BROADWAY FINANCIAL CORP DE 10-Q

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). 30 Table of Contents 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. 31 Table of Contents 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. 32 Table of Contents 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. 33 Table of Contents 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. 34 Table of Contents 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. 35 Table of Contents 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. 36 Table of Contents 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. 37 Table of Contents 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. 38 Table of Contents 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. 39 Table of Contents 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. 40 Table of Contents 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. 41 Table of Contents 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