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, Financial Statements,” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022. 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 “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue,” “poised,” “optimistic,” “prospects,” “ability,” “looking,” “forward,” “invest,” “grow,” “improve,” “deliver” and other similar expressions. These forward-looking statements are subject to risks and uncertainties, which could cause actual future results to differ materially from historical results or from those anticipated or implied by such statements. Readers should not place undue reliance on these forward-looking statements, which speak only as of their dates or, if no date is provided, then as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law. Critical Accounting Policies and Estimates Critical accounting policies are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations under different assumptions and conditions. This discussion highlights those accounting policies that management considers critical. All accounting policies are important; therefore, you are encouraged to review each of the policies included in Note 1 “Summary of Significant Accounting Principles” of the Notes to Consolidated Financial Statements in our 2022 Form 10-K to gain a better understanding of how our financial performance is measured and reported. Management has identified the Company’s critical accounting policies as follows: Allowance for Credit Losses for Loans Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination or acquisition. The allowance for credit losses (“ACL”) is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company measures the ACL for each of its loan segments using the weighted-average remaining maturity (“WARM”) method. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions. The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Certain loans, such as those that are nonperforming or are considered to be collateral dependent, are deemed to no longer possess risk characteristics similar to other loans in the loan portfolio, because the specific attributes and risks associated with the loan have likely become unique as the credit quality of the loan deteriorates. As such, these loans may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent in which case the ACL is determined using estimates of the fair value of the underlying collateral, less estimated selling costs. Allowance for Loan Losses Prior to the adoption of ASC 326 on January 1, 2023, the ALLL was accounted for under the guidance of ASC 310 and 450. The ALLL was considered a critical estimate due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could have resulted in material changes in the amount of the ALLL considered necessary. The ALLL was evaluated on a regular basis by management and the Board of Directors and was based on a periodic review of the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral, prevailing economic conditions, and feedback from regulatory examinations. 29 Table of Contents Goodwill and Intangible Assets Goodwill and intangible assets acquired in a purchase business combination and that are determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has selected November 30th as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s consolidated statement of financial condition. Income Taxes Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry‑back years, forecasts of future income and available tax planning strategies. This analysis is updated quarterly. Fair Value Measurements Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair values are estimated using relevant market information and other assumptions, as more fully disclosed in Note 7 of the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for items. Changes in assumptions or in market conditions could significantly affect the estimates. Out - of - Period Adjustments Following the quarter ended September 30 , 2023, the Company performed a review of internal controls over financial reporting, encompassing an examination of financial reporting processes. During this assessment and while preparing financial statements for the three and nine months ended September 30, 2023, certain previously unrecorded adjustments totaling $8 thousand , net of tax expense, increasing net income were identified pertaining to prior periods. In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 , these adjustments were evaluated both individually and collectively. Following this assessment, these adjustments were immaterial to both historical and current reporting periods. Consequently, the Company determined that no amendment to the previously filed reports was warranted. However, the Company addressed these prior period adjustments and incorporated them into its financial statements for the three and nine months ended September 30, 2023. These adjustments are included in the other expense line on the consolidated statements of operations and comprehensive income (loss). 30 Table of Contents Overview Total assets increased by $53. 5 million to $1.2 billion at September 30, 2023 from December 31, 2022, primarily due to growth in loans receivable held for investment of $67.3 million , partially offset by a decrease of securities available-for-sale of $12.3 million and a decrease of cash and cash equivalents of $4.6 million. Loans held for investment, net of the ACL, increased by $67.3 million to $835.4 million at September 30, 2023, compared to $768.0 million at December 31, 2022. The increase was primarily due to loan originations of $ 112.2 million during the first nine months of 2023, which consisted of $ 47.4 million of multi-family loans, $36.6 million of construction loans , $15.0 million of other commercial loans and $13.2 million of commercial real estate loans , offset in part by loan payoffs and repayments of $ 44.9 million. Deposits decreased by $15.4 million to $671.5 million at September 30, 2023, from $686.9 million at December 31, 2022, with $29.4 million of the decrease occurring in the first quarter and $11.5 million in the second quarter, partially offset by an increase of $25.5 million in the third quarter. Management has made reasonable attempts to be responsive to the higher interest rate environment, but some depositors have left the Bank for the highest rates available from other financial institutions in response to rate increases by the Federal Reserve. As of September 30, 2023, our uninsured deposits, including deposits from affiliates, represented 37% of our total deposits, as compared to 31% as of December 31, 2022. Total borrowings increased by $71.7 million to $277.5 million at September 30, 2023, from $205.8 million at December 31, 2022, primarily due to a net increase of $59.4 million in advances from the FHLB and $12.3 million in additional securities sold under agreements to repurchase. For the three months ended September 30, 2023, the Company reported net earnings of $ 91 thousand compared to net earnings of $1.3 million for the three months ended September 30, 2022. The decrease resulted from a decline in pretax earnings of $1.8 million primarily due to a decrease in net interest income of $1.8 million during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and a $909 thousand increase in non-interest expense, partially offset by a $1.0 million decrease in the provision for credit losses and a $495 thousand decrease in tax expense . For the nine months ended September 30, 2023, the Company reported net earnings of $1.9 million compared to net earnings of $4.1 million for the nine months ended September 30, 2022. The decrease resulted from a decline in pretax earnings of $3.1 million primarily due to a decrease in net interest income of $1.5 million during the first nine months of 2023 compared to the first nine months of 2022, an increase in non-interest expense of $1.4 million and an increase in the provision for credit losses of $216 thousand . This decrease in pretax earnings was offset by an $848 thousand decrease in income tax expense. 31 Table of Contents Results of Operations Net Interest Income Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 Net interest income before provision for credit losses for the third quarter of 2023 totaled $6.8 million, representing a decrease of $1.8 million, or 21.3%, from net interest income before loan loss provision of $8.6 million for the third quarter of 2022. The decrease resulted from additional interest expense, primarily due to an increase in the cost of average borrowings of 4.07% and an increase in the cost of average deposits of 1. 22 % during the third quarter of 2023, compared to the third quarter of 2022. In addition, the decrease in net interest income before provision for credit losses was caused by an increase in average borrowings of $151.8 million during the third quarter of 2023, compared to the third quarter of 2022, which was due to a decrease in average deposits of $123. 7 million during the third quarter of 2023. The net interest margin decreased to 2.33% for the third quarter of 2023, compared to 3.02% for the third quarter of 2022, primarily due to an overall increase of 216 basis points in the average cost of funds, which reflected higher rates paid on deposits and borrowings because of the eleven increases in interest rates implemented by the Federal Open Market Committee of the Federal Reserve (the “Federal Reserve” or “FRB”) since the middle of March of 2022 through September of 2023. The impact of the rising cost of funds was partially offset by an increase in the yield on interest-earnings assets of 85 basis points, primarily due to higher rates earned on interest-bearing deposits in other banks and the loan portfolio, partially offset by lower rates earned on FRB and FHLB of Atlanta stock. Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 Net interest income before provision for credit losses for the nine months ended September 30, 2023, totaled $22.3 million, representing a decrease of $1.5 million, or 6.3%, from net interest income before loan loss provision of $23.8 million for the nine months ended September 30, 2022. The decrease resulted from higher interest expense, primarily due to an increase in the cost of borrowings and deposits, and to a lesser extent, from an increase in average borrowings, which was needed to offset deposit outflows. The net interest margin decreased to 2.60% for the nine months ended September 30, 2023, compared to 2.93% for the nine months ended September 30, 2022, primarily due to an overall increase of 332 basis points in the average cost of funds, which reflected the higher rates that the Bank paid on deposits and borrowings because of the interest rate increases implemented by the FRB. The decrease in net interest income before provision for credit losses was partially offset by growth of $62.6 million in average interest-earning assets during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. In addition, the overall rate earned on interest-earning assets increased by 87 basis points as the Bank earned higher rates on interest-earning deposits, securities, and, to a lesser extent, the loan portfolio. The following tables set forth the average balances, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status, but the balance of these loans is included in the total average balance of loans receivable, which has the effect of reducing average loan yields. (Dollars in Thousands) For the Three Months Ended September 30, 2023 September 30, 2022 Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets Interest-earning assets: Interest-bearing deposits in other banks $ 10,629 $ 139 5.23 % $ 141,281 $ 594 1.68 % Securities 319,866 2,180 2.73 % 313,983 2,069 2.64 % Loans receivable (1) 822,031 9,406 4.58 % 683,085 6,520 3.82 % FRB and FHLB stock 12,538 202 6.44 % 2,166 45 8.31 % Total interest-earning assets 1,165,064 $ 11,927 4.09 % 1,140,515 $ 9,228 3.24 % Non-interest-earning assets 67,047 51,845 Total assets $ 1,232,111 $ 1,192,360 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Money market deposits $ 122,577 $ 1,256 4.10 % $ 180,865 $ 271 0.60 % Savings deposits 58,686 42 0.29 % 70,909 23 0.13 % Interest checking and other demand deposits 238,265 93 0.16 % 267,560 66 0.10 % Certificate accounts 152,577 735 1.93 % 176,433 114 0.26 % Total deposits 572,105 2,126 1.49 % 695,767 474 0.27 % FHLB advances 196,184 2,571 5.24 % 32,913 111 1.35 % Other borrowings 67,533 457 2.71 % 79,025 35 0.18 % Total borrowings 263,717 3,028 4.59 % 111,938 146 0.52 % Total interest-bearing liabilities 835,822 $ 5,154 2.47 % 807,705 $ 620 0.31 % Non-interest-bearing liabilities 120,161 103,635 Stockholders’ equity 276,128 281,020 Total liabilities and stockholders’ equity $ 1,232,111 $ 1,192,360 Net interest rate spread (2) $ 6,773 1.62 % $ 8,608 2.93 % Net interest rate margin (3) 2.33 % 3.02 % Ratio of interest-earning assets to interest-bearing liabilities 139.39 % 141.20 % (1) Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs and loan premiums. (2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (3) Net interest rate margin represents net interest income as a percentage of average interest-earning assets. 32 Table of Contents (Dollars in Thousands) For the Nine Months Ended September 30, 2023 September 30, 2022 Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets Interest-earning assets: Interest-bearing deposits in other banks $ 13,889 $ 425 4.08 % $ 183,463 $ 1,466 1.07 % Securities 324,719 6,543 2.69 % 229,630 3,416 1.98 % Loans receivable (1) 794,524 27,039 4.54 % 666,493 20,603 4.12 % FRB and FHLB stock 11,577 603 6.94 % 2,522 123 6.50 % Total interest-earning assets 1,144,709 $ 34,610 4.03 % 1,082,108 $ 25,608 3.16 % Non-interest-earning assets 67,712 49,624 Total assets $ 1,212,421 $ 1,131,732 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Money market deposits $ 125,944 $ 2,959 3.13 % $ 195,292 $ 654 0.45 % Savings deposits 60,275 71 0.16 % 67,125 44 0.09 % Interest checking and other demand deposits 238,078 257 0.14 % 249,750 147 0.08 % Certificate accounts 150,651 1691 1.50 % 191,684 328 0.23 % Total deposits 574,948 4,978 1.15 % 703,851 1,173 0.22 % FHLB advances 173,312 6,035 4.64 % 51,063 538 1.40 % Other borrowings 70,957 1,282 2.41 % 71,751 79 0.15 % Total borrowings 244,269 7,317 3.99 % 122,814 617 0.67 % Total interest-bearing liabilities 819,217 $ 12,295 2.00 % 826,665 $ 1,790 0.29 % Non-interest-bearing liabilities 115,363 95,254 Stockholders’ equity 277,841 209,813 Total liabilities and stockholders’ equity $ 1,212,421 $ 1,131,732 Net interest rate spread (2) $ 22,315 2.03 % $ 23,818 2.87 % Net interest rate margin (3) 2.60 % 2.93 % Ratio of interest-earning assets to interest-bearing liabilities 139.73 % 130.90 % (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. 33 Table of Contents Credit Loss Recapture/Provision For the three months ended September 30, 2023, the Company recorded a recapture of credit losses under the Current Expected Credit Loss (“CECL”) methodology of $2 thousand , compared to a loan loss provision under the previously used incurred loss model of $1.0 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the Company recorded a provision for credit loss of $808 thousand , compared to a loan loss provision of $592 thousand for the nine months ended September 30, 2022. The provision for credit losses during the third quarter ended September 30, 2023, decreased by $1.0 million compared to the third quarter ended September 30, 2022, due to a decline in loan origination volume. The Bank originated $14.0 million in loans during the third quarter of 2023 compared to $101.6 million in loans during the third quarter of 2022. The provision for credit losses increased by $216 thousand during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to an increase in loans rated as watch and special mention, which require additional provisions for credit losses. Provisions for credit losses during the third quarter and nine months ended September 30, 2023, include provisions for off-balance sheet loan commitments of $ 69 thousand and $ 106 thousand, respectively. The ACL increased to $6.9 million as of September 30, 2023, compared to $4.4 million as of December 31, 2022. The increase was primarily due to the implementation of the CECL methodology adopted by the Bank effective January 1, 2023, which increased the ACL by $1.8 million in addition to the provision recorded during the nine months ended September 30, 2023 mentioned above. The CECL methodology includes estimates of expected loss rates in the future, whereas the former ALLL methodology did not. The Bank had no non-accrual loans at September 30, 2023. Loan delinquencies for 30 days or more, but less than 90 days, increased to $1.2 million at September 30, 2023, compared to none at December 31, 2022. There were no loans past due by greater than 90 days at either September 30, 2023 or December 31, 2022. No loan charge-offs were recorded during the three or nine months ended September 30, 2023 or 2022. Non-interest Income Non-interest income for the third quarter of 2023 totaled $331 thousand, compared to $365 thousand for the third quarter of 2022. Non-interest income totaled $880 thousand for the first nine months of 2023, compared to $907 thousand for the first nine months of 2022. The decrease was due to lower management fees from new market tax credit projects and l ower grant income received from the U.S. Treasury’s Community Development Financial Institutions Fund in the first nine months of 2023. These decreases were partially offset by fees from a revenue sharing agreement with another financial institution and an increase in branch services fees for the first nine months of 2023, compared to the first nine months of 2022. Non-interest Expense Total non-interest expense was $7.0 million for the third quarter of 2023, representing an increase of $909 thousand, or 15.0%, from $6.1 million for the third quarter of 2022. The increase was primarily due to higher compensation and benefits expense of $940 thousand and supervisory costs of $153 thousand, partially offset by a decrease in professional services expense of $232 thousand. Non-interest expense totaled $19. 7 million for the first nine months of 2023, representing an increase of $1.4 million, or 7.4 %, from $18.3 million for the first nine months of 2022. The increase primarily resulted from increases in compensation and benefits expense of $1.5 million , supervisory costs of $191 thousand and occupancy costs of $145 thousand. These increases were partially offset by decreases in professional services expense of $442 thousand and information services expense of $216 thousand. The increase in compensation and benefits expense was primarily attributable to additional full-time employees that the Bank hired over the past twelve months in various production and administrative support positions. These hires were part of the Company’s overall efforts to expand its operational capabilities to strategically grow its balance sheet and fulfill the intersecting lending objectives of the Company’s mission and the funding received from the Emergency Capital Investment Program of the United States Department of the Treasury. A portion of the increase in compensation expenses during the quarter and first nine months of 2023 pertained to recruiting expenses. Income Taxes Income taxes are computed by applying the statutory federal income tax rate of 21% and the combined California and Washington, D.C. income tax rate of 9.75% to taxable income. The Company recorded income tax expense of $ 39 thousand for the third quarter of 2023 and $534 thousand for the third quarter of 2022. The effective tax rate was 31.2 % for the third quarter of 2023, compared to 28.40% for the third quarter of 2022. 34 Table of Contents For the nine months ended September 30, 2023, income tax expense was $ 806 thousand , compared to $1.7 million for the nine months ended September 30, 2022. The effective tax rate was 29.50 % for the nine months ended September 30, 2023 , compared to 28.35% for the nine months ended September 30, 2022 . Financial Condition Total Assets Total assets increased by $53. 5 million at September 30, 2023, compared to December 31, 2022, reflecting growth in loans receivable held for investment of $67.3 million and growth in FHLB stock of $3.6 million, partially offset by a decrease of securities available-for-sale of $12.3 million and a decrease of cash and cash equivalents of $4.6 million. Securities Available-For-Sale Securities available-for-sale totaled $316.4 million at September 30, 2023, compared with $328.7 million at December 31, 2022. The $12.3 million decrease in securities available-for-sale during the nine months ended September 30, 2023 was primarily due to principal paydowns of $10.5 million and a decline in the fair value of securities of $2.6 million, partially offset by increases in the carrying value of $778 thousand due to the amortization of net discounts. The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of September 30, 2023. The table reflects stated final maturities and does not reflect scheduled principal payments or expected payoffs. The average duration of the portfolio is 2.4 years at September 30, 2023. September 30, 2023 One Year or Less More Than One Year to Five Years More Than Five Years to Ten Years More Than Ten Years Total Carrying Amount Weighted Average Yield Carrying Amount Weighted Average Yield Carrying Amount Weighted Average Yield Carrying Amount Weighted Average Yield Carrying Amount Weighted Average Yield (Dollars in thousands) Available‑for‑sale: Federal agency mortgage‑backed securities $ 4,903 3.68 % $ 1,217 1.59 % $ 9,874 1.47 % $ 49,143 2.72 % $ 65,137 2.58 % Federal agency CMO – – 505 0.87 % 10,490 4.54 % 12,301 3.41 % 23,296 3.86 % Federal agency debt 9,892 2.87 % 32,195 1.96 % 9,487 3.15 % – – 51,574 2.35 % Municipal bonds – – 2,403 1.64 % 343 1.83 % 1,424 1.86 % 4,170 1.73 % U.S. Treasuries 63,543 2.90 % 98,107 2.75 % – – – – 161,650 2.81 % SBA pools – – 100 6.63 % 2,013 2.82 % 8,489 2.88 % 10,602 2.90 % Total $ 78,338 2.95 % $ 134,527 2.53 % $ 32,207 3.05 % $ 71,357 2.84 % $ 316,429 2.75 % Loans Receivable Loans receivable held for investment, net of the ACL, increased by $67.3 million to $835.4 million at September 30, 2023, compared to $768.0 million at December 31, 2022. The increase was primarily due to loan originations of $ 112.2 million during the first nine months of 2023, which consisted of $ 47.4 million of multi-family loans, $36.6 million of construction loans , $15.0 million of other commercial loans and $13.2 million of commercial real estate loans , offset in part by loan payoffs and repayments of $ 44.9 million. 35 Table of Contents The following tables present loan categories by maturity for the period indicated. Actual repayments historically have, and will likely in the future, differ significantly from contractual maturities because individual borrowers generally have the right to prepay loans, with or without prepayment penalties. September 30, 2023 One Year or Less More Than One Year to Five Years More Than Five Years to 15 Years More Than 15 Years Total (Dollars in thousands) Loans receivable held for investment: Single family $ 3,767 $ 8,642 $ 2,511 $ 10,594 $ 25,514 Multi-family 10,440 19,017 7,767 495,465 532,689 Commercial real estate 6,665 67,404 36,582 5,449 116,100 Church 4,690 4,618 3,588 – 12,896 Construction 26,219 30,703 24,891 – 81,813 Commercial - other 14,573 26,812 7,160 16,398 64,943 SBA loans – 3,072 148 4,550 7,770 Consumer 20 – – – 20 $ 66,374 $ 160,268 $ 82,647 $ 532,456 $ 841,745 Loans maturities after one year with: Fixed rates Single family $ 8,147 $ 1,774 $ 6,142 $ 16,063 Multi-family 14,596 3,293 232 18,121 Commercial real estate 60,755 23,751 – 84,506 Church 3,102 – – 3,102 Construction 8,553 22,099 – 30,652 Commercial - other 11,401 6,071 14,160 31,632 SBA loans 2,453 – – 2,453 Consumer – – – – $ 109,007 $ 56,988 $ 20,534 $ 186,529 Variable rates Single family $ 495 $ 737 $ 4,452 $ 5,684 Multi-family 4,421 4,474 495,233 504,128 Commercial real estate 6,649 12,831 5,449 24,929 Church 1,516 3,588 – 5,104 Construction 22,150 2,792 – 24,942 Commercial - other 15,411 1,089 2,238 18,738 SBA loans 619 148 4,550 5,317 Consumer – – – – $ 51,261 $ 25,659 $ 511,922 $ 588,842 Total $ 160,268 $ 82,647 $ 532,456 $ 775,371 Certain multi-family loans have adjustable-rate features based on the Secured Overnight Financing Rate but are fixed for the first five years. Our experience has shown that these loans typically payoff during the first five years and do not reach the adjustable-rate phase. However, in the current high interest rate environment, we have seen more borrowers maintain their loans instead of paying them off due to interest rate caps which make the adjusted interest rate on their existing loan more desirable than getting a new loan at current interest rates. Multi-family loans in their initial fixed period totaled $458.6 million or 54.5% of our loan portfolio as of September 30, 2023. Allowance for Credit Losses Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326 – Financial Instruments-Credit Losses , to determine the ACL. ASC 326 requires the Company to recognize estimates for lifetime losses on loans and off-balance sheet loan commitments at the time of origination or acquisition. The recognition of losses at origination or acquisition represents the Company’s best estimate of the lifetime expected credit loss associated with a loan given the facts and circumstances associated with the particular loan and involves the use of significant management judgment and estimates, which are subject to change based on management’s on-going assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses the WARM method when determining estimates for the ACL for each of its portfolio segments. The weighted average remaining life, including the effect of estimated prepayments, is calculated for each loan pool on a quarterly basis. The Company then estimates a loss rate for each pool using both its own historical loss experience and the historical losses of a group of peer institutions during the period from 2004 through the most recent quarter. Since historical information (such as historical net losses) may not always, by itself, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. 36 Table of Contents The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist of loans on nonaccrual status, loans that have recently been modified in response to a borrower’s deteriorating financial condition, loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans, and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed to no longer possess risk characteristics similar to other loans in the loan portfolio because the specific attributes and risks associated with the loan have likely become unique as the credit quality of the loan deteriorates. As such, these loans may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. The ACL for collateral dependent loans is determined using estimates of the fair value of the underlying collateral, less estimated selling costs. The estimation of the appropriate level of the ACL requires significant judgment by management. Although management uses the best information available to make these estimations, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Changes in management’s estimates of forecasted net losses could materially change the level of the ACL. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process. Such agencies may require the Company to recognize additions to the ACL based on judgments different from those of management. The ACL, formerly known as the allowance for loan losses, was $6.9 million or 0.82% of gross loans held for investment at September 30, 2023, compared to an ALLL of $4.4 million, or 0.57% of gross loans held for investment, at December 31, 2022. There were no recoveries or charge-offs recorded during either the three or nine month periods ending September 30, 2023 and 2022. Collateral dependent loans at September 30, 2023 totaled $6.4 million, which had no associated ACL. Loan delinquencies less than 30 days increased to $10.5 million at September 30, 2023 compared to $8.3 million at December 31, 2022. Loan delinquencies greater than 30 days delinquent, but less than 90 days delinquent, increased to $1.2 million at September 30, 2023 compared to none at December 31, 2022. There were no non-performing loans as of September 30, 2023 compared to $144 thousand as of December 31, 2022. Non-performing loans consist of delinquent loans that are 90 days or more past due and other loans, including loans modified in response to a borrower’s financial difficulty, that do not qualify for accrual status. We believe that the ACL is adequate to cover currently expected losses in the loan portfolio as of September 30, 2023, but there can be no assurance that actual losses will not exceed the estimated amounts. The OCC and the Federal Deposit Insurance Corporation (“FDIC”) periodically review the ACL as an integral part of their examination process. These agencies may require an increase in the ACL based on their judgments of the information available to them at the time of their examinations. The following table details our allocation of the ALLL to the various categories of loans held for investment and the percentage of loans in each category to total loans at the dates indicated: September 30, 2023 December 31, 2022 September 30, 2022 Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans (Dollars in thousands) Single family $ 241 3.03 % $ 109 3.89 % $ 112 4.24 % Multi‑family 4,247 63.29 % 3,273 65.08 % 2,919 63.23 % Commercial real estate 1,021 13.79 % 449 14.85 % 295 12.61 % Church 79 1.53 % 65 2.04 % 54 2.30 % Construction 847 9.72 % 313 5.27 % 408 7.96 % Commercial and SBA 464 8.64 % 175 8.87 % 191 9.66 % Consumer – – 4 – 4 – Total allowance for loan losses $ 6,899 100.00 % $ 4,388 100.00 % $ 3,983 100.00 % Goodwill and Intangible Assets The core deposit intangible asset is amortized on an accelerated basis reflecting the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. The estimated life of the core deposit intangible is approximately 10 years. During the three months ended September 30, 2023 and 2022, the Company recorded $98 thousand and $109 thousand, respectively, of amortization expense related to the core deposit intangible. During the nine months ended September 30, 2023 and 2022, the Company recorded $293 thousand and $326 thousand, respectively, of amortization expense related to the core deposit intangible. 37 Table of Contents An assessment of goodwill impairment was performed by a third party as of December 31, 2022, in which no impairment was determined. No impairment charges were recorded during the nine months ended September 30, 2023 or 2022, for goodwill or the core deposit intangible. Total Liabilities Total liabilities increased by $58.0 million to $962. 6 million at September 30, 2023 from $904.6 million at December 31, 2022, largely due to an increase in FHLB borrowings of $59.4 million and an increase in securities sold under agreements to repurchase of $12.3 million, which was partially offset by a decrease in deposits of $15.4 million . Deposits Deposits decreased by $15.4 million to $671.5 million at September 30, 2023, from $686.9 million at December 31, 2022, with decreases of $29.5 million in the first quarter and $11.5 million in the second quarter, partially offset by an increase of $25.4 million in the third quarter. The decrease in deposits was attributable to decreases of $21.1 million in liquid deposits (demand, interest checking and money market accounts), $10.5 million in Insured Cash Sweep (“ICS”) deposits (ICS deposits are the Bank’s money market deposit accounts in excess of FDIC insured limits whereby the Bank makes reciprocal arrangements for insurance with other banks), and $5.8 million of savings deposits, partially offset by an increase of $18.0 million in Certificate of Deposit Registry Service (“CDARS”) deposits (CDARS deposits are similar to ICS deposits, but involve certificates of deposit, instead of money market accounts) and $4.0 million in other certificates of deposit accounts . The decrease in deposits was primarily due to customers who left the Bank for higher interest rates available elsewhere. As of September 30, 2023, our uninsured deposits, including deposits from affiliates, represented approximately 37% of our total deposits, as compared to approximately 31% as of December 31, 2022. The following table presents the maturity of time deposits as of the dates indicated: Three Months or Less Three to Six Months Six Months to One Year Over One Year Total (In thousands) September 30, 2023 Time deposits of $250,000 or less $ 39,499 $ 36,083 $ 43,578 $ 13,639 $ 132,799 Time deposits of more than $250,000 7,962 7,408 2,087 6,836 24,293 Total $ 47,461 $ 43,491 $ 45,665 $ 20,475 $ 157,092 Not covered by deposit insurance $ 5,212 $ 4,908 $ 837 $ 5,836 $ 16,793 December 31, 2022 Time deposits of $250,000 or less $ 30,244 $ 23,155 $ 49,461 $ 4,281 $ 107,141 Time deposits of more than $250,000 27,912 – – – 27,912 Total $ 58,156 $ 23,155 $ 49,461 $ 4,281 $ 135,053 Not covered by deposit insurance $ 17,913 $ – $ – $ – $ 17,913 Borrowings At September 30, 2023 and December 31, 2022, the Company had outstanding advances from the FHLB totaling $187.7 million and $128.3 million, respectively. The weighted interest rates were 4.42% and 3.74% as of September 30, 2023 and December 31, 2022, respectively. The weighted average contractual maturity was 13 months as of both September 30, 2023 and December 31, 2022, respectively. The advances were collateralized by loans with a fair value of $457.3 million at September 30, 2023 and $328.1 million at December 31, 2022. The Company is currently approved by the FHLB of Atlanta to borrow up to 25% of total assets to the extent the Company provides qualifying collateral and holds sufficient FHLB stock. Based on collateral pledged and FHLB stock as of September 30, 2023, the Company was eligible to borrow an additional $154.3 million as of September 30, 2023. The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obliges the Company 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 Company’s consolidated statements of financial condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. These agreements mature on a daily basis. As of September 30, 2023 securities sold under agreements to repurchase totaled $75.8 million at an average rate of 3.06%. The fair value of securities pledged totaled $71.0 million as of September 30, 2023. As of December 31, 2022, securities sold under agreements to repurchase totaled $63.5 million at an average rate of 0.38%. The fair value of securities pledged totaled $64.4 million as of December 31, 2022. 38 Table of Contents One relationship accounted for 77% of our balance of securities sold under agreements to repurchase as of September 30, 2023. We expect to maintain this relationship for the foreseeable future. In connection with the New Market Tax Credit activities of the Company, CFC 45 is a partnership whose members include CFNMA and City First New Markets Fund II, LLC. This CDE acts in effect as a pass-through for a Merrill Lynch allocation totaling $14.0 million that needed to be deployed. In December 2015, Merrill Lynch made a $14.0 million non-recourse loan to CFC 45, whereby CFC 45 passed that loan through to a QALICB. The loan to the QALICB is secured by a Leasehold Deed of Trust that, due to the pass-through, non-recourse structure, is operationally and ultimately for the benefit of Merrill Lynch rather than CFC 45. Debt service payments received by CFC 45 from the QALICB are passed through to Merrill Lynch in return for which CFC 45 receives a servicing fee. The financial statements of CFC 45 are consolidated with those of the Company. Stockholders’ Equity Stockholders’ equity was $275. 0 million, or 22.2%, of the Company’s total assets, at September 30, 2023, compared to $279.5 million, or 23.6% of the Company’s total assets at December 31, 2022. Upon adoption of CECL on January 1, 2023, the Company recognized a net decrease in retained earnings of $1.3 million. S tockholders’ equity also decreased primarily due to the purchase of unearned shares for the employee stock ownership plan of $3. 4 million and an increase of $1.9 million in the accumulated other comprehensive loss, net of tax. These decreases were offset by year-to-date net earnings of $1.9 million. Book value per share was $13. 48 at September 30, 2023 and $14.11 at December 31, 2022. During the first quarter of 2022, the Company completed the exchange of all the Series A Fixed Rate Cumulative Redeemable Preferred Stock, with an aggregate liquidation value of $3 million, plus accrued dividends, for 149,165 shares of Class A Common Stock at an exchange price of $20.08 per share of Class A Common Stock. During the second quarter of 2022, the Company closed a private placement of shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”), pursuant to a Purchase Agreement with the United States Department of the Treasury (the “Purchaser”) as part of the Emergency Capital Investment Program (“ECIP”), which has provided funding to Minority Depository Institutions and Community Development Financial Institutions to increase access to capital for underserved communities that may have been disproportionately impacted by the economic effects of the COVID-19 pandemic. Pursuant to the Purchase Agreement, the Purchaser acquired an aggregate of 18,750 shares of Series C Preferred Stock for an aggregate purchase price equal to $150.0 million in cash, which is intended to qualify as Tier 1 Capital. In December of 2022, the Company issued a $5 million line of credit the Employee Stock Ownership Plan to purchase additional shares of Company stock for the Plan. In December of 2022, the ESOP purchased 58,369 shares of the Company’s common stock at an average cost of $8.56 per share for a total cost of $500 thousand , and during the first nine months of 2023 the ESOP purchased 369,949 shares of the Company’s stock at an average cost of $9.19 per share for a total cost of $3.4 million. During the second quarter of 2023, the Company issued 92,720 shares of restricted stock to its officers and employees based on performance during 2022 under the Amended LTIP and, during the first quarter of 2022, the Company issued 61,908 shares of restricted stock to its officers and employees based on performance during 2021 under the LTIP. All the shares issued to officers and employees vest over periods ranging from 36 months to 60 months. During the first quarter of 2023 and the first quarter of 2022, the Company issued 9,230 and 5,898 shares of stock, respectively, to its directors which were fully vested. Tangible book value per common share is a non-GAAP measurement that excludes goodwill and the net unamortized core deposit intangible asset, which were both originally recorded in connection with the CFBanc merger. The Company uses this non-GAAP financial measure to provide supplemental information regarding the Company’s financial condition and operational performance. A reconciliation between common book value and tangible book value per common share is shown as follows: Common Equity Capital Shares Outstanding Per Share Amount (Dollars in thousands) September 30, 2023: Common book value $ 124,967 9,268,784 $ 13.48 Less: Goodwill 25,858 Net unamortized core deposit intangible 2,208 Tangible book value $ 96,901 9,268,784 $ 10.45 December 31, 2022: Common book value $ 129,482 9,179,065 $ 14.11 Less: Goodwill 25,858 Net unamortized core deposit intangible 2,501 Tangible book value $ 101,123 9,179,065 $ 11.02 All common stock share amounts and per share amounts above have been retroactively adjusted for the 1-for-8 reverse stock split effective November 1, 2023. See Note 1. 39 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 and 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, or $343.9 million, to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. Based on FHLB stock held and collateral pledged as of September 30, 2023, the Bank had the ability to borrow an additional $154.3 million from the FHLB of Atlanta. In addition, the Bank had additional lines of credit of $10.0 million with other financial institutions as of September 30, 2023. The Bank had unpledged securities of $231.6 million as of September 30, 2023 which could be used as collateral for borrowings from the Federal Reserve Bank under the Bank Term Funding Program. The Bank’s primary uses of funds include originations of loans, withdrawals of and interest payments on deposits, 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, 2023 consisted of $11.5 million in cash and cash equivalents and $231.6 million in securities available-for-sale that were not pledged, compared to $16.1 million in cash and cash equivalents and $250.3 million in securities available-for-sale that were not pledged at December 31, 2022. Currently, we believe the Bank has sufficient liquidity to support growth over the next twelve months and in the longer term. The Bank had commitments to fund $15.1 million in loans that were approved but unfunded as of September 30 , 2023. In addition, the bank had $6.4 million in unfunded line of credit loans and $45.9 million in unfunded construction loans as of September 30, 2023. The Bank has a significant concentration of deposits with five customers that accounted for approximately 21 % of its deposits as of September 30, 2023. The Bank also has a significant concentration of short-term borrowings with one customer that accounted for 77% of the outstanding balance of securities sold under agreements to repurchase as of September 30, 2023. The Bank has long-term relationships with these customers and expects to maintain its relationships with them for the foreseeable future. The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the private placement completed in June of 2022 and previous private placements. The Bank is currently under no prohibition from paying dividends to the Company but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines. The Company recorded consolidated net cash outflows from investing activities of $61.5 million during the nine months ended September 30, 2023, compared to consolidated net cash outflows from investing activities of $275.5 million during the nine months ended September 30, 2022. Net cash outflows from investing activities for the nine months ended September 30, 2023 were primarily due to the funding of new loans, net of repayments, of $70.0 million and purchases of FHLB stock of $7.5 million, partially offset by proceeds from principal paydowns on available-for-sale securities of $10.5 million. Net cash outflows from investing activities during the nine months ended September 30, 2022 were primarily due to purchases of investment securities of $215.5 million and funding of new loans, net of repayments, of $74.2 million, partially offset by $13.9 million in proceeds from principal paydowns on available-for-sale securities. The Company recorded consolidated net cash inflows from financing activities of $52.9 million during the nine months ended September 30, 2023, compared to consolidated net cash inflows of $90.9 million during the nine months ended September 30, 2022. Net cash inflows from financing activities during the nine months ended September 30, 2023 were primarily due to proceeds from FHLB advances of $329.0 million along with a net increase in securities sold under agreements to repurchase of $12.3 million, partially offset by repayments of FHLB advances of $269.6 million and a net decrease in deposits of $15. 4 million. Net cash inflows from financing activities during the nine months ended September 30, 2022 were primarily attributable to proceeds from the private placement of preferred stock of $150.0 million and a net increase of $13. 9 million in securities sold under agreements to repurchase, partially offset by repayments of FHLB advances of $53.0 million and a net decrease in deposits of $19.5 million. 40 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, 2023 and December 31, 2022, the Bank exceeded all capital adequacy requirements to which it is subject and meets the qualifications to be considered “well capitalized.” (See Note 10 – Stockholders’ Equity and Regulatory Matters.) 41 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable