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Item 2. Management’s Discussion and Analysis

2024-11-13 compared with 2024-08-14 · 234 added, 227 removed, 232 unchanged (67% of the section changed)

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, 2023.

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, 2023.

Certain statements herein are forward-looking statements within the

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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.

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 Policies” of the Notes to Consolidated Financial Statements in our 2023 Form 10-K to gain a better understanding of how our financial performance is measured and

therefore, you are encouraged to review

each of the policies included in Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in our 2023 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

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 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 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.

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.

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

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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.

Total assets decreased by $8.1 million to $1.4 billion at June 30, 2024 from December 31, 2023, primarily due to decreases in securities

available-for-sale of $55.5 million and cash and cash equivalents of $15.4 million, partially offset by growth in net loans of $58.3 million and other assets of $4.1 million.

Loans held for investment, net of the ACL, increased by $58.3 million to $938.7 million at June 30, 2024, compared to $880.5 million at December 31, 2023.

The increase was primarily due to loan

originations of $97.0 million which consisted of $53.8 million in multi-family loans, $21.5 million in commercial real estate loans, $17.5 million in other commercial loans, $3.7 million in construction loans, and $500 thousand in SBA loans,

partially offset by loan payoffs and repayments of $38.7 million.

Deposits increased by $4.7 million to $687.4 million at June 30, 2024, from $682.6 million at December 31, 2023.

The increase in deposits was attributable to an increase of $19.4 million in Insured

Cash Sweep (“ICS”) deposits, partially offset by decreases of $8.4 million in liquid deposits (demand, interest checking, and money market accounts), $3.2 million in savings deposits, $1.7 million in other certificates of deposit accounts and $1.4

million in Certificate of Deposit Registry Service (“CDARS”) deposits.

As of June 30, 2024, our uninsured deposits, including deposits from affiliates, represented 35% of our total deposits, as compared to 37% as of

December 31, 2023.

Total borrowings decreased by $14.9 million to $381.9 million at June 30, 2024, from $396.8 million at December 31, 2023, primarily due to the payoff of two notes

payable totaling $14.0 million during January 2024.

For the three months ended June 30, 2024, the Company reported net income of $269 thousand compared to net income of $243 thousand for the three months ended June 30, 2023.

increase resulted from an increase in net interest income of $650 thousand and a $274 thousand decrease in the provision for credit losses during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, partially

offset by an increase in non-interest expense of $859 thousand during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The increase in non-interest expense was primarily due to a $735 thousand increase in

compensation and benefits expense.

For the six months ended June 30, 2024, the Company reported net income of $105 thousand compared to net income of $1.8 million for the six months ended June 30, 2023.

decrease resulted from an increase in non-interest expense of $2.4 million during the first six months of 2024 compared to the first six months of 2023.

The increase in non-interest expense was primarily due to a $1.4 million increase in

compensation and benefits expense and an $861 thousand increase in professional services expense.

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

using estimates of the fair value of the underlying collateral, less estimated selling costs.

Total assets decreased by $2.3 million at September 30, 2024 compared to December 31, 2023, primarily due to decreases in securities available-for-sale of

$78.5 million, due to maturities and paydowns, cash and cash equivalents of $8.1 million, other assets of $1.3 million, and deferred tax assets of $1.1 million, partially offset by growth in net loans of $86.3 million.

Loans held for investment, net of the ACL, increased by $86.3 million to $966.8 million at September 30, 2024, compared to $880.5 million at December 31, 2023.

The increase was primarily due to

loan originations of $136.2 million during the first nine months of 2024, which consisted of $65.7 million in multi-family loans, $46.6 million in commercial real estate loans, $17.6 million in other commercial loans, $5.5 million in construction

loans, and $800 thousand in SBA loans, partially offset by loan payoffs and repayments of $49.9 million.

Deposits decreased by $10.4 million to $672.2 million at September 30, 2024, from $682.6 million at December 31, 2023.

The decrease in deposits was attributable to a decrease of $33.1 million in

liquid deposits (demand, interest checking, and money market accounts), a decrease of $7.4 million in savings deposits, and a decrease of $2.2 million in Certificate of Deposit Registry Service (“CDARS”) deposits, partially offset by an increase of

$32.2 million in Insured Cash Sweep (“ICS”) deposits and $148 thousand in other certificates of deposit accounts.

As of September 30, 2024, our uninsured deposits, including deposits from affiliates, represented 34%

of our total deposits, as compared to 37% as of December 31, 2023.

Total borrowings increased by $1.6 million to $398.4 million at September 30, 2024, from $396.8 million at December 31, 2023, primarily due to an increase of $16.3

million in securities sold under agreements to repurchase, partially offset by the payoff of two notes payable totaling $14.0 million during January 2024.

For the three months ended September 30, 2024, the Company reported net income attributable to Broadway Financial Corporation ("Broadway") of $522 thousand compared to

net income attributable to Broadway of $91 thousand for the three months ended September 30, 2023, an increase of $431 thousand.

Net loss attributable to common stockholders was $228 thousand during the third quarter of 2024 after

deducting preferred dividends of $750 thousand, compared to net income attributable to common stockholders of $91 thousand for the third quarter of 2023.

For the nine months ended September 30, 2024, the Company reported net income attributable to Broadway of $627 thousand compared to net income attributable to Broadway of $1.9

million for the nine months ended September 30, 2023.

Net loss attributable to common stockholders was $190 thousand during the first nine months of 2024 after deducting preferred dividends of $817 thousand, compared to net income attributable to

common stockholders of $1.9 million for the first nine months of 2023.

The decrease in net income attributable to the Company primarily resulted from an increase in non-interest expense of $3.0 million during the first nine months of 2024,

compared to the first nine months of 2023, primarily due to increases in compensation and benefits expense of $1.4 million and professional services expense of $1.2 million.

The increase in non-interest expense was partially offset by an increase

of $1.5 million in net interest income and a decrease in income tax expense of $508 thousand during the first nine months of 2024, compared to the first nine months of 2023.

Results of Operations

Net Interest Income

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Net interest income before provision for credit losses for the second quarter of 2024 totaled $7.9 million, representing an increase of $650 thousand, or 8.9%, from net

interest income before provision for credit losses of $7.3 million for the second quarter of 2023.

The increase resulted from higher interest income, primarily due to an increase in interest on loans, partially offset by an increase in interest

expense, due to increases in the cost of borrowings and deposits.

The increase in interest income was primarily due to growth of $145.5 million in average loans receivable during the second quarter of 2024, compared to the second quarter of 2023.

In addition, the overall rate earned on interest-earning assets increased by 67 basis points as the Bank earned higher rates on interest-earning deposits, securities, and the loan portfolio.

The net interest margin decreased to 2.41% for the

second quarter of 2024 from 2.52% for the second quarter of 2023, primarily due to an increase in the average cost of funds, which increased to 3.19% for the second quarter of 2024 from 2.12% for the second quarter of 2023, due to higher rates paid

on deposits and borrowings after eleven rate increases by the Federal Open Market Committee of the Federal Reserve (the “FRB”) from March 2022 through December 2023.

Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023

Net interest income before provision for credit losses for the six months ended June 30, 2024, totaled $15.4 million, representing a decrease of $100 thousand, or 0.6%, from

net interest income before provision for credit losses of $15.5 million for the six months ended June 30, 2023.

The decrease resulted from a $7.7 million increase in interest expense, primarily due to an increase in the average cost of funds,

which increased to 3.11% for the first six months of 2024 from 1.76% for the first six months of 2023, due to higher interest rates on deposits and borrowings.

This decrease was partially offset by a $7.6 million increase in interest income for

the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to a 60 basis point increase in the overall rate earned on interest-earning assets as the Bank earned higher rates on interest-earning deposits, the

loan portfolio, and, to a lesser extent, securities, and due to growth of $143.3 million in average loans receivable during the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

The net interest margin decreased to

2.34% for the six months ended June 30, 2024, compared to 2.74% for the six months ended June 30, 2023.

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

Net interest income before provision for credit losses for the third quarter of 2024 totaled $8.3 million, representing an increase of $1.5 million, or 23.0%, from net interest

income before provision for credit losses of $6.8 million for the third quarter of 2023.

The increase resulted from higher interest income of $4.2 million, partially offset by an increase in interest expense of $2.7 million.

The increase in

interest income was primarily due to growth of $141.8 million in average loans receivable and $95.9 million in average interest-earning deposits, which were partially offset by a decline of $71.0 million in average securities during the third

quarter of 2024, compared to the third quarter of 2023.

In addition, the overall rate earned on interest-earning assets increased by 73 basis points as the Bank earned higher rates on the loan portfolio, as well as on interest-earning deposits.

The increase in interest income was partially offset by an increase in the average cost of funds, which increased to 3.23% for the third quarter of 2024 from 2.47% for the third quarter of 2023, due to higher average balances of borrowings and

higher rates paid on deposits.

Net interest margin increased to 2.49% for the third quarter of 2024 from 2.33% for the third quarter of 2023.

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

Net interest income before provision for credit losses for the nine months ended September 30, 2024 totaled $23.8 million, representing an increase of $1.5 million, or 6.5%, from

net interest income before provision for credit losses of $22.3 million for the nine months ended September 30, 2023.

The increase resulted from higher interest income of $11.8 million, partially offset by an increase in interest expense of $10.4

The increase in interest income was primarily due to an increase of $144.1 million in the average balance of loans receivable and an increase of $88.2 million in average interest-bearing deposits, which were partially offset by a decrease

of $47.8 million in average securities.

In addition, interest income increased due to an increase of 63 basis points, or 15.6%, in the overall rate earned on interest-earning assets during the nine months ended September 30, 2024, as the Bank

earned higher rates on the loan portfolio, interest-bearing deposits and stock investments with the Federal Reserve and Federal Home Loan Bank.

The increase in interest income was partially offset by an increase in the average cost of funds, which

increased to 3.14% for the nine months ended September 30, 2024 from 2.00% for the nine months ended September 30, 2023, due to higher average balances of borrowings and higher rates paid on borrowings and deposits.

Net interest margin decreased to

2.38% for the nine months ended September 30, 2024, compared to 2.60% for the nine months ended September 30, 2023.

The following tables set forth the average balances, average yields and costs, and certain other information for the periods indicated.

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For the Three Months Ended

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

(Dollars in thousands)

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Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

For the Six Months Ended

June 30, 2024

June 30, 2023

For the Nine Months Ended

September 30, 2024

September 30, 2023

(Dollars in thousands)

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Provision for Credit Losses

For the three months ended June 30, 2024, the Company recorded a provision for credit losses of $494 thousand , compared to $768 thousand for the three months ended June 30, 2023.

For the six months ended June 30, 2024, the Company recorded a provision for credit losses of $754 thousand , compared to $810 thousand for the six months ended June 30, 2023.

The provisions for credit losses during the three and six months ended June 30, 2024 include recoveries of provisions for credit losses for off-balance

sheet loan commitments of $58 thousand and $2 thousand, respectively.

The provisions for credit losses during the three and six months ended June 30, 2023 include provisions for credit losses for off-balance sheet loan commitments of $83

thousand and $37 thousand, respectively.

The decreases in the provisions for credit losses were primarily due to lower loan originations and declines in the provision for credit losses for off-balance sheet loan commitments.

The allowance for credit losses (“ACL ”) increased to $8.1 million as of June 30, 2024, compared to $7.3 million as of

For the three months ended September 30, 2024, the Company recorded a provision for credit losses of $399 thousand , compared to a recovery of provision for credit losses of $2 thousand for the three months ended September 30, 2023.

For the nine months ended September 30, 2024, the Company recorded a provision for credit losses of

$1.2 million, compared to $808 thousand for the nine months ended September 30, 2023.

The provisions for credit losses during the third quarter and nine months ended September 30, 2024 include recoveries of provisions for credit losses for

off-balance sheet loan commitments of $24 thousand and $26 thousand, respectively.

The increases in the provisions for credit losses during the third quarter and nine months ended September 30, 2024 were primarily due to growth in the loan

The allowance for credit losses (“ACL ”) increased to $8.5 million as of September 30, 2024, compared to $7.3 million as of

December 31, 2023 due to growth in the loan portfolio.

The Bank had two non-accrual loans at June 30, 2024 with total unpaid principal balances of $328 thousand.

No loan charge-offs were recorded during the quarters or six months ended June 30, 2024 or 2023.

The Bank had one non-accrual loan at September 30, 2024 with an unpaid principal balance of $291 thousand.

No loan charge-offs were recorded during the quarters or nine months ended September 30, 2024 or 2023.

Non-interest Income

Non-interest income for the second quarter of 2024 totaled $273 thousand,

compared to $260 thousand for the second quarter of 2023.

For the first six months of 2024, non-interest income totaled $579 thousand, compared to $549 thousand for the same period in the prior year.

The increase was primarily due to

an increase in fees from a revenue sharing agreement with another financial institution.

Non-interest income for the third quarter of 2024 totaled $416 thousand, compared to $331

thousand for the third quarter of 2023.

For the first nine months of 2024, non-interest income totaled $995 thousand, compared to $880 thousand for the same period in the prior year.

Non-interest Expense

Total non-interest expense was $7.3 million for the second quarter of 2024, compared to $6.4 million for the second quarter of 2023, representing an increase of $859 thousand, or 13.4%.

increase was primarily due to an increase of $735 thousand in compensation and benefits expense.

For the first six months of 2024, non-interest expense totaled $15.1 million, representing an increase of $2.4 million, or 19.1%, from $12.7 million for the same period in the

The increase of $2.4 million primarily resulted from increases in compensation and benefits expense of $1.4 million and professional services expense of $861 thousand.

The increase in professional service expense was primarily due to

hiring a third-party firm to assist with reviewing certain general ledger account reconciliations, as well as other professionals, in connection with the Company’s investigation of the weaknesses in internal controls that were identified during

preparation of the financial statements for the third quarter of 2023.

The increases in compensation and benefits expense were primarily attributable to the addition of full-time employees during 2023 in various production and administrative positions as part of the

Bank’s efforts to expand its operational capabilities to grow its balance sheet and fulfill the intersecting lending objectives of the Company’s mission and the ECIP funding received in June 2022.

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

an income tax expense of $146 thousand for the second quarter of 2024 and $93 thousand for the second quarter of 2023.

The increase in tax expense reflected an increase of $78 thousand in pre-tax income between the two periods.

The effective tax

rate was 35.01% for the second quarter of 2024, compared to 27.43% for the second quarter of 2023.

The increase in the effective tax rate was primarily due to the vesting of stock awards.

For the six months ended June 30, 2024, income tax expense was $89 thousand, compared to $767 thousand for the six months ended June 30, 2023.

The decrease in

tax expense reflected a decrease in pretax earnings of $2.4 million between the two periods.

The effective tax rate was 50.28% for the six months ended June 30, 2024 , compared to 29.41% for the six months

ended June 30, 2023 .

The increase in the effective tax rate was primarily due to the vesting of stock awards.

Total non-interest expense was $7.6 million for the third quarter of 2024, compared to $7.0 million for the third quarter of 2023, representing an increase of $613 thousand, or 8.8%.

was primarily due to an increase in professional and accounting fees in connection with the Company’s remediation efforts of the weaknesses in internal controls that were identified during preparation of the financial

statements for the third quarter of 2023.

For the first nine months of 2024, non-interest expense totaled $22.7 million, representing an increase of $3.0 million, or 15.4%, from $19.7 million for the same

period in the prior year.

The increase primarily resulted from increases in compensation and benefits expense of $1.4 million and professional services expense of $1.2 million.

The increase in compensation and benefits expense reflects

the investment in additional executives and staff to support growth and strengthen overall controls and management depth.

As previously reported, the Company hired a new Chief Financial Officer.

The Company also hired a General Counsel and Chief

Risk Officer, Chief Accounting Officer, and Treasurer during the first six months of 2024.

The increase in professional services expense was primarily due to the costs associated with third-party professionals that

were retained in connection with the Company’s investigation of the weaknesses in internal controls that were identified during preparation of the financial statements for the third quarter of 2023.

The Company recorded an income tax expense of $209 thousand for the third quarter of 2024, compared to $39 thousand for the third quarter of 2023.

The increase in income tax expense reflected an

increase of $628 thousand in pre-tax income between the two periods.

The effective tax rate was 27.76% for the third quarter of 2024, compared to 31.20% for the third quarter of 2023.

For the nine months ended September 30, 2024, income tax expense was $298 thousand, compared to $806 thousand for the nine months ended September 30, 2023.

decrease in income tax expense reflected a decrease in pretax earnings of $1.8 million between the two periods.

The effective tax rate was 32.04% for the nine months ended September 30, 2024 , compared to 29.49% for the nine months ended September 30, 2023 .

Financial Condition

Total assets decreased by $8.1 million at June 30, 2024, compared to December 31, 2023, prima rily due to decreases in securities available-for-sale of $55.5

million and cash and cash equivalents of $15.4 million, partially offset by growth in net loans of $58.3 million and other assets of $4.1 million.

Total assets decreased by $2.3 million at September 30, 2024, compared to December 31, 2023, reflecting decreases in securities available-for-sale of $78.5 million, cash and cash equivalents of

$8.1 million, other assets of $1.3 million, and deferred tax assets of $1.1 million, partially offset by growth in net loans of $86.3 million.

Securities Available-For-Sale

Securities available-for-sale totaled $261.5 million at June 30, 2024, compared with $317.0 million at December 31, 2023.

Securities available-for-sale totaled $238.5 million at September 30, 2024, compared with $317.0 million at December 31, 2023.

The $78.5 million decrease in securities

available-for-sale during the six months ended June 30, 2024 was primarily due to maturities and principal paydowns.

The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of June 30, 2024.

available-for-sale during the nine months ended September 30, 2024 was primarily due to maturities and principal paydowns.

The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of September 30, 2024.

The table reflects stated final

maturities and does not reflect scheduled principal payments or expected payoffs.

June 30, 2024

September 30, 2024

One Year or Less

More Than One Year

to Five Years

More Than One Year to Five Years

More Than Five Years to Ten Years

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Loans Receivable

Loans receivable held for investment, net of the ACL, increased by $58.3 million to $938.7 million at June 30, 2024, compared to $880.5 million at December 31,

The increase was primarily due to loan originations of $97.0 million which consisted of $53.8 million in multi-family loans, $21.5 million in commercial real estate loans, $17.5 million in other commercial loans, $3.7 million in

construction loans, and $500 thousand in SBA loans, partially offset by loan payoffs and repayments of $38.7 million.

Loans receivable held for investment, net of the ACL, increased by $86.3 million to $966.8 million at September 30, 2024, compared to $880.5 million at December 31,

The increase was primarily due to loan originations of $136.2 million during the first nine months of 2024, which consisted of $65.7 million in multi-family loans, $46.6 million in commercial real estate loans, $17.6 million in

other commercial loans, $5.5 million in construction loans, and $800 thousand in SBA loans, partially offset by loan payoffs and repayments of $49.9 million.

The following table presents 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.

June 30, 2024

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, 2024

One Year or Less

More Than One Year to Five Years

Five Years to

More Than Five Years to 15 Years

More Than 15 Years

(Dollars in thousands)

12 unchanged sentences

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.

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 $592.4 million or 60.8% of our loan portfolio as of

June 30, 2024.

September 30, 2024.

Allowance for Credit Losses

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 accounts for credit losses on loans in accordance with ASC 326 – Financial Instruments-Credit Losses .

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.

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

1 unchanged sentence

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.

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

collateral dependent loans is determined using estimates of the fair value of the underlying collateral, less estimated selling costs.

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.

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on judgments different from those of management.

The ACL was $8.1 million, or 0.86% of gross loans held for investment at June 30, 2024, compared to an ACL of $7.3 million, or 0.83% of gross loans held for investment, at

The ACL was $8.5 million, or 0.87% of gross loans held for investment at September 30, 2024, compared to an ACL of $7.3 million, or 0.83% of gross loans held for investment, at

December 31, 2023.

There were no recoveries or charge-offs recorded during the three or six month periods ending June 30, 2024 and 2023.

Collateral dependent loans at June 30, 2024 and December 31, 2023 totaled $481 thousand and $6.4 million, respectively.

There were no recoveries or charge-offs recorded during the three or nine month periods ending September 30, 2024 or 2023.

Collateral dependent loans at September 30, 2024 and December 31, 2023 totaled $36 thousand and $6.4 million, respectively.

These loans had an ACL of $0 and $112 thousand as of

June 30, 2024 and December 31, 2023, respectively.

The Bank had non-accrual loans of $328 thousand at June 30, 2024.

Loan delinquencies for 30 days or more, but less than 90 days, decreased to $710

thousand at June 30, 2024, compared to $780 thousand at December 31, 2023.

There was one $5 thousand loan past due by greater than 90 days at June 30, 2024.

There were no loans past due by greater than 90

days at December 31, 2023.

We believe that the ACL is adequate to cover currently expected losses in the loan portfolio as of June 30, 2024, but there can be no assurance that actual losses will not

September 30, 2024 and December 31, 2023, respectively.

The Bank had non-accrual loans of $291 thousand at September 30, 2024.

Loan delinquencies for 30 days or more, but less than 90 days, increased to $1.7

million at September 30, 2024, compared to $780 thousand at December 31, 2023.

There were no loans past due by greater than 90 days at September 30, 2024 or December 31, 2023.

We believe that the ACL is adequate to cover currently expected losses in the loan portfolio as of September 30, 2024, but there can be no assurance that actual losses will not

exceed the estimated amounts.

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the information available to them at the time of their examinations.

The following table details our allocation of the ACL to the various categories of loans held for investment and the percentage of loans in each category to total loans at the

dates indicated:

June 30, 2024

The following table details our allocation of the ACL to the various categories of loans held for investment and the percentage of loans in each category to total loans at the dates

September 30, 2024

December 31, 2023

June 30, 2023

September 30, 2023

Percent of Loans in

Category to Total

Percent of Loans in

Each Category to

Percent of Loans in

(Dollars in thousands)

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Total Liabilities

Total liabilities decreased by $8.5 million to $1.1 billion at June 30, 2024 from December 31, 2023, largely due to decreases of $14.0 million in notes payable and $817

thousand in securities sold under agreements to repurchase, partially offset by increases in deposits of $4.7 million and $1.7 million in accrued expenses and other liabilities.

Deposits increased by $4.7 million to $687.4 million at June 30, 2024, from $682.6 million at December 31, 2023.

The increase in deposits was attributable to an increase of $19.4 million in ICS

deposits, partially offset by decreases of $8.4 million in liquid deposits (demand, interest checking, and money market accounts), $3.2 million in savings deposits, $1.7 million in other certificates of deposit accounts and $1.4 million in CDARS

As of June 30, 2024, our uninsured deposits, including deposits from affiliates, represented 35% of our total deposits, as compared to 37% as of December 31, 2023.

Total liabilities decreased by $6.8 million to $1.1 billion at September 30, 2024 from December 31, 2023, largely due to decreases of $14.0 million in notes payable and $10.4

million in deposits, partially offset by an increase of $16.3 million in securities sold under agreements to repurchase.

Deposits decreased by $10.4 million to $672.2 million at September 30, 2024, from $682.6 million at December 31, 2023.

The decrease in deposits was attributable to a decrease of $33.1 million in

$32.2 million in Insured Cash Sweep (“ICS”) deposits and $148 thousand in other certificates of deposit accounts.

As of September 30, 2024, our uninsured deposits, including deposits from Broadway and other

affiliates, represented 34% of our total deposits, as compared to 37% as of December 31, 2023.

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

(In thousands)

June 30, 2024

September 30, 2024

Time deposits of $250,000 or less

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Not covered by deposit insurance

At June 30, 2024 and December 31, 2023, the Company had outstanding advances from the FHLB totaling $209.2 million.

and $209.3 million, respectively.

At September 30, 2024 and December 31, 2023, the Company had outstanding advances from the FHLB totaling $208.6 million and $209.3 million, respectively.

The weighted interest rate

was 4.91% as of both June 30, 2024 and December 31, 2023.

The weighted average contractual maturity was one month as of June 30, 2024 and two months as of December 31, 2023.

The advances were collateralized by loans with an unpaid balance of

$506.2 million at June 30, 2024 and $435.4 million at December 31, 2023.

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

Based on collateral pledged and FHLB stock as of June 30, 2024, the Company was eligible to borrow an additional $171.4 million as of June 30, 2024.

was 4.35% and 4.91% as of September 30, 2024 and December 31, 2023, respectively.

The weighted average contractual maturity was two months as of both September 30, 2024 and December 31, 2023.

The advances were collateralized by loans with an

unpaid balance of $484.4 million at September 30, 2024 and $435.4 million at December 31, 2023.

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, 2024, the Company was eligible to borrow an additional $133.9 million as of September 30, 2024.

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.

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

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These agreements mature on a daily basis.

As of June 30, 2024 securities sold under agreements to repurchase totaled $72.7 million at an average rate of 3.68%.

The fair value of securities pledged totaled $70.9 million as of June 30,

As of September 30, 2024 securities sold under agreements to repurchase totaled $89.8 million at an average rate of 3.68%.

The fair value of securities pledged totaled $97.6 million as of

September 30, 2024.

As of December 31, 2023, securities sold under agreements to repurchase totaled $73.5 million at an average rate of 2.60%.

The fair value of securities pledged totaled $89.0 million as of December 31, 2023.

One relationship accounted for 95% of our balance of securities sold under agreements to repurchase as of June 30, 2024.

One relationship accounted for 92% of our balance of securities sold under agreements to repurchase as of September 30, 2024.

We expect to maintain this relationship for the

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On December 27, 2023, the Company borrowed $100.0 million from the Federal Reserve under the BTFP.

As of both June 30, 2024 and December 31, 2023, $100.0 million was outstanding.

rate on this borrowing is fixed at 4.84% and the borrowing matures on December 29, 2024.

Investment securities with a fair value of $94.0 million and $98.3 million were pledged as collateral for this borrowing as of June 30, 2024 and December 31,

2023, respectively.

As of both September 30, 2024 and December 31, 2023, $100.0 million was outstanding.

interest rate on this borrowing is fixed at 4.84% and the borrowing matures on December 29, 2024.

Investment securities with a fair value of $94.3 million and $98.3 million were pledged as collateral for this borrowing as of September 30, 2024 and

December 31, 2023, respectively.

There are no prepayment penalties for early payoff.

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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.

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

The loan to the QALICB was 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.

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.

loan to the QALICB was 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.

This loan was paid off on January 18, 2024.

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Stockholders’ Equity

Stockholders’ equity was $282.3 million, or 20.6%, of the Company’s total assets, at June 30, 2024, compared to $281.9 million, or 20.5% of the Company’s total assets at

Stockholders’ equity was $286.4 million, or 20.9%, of the Company’s total assets, at September 30, 2024, compared to $281.9 million, or 20.5% of the Company’s total assets at

December 31, 2023.

Book value per share was $14.49 at June 30, 2024 and $14.65 at December 31, 2023.

Book value per share was $14.97 at September 30, 2024 and $14.65 at December 31, 2023.

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.

All the shares issued to officers and employees vest over periods ranging from 36 months to 60 months.

the shares issued to officers and employees vest over periods ranging from 36 months to 60 months.

On March 26, 2024, the Company issued 94,413 shares of restricted stock to its officers and employees under the Amended and Restated LTIP.

Each restricted stock award was

valued based on the fair value of the stock on the date of the award.

During February of 2023 and May of 2024, the Company issued 9,230 and 19,832 shares of stock, respectively, to its directors under the LTIP and Amended LIP, which were fully

Each restricted stock award was valued

based on the fair value of the stock on the date of the award.

During February of 2023 and May of 2024, the Company issued 9,230 and 19,832 shares of stock, respectively, to its directors under the LTIP and Amended LIP, which were fully vested.

On April 5, 2024, the Company issued 31,645 shares of restricted stock to an officer under the Amended LTIP.

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(Dollars in thousands)

June 30, 2024:

September 30, 2024:

Common book value

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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.

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 $284.3 million, to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock.

Based on FHLB stock held and collateral pledged as of June 30, 2024, the

Bank had the ability to borrow an additional $171.4 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 June 30, 2024.

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 June 30, 2024 consisted of $89.8 million in cash and cash equivalents and $85.0 million in securities available-for-sale that were not pledged, compared to $105.2 million in cash and cash equivalents and

$173.3 million in securities available-for-sale that were not pledged at December 31, 2023.

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 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, 2024, the Bank had the ability to

borrow an additional $133.9 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, 2024.

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

Bank’s liquid assets at September 30, 2024 consisted of $97.1 million in cash and cash equivalents and $35.0 million in securities available-for-sale that were not pledged, compared to $105.2 million in cash and cash equivalents and $186.0 million

in securities available-for-sale that were not pledged at December 31, 2023.

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 $408 thousand in loans that were approved but unfunded as of June 30, 2024.

The Bank had commitments to fund $923 thousand in loans that were approved but unfunded as of September 30, 2024.

In addition, the bank had $3.7 million in unfunded line of credit

loans and $49.2 million in unfunded construction loans as of June 30, 2024.

The Bank has a significant concentration of deposits with two customers that accounted for approximately 12% of its deposits as of June 30, 2024.

loans and $47.5 million in unfunded construction loans as of September 30, 2024.

The Bank has a significant concentration of deposits with two customers that accounted for approximately 12% of its deposits as of September 30, 2024.

The Bank also has a

significant concentration of short-term borrowings with one customer that accounted for 95% of the outstanding balance of securities sold under agreements to repurchase as of June 30, 2024.

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.

significant concentration of short-term borrowings with one customer that accounted for 92% of the outstanding balance of securities sold under agreements to repurchase as of September 30, 2024.

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 $3.3 million during the six months ended June 30, 2024, compared to $53.7 million during the

six months ended June 30, 2023.

Net cash outflows from investing activities for the six months ended June 30, 2024 were primarily due to the funding of new loans, net of repayments, of $59.1 million, partially offset by proceeds from principal

paydowns on available-for-sale securities of $56.0 million.

Net cash outflows from investing activities during the six months ended June 30, 2023 were primarily due to funding of new loans, net of repayments, of $58.7 million, partially offset by

$6.8 million in proceeds from principal paydowns on available-for-sale securities.

The Company recorded consolidated net cash outflows from financing activities of $10.2 million during the six months ended June 30, 2024, compared to consolidated net cash

inflows of $46.2 million during the six months ended June 30, 2023.

Net cash outflows from financing activities during the six months ended June 30, 2024 were primarily due to the $14.0 million repayment of notes payable, partially offset by a net

increase in deposits of $4.7 million.

Net cash inflows from financing activities during the six months ended June 30, 2023 were primarily attributable to proceeds from FHLB advances of $82.0 million, partially offset by a net decrease in deposits

of $40.9 million.

The Company recorded consolidated net cash outflows from investing activities of $2.7 million during the nine months ended September 30, 2024, compared to $61.5 million during the

nine months ended September 30, 2023.

Net cash outflows from investing activities for the nine months ended September 30, 2024 were primarily due to the funding of new loans, net of repayments, of $87.6 million, partially offset by proceeds from

principal paydowns on available-for-sale securities of $85.1 million.

Net cash outflows from investing activities during the nine months ended September 30, 2023 were primarily due to funding of new loans, net of repayments, of $70.0 million,

partially offset by $10.5 million in proceeds from principal paydowns on available-for-sale securities.

The Company recorded consolidated net cash outflows from financing activities of $9.6 million during the nine months ended September 30, 2024, compared to consolidated net cash

inflows of $52.9 million during the nine months ended September 30, 2023.

Net cash outflows from financing activities during the nine months ended September 30, 2024 were primarily due to repayments of FHLB advances of $176.7 million and the $14.0

million repayment of notes payable, partially offset by proceeds from FHLB advances of $176.0 million.

Net cash inflows from financing activities during the nine months ended September 30, 2023 were primarily attributable to proceeds from FHLB

advances of $329.0 million, partially offset by repayments of FHLB advances of $269.6 million.

Capital Resources and Regulatory Capital

6 unchanged sentences

amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

As of June 30, 2024 and December 31, 2023, the Bank exceeded all capital adequacy requirements to which it

is subject and meets the qualifications to be considered “well capitalized.” (See Note 10 – Regulatory Matters.)

As of September 30, 2024 and December 31, 2023, the Bank exceeded all capital adequacy requirements to

which it is subject and meets the qualifications to be considered “well capitalized.” (See Note 10 – Regulatory Matters.)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis