of the new accounting standard.
The operating lease has one 5-year extension option at the then fair market rate. As this extension option is not reasonably certain of exercise, it is not included in the lease term. The Bank has no finance leases.
As the lease term started on October 1, 2021, there is no rent expense under the operating lease for the three months or nine months ended September 30, 2021.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

NOTE (8) 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. The following table presents the changes in the carrying amounts of goodwill and core deposit intangibles for the three months ended September 30, 2021:


    Goodwill
   
Core Deposit
Intangible
 
    (In thousands)
 
Balance at the beginning of the period
 
$
-
   
$
-
 
Additions
    25,996
     
3,329
 
Amortization
    -
     
(262
)
Impairment
    -
     
-
 
Balance at the end of the period
  $ 25,996    
$
3,067
 



 The carrying amount of the core deposit intangible consisted of the following at September 30, 2021:



   
(In thousands)
 
Core deposit intangible acquired
 
$
3,329
 
Less: accumulated amortization
   
(262
)

 
$
3,067
 

 

  The following table outlines the estimated amortization expense for the core deposit intangible during the next five fiscal years:


   
(In thousands)
 
2021
 
$
131
 
2022
   
435
 
2023
   
390
 
2024
   
336
 
2025
   
315
 
Thereafter
   
1,460
 
   
$
3,067
 

NOTE (9) 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. As of September 30, 2021, securities sold under agreements to repurchase totaled $52.9 million at an average rate of 0.10%. The market value of securities pledged totaled $71.4 million as of September 30, 2021 and included $23.4 million of U.S. Government Agency securities, $43.8 million of mortgage-backed securities, and $4.2 million of collateralized mortgage obligations. There were no securities pledged as of December 31, 2020.

 

At September 30, 2021 and December 31, 2020, the Bank had outstanding Advances from the FHLB totaling $91.1 million and $110.5 million, respectively. The weighted interest rate was 1.91% and 1.94% as of September 30, 2021 and December 31, 2020, respectively. The weighted average contractual maturity was 26 months and 27 months as of September 30, 2021 and December 31, 2020, respectively. The advances were collateralized by loans with a market value of $176.5 million at September 30, 2021.


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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

On September 17, 2021, the Company fully redeemed its Floating Rate Junior Subordinated Debentures.



In connection with the New Market Tax Credit activities of City First Bank CFC 45 is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. This CDE acts in effect as a pass-through for a Merrill Lynch allocation totaling $14.0 million that needed to be deployed. In December 2015, Merrill Lynch made a $14.0 million non-recourse loan to CFC 45, whereby CFC 45 passed that loan through to a 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 (10) 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 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.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
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 September 30, 2021:
                       
Securities available-for-sale – federal agency mortgage-backed
 
$
-
   
$
82,365
   
$
-
   
$
82,365
 
Securities available-for-sale – federal agency CMO
    -       5,478       -       5,478  
Securities available-for-sale – federal agency debt
   
-
     
36,061
     
-
     
36,061
 
Municipal bonds
   
-
     
4,933
     
-
     
4,933
 
U. S. Treasuries
    -       18,167       -       18,167  
SBA pools
    -       10,624       -       10,624  
                                 
At December 31, 2020:
                               
Securities available-for-sale – federal agency mortgage-backed
 
$
-
   
$
5,807
   
$
-
   
$
5,807
 
Securities available-for-sale – federal agency debt
   
-
     
2,872
     
-
     
2,872
 
Municipal bonds
   
-
     
2,019
     
-
     
2,019
 


There were no transfers between Level 1, Level 2, or Level 3 during the three and nine months ended September 30, 2021 and 2020.

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 September 30, 2021 and December 31, 2020, the Bank did not have any impaired loans carried at fair value of collateral.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
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 September 30, 2021 and December 31, 2020.  This table excludes financial instruments for which the carrying amount approximates fair value.  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 September 30, 2021
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
Financial Assets:
                             
Cash and cash equivalents   $ 208,687     $ 208,687     $ -     $ -     $ 208,687  
Securities available-for-sale
    157,628
      -
      157,628
      -
      157,628
 
Loans receivable held for investment
   
642,198
     
-
     
-
     
647,988
     
647,988
 
Accrued interest receivables
    2,565
      206
      275
      2,084
      2,565
 
Bank owned life insurance
    3,179
      3,179
      -
      -
      3,179
 
                                         
Financial Liabilities:
                                       
Deposits
 
$
749,645
   
$
-
   
$
749,645
   
$
-
   
$
749,645
 
Securities sold under agreements to repurchase
    52,876       -       52,332       -       52,332  
Federal Home Loan Bank advances
   
91,070
     
-
     
92,836
     
-
     
92,836
 
Note payable
    14,000       -       -       14,000       14,000  
Accrued interest payable
    99
      -
      99
      -
      99
 

         
Fair Value Measurements at December 31, 2020
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
Financial Assets:
                             
Cash and cash equivalents
 
$
96,109
   
$
96,109
   
$
-
   
$
-
   
$
96,109
 
Securities available-for-sale
   
10,698
     
-
     
10,698
     
-
     
10,698
 
Loans receivable held for investment
   
360,129
     
-
     
-
     
366,279
     
366,279
 
Accrued interest receivables
   
1,202
     
60
     
14
     
1,128
     
1,202
 
Bank owned life insurance
   
3,147
     
3,147
     
-
     
-
     
3,147
 
                                         
Financial Liabilities:
                                       
Deposits
 
$
315,630
   
$
-
   
$
312,725
   
$
-
   
$
312,725
 
Federal Home Loan Bank advances
   
110,500
     
-
     
113,851
     
-
     
113,851
 
Junior subordinated debentures
   
3,315
     
-
     
-
     
2,798
     
2,798
 
 Accrued interest payable
    88       -       84       4       88  


In accordance with ASU No. 2016-01, the fair value of certain financial assets and liabilities, including loans and time deposits as of September 30, 2021 and December 31, 2020 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.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE (11) – 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 September 30, 2021, 533,169 shares had been awarded and 759,940 shares are available under the LTIP.

During the third quarter of 2021, the Company issued 64,516 shares of stock that vested immediately to its Chief Executive Officer at a cost of $200 thousand. As permitted by the LTIP, 21,354 of these shares were cancelled to pay income taxes. At September 30, 2021, no unvested restricted stock awards were outstanding.


No stock options were granted during the nine months ended September 30, 2021 and 2020.


The following table summarizes stock option activity during the nine months ended September 30, 2021 and 2020:


   
Nine Months Ended
September 30, 2021
   
Nine Months Ended
September 30, 2020
 
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
 
Outstanding at beginning of period
   
450,000
   
$
1.62
     
455,000
   
$
1.67
 
Granted during period
   
-
     
-
     
-
     
-
 
Exercised during period
   
-
     
-
     
-
     
-
 
Forfeited or expired during period
   
-
     
-
     
(5,000
)
   
6.00
 
Outstanding at end of period
   
450,000
   
$
1.62
     
450,000
   
$
1.62
 
Exercisable at end of period
   
450,000
   
$
1.62
     
360,000
   
$
1.62
 


The Company did not record any stock-based compensation expense related to stock options during the three months ended September 30, 2021 as these options became fully vested and all compensation cost was recognized in February 2021.  For the nine months ended September 30, 2021, the Company recorded $7 thousand expense related to stock options. During the three and nine months ended September 30, 2020, the Company recorded $10 thousand and $20 thousand of stock-based compensation expense related to stock options, respectively.


Options outstanding and exercisable at September 30, 2021 were as follows:

   
Outstanding
   
Exercisable
 
Grant Date
 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life
 
Weighted
Average
Exercise
Price
   
Aggregate
Intrinsic
Value
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
   
 
 
Aggregate
Intrinsic
Value
 
February 24, 2016
   
450,000
 

 
$
1.62
           
450,000
   
$
1.62
       
     
450,000
 
4.40 years
 
$
1.62
   
$
481,500
     
450,000
   
$
1.62
   
$
481,500
 

26

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE (12) – 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 $34 thousand and $18 thousand for the three months ended September 30, 2021 and 2020, respectively, and $81 thousand and $50 thousand for the nine months ended September 30, 2021 and 2020, respectively.


Shares held by the ESOP were as follows:

   
September 30, 2021
   
December 31, 2020
 
   
(Dollars in thousands)
 
             
Allocated to participants
   
1,092,033
     
1,065,275
 
Committed to be released
   
-
     
10,236
 
Suspense shares
   
531,682
     
562,391
 
Total ESOP shares
   
1,623,715
     
1,637,902
 
Fair value of unearned shares
 
$
1,458
   
$
1,040
 


Unearned shares, which are reported as Unearned ESOP shares in the equity section of the consolidated statements of financial condition, were $844 thousand and $893 thousand at September 30, 2021 and December 31, 2020, respectively.

NOTE (13) – Regulatory Matters


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 September 30, 2020. The ratio then rose to 8.5% for 2021 and reestablishes at 9% on January 1, 2022.

27

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements

City First Bank, N.A. elected to adopt the CBLR option on April 1, 2020 as reflected in its September 30, 2020  Call Report. Its CBLR as of September 30, 2021 is shown in the table below. The Company’s former subsidiary, Broadway Federal Bank, f.s.b., did not elect to adopt the CBLR and reported the December 31, 2020 capital ratios as shown in the table below.


Actual and required capital amounts and ratios as of the periods indicated are presented below.

   
Actual
   
Minimum Capital
Requirements
   
Minimum Required to
Be Well Capitalized
Under Prompt
Corrective Action
Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(Dollars in thousands)
 
September 30, 2021:
                                   
Community Bank Leverage Ratio (1)
 
$
98,009
     
9.41
%  
$






 
$
88,576
     
8.50
%
December 31, 2020:
                                               
Tier 1 (Leverage)
 
$
46,565
     
9.54
%
 
$
19,530
     
4.00
 %  
$
24,413
     
5.00
 %
Common Equity Tier 1
 
$
46,565
     
18.95
%  
$
11,059
     
4.50
 %  
$
15,975
     
6.50
 %
Tier 1
 
$
46,565
     
18.95
%  
$
14,746
     
6.00
 %  
$
19,661
     
8.00
 %
Total Capital
 
$
49,802
     
20.20
%  
$
19,661
     
8.00
 %  
$
24,577
     
10.00
 %



(1)
At the Merger on April 1, 2021, the Company’s former subsidiary, Broadway Federal Bank, f.s.b., was merged into City First Bank of D.C, N. A., with City First Bank of D.C, N.A. as the surviving entity and the resultant bank being named City First Bank, National Association, which had elected to adopt Community Bank Leverage Ratio option on April 1, 2020 as reflected in its September 30, 2020 Call Report.


At September 30, 2021, 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 December 31, 2020 that would materially adversely change the Bank’s capital classifications. From time to time, we may need to raise additional capital to support the Bank’s further growth and to maintain the “well capitalized” status.

NOTE (14) – 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 carry-forwards.  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.



The Company’s tax expense for the nine months ended September 30, 2021 included a $370 thousand impairment 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.

28

Table of Contents
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE (15) – Concentration of Credit Risk
   

The Bank has a significant concentration of deposits with one customer that accounted for approximately 9% of its deposits as of September 30, 2021. The Bank also has a significant concentration of short term borrowings from one customer that accounted for 66% of the outstanding balance of securities sold under agreements to repurchase as of September 30, 2021. 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, “Consolidated Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q and Item 8 of Part II, “Financial Statements and Supplementary Data” of our 2020 Form 10-K.  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
 
Our significant accounting policies, which are essential to understanding MD&A, are described in the “Notes to Consolidated Financial Statements” and in the “Critical Accounting Policies” section of MD&A in our 2020 Form 10-K.
 
As a result of the Company’s acquisition of CFBanc Corporation on April 1, 2021, the accounting policy related to business combinations has been added to our critical accounting policies during the nine months ended September 30, 2021. See Note 1 - Basis of Financial Statement Presentation in the accompanying Notes to Unaudited Consolidated Financial Statements contained in Item 1-- Consolidated Financial Statements (Unaudited).

COVID-19 Pandemic Impact
 
The Company continues to monitor the impact of the lingering COVID-19 pandemic on its operations.  To date, the Bank has not implemented layoffs or furloughs of any employees because of the pandemic.
 
Although the Bank developed plans and policies for providing financial relief to borrowers that may experience difficulties in meeting the terms of their loans, as of September 30, 2021, none of its borrowers had requested loan modifications and the Bank had no delinquencies related to COVID-19.
 
As of September 30, 2021, the Company participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) by way of its merger with CFBanc Corporation. The Bank has originated $26.5 million in PPP since the merger. No PPP loans were originated during the three months ended September 30, 2021 as the program ended in June of 2021.
 
Overview
 
The Company merged withCFBanc on April 1, 2021, with Broadway Financial Corporation continuing as the surviving entity.  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). Accordingly, results for the third quarter of 2021 include the operations of Broadway Financial Corporation and its subsidiary, City First Bank, National Association. Results for the nine months ended September 30, 2021 include the operations of Broadway Financial Corporation and the results of Broadway Federal Bank, f.s.b., its former subsidiary, for the first quarter and the results for Broadway Financial Corporation and City First Bank, N.A. for the second and third quarters. Results for the three months ended September 30, 2020 and the nine months ended September 30, 2020 include the results of Broadway Financial Corporation and  Broadway Federal Bank, f.s.b.
 
Total assets increased by $580.2 million to $1.064 billion at September 30, 2021 from $483.4 million at December 31, 2020.  The increase in total assets was primarily due to assets acquired in the merger, which increased total assets by $501.2 million for the period. The increase in total assets was also due to a net increase in cash of $35.8 million since the merger and an increase in the loan portfolio of $53.8 million since the merger, which was primarily due to loan originations of $173.3 million, net of loan repayments and payoffs of $120.8 million for the nine months ended September 30, 2021.
 
Total liabilities increased by $485.7 million to $920.2 million at September 30, 2021 from $434.5 million at December 31, 2020. The increase in total liabilities primarily consisted of the assumption of $353.7 million of deposits, $3.2 million of FHLB advances, and $73.9 million of other borrowings in the CFBanc Merger. Since the merger, deposits have increased by $83.6 million, FHLB advances have decreased by $22.7 million, short term borrowings have decreased by $7.1 million and the junior subordinated debt, which was $3.3 million at December 31, 2020, was fully paid off.

Net income for the third quarter of 2021 increased by $426 thousand compared to the third quarter of 2020 primarily due to an increase of $2.2 million in net interest income after loan loss provision and an increase of $496 thousand in grant and fee income, which were offset by additional operating expenses of $2.2 million due to the combined operations of the two banks after the merger and higher data processing costs after the merger.  Results for the second quarter of 2021 were $519 thousand higher than the third quarter of 2021 primarily due to a special grant award of $1.8 million, offset by a higher effective tax rate and a tax adjustment of $370 thousand during the second quarter for a valuation allowance on the deferred tax asset due to a limitation on the use of net operating loss carryforwards.

For the year-to-date period ended September 30, 2021, the Company reported a net loss of $2.6 million, or $(0.05) per share, compared to a net loss of $61 thousand or $0.00 per share for the first nine months of 2020.  The net loss during 2021 was due to merger-related costs of $5.6 million, ($4.2 million net of tax) and one-time costs of $408 thousand associated with the data processing conversion. The net loss during the first nine months of 2020 was due to merger-related expenses of $710 thousand as well as $210 thousand in higher professional services costs due to actions by a former shareholder.
 
Net Interest Income

Third Quarter of 2021 Compared to Third Quarter of 2020

Net interest income for the third quarter of 2021 totaled $6.0 million, representing an increase of $2.6 million over net interest income of $3.4 million for the third quarter of 2020. The increase resulted from higher interest income, primarily due to growth of $508.1 million in average interest-earning assets during the third quarter of 2021 compared to the third quarter of 2020 due to the acquisition of loans, securities, and cash equivalents in the Merger on April 1, 2021.

Interest income and fees on loans receivable increased by $1.9 million to $6.0 million for the third quarter of 2021, from $4.4 million for the third quarter of 2020 due to an increase of $189.5 million in the average balance of loans receivable, which increased interest income by $1.9 million, and an 8 basis point decrease in the average yield on loans, which decreased interest income by $90 thousand. 

Interest income on securities increased by $398 thousand for the third quarter of 2021, compared to the third quarter of 2020.  The increase in interest income on securities primarily resulted from growth of $146.9 million in the average balance, which resulted from securities acquired in the Merger of $150 million, net of purchases of  $10.1 million and payoffs and amortization of $12.7 million since the Merger.  The higher average balance of securities increased interest income by $441 thousand.  This increase was partially offset by the effects of a decrease of 114 basis points in the average interest rate earned on securities, which decreased interest income by $43 thousand.

Other interest income increased by $79 thousand during the third quarter of 2021 compared to the third quarter of 2020 primarily due to higher interest earned on cash deposits in other banks which increased by $69 thousand for the third quarter of 2021 compared to the third quarter of 2020.  The average balance increased by $172.0 million, which increased interest income by $85 thousand.  This increase was partially offset by the effects of lower rates earned on interest-earning deposits in other banks, which decreased by 11 basis points and lowered interest income by $16 thousand.  Also, interest income on Federal Reserve Bank (“FRB”) stock and Federal Home Loan Bank (“FHLB”) stock increased by $10 thousand during the third quarter of 2021 compared to the third quarter of 2020.

Interest expense for the third quarter of 2021 decreased by $279 thousand compared to the third quarter of 2020 due to a decrease of 66 basis points in the cost of funds.  The lower rates paid offset the impact of an increase of $405.9 million in average interest-bearing liabilities, due to the assumption of $307.6 million of interest-bearing deposits, $73.9 million of borrowings, and $3.2 million of FHLB advances in the Merger.  In addition, $46.1 million of non-interest-bearing deposits were assumed in the Merger.

Interest expense on deposits decreased by $185 thousand for the third quarter of 2021, compared to the third quarter of 2020.  The decrease was primarily attributable to a decrease of 54 basis points in the average rate paid on deposits, which caused interest expense on deposits to decrease by $605 thousand.  This decrease was partially offset by the effects of an increase of $365.6 million in the average balance of deposits, primarily because of the Merger, which increased interest expense by $420 thousand.

Interest expense on borrowings decreased by $94 thousand for the third quarter of 2021, compared to the third quarter of 2020.  The decrease was attributable to a decrease of 71 basis points in the average borrowing rate, which decreased interest expense by $251 thousand, offset by an increase in average borrowings of $40.3 million during the period, which increased interest expense by $157 thousand.  The increase in borrowings was due to an increase of $51.7 million in the average balance of short term borrowings (securities sold under agreements to repurchase), offset by a decrease of $24.5 million in average borrowings from the FHLB and a decrease of $860 in the average balance of the Company’s junior subordinated debentures during the third quarter of 2021 compared to the third quarter of 2020.

The net interest margin decreased to 2.43% for the third quarter of 2021 from 2.82% for the third quarter of 2020 primarily due to lower rates earned on higher balances of interest-earning cash deposits in other banks, which grew to an average balance of $214.4 million during the third quarter of 2021 compared to an average balance of $42.4 million during the third quarter of 2020.  During the third quarter of 2021, the average interest rate earned on cash deposits decreased to 0.19% from an average rate of 0.30% earned during the third quarter of 2020.

First Nine Months of 2021 Compared to the First Nine Months of 2020

For the first nine months of 2021, net interest income before provisions increased by $5.4 million to $14.7 million compared to $9.3 million for the first nine months of 2020.  The increase in net interest income primarily resulted from additional net interest income earned on assets acquired in the Merger.

Interest income and fees on loans receivable increased by $3.0 million during the first nine months of 2021, compared to the first nine months of 2020, due to an increase of $108.5 million in the average balance of loans receivable, primarily resulting from the Merger, which increased interest income by $3.3 million, and a decrease of 8 basis points in the average loan yield, which decreased interest income by $254 thousand.

Interest income on securities increased by $759 thousand for the first nine months of 2021, compared to the first nine months of 2020.  The increase in interest income on securities primarily resulted from an increase of $110.4 million in the average balance of securities because of the Merger, which increased interest income by $930 thousand.  This increase was partially offset by the effects of a decrease of 140 basis points in the average interest yield earned on investment securities, which decreased interest income by $171 thousand.

Other interest income increased by $42 thousand during the first nine months of 2021, compared to the first nine months of 2020 due to higher average cash balances in other banks, which increased by an average of $161.9 million during the first nine months of 2021 compared to the first nine months of 2020.  The Company also recorded $42 thousand in higher interest income on regulatory stock during the first nine months of 2021, primarily due to interest earned on FRB and FHLB stock acquired in the Merger, along with the existing holdings of FHLB stock.

During the first nine months of 2021, interest expense on deposits decreased by $1.3 million, compared to the first nine months of 2020, due to a decrease of 81 basis points in the average cost of deposits, which decreased interest expense by $2.6 million.  This decrease was partially offset by an increase of $261.4 million in the average balance of deposits, primarily due to deposits assumed in the Merger, which increased interest expense by $1.3 million.

During the first nine months of 2021, interest expense on borrowings decreased by $147 thousand compared to the first nine months of 2020 due to a decrease of 60 basis points in the average cost of borrowings, which decreased interest expense by $612 thousand.  This decrease was offset by an increase of $37.1 million in average outstanding borrowings, which increased interest expense by $465 thousand.  The increase in average borrowings was due primarily due to short-term borrowings assumed in the Merger.

The net interest margin decreased by 31 basis points to 2.26% for the first nine months of 2021 from 2.57% for the same period in 2020.
 
 
 
For the three months ended
 
 
 
September 30, 2021
   
September 30, 2020
 
(Dollars in Thousands)
 
Average Balance
   
Interest
   
Average
Yield/
Cost
   
Average Balance
   
Interest
   
Average
Yield/
Cost
 
Assets
                                   
Interest-earning assets:
                                   
Interest-earning deposits
 
$
214,366
   
$
101
     
0.19
%
 
$
42,406
   
$
32
     
0.30
%
Securities
   
157,142
     
457
     
1.16
%
   
10,242
     
59
     
2.30
%
Loans receivable (1)
   
612,755
     
6,296
     
4.12
%
   
423,305
     
4,438
     
4.19
%
FRB and FHLB stock
   
3,401
     
55
     
6.47
%
   
3,586
     
45
     
5.02
%
Total interest-earning assets
   
987,664
   
$
6,909
     
2.80
%
   
479,539
   
$
4,574
     
3.82
%
Non-interest-earning assets
   
61,615
                     
10,663
                 
Total assets
 
$
1,049,279
                   
$
490,202
                 
                                                 
Liabilities and Stockholders’ Equity
                                               
Interest-bearing liabilities:
                                               
Money market deposits
 
$
199,577
   
$
159
     
0.16
%
 
$
50,238
   
$
60
     
0.48
%
Passbook deposits
   
74,223
     
61
     
0.11
%
   
58,377
     
55
     
0.38
%
NOW and other demand deposits
   
210,014
     
37
     
0.02
%
   
60,835
     
5
     
0.03
%
Certificate accounts
   
197,746
     
189
     
0.07
%
   
146,469
     
511
     
1.40
%
Total deposits
   
681,560
     
446
     
0.26
%
   
315,919
     
631
     
0.80
%
FHLB advances
   
91,000
     
440
     
1.98
%
   
115,500
     
538
     
1.86
%
Junior subordinated debentures
   
2,923
     
17
     
2.67
%
   
3,783
     
28
     
2.96
%
Other borrowings
   
65,657
     
15
     
0.09
%
   
-
     
-
     
-
 
Total borrowings
   
159,580
     
472
     
1.18
%
   
119,283
     
566
     
1.90
%
Total interest-bearing liabilities
   
841,140
   
$
918
     
0.44
%
   
435,202
   
$
1,197
     
1.10
%
Non-interest-bearing liabilities
   
64,271
                     
5,281
                 
Stockholders’ Equity
   
143,868
                     
49,719
                 
Total liabilities and stockholders’ equity
 
$
1,049,279
                   
$
490,202
                 
                                                 
Net interest rate spread (2)
         
$
5,991
     
2.36
%
         
$
3,377
     
2.72
%
Net interest rate margin (3)
                   
2.43
%
                   
2.82
%
Ratio of interest-earning assets to interest-bearing liabilities
             
117.4
%
                   
110.19
%

(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 nine months ended
 
 
 
September 30, 2021
   
September 30, 2020
 
(Dollars in Thousands)
 
Average Balance
   
Interest
   
Average
Yield/
Cost
   
Average Balance
   
Interest
   
Average
Yield/
Cost
 
Assets
                                   
Interest-earning assets:
                                   
Interest-earning deposits
 
$
198,922
   
$
207
     
0.14
%
 
$
36,989
   
$
165
     
0.59
%
Securities
   
120,952
     
953
     
1.05
%
   
10,539
     
194
     
2.45
%
Loans receivable (1)
   
539,811
     
16,240
     
4.01
%
   
431,330
     
13,226
     
4.09
%
FHLB stock
   
3,718
     
170
     
6.10
%
   
3,410
     
128
     
5.00
%
Total interest-earning assets
   
863,403
   
$
17,570
     
2.71
%
   
482,268
   
$
13,713
     
3.79
%
Non-interest-earning assets
   
34,696
                     
10,530
                 
Total assets
 
$
898,099
                   
$
492,798
                 
                                                 
Liabilities and Stockholders’ Equity
                                               
Interest-bearing liabilities:
                                               
Money market deposits
 
$
162,230
   
$
463
     
0.38
%
 
$
44,853
   
$
277
     
0.82
%
Passbook deposits
   
69,728
     
175
     
0.33
%
   
53,451
     
224
     
0.56
%
NOW and other demand deposits
   
165,646
     
84
     
0.07
%
   
52,655
     
12
     
0.03
%
Certificate accounts
   
183,569
     
584
     
0.42
%
   
168,812
     
2,140
     
1.69
%
Total deposits
   
581,173
     
1,306
     
0.30
%
   
319,771
     
2,653
     
1.11
%
FHLB advances
   
104,366
     
1,516
     
1.94
%
   
114,234
     
1,646
     
1.92
%
Junior subordinated debentures
   
3,113
     
60
     
2.57
%
   
4,036
     
108
     
3.57
%
Other borrowings
   
47,863
     
31
     
0.09
%
   
-
     
-
     
-
 
Total borrowings
   
155,342
     
1 607
     
1.38
%
   
118,270
     
1,754
     
1.98
%
Total interest-bearing liabilities
   
736,515
   
$
2,913
     
0.53
%
   
438,041
   
$
4,407
     
1.34
%
Non-interest-bearing liabilities
   
49,696
                     
5,476
                 
Stockholders’ Equity
   
111,889
                     
49,281
                 
Total liabilities and stockholders’ equity
 
$
898,099
                   
$
492,798
                 
                                                 
Net interest rate spread (2)
         
$
14,657
     
2.19
%
         
$
9,306
     
2.45
%
Net interest rate margin (3)
                   
2.26
%
                   
2.57
%
Ratio of interest-earning assets to interest-bearing liabilities
             
117.2
%
                   
110.10
%
 


(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 of $365 thousand for the three months ended September 30, 2021 and $446 thousand for the nine months ended September 30, 2021 due to growth in the loan portfolio. No loan charge-offs were recorded during the three months or the nine months ended September 30, 2021. The Allowance for Loan and Lease Losses (“ALLL”) increased to $3.7 million as of September 30, 2021 compared to $3.2 million as of December 31, 2020.
 
The Bank did not record a loan loss provision or recapture during the three months ended September 30, 2020, but a loan loss provision of $29 thousand and a loan loss recapture of $4 thousand were recorded during the nine months ended September 30, 2020. Due to economic uncertainty related to the COVID-19 Pandemic, the Bank maintained its ALLL at $3.2 million as of September 30, 2020 despite a net decrease of $36.1 million in loans held for investment portfolio during the nine months ended September 30, 2020.  No loan charge-offs were recorded during the three months or the nine months ended September 30, 2020.
 
Non-interest Income

Non-interest income for the third quarter of 2021 totaled $609 thousand compared to $206 thousand for the third quarter of 2020.  Non-interest income increased due to $217 thousand in CDFI grant income recognized during the third quarter. No grant income was recorded during the third quarter of 2020. Other non-interest income during the third quarter of 2021 also included $154 thousand in management fees related to New Market Tax Credit projects managed by City First Bank in Washington, D.C.  No gain on the sale of loans was recorded during the third quarter and first nine months of 2021 compared to gains of $76 thousand recorded during the third quarter of 2020 and $199 thousand during the first nine months of 2020.

For the first nine months of 2021, non-interest income totaled $2.9 million compared to $645 thousand for the same period in the prior year.  The increase of $2.3 million in non-interest income was primarily due to the grant of $1.8 million from the CDFI Fund recognized in the second quarter of 2021, grant income of $217 thousand recognized in the third quarter, and management fees of $307 thousand related to the NMTC projects managed by City First Bank in Washington, D.C.

Non-interest Expense

Non-interest expense for the third quarter of 2021 totaled $6.0 million, compared to $3.7 million for the third quarter of 2020.  The increase of $2.3 million in non-interest expense during the third quarter of 2021 compared to the same quarter of 2020 was primarily due to the inclusion of non-interest expenses of the acquired operations of the Bank.  In addition, non-interest expense for the third quarter of 2021 included $359 thousand in one-time costs associated with the data processing conversion and $131 thousand in amortization of the core deposit intangible that was recorded in connection with the Merger.

For the first nine months of  2021, non-interest expense totaled $20.0 million, compared to $10.3 million for the same period in the prior year.  The increase of $9.7 million in non-interest expense was primarily due to Merger-related expenses of $5.6 million and data processing conversion expenses of $359 thousand during the first nine months of 2021, as well as the inclusion of non-interest expenses of the acquired operations of the Bank.

Income Tax Expense or Benefit

Income tax expense or benefit is computed by applying the statutory federal income tax rate of 21%.  State taxes are recorded at the State of California tax rate and apportioned based on an allocation schedule to reflect that a portion of the Bank’s operations are conducted in the Washington, D.C. area.  The Company recorded income tax expense of $51 thousand during the third quarter, representing an effective rate of 19.8%, and a tax benefit of $297 thousand during the first nine months of 2021, representing an effective tax rate of  10.4%.  Income tax expense for the first nine months of 2021 includes a $369 thousand valuation allowance on the Company’s deferred tax assets to record the write down of the tax benefits from net operating losses for the State of California, net of the federal tax benefit.  This change in the valuation allowance was required because the shares of common stock issued in the private placements that closed a few days after the Merger triggered a limitation on the use of net operating loss carryforwards.
 
 Financial Condition
 
Total Assets
 
Total assets increased by $580.2 million to $1.064 billion at September 30, 2021 from $483.4 million at December 31, 2020.  The increase in total assets was primarily due to the Merger, which increased total assets by $501.2 million, and $82.8 million in asset growth since the merger.
 
Securities Available-For-Sale
 
Securities available-for-sale totaled $157.6 million at September 30, 2021, compared with $10.7 million at December 31, 2020. The $146.9 million of increase in securities available-for-sale during the nine months ended September 30, 2021 was primarily due to the addition of $150.0 million of securities as a result of the CFBanc Merger, as well as additional purchases of securities of $10.0 million. These increases were partially offset by net amortizations and paydowns of investment securities of $12.7 million.
 
Loans Receivable
 
Loans receivable increased by $282.1 million during the first nine months of 2021 primarily due to loans of $225.9 million acquired in the Merger on April 1, 2021. Since the merger, the Bank originated $103.1 million multi-family loans, $23.4 million of commercial real estate loans, $26.5 million in PPP loans, $16.1 million in construction loans and $4.2 million of other loans. Loan repayments since the merger totaled $120.8 million.
 
 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 within the context of the current uncertainties posed by the COVID-19 Pandemic, 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 assess the overall quality of the loan portfolio and general economic trends in the local markets in which we operate.  The determination of the appropriate level for the allowance is based on these reviews, 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 $3.7 million or 0.57% of gross loans held for investment at September 30, 2021, compared to $3.2 million, or 0.88% of gross loans held for investment, at December 31, 2020.  The decrease in the ALLL as a percentage of gross loans is because there is no ALLL associated with the loans acquired in the merger.  The increase in the dollar amount of ALLL during the nine months ended September 30, 2021 was the result of additional loan loss provisions due to loan growth during the period.
 
As of September 30, 2021, loan delinquencies totaled $249 thousand, compared to $0 at December 31, 2020.  None of these loans were greater than 90 days delinquent. The slight increase in delinquencies was due to one commercial real estate loan acquired in the merger.
 
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 September 30, 2021, NPLs totaled $709 thousand, compared to $787 thousand at December 31, 2020.  The decrease of $78 thousand in NPLs during the nine months ended September 30, 2021 was due to loan repayments. The Bank did not have any real estate owned from foreclosures (“REO”) at September  30, 2021 or December 31, 2020.
 
In connection with our review of the adequacy of our ALLL, we track the amount and percentage of our NPLs that are paying currently, but nonetheless must be classified as NPL for reasons unrelated to payments, such as lack of current financial information and an insufficient period of satisfactory performance.  As of September 30, 2021, all our non-performing loans were current in their payments.  Also, in determining the ALLL, we evaluate the ratio of the ALLL to NPLs, which was 516.4% at September 30, 2021 compared to 408.5% at December 31, 2020.
 
When reviewing the adequacy of the ALLL, we also consider the impact of charge-offs, including the changes and trends in loan charge-offs.  There 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 the nine months ended September 30, 2021 compared to $4 thousand in recoveries recorded during the nine months ended September 30, 2020.
 
Impaired loans at September 30, 2021 were $3.7 million, compared to $4.7 million at December 31, 2020.  The  decrease of $1.0 million in impaired loans during the nine months ended September 30, 2021 was primarily due to loan repayments.  Specific reserves for impaired loans were $30 thousand, or 0.82% of the aggregate impaired loan amount at September 30, 2021, compared to $141 thousand, or 2.98% at December 31, 2020.
 
On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was signed into law by Congress. The CARES Act provides financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to Troubled Debt Restructurings (“TDR’s”) for a limited period of time to account for the effects of COVID-19.  In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other insignificant payment delays, are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, nine months or less is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented.  The guidance also provides that these modified loans generally will not be classified as non-accrual loans during the term of the modification.
 
The Bank has implemented a loan modification program for the effects of COVID-19 on its borrowers. At the date of this filing, two borrowers have requested applications, but no applications for loan modifications have been formally submitted. Both borrowers were current at the time modification program was implemented.  To date, no modifications have been granted.
 
We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of September 30, 2021, but because of the current 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.
 
Office Properties and Equipment
 
Net office properties and equipment increased by $6.6 million to $9.2 million at September 30, 2021 from $2.5 million as of December 31, 2020.  The large increase was due to the result of the merger, as CFBanc owned the land and building that in which it operates its headquarters and branch. Office properties and equipment, net increased by $7.0 million as of the date of the merger.
 
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 are 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 nine months ended September 30, 2021, the Company recorded $262 thousand of amortization expense related to the core deposit intangible.
 
No impairment charges were recorded during 2021 for goodwill or the core deposit intangible.
 
Total Liabilities
 
Total liabilities increased by $463.0 million to $920.2 million at September 30, 2021 from $434.5 million at December 31, 2020.  The increase in total liabilities was largely the result of liabilities assumed in the CFB merger, plus additional activity since the merger date.
 
Deposits
 
Deposits increased to $749.6 million at September 30, 2021 from $315.6 million at December 31, 2020, due to deposits of $353.7 million that were assumed in the Merger and additional growth in deposits of $83.6 million since the Merger, primarily in money market and demand deposit accounts.

Single customer relationships accounted for approximately 9% and 13% of deposits at September 30, 2021 and December 31, 2020, respectively.  We expect to maintain these relationships for the foreseeable future.
 
Borrowings
 
Total borrowings increased by $44.1 million to $157.9 million at September 30, 2021 from $113.8 million at December 31, 2020. The increase consisted of the addition of $77.1 million of  borrowings assumed at the merger date, and decreases of $10.0 million in short term borrowings, payoffs of $22.7 million in FHLB advances and payoffs of subordinated debt of $3.1 million. 
 
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 asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. The outstanding balance of these borrowings totaled $52.9 million as of September 30, 2021. There were no such borrowings as of December 31, 2020.  The market value of securities pledged totaled $71.4 million as of September 30, 2021 and included $23.4 million of U.S. Government Agency securities, $43.8 million of mortgage-backed securities,  and $4.2 million of collateralized mortgage obligations. The weighted average rate paid on repurchase agreements was 0.10% for the three months ended September 30, 2021.
 
Agreements to sell securities subject to obligations to repurchase with a single customer totaled $34.7 million as of September 30, 2021. There were no such agreements as of December 31, 2020. We expect to maintain these relationships for the foreseeable future.
 
Borrowings from the FHLB totaled $91.1 million as of September 30, 2021 at a weighted average interest rate of 1.91% at September 30, 2021, compared with borrowings of $110.5 million at a rate of 1.94% at December 31, 2020. The Company has not been renewing FHLB advances since the merger.
 
The Company paid off its Junior Subordinated Debt in September of 2021. The balance outstanding as of December 31, 2020 was $3.3 million.
 
Stockholders’ Equity
 
Stockholders’ equity was $143.3 million, or 13.48% of the Company’s total assets, at September 30, 2021, compared to $48.9 million, or 10.1% of the Company’s total assets at December 31, 2020.  The Company issued $63.3 million in common stock at a price per share of $2.49 and $3.0 million in preferred stock in connection with the merger.  In addition, the Company raised $30.9 million in net proceeds from the sale of common stock in private placements immediately following the merger on April 6, 2021.
 
The Company’s book value was $1.96 per share at September 30, 2021, and its tangible book value was $1.55 per share as of September 30, 2021 after adjusting for goodwill of $26.0 million and the net unamortized core deposit intangible of $3.1 million, which were both originally recorded in connection with the merger. The Company’s tangible book value per share was $1.74 per share as of December 31, 2020.
 
A capital contribution of $20 million was made from the Company to the Bank in June of  2021.  The Bank (City First Bank, N.A.) elected to adopt the CBLR as of April 1, 2020 as reflected in its September 30, 2020 Call Report. The Bank’s CBLR was 9.41% at September 30, 2021.
 
Prior to the Merger, the Company’s former subsidiary, Broadway Federal Bank, f.s.b., did not elect to adopt the CBLR and reported a Total Capital ratio of 20.20% and a Leverage ratio of 9.54% at December 31, 2020.
 
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 $16.9 million at September 30, 2021 based on pledged collateral.  In addition, the Bank had additional lines of credit of  $11.0 million with other financial institutions as of that date.
 
The Bank’s primary uses of funds include withdrawals of and interest payments on deposits, originations of loans, purchases of investment securities, and the payment of operating expenses.  Also, when the Bank has more funds than required for reserve requirements or short-term liquidity needs, the Bank invests in federal funds with the Federal Reserve Bank or in money market accounts with other financial institutions.  The Bank’s liquid assets at September 30, 2021 consisted of $208.7 million in cash and cash equivalents and $49.7 million in securities available-for-sale that were not pledged, compared to $96.1 million in cash and cash equivalents and $10.7 million in securities available-for-sale that were not pledged at December 31, 2020.  The increases were due to liquid assets acquired in the CFBanc Merger. Currently, we believe that the Bank has sufficient liquidity to support growth over the foreseeable future.

The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the private placements completed in August 2013, October 2014, December 2016, and April 2021 and dividends received from the Bank in 2021 and 2020.  The Bank is currently under no prohibition to pay dividends, but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines.
 
The Company recorded consolidated net cash inflows from operating activities of $3.9 million during the nine months ended September 30, 2021, compared to consolidated net cash outflows from operating activities of $39.8 million during the nine months ended September 30, 2020.  Net cash inflows from operating activities during the nine months ended September 30, 2021 were primarily attributable to increases in accrued liabilities, whereas net cash outflows from operating activities for the nine months ended September 30, 2020 were primarily due to originations of loans receivable held for sale of $118.6 million, offset primarily by proceeds from sales of loans receivable held for sale of $77.6 million.
 
The Company recorded consolidated net cash inflows from investing activities of $31.2 million during the nine months ended September 30, 2021, compared to consolidated net cash inflows of $35.6 million during the nine months ended September 30, 2020.  Net cash inflows from investing activities during the nine months ended September 30, 2021 were primarily due to net cash acquired in the merger with City First Bank N.A. of $84.7 million, net payments on securities of $12.7 million,  and redemptions of FHLB stock of $1.2 million, offset by cash used to fund new loans receivable held for investment of $57.1 million. In comparison, cash inflows from investing activities million during the nine months ended September 30, 2020 were primarily due to principal payments on loans receivable held for investment
 
The Company recorded consolidated net cash inflows from financing activities of $77.5 million during the nine months ended September 30, 2021, compared to consolidated net cash inflows from financing activities of $58.3 million during the nine months ended September 30, 2020.  Net cash inflows from financing activities during the nine months ended September 30, 2021 were primarily attributable to a net increase in deposits of $80.3 million and proceeds from the sale of stock of $30.8 million. These increases were offset by a net decrease in FHLB advances of $22.6 million, a decrease in securities sold under agreements to repurchase of $7.1 million since the merger, and the payoff of subordinated debt of $3.3 million. During the nine months ended September 30, 2020, net cash inflows from financing activities were primarily due to a net increase in deposits of $27.6 million and net proceeds from FHLB advances of $31.5 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 September 30, 2021 and December 31, 2020, the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered “well capitalized.” As of April 1, 2020, the Bank elected to follow the CBLR guidelines. (See Note 13 – 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 September 30, 2021.  Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.
 
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 September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as noted below.
 
We completed the CFBanc Merger during the second quarter of 2021.  (See Note 2 - Business Combination.)  We are currently integrating CFBanc into our operations and internal control processes. As we complete this integration, we are analyzing, evaluating, and where necessary, making changes in control and procedures related to the CFBanc business, which we expect to complete within one year after the date of acquisition. Pursuant to the SEC’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of our internal controls over financial reporting at December 31, 2021 may exclude CFBanc to the extent that they are not yet integrated into our internal controls environment.
 
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, 2021 (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)
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted 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

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Broadway Financial Corporation
     
Date: November 15, 2021
By:
/s/ Brian Argrett
   
Brian Argrett
   
Chief Executive Officer
     
Date: November 15, 2021
By:
/s/ Brenda J. Battey
   
Brenda J. Battey
   
Chief Financial Officer


45