BYFC US Equity☆

10-K

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brhc10022486_10k.htm

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10‐K

(Mark one)

For the fiscal year ended December 31, 2020

For the transition period from to___________

Commission file number 001‐39043

BROADWAY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

5055 Wilshire Boulevard, Suite 500 Los Angeles, California 90036

(Address of principal executive offices) (Zip Code)

(323) 634‐1700

(Registrant’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‐known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that

the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‐T during the preceding 12 months (or for such shorter

period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‐K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or

information statements incorporated by reference in Part III of this Form 10‐K or any amendment to this Form 10‐K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‐accelerated, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated

filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‐2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐

Non‐accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to

Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‐2 of the Exchange Act). Yes ☐ No ☒

State the aggregate market value of the voting and non‐voting common equity held by non‐affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such

common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $54,555,000.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the

Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of March 26, 2021, 19,142,498 shares of the Registrant’s voting common stock and

8,756,396 shares of the Registrant’s non‐voting common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2021 annual meeting of stockholders, which will be filed no later than April 30, 2021, are incorporated by reference in Part III, Items 10 through 14 of

this report.

TABLE OF CONTENTS

PART I

Item 1. Business 1

Item 2. Properties 22

Item 3. Legal Proceedings 23

Item 4. Mine Safety Disclosure 23

PART II

Item 8. Financial Statements and Supplementary Data 35

Item 9A. Controls and Procedures 35

Item 9B. Other Information 36

PART III

Item 10. Directors, Executive Officers and Corporate Governance 37

Item 11. Executive Compensation 37

Item 14. Principal Accountant Fees and Services 37

PART IV

Item 15. Exhibits and Financial Statement Schedules 38

Signatures 41

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Forward‐Looking Statements

Certain statements herein, including without limitation, certain matters discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10‐K, are

forward‐looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, that reflect our current views with respect to future

events and financial performance. Forward‐looking statements typically include the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” and other similar expressions. These forward‐looking statements are

subject to risks and uncertainties, including those identified below, 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‐K. 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.

The following factors, among others, could cause future results to differ materially from historical results or from those anticipated by forward‐looking statements included in this Form 10‐K: (1) the level of demand

for mortgage loans, which is affected by such external factors as general economic conditions, market interest rate levels, tax laws and the demographics of our lending markets; (2) the direction and magnitude of changes in interest rates and the

relationship between market interest rates and the yield on our interest‐earning assets and the cost of our interest‐bearing liabilities; (3) the rate and amount of loan losses incurred and projected to be incurred by us, increases in the amounts of

our nonperforming assets, the level of our loss reserves and management’s judgments regarding the collectability of loans; (4) changes in the regulation of lending and deposit operations or other regulatory actions, whether industry-wide or focused

on our operations, including increases in capital requirements or directives to increase loan loss allowances or make other changes in our business operations; (5) legislative or regulatory changes, including those that may be implemented by the

current Administration in Washington, D.C.; (6) actions undertaken by both current and potential new competitors; (7) the possibility of adverse trends in property values or economic trends in the residential and commercial real estate markets in

which we compete; (8) the effect of changes in economic conditions; (9) the effect of geopolitical uncertainties; (10) an inability to obtain and retain sufficient operating cash at our holding company; (11) the pending discontinuation of LIBOR as an

interest rate benchmark; (12) the impact of the COVID-19 Pandemic on our future financial condition and operations; (13) combining the Company and CFBanc Corporation after the merger described herein may be more difficult, costly or time consuming

than expected and the combined company may fail to realize the anticipated benefits and cost savings from the merger; and (14) other risks and uncertainties detailed in this Form 10‐K, including those described in Part II, Item 7 “Management’s

Discussion and Analysis of Financial Condition and Results of Operations.”

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PART I

ITEM 1. BUSINESS

General

Broadway Financial Corporation (the “Company”) was incorporated under Delaware law in 1995 for the purpose of acquiring and holding all of the outstanding capital stock of Broadway Federal Savings and Loan Association

(“Broadway Federal” or the “Bank”) as part of the Bank’s conversion from a federally chartered mutual savings association to a federally chartered stock savings bank. In connection with the conversion, the Bank’s name was changed to Broadway Federal

Bank, f.s.b. The conversion was completed, and the Bank became a wholly‐owned subsidiary of the Company, in January 1996.

The Company is currently regulated by the Board of Governors of the Federal Reserve System (“FRB”). The Bank is currently regulated by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit

Insurance Corporation (“FDIC”). The Bank’s deposits are insured up to applicable limits by the FDIC. The Bank is also a member of the Federal Home Loan Bank of San Francisco (“FHLB”). See “Regulation” for further descriptions of the regulatory

systems to which the Company and the Bank are subject.

On August 25, 2020, the Company entered into a definitive agreement to merge with CFBanc Corporation, a District of Columbia benefit corporation (“City First”). The Merger Agreement provides that, among other things

and subject to the terms and conditions of the Merger Agreement, City First will merge with and into the Company (the “City First Merger”), with the Company continuing as the surviving entity. At the effective time of the City First Merger, (1) each

share of City First’s Class A Common Stock, par value $0.50 per share, and Class B Common Stock, par value $0.50 per share, issued and outstanding immediately prior to the Effective Time (other than any shares owned by City First or the Company and

any Dissenting Shares (as defined in the Merger Agreement)) will be converted into 13.626 validly issued, fully paid and nonassessable shares, respectively, of the voting common stock of the Company, par value $0.01 per share, which will be renamed

Class A Common Stock, and a new class of non-voting common stock of the Company, par value $0.01 per share, which will be named Class B Common Stock, and (2) each share of Fixed Rate Cumulative Redeemable Perpetual Preferred Stock, Series B, par

value $0.50 per share, of City First (“City First Preferred Stock”) issued and outstanding immediately prior to the effective time of the City First Merger will be converted into one validly issued, fully paid and non-assessable share of a new series

of preferred stock of the Company, which new series will be designated as the Company’s Fixed Rate Cumulative Redeemable Perpetual Preferred Stock, Series A, with such rights, preferences, privileges and voting powers, and limitations and

restrictions thereof, which taken as a whole, are not materially less favorable to the holders of City First Preferred Stock than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof of City First Preferred

Stock. Immediately following the City First Merger, the Bank will merge with and into City First Bank of D.C., National Association (“CFB”), a wholly owned subsidiary of City First, with CFB continuing as the surviving entity.

On March 17, 2021, the stockholders of the Company and the stockholders of City First voted to approve the merger as described above. The Company previously announced on January 4, 2021 that all regulatory approvals

necessary for consummation of the merger had been obtained. The merger is expected to close on April 1, 2021.

Also, on March 17, 2021, the Company’s stockholders approved the proposed sale of 18,474,000 shares of Broadway common stock in private placements to institutional and accredited investors at a purchase price of $1.78

per share for an aggregate purchase price of $32.9 million. These private placements of common stock are expected to close a few days after the merger. At the same meeting, the Company’s stockholders also voted to approve an amendment to the

Company’s certificate of incorporation to increase the Company’s authorized number of shares of voting common stock to 75,000,000 and to convert the Company to a “public benefit corporation” under Delaware law. Delaware law provides that a public

benefit corporation is a for-profit corporation that is intended to produce a public benefit or benefits specified in its certificate of incorporation and to operate in a responsible and sustainable manner.

Available Information

Our internet website address is www.broadwayfederalbank.com. Our annual reports on Form 10‐K, quarterly reports on Form 10‐Q, current reports on Form 8‐K and all amendments to those reports can be obtained free of

charge by sending a written request to Broadway Financial Corporation, 5055 Wilshire Boulevard, Suite 500, Los Angeles, California 90036 Attention: Alice Wong. The above reports are available on our website as soon as reasonably practicable after we

file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”).

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Business Overview

We are headquartered in Los Angeles, California and our principal business is the operation of our wholly‐owned subsidiary, Broadway Federal, which has two offices in Los Angeles and one in the nearby city of

Inglewood, California. Broadway Federal’s principal business consists of attracting deposits from the general public in the areas surrounding our branch offices and investing those deposits, together with funds generated from operations and

borrowings, primarily in mortgage loans secured by residential properties with five or more units (“multi‐family”) and commercial real estate. Our assets also include mortgage loans secured by residential properties with one‐to‐four units (“single

family”) that we originated or purchased in prior years. In addition, we invest in securities issued by federal government agencies, residential mortgage‐backed securities and other investments.

Our revenue is derived primarily from interest income on loans and investments. Our principal costs are interest expenses that we incur on deposits and borrowings, together with general and administrative expenses. Our

earnings are significantly affected by general economic and competitive conditions, particularly monetary trends and conditions, including changes in market interest rates and the differences in market interest rates for the interest bearing deposits

and borrowings that are our principal funding sources and the interest yielding assets in which we invest, as well as government policies and actions of regulatory authorities.

The ongoing COVID-19 Pandemic (“Pandemic”) has caused significant disruption in the local, national and global economies and financial markets. Continuation and further spread of the Pandemic could cause additional

quarantines, shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The Pandemic could disrupt our operations through its impact on our

employees, depositors, borrowers, and the tenants of our multi-family loan borrowers. The disruptions in the economy may impair the ability of our borrowers to make their monthly loan payments, which could result in significant increases in

delinquencies, defaults, foreclosures, declining collateral values, and losses on our loans.

The Pandemic may also materially disrupt banking and other financial activity generally and in the Southern California area in which the Bank operates. This may result in a decline in customer demand for our products

and services, including loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, operations, consolidated financial

condition, and consolidated results of operations.

In response to the anticipated economic effects of the Pandemic, the FRB has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result

in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the Federal Reserve reduced the target federal funds rate by 50 basis points. On March 15, 2020, the Federal

Reserve further reduced the target federal funds rate by 100 basis points and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the Pandemic. On March 22, 2020, the Federal Reserve announced

that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities. We expect that these reductions in interest rates, among other

actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability.

Lending Activities

General

Our loan portfolio is comprised primarily of mortgage loans which are secured by multi‐family residential properties, single family residential properties and commercial real estate, including churches. The remainder

of the loan portfolio consists of commercial business loans, construction loans and consumer loans. At December 31, 2020, our net loan portfolio, excluding loans held for sale, totaled $360.1 million, or 75% of total assets.

We emphasize the origination of adjustable‐rate mortgage loans (“ARM Loans”), most of which are hybrid ARM Loans (ARM Loans having an initial fixed rate period, followed by an adjustable rate period), for our portfolio

of loans held for investment and held for sale. We originate these loans in order to maintain a high percentage of loans that have provisions for periodic repricing, thereby reducing our exposure to interest rate risk. At December 31, 2020, more than

97.2% of our mortgage loans had adjustable rate features. However, most of our adjustable rate loans behave like fixed rate loans for periods of time because the loans may still be in their initial fixed‐rate period or may be subject to interest rate

floors. ARM Loans in their initial fixed‐rate period totaled $293.3 million or 81.0% of our gross loan portfolio at December 31, 2020.

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The types of loans that we originate are subject to federal laws and regulations. The interest rates that we charge on loans are affected by the demand for such loans, the supply of money available for lending purposes

and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, including the FRB, and legislative tax policies.

The following table details the composition of our portfolio of loans held for investment by type, dollar amount and percentage of loan portfolio at the dates indicated:

December 31,

(Dollars in thousands)

Plus:

Less:

Multi‐Family and Commercial Real Estate Lending

Our primary lending emphasis has been on the origination of loans for apartment buildings with five or more units. These multi‐family loans amounted to $272.4 million and $287.4 million at December 31, 2020 and 2019,

respectively. Multi‐family loans represented 75% of our gross loan portfolio at December 31, 2020 compared to 72% of our gross loan portfolio at December 31, 2019. The vast majority of our multi‐family loans amortize over 30 years. As of December 31,

2020, our single largest multi‐family credit had an outstanding balance of $6.9 million, was current, and was secured by a 33‐unit apartment complex in Vista, California. At December 31, 2020, the average balance of a loan in our multi‐family

portfolio was $1.0 million.

Our commercial real estate loans amounted to $24.3 million and $14.7 million at December 31, 2020 and 2019, respectively. Commercial real estate loans represented 7% and 4% of our gross loan portfolios at December 31,

2020 and 2019, respectively. All the commercial real estate loans outstanding at December 31, 2020 were ARM Loans. Most commercial real estate loans are originated with principal repayments on a 30 year amortization schedule but are due in 10 years.

As of December 31, 2020, our single largest commercial real estate credit had an outstanding principal balance of $5.7 million, was current, and was secured by a charter school building located in Washington, D. C. At December 31, 2020, the average

balance of a loan in our commercial real estate portfolio was $1.4 million.

The interest rates on multi‐family and commercial ARM Loans are based on a variety of indices, including the 6‐Month London InterBank Offered Rate Index (“6‐Month LIBOR”), the 1‐Year Constant Maturity Treasury Index

(“1‐Yr CMT”), the 12‐Month Treasury Average Index (“12‐MTA”), the 11th District Cost of Funds Index (“COFI”), and the Wall Street Journal Prime Rate (“Prime Rate”). We currently offer adjustable rate loans with interest rates that adjust either

semi‐annually or semi‐annually upon expiration of an initial three‐ or five‐year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans.

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Loans secured by multi‐family and commercial properties are granted based on the income producing potential of the property and the financial strength of the borrower. The primary factors considered include, among

other things, the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to required principal and interest payments, or debt service), and the ratio of

the loan amount to the lower of the purchase price or the appraised value of the collateral.

We seek to mitigate the risks associated with multi‐family and commercial real estate loans by applying appropriate underwriting requirements, which include limitations on loan‐to‐value ratios and debt service coverage

ratios. Under our underwriting policies, loan‐to‐value ratios on our multi‐family and commercial real estate loans usually do not exceed 75% of the lower of the purchase price or the appraised value of the underlying property. We also generally

require minimum debt service coverage ratios of 120% for multi‐family loans and 125% for commercial real estate loans. Properties securing multi‐family and commercial real estate loans are appraised by management‐approved independent appraisers.

Title insurance is required on all loans.

Multi‐family and commercial real estate loans are generally viewed as exposing the lender to a greater risk of loss than single family residential loans and typically involve higher loan principal amounts than loans

secured by single family residential real estate. Because payments on loans secured by multi‐family and commercial real properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject

to adverse conditions in the real estate market or general economy. Adverse economic conditions in our primary lending market area could result in reduced cash flows on multi‐family and commercial real estate loans, vacancies and reduced rental rates

on such properties. We seek to reduce these risks by originating such loans on a selective basis and generally restrict such loans to our general market area. In 2008, we ceased out‐of‐state lending for all types of loans. In 2020, we resumed

out-of-state lending on a selective basis by originating two commercial real estate loans in Washington, D. C., totaling $9.8 million. As of December 31, 2020, our out‐of‐state loans totaled $11.0 million and our single largest out‐of‐state credit

had an outstanding balance of $5.7 million, was current, and was secured by a charter school building located in Washington, D. C.

Our church loans totaled $16.7 million and $21.3 million at December 31, 2020 and 2019, respectively, which represented 5% of our gross loan portfolio at December 31, 2020, and December 31, 2019. We ceased originating

church loans in 2010. As of December 31, 2020, our single largest church loan had an outstanding balance of $1.5 million, was current, and was secured by a church building in Los Angles, California. At December 31, 2020, the average balance of a loan

in our church loan portfolio was $527 thousand.

Single Family Mortgage Lending

While we have been primarily a multi‐family and commercial real estate lender, we also have purchased or originated ARM Loans secured by single family residential properties, including investor‐owned properties, with

maturities of up to 30 years. Single family loans totaled $48.2 million and $72.9 million at December 31, 2020 and 2019, respectively. Of the single family residential mortgage loans outstanding at December 31, 2020, more than 99% had adjustable rate

features. We did not purchase any single family loans during 2020 and 2019. Of the $48.2 million of single family loans at December 31, 2020, $5.8 million are secured by investor‐owned properties.

The interest rates for our single family ARM Loans are indexed to COFI, 1‐Month LIBOR, 6‐Month LIBOR, 12‐MTA and 1‐Yr. CMT. We currently offer loans with interest rates that adjust either semi‐annually or semi‐annually

upon expiration of an initial three‐ or five‐year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans. Most of our single family adjustable rate loans behave like fixed rate loans because the loans are

still in their initial fixed rate period or are subject to interest rate floors.

We qualify our ARM Loan borrowers based upon the fully indexed interest rate (LIBOR or other index plus an applicable margin) provided by the terms of the loan. However, we may discount the initial rate paid by the

borrower to adjust for market and other competitive factors. The ARM Loans that we offer have a lifetime adjustment limit that is set at the time that the loan is approved. In addition, because of interest rate caps and floors, market rates may

exceed or go below the respective maximum or minimum rates payable on our ARM Loans.

The mortgage loans that we originate generally include due‐on‐sale clauses, which provide us with the contractual right to declare the loan immediately due and payable if the borrower transfers ownership of the

property.

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Construction Lending

Construction loans totaled $429 thousand and $3.1 million at December 31, 2020 and 2019, respectively, representing less than 1% of our gross loan portfolio. We provide loans for the construction of single family,

multi‐family and commercial real estate projects and for land development. We generally make construction and land loans at variable interest rates based upon the Prime Rate. Generally, we require a loan‐to‐value ratio not exceeding 75% to 80% and a

loan‐to‐cost ratio not exceeding 70% to 80% on construction loans.

Construction loans involve risks that are different from those for completed project lending because we advance loan funds based upon the security and estimated value at completion of the project under construction. If

the borrower defaults on the loan, we may have to advance additional funds to finance the project’s completion before the project can be sold. Moreover, construction projects are affected by uncertainties inherent in estimating construction costs,

potential delays in construction schedules, market demand and the accuracy of estimates of the value of the completed project considered in the loan approval process. In addition, construction projects can be risky as they transition to completion

and lease‐up. Tenants who may have been interested in leasing a unit or apartment may not be able to afford the space when the building is completed, or may fail to lease the space for other reasons such as more attractive terms offered by competing

lessors, making it difficult for the building to generate enough cash flow for the owner to obtain permanent financing. During 2020, $1.5 million of construction loans were originated, compared to $1.7 million during 2019.

Loan Originations, Purchases and Sales

The following table summarizes loan originations, purchases, sales and principal repayments for the periods indicated:

(In thousands)

Gross loans (1):

Loans originated:

Less:

Loan charge‐offs - ‐ ‐

Lower of cost or fair value adjustment on loans held for sale - (11 ) 11

Transfer of loans to real estate owned - ‐ ‐

Loan originations are derived from various sources including our loan personnel, local mortgage brokers, and referrals from customers. More than 90% of multi-family and commercial loan originations during 2020, 2019

and 2018 were sourced from wholesale loan brokers. All construction loan originations were derived from our loan personnel. No single family or consumer loans were originated during the last three years. For all loans that we originate, upon receipt

of a loan application from a prospective borrower, a credit report is ordered, and certain other information is verified by an independent credit agency and, if necessary, additional financial information is requested. An appraisal of the real estate

intended to secure the proposed loan is required to be performed by an independent licensed or certified appraiser designated and approved by us. The Bank’s Board of Directors (the “Board”) annually reviews our appraisal policy. Management reviews

annually the qualifications and performance of independent appraisers that we use.

It is our policy to obtain title insurance on collateral for all real estate loans. Borrowers must also obtain hazard insurance naming Broadway Federal as a loss payee prior to loan closing. If the original loan amount

exceeds 80% on a sale or refinance of a first trust deed loan, we may require private mortgage insurance and the borrower is required to make payments to a mortgage impound account from which we make disbursements to pay private mortgage insurance

premiums, property taxes and hazard and flood insurance as required.

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The Board has authorized the following loan approval limits: if the total of the borrower’s existing loans and the loan under consideration is $1,000,000 or less, the new loan may be approved by a Senior Underwriter

plus a Loan Committee member, including the Chief Executive Officer or Chief Credit Officer of the Bank; if the total of the borrower’s existing loans and the loan under consideration is from $1,000,001 to $2,000,000, the new loan must be approved by

a Senior Underwriter plus two Loan Committee members, including the Chief Executive Officer or Chief Credit Officer of the Bank; if the total of the borrower’s existing loans and the loan under consideration is from $2,000,001 to $7,000,000, the new

loan must be approved by a Senior Underwriter plus two Loan Committee members, including the Chief Executive Officer and Chief Credit Officer of the Bank, and a majority of the Board‐appointed non‐management Loan Committee Directors. In addition, it

is our practice that all loans approved be reported to the Loan Committee no later than the month following their approval and be ratified by the Board.

From time to time, we purchase loans originated by other institutions based upon our investment needs and market opportunities. The determination to purchase specific loans or pools of loans is subject to our

underwriting policies, which consider, among other factors, the financial condition of the borrowers, the location of the underlying collateral properties and the appraised value of the collateral properties. We did not purchase any loans during the

years ended December 31, 2020, 2019 or 2018.

We originate loans for investment and for sale. Loan sales are generally made from the loans held‐for‐sale portfolio. During 2020, we originated $118.6 million of multi‐family loans for sale, sold $104.3 million of

multi‐family loans and transferred $13.7 million of multi family loans to held for investment from loans held for sale. We transferred the $13.7 milion of multi-family loans to loans held for investment near the end of 2020 because there was room to

do so within the regulatory loan concentration guidelines. During 2019, we originated $15.2 million of multi‐family loans for sale, transferred $1.5 million of multi‐family loans to held‐for‐sale from held‐for‐investment and sold $22.7 million of

multi‐family loans in order to comply with regulatory loan concentration guidelines.

We receive monthly loan servicing fees on loans sold and serviced for others, primarily insured financial institutions. Generally, we collect these fees by retaining a portion of the loan collections in an amount equal

to an agreed percentage of the monthly loan installments, plus late charges and certain other fees paid by the borrowers. Loan servicing activities include monthly loan payment collection, monitoring of insurance and tax payment status, responses to

borrower information requests and dealing with loan delinquencies and defaults, including conducting loan foreclosures. At December 31, 2020 and 2019, we serviced $238 thousand and $1.2 million, respectively, of loans for others. The servicing rights

associated with sold loans are recorded as assets based upon their fair values. At December 31, 2020 and 2019, we had $3 thousand and $9 thousand, respectively, in mortgage servicing rights.

Loan Maturity and Repricing

The following table shows the contractual maturities of loans in our portfolio of loans held for investment at December 31, 2020 and does not reflect the effect of prepayments or scheduled principal amortization.

(In thousands)

Amounts Due:

After one year:

Loans in their initial fixed rate period totaled $293.3 million or 81% of our loan portfolio at December 31, 2020. The average remaining initial fixed rate period as of December 31, 2020 was 2.3 years.

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Asset Quality

General

The underlying credit quality of our loan portfolio is dependent primarily on each borrower’s ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of

the collateral securing the loan, if any. A borrower’s ability to pay typically is dependent, in the case of single family residential loans and consumer loans, primarily on employment and other sources of income, and in the case of multi‐family and

commercial real estate loans, on the cash flow generated by the property, which in turn is impacted by general economic conditions. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrower’s

ability to make loan payments. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, property maintenance and collection or foreclosure delays.

Delinquencies

We perform a weekly review of all delinquent loans and a monthly loan delinquency report is made to the Internal Asset Review Committee of the Board of Directors. When a borrower fails to make a required payment on a

loan, we take several steps to induce the borrower to cure the delinquency and restore the loan to current status. The procedures we follow with respect to delinquencies vary depending on the type of loan, the type of property securing the loan, and

the period of delinquency. In the case of residential mortgage loans, we generally send the borrower a written notice of non‐payment promptly after the loan becomes past due. In the event payment is not received promptly thereafter, additional

letters are sent, and telephone calls are made. If the loan is still not brought current and it becomes necessary for us to take legal action, we generally commence foreclosure proceedings on all real property securing the loan. In the case of

commercial real estate loans, we generally contact the borrower by telephone and send a written notice of intent to foreclose upon expiration of the applicable grace period. Decisions not to commence foreclosure upon expiration of the notice of

intent to foreclose for commercial real estate loans are made on a case‐by‐case basis. We may consider loan workout arrangements with commercial real estate borrowers in certain circumstances.

The following table shows our loan delinquencies by type and amount at the dates indicated:

Loans delinquent Loans delinquent Loans delinquent

(Dollars in thousands)

Single family - $ - ‐ $ ‐ 1 $ 18 ‐ $ ‐ 1 $ 35 ‐ $ -

Total $ - ‐ $ ‐ 1 $ 18 ‐ $ ‐ 1 $ 35 ‐ $ ‐

(1) Includes loans receivable held for sale at December 31, 2018.

Non‐Performing Assets

Non‐performing assets (“NPAs”) include non‐accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure (“REO”). NPAs at December 31, 2020 increased to $787 thousand, or 0.16% of total assets,

from $424 thousand, or 0.10% of total assets, at December 31, 2019.

Non-accrual loans consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings (“TDRs”) that do not qualify for accrual status. As of December 31, 2020, all our

non‐accrual loans were current in their payments, but were treated as non‐accrual primarily because of deficiencies in non‐payment matters related to the borrowers, such as lack of current financial information. The $363 thousand increase in

non‐accrual loans during the year ended December 31, 2020 was due to a downgrade of $554 thousand of a church loan to non‐accrual status offset by a sale of $130 thousand of a church loan and repayments of $61 thousand.

The following table provides information regarding our non‐performing assets at the dates indicated:

December 31,

(Dollars in thousands)

Non‐accrual loans:

Single family $ 1 $ 18 $ ‐ $ ‐ $ ‐

Multi‐family ‐ ‐ ‐ ‐ ‐

Commercial real estate ‐ ‐ ‐ ‐ ‐

Commercial ‐ ‐ ‐ ‐ ‐

Loans delinquent 90 days or more and still accruing ‐ ‐ ‐ ‐ ‐

Real estate owned acquired through foreclosure - - 833 878 ‐

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There were no accrual loans that were contractually past due by 90 days or more at December 31, 2020 or 2019. We had no commitments to lend additional funds to borrowers whose loans were on non‐accrual status at

December 31, 2020.

We discontinue accruing interest on loans when the loans become 90 days delinquent as to their payment due date (missed three payments). In addition, we reverse all previously accrued and uncollected interest for those

loans through a charge to interest income. While loans are in non‐accrual status, interest received on such loans is credited to principal, until the loans qualify for return to accrual status. Loans are returned to accrual status when all the

principal and interest amounts contractually due are brought current and future payments are reasonably assured.

We may agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a TDR.

Non‐accrual loans modified in a TDR remain on non‐accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the restructured terms,

generally for a period of at least six months. Loans modified in a TDR that are included in non‐accrual loans totaled $232 thousand at December 31, 2020 and $406 thousand at December 31, 2019. Excluded from non‐accrual loans are restructured loans

that were not delinquent at the time of modification or loans that have complied with the terms of their restructured agreement for six months or such longer period as management deems appropriate for particular loans, and therefore have been

returned to accruing status. Restructured accruing loans totaled $4.2 million at December 31, 2020 and $4.7 million at December 31, 2019.

During 2020, gross interest income that would have been recorded on non‐accrual loans had they performed in accordance with their original terms, totaled $39 thousand. Actual interest recognized on non‐accrual loans

and included in net income for the year 2020 was $162 thousand, reflecting interest recoveries on non‐accrual loans that were paid off.

We update our estimates of collateral value on loans when they become 90 days past due and to the extent the loans remain delinquent, every nine months thereafter. We obtain updated estimates of collateral value

earlier than at 90 days past due for loans to borrowers who have filed for bankruptcy or for certain other loans when our Internal Asset Review Committee believes repayment of such loans may be dependent on the value of the underlying collateral. For

single family loans, updated estimates of collateral value are obtained through appraisals and automated valuation models. For multi‐family and commercial real estate properties, we estimate collateral value through appraisals or internal cash flow

analyses when current financial information is available, coupled with, in most cases, an inspection of the property. Our policy is to make a charge against our allowance for loan losses, and correspondingly reduce the book value of a loan, to the

extent that the collateral value of the property securing a loan is less than our recorded investment in the loan. See “Allowance for Loan Losses” for full discussion of the allowance for loan losses.

REO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at fair value less estimated selling costs. Any excess of carrying value over fair value at the time of

acquisition is charged to the allowance for loan losses. Thereafter, we charge non‐interest expense for the property maintenance and protection expenses incurred as a result of owning the property. Any decreases in the property’s estimated fair value

after foreclosure are recorded in a separate allowance for losses on REO. During 2020 and 2019, the Bank did not foreclose on any loans. At December 31, 2018, the Bank had one REO which was sold during 2019.

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Classification of Assets

Federal regulations and our internal policies require that we utilize an asset classification system as a means of monitoring and reporting problem and potential problem assets. We have incorporated asset

classifications as a part of our credit monitoring system and thus classify potential problem assets as “Watch” and “Special Mention,” and problem assets as “Substandard,” “Doubtful” or “Loss”. An asset is considered “Watch” if the loan is current

but temporarily presents higher than average risk and warrants greater than routine attention and monitoring. An asset is considered “Special Mention” if the loan is current but there are some potential weaknesses that deserve management’s close

attention. An asset is considered “Substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct

possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “Doubtful” have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the

weaknesses make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “Loss” are those considered “uncollectible” and of such little value

that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but that are

considered to possess some weaknesses, are designated “Special Mention.” Our Internal Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to the Internal Asset Review Committee of our Board

of Directors monthly.

The following table provides information regarding our criticized loans (Watch and Special Mention) and classified assets (Substandard and REO) at the dates indicated:

Number Amount Number Amount

(Dollars in thousands)

Special mention loans - - - -

REO - - - -

Criticized assets increased to $2.1 million at December 31, 2020, from $822 thousand at December 31, 2019, primarily due to a downgrade of $1.5 million on a commercial real estate loan from the pass loan category to

Watch status and an upgrade of $657 thousand on a church loan from substandard status, offset by $822 thousand payoffs of all criticized loans carried from December 31, 2019. Classified assets decreased to $3.1 million at December 31, 2020, from $4.2

million at December 31, 2019, primarily due to an upgrade of a church loan to Watch status and loan payoffs.

Allowance for Loan Losses

In originating loans, we recognize that losses may be experienced on loans and that the risk of loss may vary as a result of many factors, including the type of loan being made, the creditworthiness of the borrower,

general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan. We are required to maintain an adequate allowance for loan and lease losses (“ALLL”) in accordance with U.S. Generally Accepted Accounting

Principles (“GAAP”). The ALLL represents our management’s best estimate of probable incurred credit losses in our loan portfolio as of the date of the consolidated financial statements. Our ALLL is intended to cover specifically identifiable loan

losses, as well as estimated losses inherent in our portfolio for which certain losses are probable, but not specifically identifiable. There can be no assurance, however, that actual losses incurred will not exceed the amount of management’s

estimates.

Our Internal Asset Review Department issues reports to the Board of Directors and continually reviews loan quality. This analysis includes a detailed review of the classification and categorization of problem loans,

potential problem loans and loans to be charged off, an assessment of the overall quality and collectability of the portfolio, and concentration of credit risk. Management then evaluates the allowance, determines its appropriate level and the need

for additional provisions, and presents its analysis to the Board of Directors which ultimately reviews management’s recommendation and, if deemed appropriate, then approves such recommendation.

The ALLL is increased by provisions for loan losses which are charged to earnings and is decreased by recaptures of loan loss provision and charge‐offs, net of recoveries. Provisions are recorded to increase the ALLL

to the level deemed appropriate by management. The Bank utilizes an allowance methodology that considers a number of quantitative and qualitative factors, including the amount of non‐performing loans, our loan loss experience, conditions in the

general real estate and housing markets, current economic conditions and trends, particularly levels of unemployment, and changes in the size of the loan portfolio.

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The ALLL consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual

terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Factors considered by management in determining impairment

include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case‐by‐case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the

delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a portion of the allowance is allocated to the loan so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of

collateral if repayment is expected solely from the collateral. TDRs are separately identified for impairment and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to

be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated selling costs. For TDRs that subsequently default, we determine the amount of any necessary additional charge‐off based on internal analyses

and appraisals of the underlying collateral securing these loans. At December 31, 2020, impaired loans totaled $4.7 million and had an aggregate specific allowance allocation of $141 thousand.

The general component of the ALLL covers non‐impaired loans and is based on historical loss experience adjusted for qualitative factors. Each month, we prepare an analysis which categorizes the entire loan portfolio by

certain risk characteristics such as loan type (single family, multi‐family, commercial real estate, construction, commercial and consumer) and loan classification (pass, watch, special mention, substandard and doubtful). With the use of a migration

to loss analysis, we calculate our historical loss rate and assign estimated loss factors to the loan classification categories based on our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for

appropriateness giving consideration to our historical loss experience, levels of and trends in delinquencies and impaired loans; levels of and trends in charge‐offs and recoveries; trends in volume and terms of loans; effects of any changes in risk

selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions;

and effects of changes in credit concentrations.

In addition to loss experience and environmental factors, we use qualitative analyses to determine the adequacy of our ALLL. This analysis includes ratio analysis to evaluate the overall measurement of the ALLL and

comparison of peer group reserve percentages. The qualitative review is used to reassess the overall determination of the ALLL and to ensure that directional changes in the ALLL and the provision for loan losses are supported by relevant internal and

external data.

Based on our evaluation of the housing and real estate markets and overall economy, including the unemployment rate, the levels and composition of our loan delinquencies and non‐performing loans (no forebearances and

no modifictions formally requested by the borrowers), our loss history and the size and composition of our loan portfolio, we determined that an ALLL of $3.2 million, or 0.88% of loans held for investment was appropriate at December 31, 2020,

compared to $3.2 million, or 0.79% of loans held for investment at December 31, 2019. The increase in ALLL compared to the prior year was primarily due to uncertainty related to the COVID-19 Pandemic.

A federally chartered savings association’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, in conjunction with the other

federal banking agencies, provides guidance for financial institutions on the responsibilities of management for the assessment and establishment of adequate valuation allowances, as well as guidance for banking agency examiners to use in determining

the adequacy of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectability of the portfolio in

a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the guidelines issued by federal regulatory agencies. While we believe that the ALLL has been established and maintained at adequate levels,

future adjustments may be necessary if economic or other conditions differ materially from the conditions on which we based our estimates at December 31, 2020. In addition, there can be no assurance that the OCC or other regulators, as a result of

reviewing our loan portfolio and/or allowance, will not require us to materially increase our ALLL, thereby affecting our financial condition and earnings.

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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:

December 31,

(Dollars in thousands)

The following table shows the activity in our ALLL related to our loans held for investment for the years indicated:

(Dollars in thousands)

Charge‐offs:

Single family ‐ ‐ ‐ ‐ ‐

Multi‐family ‐ ‐ ‐ ‐ ‐

Commercial real estate ‐ ‐ ‐ ‐ ‐

Church ‐ ‐ ‐ ‐ ‐

Commercial ‐ ‐ ‐ ‐ ‐

Total charge‐offs ‐ ‐ ‐ ‐ ‐

Recoveries:

Commercial real estate ‐ ‐ ‐ ‐ 248

Commercial ‐ ‐ ‐ ‐ 8

(1) Including net deferred loan costs and premiums.

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Investment Activities

The main objectives of our investment strategy are to provide a source of liquidity for deposit outflows, repayment of our borrowings and funding loan commitments, and to generate a favorable return on investments

without incurring undue interest rate or credit risk. Subject to various restrictions, our investment policy generally permits investments in money market instruments such as Federal Funds Sold, certificates of deposit of insured banks and savings

institutions, direct obligations of the U. S. Treasury, securities issued by federal and other government agencies and mortgage‐backed securities, mutual funds, municipal obligations, corporate bonds and marketable equity securities. Mortgage‐backed

securities consist principally of securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association which are backed by 30‐year amortizing hybrid ARM Loans,

structured with fixed interest rates for periods of three to seven years, after which time the loans convert to one‐year or six‐month adjustable rate mortgage loans. At December 31, 2020, our securities portfolio, consisting primarily of federal

agency debt, mortgage‐backed securities and municipal bonds, totaled $10.7 million, or 2.2% of total assets.

We classify investments as held‐to‐maturity or available‐for‐sale at the date of purchase based on our assessment of our internal liquidity requirements. Securities purchased to meet investment‐related objectives such

as liquidity management or mitigating interest rate risk and which may be sold as necessary to implement management strategies, are designated as available‐for‐sale at the time of purchase. Securities in the held‐to‐maturity category consist of

securities purchased for long‐term investment in order to enhance our ongoing stream of net interest income. Securities deemed held‐to‐maturity are classified as such because we have both the intent and ability to hold these securities to maturity.

Held‐to‐maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. Available‐for‐sale securities are reported at fair value. We currently have no securities classified as held‐to‐maturity securities.

The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2020. The table reflects stated final maturities and does not reflect scheduled

principal payments or expected payoffs.

(Dollars in thousands)

Available‐for‐sale:

At December 31, 2020, the securities in our portfolio had an estimated remaining life of 4.1 years. During 2020, the Bank purchased five municipal bonds totaling $2.0 million at 1.38% weighted average rate, and a

weighted average remaining life of 6.4 years at December 31, 2020. There were no sales of securities during the year ended December 31, 2020.

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The following table sets forth the amortized cost and fair value of available-for-sale securities by type as of the dates indicated. At December 31, 2020, our securities portfolio did not contain securities of any

issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.

​ At December 31,

​ (Dollars in thousands)

Sources of Funds

General

Deposits are our primary source of funds for supporting our lending and other investment activities and general business purposes. In addition to deposits, we obtain funds from the amortization and prepayment of loans

and investment securities, sales of loans and investment securities, advances from the FHLB, and cash flows generated by operations.

Deposits

We offer a variety of deposit accounts featuring a range of interest rates and terms. Our deposits principally consist of savings accounts, checking accounts, NOW accounts, money market accounts, and fixed‐term

certificates of deposit. The maturities of term certificates generally range from one month to five years. We accept deposits from customers within our market area based primarily on posted rates, but from time to time we will negotiate the rate

based on the amount of the deposit. We primarily rely on customer service and long‐standing customer relationships to attract and retain deposits. We seek to maintain and increase our retail “core” deposit relationships, consisting of savings

accounts, checking accounts and money market accounts because we believe these deposit accounts tend to be a stable funding source and are available at a lower cost than term deposits. However, market interest rates, including rates offered by

competing financial institutions, the availability of other investment alternatives, and general economic conditions significantly affect our ability to attract and retain deposits.

We participate in a deposit program called the Certificate of Deposit Account Registry Service (“CDARS”). CDARS is a deposit placement service that allows us to place our customers’ funds in FDIC‐insured certificates

of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network (“CDARS Reciprocal”). We may also accept deposits from other institutions when we have no reciprocal deposit (“CDARS

One‐Way Deposits”). We had approximately $35.8 million in CDARS Reciprocal and $9.6 million in CDARS One‐Way Deposits at December 31, 2020, compared to $39.3 million in CDARS Reciprocal and $40.7 million in CDARS One‐Way Deposits at December 31,

2019. The decrease in CDARS One-Way Deposits during 2020 was impacted by an increase in the Bank’s overall liquidity and the intentional non-renewal of these deposits at maturity due to their high costs.

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The following table details the maturity periods of our certificates of deposit in amounts of $100 thousand or more at December 31, 2020.

Amount Weighted average rate

(Dollars in thousands)

Certificates maturing:

The following table presents the distribution of our average deposits for the years indicated and the weighted average interest rates during the year for each category of deposits presented.

For the Year Ended December 31,

(Dollars in thousands)

Borrowings

We utilize short‐term and long‐term advances from the FHLB as an alternative to retail deposits as a funding source for asset growth. FHLB advances are generally secured by mortgage loans and mortgage‐backed

securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions fluctuates from time to time in

accordance with the policies of the FHLB. At December 31, 2020, we had $110.5 million in FHLB advances and had the ability to borrow up to an additional $40.3 million based on available and pledged collateral.

The following table summarizes information concerning our FHLB advances at or for the periods indicated:

At or For the Year Ended

(Dollars in thousands)

FHLB Advances:

Weighted average interest rate at end of year 1.94 % 2.32 % 2.51 %

Average cost of advances during the year 1.94 % 2.42 % 2.13 %

Weighted average maturity (in months) 27 18 24

On March 17, 2004, we issued $6.0 million of Floating Rate Junior Subordinated Debentures (the “Debentures”) in a private placement to a trust that was capitalized to purchase subordinated debt and preferred stock of

multiple community banks. Interest on the Debentures is payable quarterly at a rate per annum equal to the 3‐Month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 2.77% at

December 31, 2020. On October 16, 2014, we made payments of $900 thousand of principal on the Debentures, executed a Supplemental Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024, and modified the payment

terms of the remaining $5.1 million principal amount thereof. The modified terms of the Debentures required quarterly payments of interest only through March 2019 at the original rate of 3‐Month LIBOR plus 2.54%. Starting in June 2019, the Company is

required to make quarterly payments of equal amounts of principal, plus interest, until the Debentures are fully amortized on March 17, 2024. During 2020, the Company paid $1.8 million of scheduled principal. The Debentures may be called for

redemption at any time.

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Market Area and Competition

Broadway Federal is a community‐oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. Our retail banking network includes full service banking offices,

automated teller machines and internet banking capabilities that are available using our website at www.broadwayfederalbank.com. We have two banking offices in Los Angeles and one banking office located in the nearby City of Inglewood as of December

31, 2020. As previously announced, the Bank plans to close one of the two banking offices in Los Angles in April 2021.

The Los Angeles metropolitan area is a highly competitive banking market for making loans and attracting deposits. Although our offices are primarily located in low‐to‐moderate income communities that have historically

been under‐served by other financial institutions, we face significant competition for deposits and loans in our immediate market areas, including direct competition from mortgage banking companies, commercial banks and savings and loan associations.

Most of these financial institutions are significantly larger than we are and have greater financial resources, and many have a regional, statewide or national presence.

Personnel

At December 31, 2020, we had 64 employees, which included 62 full‐time and 2 part‐time employees. We believe that we have good relations with our employees, and none are represented by a collective bargaining group.

Regulation

General

Broadway Federal Bank, f.s.b, is regulated by the OCC, as its primary federal regulator, and by the FDIC, as its deposit insurer. The Bank is also a member of the Federal Home Loan Bank System and is subject to the

regulations of the FRB concerning reserves required to be maintained against deposits, transactions with affiliates, Truth in Lending and other consumer protection requirements and certain other matters. Broadway Financial Corporation is regulated,

examined and supervised by the FRB and is also required to file certain reports and otherwise comply with the rules and regulations of the Securities and Exchange Commission (“SEC”) under the federal securities laws.

The OCC regulates and examines most of our Bank’s business activities, including, among other things, capital standards, general investment authority, deposit taking and borrowing authority, mergers and other business

combination transactions, establishment of branch offices, and permitted subsidiary investments and activities. The OCC has primary enforcement responsibility over federal savings banks and has substantial discretion to impose enforcement actions on

an institution that fails to comply with applicable regulatory requirements, including with respect to capital requirements. In addition, the FDIC has the authority to recommend to the OCC that enforcement actions be taken with respect to a

particular federal savings bank and, if recommended action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. In certain cases, the OCC has the authority to refer matters relating to federal fair lending

laws to the U.S. Department of Justice (“DOJ”) or the U.S. Department of Housing and Urban Development (“HUD”) if the OCC determines violations of the fair lending laws may have occurred.

Changes in applicable laws or the regulations of the OCC, the FDIC, the FRB or other regulatory authorities, or changes in interpretations of such regulations or in agency policies or priorities, could have a material

adverse impact on the Bank and the Company, their operations, and the value of the Company’s debt and equity securities. The Company and its stock are also subject to rules issued by The Nasdaq Stock Market LLC (“Nasdaq”), the stock exchange on which

the Company’s common stock is traded. Failure of the Company to conform to Nasdaq’s rules could have an adverse impact on the Company and the value of the Company’s equity securities.

The following paragraphs summarize certain laws and regulations that apply to the Company and the Bank. These descriptions of statutes and regulations and their possible effects do not purport to be complete

descriptions of all the provisions of those statutes and regulations and their possible effects on us, nor do they purport to identify every statute and regulation that applies to us.

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Dodd‐Frank Wall Street Reform and Consumer Protection Act

In July 2010, the Dodd‐Frank Wall Street Reform and Consumer Protection Act (the “Dodd‐Frank Act”) was signed into law. The Dodd‐Frank Act is intended to address perceived weaknesses in the U.S. financial regulatory

system and prevent future economic and financial crises.

The Dodd‐Frank Act established increased compliance obligations across a number of areas in the banking business and, among other changes, required the federal banking agencies to establish consolidated risk‐based and

leverage capital requirements for insured depository institutions, depository institution holding companies and certain non‐bank financial companies. Under an existing FRB policy statement, bank holding companies with less than $500 million in total

consolidated assets were not subject to consolidated capital requirements. In guidance effective as of May 15, 2015, the FRB formally applied the policy statement to savings and loan holding companies, such as the Company, and raised the applicable

asset threshold to $1 billion. The Dodd‐Frank Act requires savings and loan holding companies to serve as a source of financial strength for any subsidiary of the holding company that is a depository institution by providing financial assistance in

the event of the financial distress of the depository institution.

The Dodd‐Frank Act also included provisions changing the assessment base for federal deposit insurance from the amount of insured deposits to the amount of consolidated assets less tangible capital, and making

permanent the $250,000 limit for federal deposit insurance that had initially been established on a temporary basis in reaction to the economic downturn in 2008.

The Dodd‐Frank Act also established the Consumer Financial Protection Bureau (“CFPB”). The CFPB has authority to supervise compliance with and enforce consumer protection laws. The CFPB has broad rule‐making authority

for a wide range of consumer protection laws that apply to banks and savings institutions of all sizes, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Over the past several years, the CFPB has been active in

bringing enforcement actions against banks and nonbank financial institutions to enforce federal consumer financial laws and has developed a number of new enforcement theories and applications of these laws. The CFPB’s supervisory authority does not

generally extend to insured depository institutions having less than $10 billion in assets. The other federal financial regulatory agencies, however, as well as state attorneys general and state banking agencies and other state financial regulators,

have been active in this area with respect to institutions over which they have jurisdiction.

Capital Requirements

In July 2013, the federal banking regulators approved final rules (the “Basel III Capital Rules”) implementing the Basel III framework as well as certain provisions of the Dodd‐Frank Act. The Basel III Capital Rules

substantially revised the risk‐based capital requirements applicable to depository institutions including Broadway Federal. As stated above, the Company is a small savings and loan holding company that will be exempt from consolidated capital

requirements until its assets exceed $1.0 billion.

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments

meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions and adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expanded the scope of the

deductions and adjustments to capital as compared to previously existing regulations.

Under the Basel III Capital Rules, the current minimum capital ratios effective as of January 1, 2015 are:

• 4.5% CET1 to risk‐weighted assets;

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The Basel III Capital Rules also introduced a new “capital conservation buffer”, composed entirely of CET1, in addition to the minimum risk‐weighted capital to assets ratios. The implementation of the capital

conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on January 1 of each subsequent year, until it reached 2.5% on January 1, 2019. As fully phased in, the Basel III Capital Rules now require the Bank to maintain

an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk‐weighted assets of at least 7%, (ii) Tier 1 capital to risk‐weighted assets of at least 8.5%, (iii) a minimum ratio of Total

capital to risk‐weighted assets of at least 10.5%, and (iv) a minimum leverage ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk‐weighted

capital ratios. Banking institutions with a ratio of CET1 to risk‐weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of

the shortfall.

The Basel III Capital Rules also provide for several deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non‐consolidated

financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

In addition, under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded automatically; however, Broadway Federal qualified to make a one‐time permanent

election to continue to exclude these items. It made this election to avoid significant variations in the level of its capital that might otherwise occur as a result of the impact of interest rate fluctuations on the fair value of its

available‐for‐sale securities portfolio.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded both the number of risk‐weighting categories and the risk sensitivity of many categories. The risk weights assigned to a

particular category of assets depend on the nature of the assets and range from 0% for U.S. government and agency securities to 600% for certain equity exposures. On balance, the new standards result in higher risk weights for a number of asset

categories.

Prompt Corrective Action

The Federal Deposit Insurance Act, as amended (“FDIA”), requires the federal banking agencies to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements.

The OCC performs this function with respect to the Bank. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”

Generally, a capital restoration plan must be filed with the OCC within 45 days after the date a depository institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically

undercapitalized,” and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of

expansion.

The Basel III Capital Rules included revisions to the prompt corrective action framework. Under the prompt corrective action requirements, insured depository institutions are now required to meet the following

increased capital level requirements in order to qualify as “well capitalized:” (i) a new CET1 capital to risk weighted assets of 6.5%; (ii) a Tier 1 capital to risk weighted assets of 8% (increased from 6%); (iii) a total capital to risk weighted

assets of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

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At December 31, 2020, the Bank’s level of capital exceeded all regulatory capital requirements and its regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory

purposes. Actual and required capital amounts and ratios at December 31, 2020 and 2019 are presented below.

Amount Ratio Amount Ratio Amount Ratio

(Dollars in thousands)

Deposit Insurance

The FDIC is an independent federal agency that insures deposits of federally insured banks, including federal savings banks, up to prescribed statutory limits for each depositor. Pursuant to the Dodd‐Frank Act, the

maximum deposit insurance amount has been permanently increased to $250,000 per depositor, per ownership category.

The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to the FDIC’s Deposit Insurance Fund (“DIF”). The Bank’s DIF assessment is calculated by multiplying

its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the Bank. The initial base assessment rate is based on an institution’s capital level, and capital adequacy,

asset quality, management, earnings, liquidity and sensitivity (“CAMELS”) ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress, and in some cases, additional discretionary

adjustments by the FDIC to reflect additional risk factors.

The FDIC’s overall premium rate structure is subject to change from time to time to reflect its actual and anticipated loss experience. The financial crisis that began in 2008 resulted in substantially higher levels of

bank failures than had occurred in the immediately preceding years. These failures dramatically increased the resolution costs incurred by the FDIC and substantially reduced the available amount of the DIF.

As required by the Dodd‐Frank Act, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan increased the minimum designated DIF reserve ratio from 1.15% to

1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the assessments necessary to meet the new requirement, the FDIC is required to offset the effect of this provision on insured depository institutions

with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by institutions with more than $10 billion in assets. With the increase of the DIF reserve ratio to 1.17% on June 30, 2016,

the range of initial assessment rates has declined for all banks from five to 35 basis points on an annualized basis to three to 30 basis points on an annualized basis. In order to reach a DIF reserve ratio of 1.35%, insured depository institutions

with $10 billion or more in total assets are required to pay a quarterly surcharge equal to an annual rate of 4.5 basis points, in addition to regular assessments. The FDIC will impose a shortfall in the first quarter of 2020 on large banks that did

not have a reserve of at least 1.35% by December 31, 2019. The FDIC will provide assessment credits to insured depository institutions, like Broadway Federal, with total consolidated assets of less than $10 billion for the portion of their regular

assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with

credits. During 2020, the Bank received two assessment credits totaling $49 thousand compared to two assessment credits totaling $56 thousand during 2019.

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The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that

pose a risk to the DIF or that may prejudice the interest of the bank’s depositors.

Guidance on Commercial Real Estate Lending

In December 2015, the federal banking agencies released a statement titled “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”). The CRE Statement expresses the banking

agencies’ concerns with banking institutions that ease their commercial real estate underwriting standards, directs financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor

lending risks, and indicates that the agencies will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The banking agencies previously issued guidance titled “Prudent Commercial Real

Estate Loan Workouts” which provides guidance for financial institutions that are working with commercial real estate (“CRE”) borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in

selling or renting commercial properties and details risk‐management practices for loan workouts that support prudent and pragmatic credit and business decision‐making within the framework of financial accuracy, transparency, and timely loss

recognition. The banking agencies had also issued previous guidance titled “Interagency Guidance on Concentrations in Commercial Real Estate” stating that a banking institution will be considered to be potentially exposed to significant CRE

concentration risk, and should employ enhanced risk management practices, if total CRE loans represent 300% or more of its total capital and the outstanding balance of the institution’s CRE loan portfolio has increased by 50% or more during the

preceding 36 months.

In October 2009, the federal banking agencies adopted a policy statement supporting workouts of CRE loans, which is referred to as the “CRE Policy Statement”. The CRE Policy Statement provides guidance for examiners,

and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The CRE Policy Statement details

risk‐management practices for loan workouts that support prudent and pragmatic credit and business decision‐making within the framework of financial accuracy, transparency, and timely loss recognition. The CRE Policy Statement states that financial

institutions that implement prudent loan workout arrangements after performing comprehensive reviews of the financial condition of borrowers will not be subject to criticism for engaging in these efforts, even if the restructured loans have

weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely

because the value of the underlying collateral declined. The CRE Policy Statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing an institution’s risk‐management practices for loan workout

activities.

In October 2018, the OCC provided the Bank with a letter of “no supervisory objection” permitting the Bank to increase the non‐multifamily commercial real estate loan concentration limit to 100% of Tier 1 Capital plus

ALLL, including a sublimit of 50% for land/construction loans, which brought the total CRE loan concentration limit to 600% of Tier 1 Capital plus ALLL.

Loans to One Borrower

Federal savings banks generally are subject to the lending limits that are applicable to national banks. With certain limited exceptions, the maximum amount that a federal savings banks may lend to any borrower

(including certain related persons or entities of such borrower) is an amount equal to 15% of the savings institution’s unimpaired capital and unimpaired surplus, or $7.4 million for Broadway Federal at December 31, 2020, plus an additional 10% for

loans fully secured by readily marketable collateral. Real estate is not included within the definition of “readily marketable collateral” for this purpose. We are in compliance with the limits applicable to loans to any one borrower. At December 31,

2020, our largest amount of loan to one borrower was $6.9 million, and the loan was performing in accordance with their terms and the borrower had no affiliation with Broadway Federal.

Community Reinvestment Act and Fair Lending

The Community Reinvestment Act, as implemented by OCC regulations (“CRA”), requires each federal savings bank, as well as other lenders, to make efforts to meet the credit needs of the communities they serve, including

low‐ and moderate‐income neighborhoods. The CRA requires the OCC to assess an institution’s performance in meeting the credit needs of its communities as part of its examination of the institution, and to take such assessments into consideration in

reviewing applications for mergers, acquisitions and other transactions. An unsatisfactory CRA rating may be the basis for denying an application. Community groups have successfully protested applications on CRA grounds. In connection with the

assessment of a savings institution’s CRA performance, the OCC assigns ratings of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank’s CRA performance has been rated by OCC as “outstanding” since 1995, and the

Bank’s “outstanding” rating was recently reaffirmed by OCC in its most recent CRA examination completed in April 2019.

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The Bank is also subject to federal fair lending laws, including the Equal Credit Opportunity Act (“ECOA”) and the Federal Housing Act (“FHA”), which prohibit discrimination in credit and residential real estate

transactions on prohibited bases, including race, color, national origin, gender, and religion, among others. A lender may be liable under one or both acts in the event of overt discrimination, disparate treatment, or a disparate impact on a

prohibited basis. The compliance of federal savings banks of the Bank’s size with these acts is primarily supervised and enforced by the OCC. If the OCC determines that a lender has engaged in a pattern or practice of discrimination in violation of

ECOA, the OCC refers the matter to the DOJ. Similarly, HUD is notified of violations of the FHA.

Qualified Thrift Lender Test

The Home Owners Loan Act (“HOLA”) requires all federal savings banks to meet a Qualified Thrift Lender (“QTL”) test. Under the QTL test, a federal savings bank is required to maintain at least 65% of its portfolio

assets (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain “qualified thrift investments” on a monthly basis during at

least 9 out of every 12 months. Qualified thrift investments include, in general, loans, securities and other investments that are related to housing, shares of stock issued by any Federal Home Loan Bank, loans for educational purposes, loans to

small businesses, loans made through credit cards or credit card accounts and certain other permitted thrift investments. The failure of a federal savings bank to remain a QTL may result in required conversion of the institution to a bank charter,

which would change the federal savings bank’s permitted business activities in various respects, including operation under certain restrictions, such as limitations on new investments and activities, the imposition of restrictions on branching and

the payment of dividends that apply to national banks. At December 31, 2020, the Bank was in compliance with the QTL test requirements.

The USA Patriot Act, Bank Secrecy Act (“BSA”), and Anti‐Money Laundering (“AML”) Requirements

The USA PATRIOT Act was enacted after September 11, 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in the

promulgation of several regulations that have a direct impact on savings associations. Financial institutions must have a number of programs in place to comply with this law, including: (i) a program to manage BSA/AML risk; (ii) a customer

identification program designed to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations;

and (iii) a program for monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Failure to comply with these requirements may result in regulatory action, including the issuance of cease and desist

orders, impositions of civil money penalties and adverse changes in an institution’s regulatory ratings, which could adversely affect its ability to obtain regulatory approvals for business combinations or other desired business objectives.