\nBroadway Financial Corporation (\u201cBroadway\u201d, \u201cwe\u201d or the \u201cCompany\u201d) (NASDAQ Capital Market: BYFC), reported consolidated net income of $701 thousand, or $0.01 per diluted share, for the second quarter of 2021, compared to a consolidated net loss of $3.5 million, or $(0.13) per share for the first quarter of 2021 and consolidated net income of $216 thousand, or $0.01 per diluted share, for the second quarter of 2020.\n<\/p>\n
\nResults for the second quarter of 2021 reflect the consolidated operations of CFBanc Corporation (\u201cCFBanc\u201d), including CFBanc\u2019s subsidiary, City First Bank of D.C., National Association, as, on April 1, 2021: (i) CFBanc was merged into Broadway, with Broadway as the surviving entity, and (ii) Broadway\u2019s former subsidiary, Broadway Federal Bank, f.s.b., was merged into City First Bank of D.C., National Association (with City First Bank of D.C., National Association as the surviving entity and the resultant bank being renamed City First Bank, National Association) (collectively, the \u201cMerger\u201d). Accordingly, results for the second quarter of 2021 include the operations of Broadway and its current subsidiary, City First Bank, National Association (the \u201cBank\u201d), whereas results for the first quarter of 2021 and the first half of 2020 include the results of Broadway Financial Corporation and its former subsidiary, Broadway Federal Bank, f.s.b.\n<\/p>\n
\nNet income for the second quarter of 2021 was favorably impacted by an increase of $2.7 million, or 89.4%, in net interest income after loan loss provision compared to the second quarter of 2020, and a grant award of $1.8 million from the U.S. Department of the Treasury\u2019s Community Development Financial Institution (\u201cCDFI\u201d) Fund, and negatively impacted by an effective tax rate of 71.3%, which reflected changes in the assumptions for the Company\u2019s estimated annualized tax expense and an increase of $369 thousand in the valuation allowance on the Company\u2019s deferred tax assets. The issuance of 18,474,000 shares of common stock in the private placements that closed a few days after the Merger triggered a limitation on the use of the Company\u2019s deferred tax assets. As previously disclosed in the Company\u2019s filings with the U.S. Securities and Exchange Commission (the \u201cSEC\u201d), the Company raised $32.9 million in gross proceeds from the sale of common stock in the private placements in the second quarter of 2021.\n<\/p>\n
\nThe net loss during the first quarter of 2021 was primarily due to Merger-related expenses of $5.4 million, which included severance and other compensation costs, and professional service fees.\n<\/p>\n
\nFor the first six months of 2021, the Company reported a net loss of $2.8 million, or $(0.06) per share, compared to net income of $183 thousand, or $0.01 per diluted share for the first six months of 2020. Merger-related costs of $5.6 million, ($4.2 million net of tax) were recorded during the first six months of 2021.\n<\/p>\n
Other Second Quarter Highlights:<\/b><\/p>\n \nChief Executive Officer, Brian Argrett, commented, \u201cThe second quarter marked the beginning of an exciting new chapter for Broadway Financial Corporation, with the completion of the Merger with CFBanc Corporation on April 1 and subsequent receipt of over $30 million of new common equity capital from marquee institutional investors. We are reviewing and enhancing all aspects of our combined organization to ensure that we capture the full value, efficiencies, and synergies from the Merger and effectively seize the forward potential for improved economies of scale. While the second quarter was adversely impacted by one-time tax adjustments that represented almost $1 million in higher income tax expense and an additional $207 thousand of Merger-related costs, we believe that the quarter provided an early and partial glimpse into the potential for enhanced financial performance from the Merger and additional capital.\u201d\n<\/p>\n \n\u201cIn that regard, we expect to deploy our liquid assets over the next few quarters in a prudent expansion of our loan portfolio to increase net interest income, net interest margin, and return on assets, while fulfilling our mission to provide capital and economic opportunities to low-to-moderate income communities in our geographic markets. We have also been building our management team to ensure that we have the critical human capital needed to grow and manage a larger institution, and I am pleased to announce that we have recruited three experienced, talented members for our expanded senior management team for the combined organization.\u201d\n<\/p>\n \n\u201cFinally, I wish to thank all of our dedicated employees who worked tirelessly to successfully complete the merger and private placements and are now energetically focused on pursuing opportunities to improve the combined organization for the benefit of our stockholders and the low-to- moderate income communities that we serve.\u201d\n<\/p>\n Net Interest Income<\/b><\/p>\n Second Quarter of 2021 Compared to First Quarter of 2021<\/b><\/p>\n \nNet interest income for the second quarter of 2021 totaled $5.8 million, representing an increase of $3.0 million over the net interest income of $2.8 million earned for the first quarter of 2021.\n<\/p>\n \nThe increase resulted from higher interest income, primarily due to growth of $527.3 million in average interest-earning assets during the second quarter of 2021, which resulted from the acquisition of $225.9 million of loans, $150.0 million of investments and $84.7 million of cash and cash equivalents in the Merger on April 1, 2021, as well as additional growth in cash balances of $37.5 million since the Merger.\n<\/p>\n \nInterest expense for the second quarter of 2021 increased by $131 thousand over the first quarter of 2021 due to an increase of $395.7 million in average interest-bearing liabilities, which primarily resulted from the assumption of $307.6 million of interest-bearing deposits, $73.9 million of borrowings and $3.2 million of Federal Home Loan Bank (\u201cFHLB\u201d) advances in the Merger. In addition, $46.1 million of non-interest-bearing deposits were assumed in the Merger.\n<\/p>\n \nThe net interest margin decreased to 2.33% for the second quarter of 2021 from 2.40% for the first quarter of 2021 primarily due to lower rates earned on higher balances of interest-earning cash deposits in other banks, which increased to an average balance of $227.0 million during the second quarter compared to an average balance of $98.2 million during the first quarter of 2021. During the second quarter of 2021, the average interest rate earned on the cash deposits decreased to 0.13% from an average rate of 0.14% earned during the first quarter.\n<\/p>\n Second Quarter of 2021 Compared to Second Quarter of 2020<\/b><\/p>\n \nNet interest income increased by $2.8 million to $5.8 million for the second quarter of 2021 from $3.0 million for the second quarter of 2020. The increase in net interest income primarily resulted from additional net interest income earned on assets acquired in the Merger and a decrease in the cost of funds.\n<\/p>\n \nInterest income and fees on loans receivable increased by $1.9 million to $6.3 million for the second quarter of 2021, from $4.4 million for the second quarter of 2020 due to an increase of $166.6 million in the average balance of loans receivable, which increased interest income by $1.7 million, and an increase of 14 basis points in the average yield on loans, which increased interest income by $159 thousand.\n<\/p>\n \nInterest income on securities increased by $375 thousand for the second quarter of 2021, compared to the second quarter of 2020. The increase in interest income on securities primarily resulted from growth in the average balance of securities, which increased by $148.2 million because of securities acquired in the Merger. The higher average balance of securities increased interest income by $430 thousand. This increase was partially offset by the effects of a decrease of 138 basis points in the average interest rate earned on securities, which decreased interest income by $55 thousand.\n<\/p>\n \nOther interest income increased by $70 thousand during the second quarter of 2021 compared to the second quarter of 2020. Interest income on interest-earning cash in other banks increased by $25 thousand for the second quarter of 2021 compared to the second quarter of 2020 primarily due to higher average balances of $186.6 million due to the Merger, which increased interest income by $79 thousand. This increase was partially offset by the effects of lower rates earned on interest-earning deposits in other banks of 33 basis points, which lowered interest income by $54 thousand.\n<\/p>\n \nAlso, the Company recorded higher interest income on regulatory stock due to interest earned on Federal Reserve Board (\u201cFRB\u201d) stock and additional FHLB stock acquired in the Merger, which combined with interest on Broadway\u2019s pre-Merger holdings of FHLB stock, helped to increase interest income by $45 thousand during the second quarter of 2021 compared to the second quarter of 2020.\n<\/p>\n \nInterest expense on deposits decreased by $490 thousand for the second quarter of 2021, compared to the second quarter of 2020. The decrease was attributable to a decrease of 87 basis points in the average rate paid on deposits, which caused interest expense on deposits to decrease by $797 thousand. This decrease was partially offset by the effects of an increase of $306.1 million in the average balance of deposits, primarily because of the Merger, which increased interest expense by $307 thousand.\n<\/p>\n \nInterest expense on borrowings increased by $16 thousand for the second quarter of 2021, compared to the second quarter of 2020 primarily due to an increase in average short term borrowings (securities sold under agreements to repurchase) of $60.1 million and a long term borrowing of $14 million that were assumed in the Merger at an average rate of 0.09%.\n<\/p>\n \nThe net interest margin decreased to 2.33% for the second quarter of 2021 from 2.43% for the second quarter of 2020.\n<\/p>\n First Six Months of 2021 Compared to the First Six Months of 2020<\/b><\/p>\n \nFor the first six months of 2021, net interest income before provisions increased by over $2.7 million to $8.7 million compared to $5.9 million for the first six months of 2020. The increase in net interest income primarily resulted from additional net interest income earned on assets acquired in the Merger and a decrease in the cost of funds.\n<\/p>\n \nInterest income and fees on loans receivable increased by $1.2 million during the first six months of 2021 compared to the first six months of 2020 due to an increase of $50.9 million in the average balance of loans receivable, primarily resulting from the Merger, which increased interest income by over $1.0 million, and an increase of 5 basis points in the average loan yield, due to a higher average yield on the loan portfolio acquired from City First Bank in the Merger, which increased interest income by $116 thousand.\n<\/p>\n \nInterest income on securities increased by $361 thousand for the first six months of 2021, compared to the first six months of 2020. The increase in interest income on securities primarily resulted from an increase of $73.8 million in the average balance of securities because of the Merger, which increased interest income by $469 thousand. This increase was partially offset by the effects of a decrease of 135 basis points in the average interest yield earned on investment securities, which decreased interest income by $108 thousand.\n<\/p>\n \nOther interest income increased $5 thousand during the first six months of 2021 compared to the first six months of 2020. The Company recorded higher interest income on regulatory stock during the first six months of 2021, primarily due to interest earned on FRB and FHLB stock acquired in the Merger, which combined with interest on Broadway\u2019s holdings of FHLB stock, increased interest income by $32 thousand. This increase was partially offset by a decrease of $27 thousand in interest income generated on interest-earning cash in other banks for the first six months of 2021 compared to the first six months of 2020. The decrease was primarily due to a decrease of 65 basis points in the average rate earned on interest-earning cash, which more than offset the positive effects of an increase of $128.4 million in the average balance of interest-earning cash because of the Merger.\n<\/p>\n \nDuring the first six months of 2021, interest expense on deposits decreased by $1.2 million due to a decrease of 90 basis points in the average cost of deposits, which decreased interest expense by $1.3 million. This decrease was partially offset by the effects of an increase of $155.2 million in the average balance of deposits, primarily because of deposits assumed in the Merger, which increased interest expense by $145 thousand.\n<\/p>\n \nDuring the first six months of 2021, interest expense on borrowings decreased by $53 thousand, compared to the first six months of 2020. The decrease in interest expense on borrowings was primarily due to lower rates paid on FHLB advances and Broadway\u2019s junior subordinated debentures, which offset additional interest expenses on borrowings assumed through the Merger.\n<\/p>\n \nThe net interest margin decreased by 10 basis points to 2.35% for the for the first six months of 2021 from 2.45% for the same period in 2020.\n<\/p>\n Loan Loss Provision<\/b><\/p>\n \nAs a smaller reporting company as defined by the SEC, Broadway is not required to adopt the current expected credit losses (\u201cCECL\u201d), accounting standard until 2023; consequently, the Bank\u2019s allowance for loan and lease losses (\u201cALLL\u201d) is based on evidence available at the date of preparation of its financial statements (incurred loss method), rather than projections of future economic conditions over the life of the loans. In determining the adequacy of the ALLL within the context of the current uncertainties posed by the COVID-19 Pandemic, management has considered the historical and current performance of the Bank\u2019s portfolio, as well as various measures of the quality and safety of the portfolio, such as debt service coverage and loan-to-value ratios. The Bank recorded a loan loss provision of $81 thousand during the second quarter and the first six months of 2021 due to growth in the loan portfolio. No loan charge-offs were recorded during the first six months of 2021.\n<\/p>\n \nThe ALLL was $3.3 million or 0.53% of gross loans held for investment at June 30, 2021, compared to $3.2 million, or 0.88% of gross loans held for investment, at March 31, 2021 and December 31, 2020. The ALLL as a percentage of gross loans decreased because acquired loans are recorded at fair value without any ALLL at the acquisition date. The increase in ALLL during the second quarter of 2021 resulted from originating more loans than the amount of loan payoffs during the quarter. The ALLL as a percentage of non-performing loans was 448.4% at June 30, 2021 compared to 423.0% at March 31, 2021 and 408.5% at December 31, 2020. The Bank\u2019s total non-performing assets were $735 thousand at June 30, 2021 compared to $760 thousand at March 31, 2021 and $787 thousand at December 31, 2020. The Bank did not have any real estate owned from foreclosures (\u201cREO\u201d) at June 30, 2021, March 31, 2021, or December 31, 2020.\n<\/p>\n Non-interest Income<\/b><\/p>\n \nNon-interest income for the second quarter of 2021 totaled $2.2 million compared to $242 thousand for the second quarter of 2020. Non-interest income increased by $2.0 million primarily due to a grant of $1.8 million from the CDFI Fund during the second quarter. The Bank fulfilled its performance obligations for the award during the second quarter, and therefore, recorded the award as grant income. Other income during the second quarter of 2021 included $154 thousand in management fees related to New Market Tax Credit projects managed by City First Bank in Washington, D.C. No gain on sale of loans was recorded during the second quarter and first six months of 2021 compared to gains of $116 thousand recorded during the second quarter of 2020 and $123 thousand during the first six months of 2020.\n<\/p>\n \nFor the first six months of 2021, non-interest income totaled $2.3 million compared to $439 thousand for the same period in the prior year. The increase of $1.9 million in non-interest income was primarily due to the grant of $1.8 million received from the CDFI Fund during the second quarter of 2021.\n<\/p>\n Non-interest Expense<\/b><\/p>\n \nNon-interest expense for the second quarter of 2021 totaled $5.4 million, compared to $3.4 million for the second quarter of 2020. The increase of $2.0 million in non-interest expense during the second quarter of 2021 compared to the same quarter of 2020 was primarily due to the inclusion of the non-interest expenses of the acquired operations of the Bank, which included increases of $836 thousand in compensation and benefits expense, $345 thousand in information services expense, $307 thousand in occupancy expense, $93 thousand in loan related expenses, and $82 thousand in supervisory costs. In addition, non-interest expense for the second quarter of 2021 included $207 thousand in Merger-related costs and $131 thousand in amortization of the core deposit intangible that was recorded in connection with the Merger.\n<\/p>\n \nFor the first six months of 2021, non-interest expense totaled $14.0 million, compared to $6.6 million for the same period in the prior year. The increase of $7.4 million in non-interest expense was primarily due to Merger-related expenses of $5.6 million in 2021, as well as the inclusion of the non-interest expenses of the acquired operations of the Bank.\n<\/p>\n Income Tax Expense or Benefit<\/b><\/p>\n \nIncome tax expense or benefit is computed by applying the statutory federal income tax rate of 21%. State taxes are recorded at the State of California tax rate and apportioned based on an allocation schedule to reflect that a portion of the Bank\u2019s operations are conducted in the Washington, D.C. area. The Company recorded income tax expense of $1.8 million during the second quarter, representing an effective rate of 71.3%, and a benefit of $348 thousand during the first six months of 2021. The high effective income tax for the second quarter reflects changes in the assumptions used to estimate the Company\u2019s annual income tax expense. Income tax expense for the second quarter and first six months of 2021 also includes an increase of $369 thousand in the valuation allowance on the Company\u2019s deferred tax assets to record the write down of the tax benefits from net operating losses for the State of California, net of the federal tax benefit. This change in the valuation allowance was required because the shares of common stock issued in the private placements that closed a few days after the Merger triggered a limitation on the use of the deferred tax assets.\n<\/p>\n Balance Sheet Summary<\/b><\/p>\n \nTotal assets increased by $557.6 million to $1.041 billion at June 30, 2021 from $483.4 million at December 31, 2020. The increase in total assets was primarily due to the Merger, which increased total assets by $501.2 million. The following table represents the assets acquired and liabilities assumed in the Merger as of April 1, 2021 (subject to adjustment for up to one year after the Merger date):\n<\/p>\n\n