Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

[X]                          QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

[  ]                              TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from__________ to___________

 

Commission file number      000-27464

 

BROADWAY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4547287

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

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)

 

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 [ X ]   No [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes [ X ]  No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer [   ]   Accelerated Filer [   ]   Non-Accelerated Filer [   ]   Smaller Reporting Company [ X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]   No [ X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of May 2, 2016, 21,405,188 shares of the Registrant’s voting common stock and 7,671,520 shares of the Registrant’s non-voting common stock were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015

 

1

 

 

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015

 

2

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

 

3

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

4

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

28

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

28

 

 

 

 

 

 

Item 5.

Other Information

 

28

 

 

 

 

 

 

Item 6.

Exhibits

 

28

 

 

 

 

 

 

Signatures

 

 

29

 



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Financial Condition

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

March 31,
2016

 

December 31,
2015

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

7,656

 

$

5,104

Federal funds

 

28,335

 

62,735

Cash and cash equivalents

 

35,991

 

67,839

Securities available-for-sale, at fair value

 

15,209

 

14,140

Loans receivable held for investment, net of allowance of $4,534 and $4,828, respectively

 

319,881

 

304,171

Accrued interest receivable

 

1,091

 

1,077

Federal Home Loan Bank (FHLB) stock

 

2,573

 

2,573

Office properties and equipment, net

 

2,522

 

2,570

Real estate owned (REO)

 

-

 

360

Bank owned life insurance

 

2,897

 

2,882

Investment in affordable housing limited partnership

 

877

 

925

Deferred tax assets, net

 

4,565

 

4,594

Other assets

 

1,674

 

1,781

Total assets

 

$

387,280

 

$

402,912

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

Deposits

 

$

257,409

 

$

272,614

FHLB advances

 

72,000

 

72,000

Junior subordinated debentures

 

5,100

 

5,100

Advance payments by borrowers for taxes and insurance

 

297

 

663

Accrued expenses and other liabilities

 

5,584

 

6,372

Total liabilities

 

340,390

 

356,749

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued or outstanding

 

-

 

-

Common stock, $.01 par value, voting, authorized 50,000,000 shares at March 31, 2016 and December 31, 2015; issued 21,509,179 shares at March 31, 2016 and December 31, 2015; outstanding 21,405,188 shares at March 31, 2016 and December 31, 2015

 

215

 

215

Common stock, $.01 par value, non-voting, authorized 25,000,000 shares at March 31, 2016 and December 31, 2015; issued and outstanding 7,671,520 shares at March 31, 2016 and December 31, 2015

 

77

 

77

Additional paid-in capital

 

44,672

 

44,669

Retained earnings

 

3,166

 

2,533

Accumulated other comprehensive income (loss)

 

89

 

(2)

Treasury stock-at cost, 103,991 shares

 

(1,329)

 

(1,329)

Total stockholders’ equity

 

46,890

 

46,163

Total liabilities and stockholders’ equity

 

$

387,280

 

$

402,912

 

See accompanying notes to unaudited consolidated financial statements.

 

1



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

2016

 

2015

 

 

(In thousands, except per share)

Interest income:

 

 

 

 

Interest and fees on loans receivable

 

$

3,429

 

$

3,724

Interest on mortgage-backed and other securities

 

83

 

94

Other interest income

 

103

 

87

Total interest income

 

3,615

 

3,905

 

 

 

 

 

Interest expense:

 

 

 

 

Interest on deposits

 

517

 

415

Interest on borrowings

 

427

 

531

Total interest expense

 

944

 

946

 

 

 

 

 

Net interest income before loan loss provision recapture

 

2,671

 

2,959

Loan loss provision recapture

 

300

 

750

Net interest income after loan loss provision recapture

 

2,971

 

3,709

 

 

 

 

 

Non-interest income:

 

 

 

 

Service charges

 

126

 

106

Net gain on sale of loans

 

-

 

134

CDFI grant

 

265

 

355

Other 

 

152

 

34

Total non-interest income

 

543

 

629

 

 

 

 

 

Non-interest expense:

 

 

 

 

Compensation and benefits

 

1,903

 

1,768

Occupancy expense

 

293

 

299

Information services

 

206

 

217

Professional services

 

127

 

270

Office services and supplies

 

70

 

81

FDIC assessments

 

25

 

80

Corporate insurance

 

71

 

94

Other

 

184

 

229

Total non-interest expense

 

2,879

 

3,038

 

 

 

 

 

Income before income taxes

 

635

 

1,300

Income tax expense

 

2

 

2

Net income

 

$

633

 

$

1,298

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

Unrealized gains on securities available-for-sale arising during the period

 

$

120

 

$

57

Income tax

 

29

 

-

Other comprehensive income, net of tax

 

91

 

57

 

 

 

 

 

Comprehensive income

 

$

724

 

$

1,355

 

 

 

 

 

Earnings per common share-basic

 

$

0.02

 

$

0.04

Earnings per common share-diluted

 

$

0.02

 

$

0.04

 

See accompanying notes to unaudited consolidated financial statements.

 

2



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

2016

 

2015

 

 

(In thousands)

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

Net income

 

$

633

 

$

1,298

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

Loan loss provision recapture

 

(300)

 

(750)

Provision for losses on REOs

 

-

 

6

Depreciation

 

61

 

59

Net amortization of deferred loan origination costs

 

61

 

91

Net amortization of premiums on mortgage-backed securities

 

9

 

16

Amortization of investment in affordable housing limited partnership

 

48

 

48

Stock-based compensation expense

 

3

 

-

Earnings on bank owned life insurance

 

(15)

 

(15)

Originations of for-sale loans receivable

 

-

 

(12,562)

Net gain on sale of loans

 

-

 

(134)

Net gain on sale of REOs

 

(22)

 

(14)

Net change in accrued interest receivable

 

(14)

 

44

Net change in other assets

 

107

 

190

Net change in advance payments by borrowers for taxes and insurance

 

(366)

 

(421)

Net change in accrued expenses and other liabilities

 

(788)

 

(483)

Net cash used in operating activities

 

(583)

 

(12,627)

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Net change in loans receivable held for investment

 

(15,471)

 

3,945

Proceeds from sales of loans receivable transferred to held-for-sale

 

-

 

12,292

Principal repayments on loans receivable transferred to held-for-sale

 

-

 

72

Purchase of available-for-sale securities

 

(1,484)

 

-

Prepayments and amortizations on available-for-sale securities

 

526

 

630

Proceeds from sales of REO

 

382

 

454

Redemption of FHLB stock

 

-

 

470

Purchase of FHLB stock

 

-

 

(188)

Additions to office properties and equipment

 

(13)

 

(14)

Net cash (used in) provided by investing activities

 

(16,060)

 

17,661

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Net change in deposits

 

(15,205)

 

4,225

Repayments of FHLB advances

 

-

 

(1,500)

Net cash (used in) provided by financing activities

 

(15,205)

 

2,725

 

 

 

 

 

Net change in cash and cash equivalents

 

(31,848)

 

7,759

Cash and cash equivalents at beginning of the period

 

67,839

 

20,790

Cash and cash equivalents at end of the period

 

$

35,991

 

$

28,549

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

Cash paid for interest

 

$

941

 

$

972

Cash paid for income taxes

 

-

 

-

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

Transfers of loans receivable held for investment to REO

 

$

-

 

$

843

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2016

 

 

NOTE (1) – Basis of Financial Statement Presentation

 

The accompanying unaudited consolidated financial statements include Broadway Financial Corporation (the “Company”) and its wholly owned subsidiary, Broadway Federal Bank, f.s.b. (the “Bank”).  Also included in the unaudited consolidated financial statements is Broadway Service Corporation, a wholly owned subsidiary of the Bank.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for quarterly reports on Form 10-Q.  These unaudited consolidated financial statements do not include all disclosures associated with the Company’s consolidated annual financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015 and, accordingly, should be read in conjunction with such audited consolidated financial statements.  In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

Some items in the consolidated financial statements for the prior period were reclassified to conform to the current presentation.  Reclassifications had no effect on prior period consolidated net income or stockholders’ equity.

 

Recent Accounting Pronouncements

 

In January 2016, the FASB issued ASU 2016-1, “Financial Instruments — Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities”.  ASU 2016-1 (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale.  For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued are permitted as of the beginning of the fiscal year of adoption.  Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”.  Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Under the new guidance, lessor accounting is largely unchanged.  Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early application is permitted for all public business entities upon issuance.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

 

4



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”.  ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  The areas for simplification include income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted.  The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

 

NOTE (2)  Earnings Per Share of Common Stock

 

Basic earnings per share of common stock is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period.  Diluted earnings per share of common stock is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period, increased for the dilutive effect of common stock equivalents.

 

The following table shows how the Company computed basic and diluted earnings per share of common stock for the periods indicated:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(Dollars in thousands,
except share and per share)

 

Basic

 

 

 

 

 

Net income

 

$

633

 

$

1,298

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

29,076,708

 

29,076,708

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.02

 

$

0.04

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

Net income

 

$

633

 

$

1,298

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

29,076,708

 

29,076,708

 

Add: dilutive effects of assumed exercises of stock options

 

-

 

-

 

Weighted average common shares - fully dilutive

 

29,076,708

 

29,076,708

 

 

 

 

 

 

 

Earnings per common share - diluted

 

$

0.02

 

$

0.04

 

 

Stock options for 540,625 and 90,625 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2016 and 2015, respectively, because they were anti-dilutive.

 

5



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

NOTE (3)  Securities

 

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolios as of the periods indicated and the corresponding amounts of unrealized gains and losses which are recognized in accumulated other comprehensive income (loss):

 

 

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

 

 

(In thousands)

 

March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed

 

$

12,742

 

$

459

 

$

-

 

$

13,201

 

U.S. Government and federal agency

 

 

1,949

 

 

59

 

 

-

 

 

2,008

 

Total available-for-sale securities

 

$

14,691

 

$

518

 

$

-

 

$

15,209

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

Residential mortgage-backed

 

$

11,796

 

$

371

 

$

-

 

$

12,167

 

U.S. Government and federal agency

 

1,946

 

27

 

-

 

1,973

 

Total available-for-sale securities

 

$

13,742

 

$

398

 

$

-

 

$

14,140

 

 

At March 31, 2016, the Bank’s investment portfolio had an estimated remaining life of 4.1 years.  The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity at March 31, 2016.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity date, primarily residential mortgage-backed securities, are shown separately.

 

 

 

Available-for-Sale

 

Maturity

 

Amortized Cost

 

Fair Value

 

 

 

(In thousands)

 

Within one year

 

$

-

 

$

-

 

One to five years

 

1,949

 

2,008

 

Five to ten years

 

-

 

-

 

Beyond ten years

 

-

 

-

 

Residential mortgage-backed

 

12,742

 

13,201

 

Total

 

$

14,691

 

$

15,209

 

 

At March 31, 2016 and December 31, 2015, securities pledged to secure public deposits had a carrying amount of $708 thousand and $731 thousand, respectively.  At March 31, 2016 and December 31, 2015, there were no holdings of securities by any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

There were no sales of securities during the three months ended March 31, 2016 and 2015.

 

6



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

NOTE (4)  Loans Receivable Held for Investment

 

Loans receivable held for investment were as follows as of the periods indicated:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

(In thousands)

Real estate:

 

 

 

 

Single family (1) 

 

$

124,025

 

$

130,891

Multi-family

 

142,773

 

118,616

Commercial real estate

 

11,073

 

11,442

Church

 

44,710

 

46,390

Construction

 

332

 

343

Commercial – other

 

289

 

270

Consumer

 

6

 

4

Gross loans receivable before deferred loan costs and premiums

 

323,208

 

307,956

Unamortized net deferred loan costs and premiums

 

1,207

 

1,043

Gross loans receivable

 

324,415

 

308,999

Allowance for loan losses

 

(4,534)

 

(4,828)

Loans receivable, net

 

$

319,881

 

$

304,171

 

______

(1)         Includes $94.4 million and $99.5 million of non-impaired purchased loans at March 31, 2016 and December 31, 2015, respectively, which are accounted for under ASC 310-20.

 

The following tables present the activity in the allowance for loan losses by loan type for the periods indicated:

 

 

 

Three Months Ended March 31, 2016

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single

 family

 

Multi-
family

 

Commercial
real estate

 

Church

 

Construction

 

Commercial
- other

 

Consumer

 

Total

 

 

 

(In thousands)

 

Beginning balance

 

$

597

 

$

1,658

 

$

469

 

$

2,083

 

$

3

 

$

18

 

$

-

 

$

4,828

 

Provision for (recapture of) loan losses

 

(69

)

208

 

(25

)

(413

)

-

 

(1

)

-

 

(300

)

Recoveries

 

-

 

-

 

-

 

6

 

-

 

-

 

-

 

6

 

Loans charged off

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

Ending balance

 

$

528

 

$

1,866

 

$

444

 

$

1,676

 

$

3

 

$

17

 

$

-

 

$

4,534

 

 

 

Three Months Ended March 31, 2015

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single

 family

 

Multi-
family

 

Commercial
real estate

 

Church

 

Construction

 

Commercial
- other

 

Consumer

 

Total

 

 

 

(In thousands)

 

Beginning balance

 

$

1,174

 

$

2,726

 

$

496

 

$

4,047

 

$

7

 

$

12

 

$

3

 

$

8,465

 

Provision for (recapture of) loan losses

 

(10

)

15

 

(60

)

(689

)

(3

)

(1

)

(2

)

(750

)

Recoveries

 

-

 

-

 

-

 

6

 

-

 

-

 

-

 

6

 

Loans charged off

 

-

 

-

 

-

 

(50

)

-

 

-

 

-

 

(50

)

Ending balance

 

$

1,164

 

$

2,741

 

$

436

 

$

3,314

 

$

4

 

$

11

 

$

1

 

$

7,671

 

 

7



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment (unpaid contractual principal balance less charge-offs, less interest applied to principal, plus unamortized deferred costs and premiums) by loan type and based on impairment method as of the periods indicated:

 

 

 

March 31, 2016

 

 

Real Estate

 

 

 

 

 

 

 

 

Single
family

 

Multi-
family

 

Commercial
real estate

 

Church

 

Construction

 

Commercial
- other

 

Consumer

 

Total

 

 

(In thousands)

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

  $

131

 

 $

2

 

 $

91

 

 $

570

 

 $

-

 

 $

15

 

 $

-

 

 $

809

Collectively evaluated for impairment

 

397

 

1,864

 

353

 

1,106

 

3

 

2

 

-

 

3,725

Total ending allowance balance

 

  $

528

 

 $

1,866

 

 $

444

 

 $

1,676

 

 $

3

 

 $

17

 

 $

-

 

 $

4,534

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

  $

939

 

 $

972

 

 $

1,939

 

 $

10,995

 

 $

-

 

 $

67

 

 $

-

 

 $

14,912

Loans collectively evaluated for impairment

 

123,726

 

142,995

 

9,141

 

33,081

 

332

 

222

 

6

 

309,503

Total ending loans balance

 

  $

124,665

 

 $

143,967

 

 $

11,080

 

 $

44,076

 

 $

332

 

 $

289

 

 $

6

 

 $

324,415

 

 

 

December 31, 2015

 

 

Real Estate

 

 

 

 

 

 

 

 

Single
family

 

Multi-
family

 

Commercial
real estate

 

Church

 

Construction

 

Commercial
- other

 

Consumer

 

Total

 

 

(In thousands)

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

  $

134

 

 $

1

 

 $

88

 

 $

756

 

 $

-

 

 $

16

 

 $

-

 

 $

995

Collectively evaluated for impairment

 

463

 

1,657

 

381

 

1,327

 

3

 

2

 

-

 

3,833

Total ending allowance balance

 

  $

597

 

 $

1,658

 

 $

469

 

 $

2,083

 

 $

3

 

 $

18

 

 $

-

 

 $

4,828

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

  $

963

 

 $

1,440

 

 $

1,924

 

 $

11,390

 

 $

-

 

 $

67

 

 $

-

 

 $

15,784

Loans collectively evaluated for impairment

 

130,632

 

118,186

 

9,488

 

34,359

 

343

 

203

 

4

 

293,215

Total ending loans balance

 

  $

131,595

 

 $

119,626

 

 $

11,412

 

 $

45,749

 

 $

343

 

 $

270

 

 $

4

 

 $

308,999

 

8



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

The following table presents information related to loans individually evaluated for impairment by loan type as of the periods indicated:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses
Allocated

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses
Allocated

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

$

873

 

$

282

 

$

-

 

$

877

 

$

302

 

$

-

 

Multi-family

 

385

 

315

 

-

 

912

 

779

 

-

 

Commercial real estate

 

635

 

240

 

-

 

636

 

259

 

-

 

Church

 

6,046

 

3,917

 

-

 

5,615

 

3,542

 

-

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

657

 

657

 

131

 

662

 

661

 

134

 

Multi-family

 

657

 

657

 

2

 

661

 

661

 

1

 

Commercial real estate

 

1,699

 

1,699

 

91

 

1,702

 

1,665

 

88

 

Church

 

7,470

 

7,078

 

570

 

8,245

 

7,848

 

756

 

Commercial -other

 

67

 

67

 

15

 

67

 

67

 

16

 

Total

 

$

18,489

 

$

14,912

 

$

809

 

$

19,377

 

$

15,784

 

$

995

 

 

The recorded investment in loans excludes accrued interest receivable due to immateriality.  For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.

 

The following tables present the monthly average of loans individually evaluated for impairment by loan type and the related interest income for the periods indicated.

 

 

 

Three Months Ended March 31, 2016

 

Three Months Ended March 31, 2015

 

 

Average
Recorded
Investment

 

Cash Basis
Interest
Income
Recognized

 

Average
Recorded
Investment

 

Cash Basis
Interest
Income
Recognized

 

 

(In thousands)

Single family

 

 

$

951

 

 

 

$

7

 

 

 

$

1,382

 

 

 

$

7

 

Multi-family

 

 

1,206

 

 

 

41

 

 

 

2,740

 

 

 

16

 

Commercial real estate

 

 

1,933

 

 

 

56

 

 

 

4,264

 

 

 

106

 

Church

 

 

11,191

 

 

 

126

 

 

 

14,603

 

 

 

142

 

Commercial -other

 

 

67

 

 

 

-

 

 

 

95

 

 

 

2

 

Total

 

 

$

15,348

 

 

 

$

230

 

 

 

$

23,084

 

 

 

$

273

 

 

Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans.  Interest payments collected on non-accrual loans are characterized as payments of principal rather than payments of the outstanding accrued interest on the loans until the remaining principal on the non-accrual loans is considered to be fully collectible.  Foregone interest income that would have been recognized had loans performed in accordance with their original terms amounted to $119 thousand and $284 thousand for the three months ended March 31, 2016 and 2015, respectively, and were not included in the consolidated results of operations.

 

9



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

The following tables present the aging of the recorded investment in past due loans by loan type as of the periods indicated:

 

 

 

March 31, 2016

 

 

30-59
Days
Past Due

 

60-89
Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Current

 

 

(In thousands)

Loans receivable held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

$

73

 

 

 

$

5

 

 

 

$

-

 

 

 

$

78

 

 

 

$

124,587

 

Multi-family

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

143,967

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,080

 

Church

 

 

578

 

 

 

-

 

 

 

463

 

 

 

1,041

 

 

 

43,035

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

332

 

Commercial - other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

289

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

Total

 

 

$

651

 

 

 

$

5

 

 

 

$

463

 

 

 

$

1,119

 

 

 

$

323,296

 

 

 

 

December 31, 2015

 

 

30-59
Days
Past Due

 

60-89
Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Current

 

 

(In thousands)

Loans receivable held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family

 

 

$

103

 

 

 

$

-

 

 

 

$

-

 

 

 

$

103

 

 

 

$

131,492

 

Multi-family

 

 

291

 

 

 

-

 

 

 

-

 

 

 

291

 

 

 

119,335

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,412

 

Church

 

 

595

 

 

 

-

 

 

 

456

 

 

 

1,051

 

 

 

44,698

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

343

 

Commercial - other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

270

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

Total

 

 

$

989

 

 

 

$

-

 

 

 

$

456

 

 

 

$

1,445

 

 

 

$

307,554

 

 

The following table presents the recorded investment in non-accrual loans by loan type as of the periods indicated:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

(In thousands)

Loans receivable held for investment:

 

 

 

 

 

 

 

 

 

 

Single family

 

 

$

282

 

 

 

$

302

 

Multi-family

 

 

315

 

 

 

779

 

Commercial real estate

 

 

240

 

 

 

259

 

Church

 

 

3,265

 

 

 

2,887

 

Total non-accrual loans

 

 

$

4,102

 

 

 

$

4,227

 

 

There were no loans 90 days or more delinquent that were accruing interest as of March 31, 2016 or December 31, 2015.

 

10



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

Troubled Debt Restructurings

 

At March 31, 2016, loans classified as troubled debt restructurings (“TDRs”) totaled $14.4 million, of which $3.6 million were included in non-accrual loans and $10.8 million were on accrual status.  At December 31, 2015, loans classified as TDRs totaled $15.3 million, of which $3.8 million were included in non-accrual loans and $11.5 million were on accrual status.  The Company has allocated $809 thousand and $995 thousand of specific reserves for accruing TDRs as of March 31, 2016 and December 31, 2015, respectively.  TDRs on accrual status are comprised of loans that were accruing at the time of restructuring or loans that have complied with the terms of their restructured agreements for a satisfactory period of time and for which the Bank anticipates full repayment of both principal and interest.  TDRs that are on non-accrual status can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments, as modified.  A well-documented credit analysis that supports a return to accrual status based on the borrower’s financial condition and prospects for repayment under the revised terms is also required.  As of March 31, 2016 and December 31, 2015, the Company had no commitment to lend additional amounts to customers with outstanding loans that are classified as TDRs.  No loans were modified during the three months ended March 31, 2016 and 2015.

 

Credit Quality Indicators

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  For single family residential, consumer and other smaller balance homogenous loans, a credit grade is established at inception, and generally only adjusted based on performance.  Information about payment status is disclosed elsewhere herein.  The Company analyzes all other loans individually by classifying the loans as to credit risk.  This analysis is performed at least on a quarterly basis.  The Company uses the following definitions for risk ratings:

 

·                  Watch.  Loans classified as watch exhibit weaknesses that could threaten the current net worth and paying capacity of the obligors.  Watch graded loans are generally performing and are not more than 59 days past due. A watch rating is used when a material deficiency exists but correction is anticipated within an acceptable time frame.

 

·                  Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

·                  Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

·                  Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

 

·                  Loss.  Loans classified as loss are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

 

11



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  Pass rated loans are generally well protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.  Pass rated loans are not more than 59 days past due and are generally performing in accordance with the loan terms.  Based on the most recent analysis performed, the risk categories of loans by loan type as of the periods indicated were as follows:

 

 

 

March 31, 2016

 

 

 

Pass

 

Watch

 

Special Mention

 

Substandard

 

Doubtful

 

Loss

 

 

 

(In thousands)

 

Single family

 

  $

122,163

 

  $

 -

 

  $

2,220

 

  $

282

 

  $

-

 

  $

-

 

Multi-family

 

141,922

 

493

 

350

 

1,202

 

-

 

-

 

Commercial real estate

 

7,170

 

-

 

-

 

3,910

 

-

 

-

 

Church

 

34,425

 

725

 

836

 

8,090

 

-

 

-

 

Construction

 

332

 

-

 

-

 

-

 

-

 

-

 

Commercial - other

 

222

 

-

 

-

 

67

 

-

 

-

 

Consumer

 

6

 

-

 

-

 

-

 

-

 

-

 

Total

 

  $

306,240

 

  $

1,218

 

  $

3,406

 

  $

13,551

 

  $

 -

 

  $

-

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Pass

 

Watch

 

Special Mention

 

Substandard

 

Doubtful

 

Loss

 

 

 

(In thousands)

 

Single family

 

  $

128,736

 

  $

-

 

  $

2,557

 

  $

302

 

  $

-

 

  $

-

 

Multi-family

 

117,602

 

-

 

352

 

1,672

 

-

 

-

 

Commercial real estate

 

7,509

 

-

 

-

 

3,903

 

-

 

-

 

Church

 

35,013

 

776

 

1,431

 

8,529

 

-

 

-

 

Construction

 

343

 

-

 

-

 

-

 

-

 

-

 

Commercial - other

 

203

 

-

 

-

 

67

 

-

 

-

 

Consumer

 

4

 

-

 

-

 

-

 

-

 

-

 

Total

 

  $

289,410

 

  $

776

 

  $

4,340

 

  $

14,473

 

  $

-

 

  $

-

 

 

NOTE (5)  Junior Subordinated Debentures

 

On March 17, 2004, the Company 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 3.18% at March 31, 2016.  On October 16, 2014, the Company made payments of $900 thousand of principal on 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 require 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 will be required to make quarterly payments of equal amounts of principal, plus interest, until the Debentures are fully amortized on March 17, 2024.  The Debentures may be called for redemption at any time by the Company.

 

12



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

 

NOTE (6)  Fair Value

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate fair value:

 

The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

The fair value of impaired loans that are collateral dependent is generally based upon the fair value of the collateral, which is obtained from recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Assets acquired through or by transfer in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated every nine months.  These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Appraisals for collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, an independent third-party licensed appraiser reviews the appraisals for accuracy and reasonableness, reviewing the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

 

13



Table of Contents

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

 

Assets Measured on a Recurring Basis

 

Assets measured at fair value on a recurring basis are summarized below:

 

 

 

Fair Value Measurements at March 31, 2016

 

 

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Securities available-for-sale - residential mortgage-backed

 

$

-

 

$

13,201

 

$

-

 

$

13,201

 

Securities available-for-sale - U.S. Government and federal agency

 

2,008

 

-

 

-

 

2,008

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015

 

 

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Securities available-for-sale - residential mortgage-backed

 

$

-

 

$

12,167

 

$

-

 

$

12,167

 

Securities available-for-sale - U.S. Government and federal agency

 

1,973

 

-

 

-

 

1,973

 

 

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended March 31, 2016 and 2015.

 

Assets Measured on a Non-Recurring Basis

 

Assets are considered to be reflected at fair value on a non-recurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet.  Generally, a non-recurring valuation is the result of the application of other accounting pronouncements that require assets to be assessed for impairment or recorded at the lower of cost or fair value.

 

The following table provides information regarding the carrying values of our assets measured at fair value on a non-recurring basis as of the periods indicated.  The fair value measurement for all of these assets falls within Level 3 of the fair value hierarchy.

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

(In thousands)

 

Impaired loans carried at fair value of collateral

 

$        2,456

 

$        2,557

 

Real estate owned

 

-

 

360

 

 

There were no losses recognized on assets measured at fair value on a non-recurring basis for the three months ended March 31, 2016 and 2015.

 

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

 

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2016:

 

 

 

Valuation
Technique(s)

 

Unobservable Input(s)

 

Range

 

Weighted
Average

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

Third Party Appraisals

 

Adjustment for differences between the comparable sales

 

-18% to 13%

 

0%

 

 

Fair Values of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments as of the periods indicated were as follows:

 

 

 

 

 

Fair Value Measurements at March 31, 2016

 

 

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,991   

 

$

35,991   

 

$

-   

 

$

-   

 

$

35,991   

 

Securities available-for-sale

 

15,209   

 

2,008   

 

13,201   

 

-   

 

15,209   

 

Loans receivable held for investment

 

319,881   

 

-   

 

-   

 

327,441

 

327,441   

 

Accrued interest receivable

 

1,091   

 

63   

 

34   

 

994   

 

1,091   

 

Federal Home Loan Bank stock

 

2,573   

 

2,573   

 

-   

 

-   

 

2,573   

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

257,409   

 

$

-   

 

$

252,816   

 

$

-   

 

$

252,816   

 

Federal Home Loan Bank advances

 

72,000   

 

-   

   

73,728   

 

-   

 

73,728   

 

Junior subordinated debentures

 

5,100   

 

-   

   

-   

 

3,164   

 

3,164   

 

Accrued interest payable

 

54   

 

-   

 

48   

 

6   

 

54   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015

 

 

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,839   

 

$

67,839   

 

$

-   

 

$

-   

 

$

67,839   

 

Securities available-for-sale

 

14,140   

 

1,973   

 

12,167   

 

-   

 

14,140   

 

Loans receivable held for investment

 

304,171   

 

-   

 

-   

 

306,643   

 

306,643   

 

Accrued interest receivable

 

1,077   

 

63   

 

31   

 

983   

 

1,077   

 

Federal Home Loan Bank stock

 

2,573   

 

2,573   

 

-   

 

-   

 

2,573   

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

272,614   

 

$

-   

 

$

265,495   

 

$

-   

 

$

265,495   

 

Federal Home Loan Bank advances

 

72,000   

 

-   

 

73,441   

 

-   

 

73,441   

 

Junior subordinated debentures

 

5,100   

 

-   

 

-   

 

3,117   

 

3,117   

 

Accrued interest payable

 

52   

 

-   

 

46   

 

6   

 

52   

 

 

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

(a) Cash and Cash Equivalents

 

The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

 

(b) Loans Receivable Held For investment

 

Fair values of loans are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

(c) FHLB Stock

 

The carrying value of FHLB stock approximates its fair value as the shares can only be redeemed by the FHLB at par.

 

(d) Accrued Interest Receivable/Payable

 

The carrying amounts of accrued interest receivable/payable approximate their fair value and are classified the same as the related asset.

 

(e) Deposits

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 2 classification.  Fair values for fixed rate certificates of deposit are estimated using discounted cash flow calculations that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

(f) Federal Home Loan Bank Advances

 

The fair values of the Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

(g) Junior Subordinated Debentures

 

The fair values of the Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

 

NOTE (7) – Stock-based Compensation

 

In 2008, the Company adopted the 2008 Long-Term Incentive Plan (“2008 LTIP”), which was approved by its stockholders.  The 2008 LTIP permits the grant of non-qualified and incentive stock options, stock appreciation rights, full value awards and cash incentive awards to the Company’s non-employee directors and certain officers and employees for up to 2,000,000 shares of common stock.  Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; the option awards have vesting periods ranging from immediate vesting to five years and have 10-year contractual terms.

 

In February 2016, the Company granted 450,000 stock options, with an exercise price of $1.62 per share, to senior executive officers.  These options vest over five years and expire in ten years.  The Company estimated the compensation costs and fair value per share of these stock options to be $194 thousand and $0.43 per share, respectively, using the Black-Scholes option pricing model and the following assumptions: (i) expected volatility of 27.36%; (ii) risk free interest rate of 1.21%; (iii) expected option term of five years; and (iv) 0% dividend yield.

 

The Company recorded $3 thousand of stock-based compensation expense during the three months ended March 31, 2016 compared to $0 during the three months ended March 31, 2015.

 

NOTE (8) – Regulatory Matters

 

The Bank’s capital requirements are administered by the Office of the Comptroller of the Currency (“OCC”) and involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by the OCC.  Failure to meet capital requirements can result in regulatory action.

 

The federal banking regulators approved final capital rules (“Basel III Capital Rules”) in July 2013 implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act.  The Basel III Capital Rules prescribe a standardized approach for calculating risk-weighted assets and revised the definition and calculation of Tier 1 capital and Total capital, and include a new Common Equity Tier 1 capital (“CET1”) measure.  Under the Basel III Capital Rules, the currently effective minimum capital ratios are:

 

·                        4.5% CET1 to risk-weighted assets;

·                        6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

·                        8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

·                        4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”).

 

A new capital conservation buffer was also established above the regulatory minimum capital requirements.  This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until it reaches its final level of 2.5% on January 1, 2019.

 

The Basel III Capital rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness.  Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are now required to meet the following increased capital level requirements in order to qualify as “well capitalized”: (i) a CET1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

 

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

 

 

The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).  At March 31, 2016 and December 31, 2015, 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 as of the periods indicated are presented below.

 

 

 

Actual

 

Minimum Capital
Requirements

 

Minimum Required To
Be Well Capitalized
Under Prompt
Corrective Action
Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in thousands)

 

March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (Leverage)

 

$

46,751

 

12.02%

 

$

15,560

 

4.0%

 

$

19,450

 

5.0%

 

Common Equity Tier 1

 

$

46,751

 

19.19%

 

$

10,960

 

4.5%

 

$

15,832

 

6.5%

 

Tier 1

 

$

46,751

 

19.19%

 

$

14,614

 

6.0%

 

$

19,485

 

8.0%

 

Total Capital

 

$

49,814

 

20.45%

 

$

19,485

 

8.0%

 

$

24,356

 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (Leverage)

 

$

46,028

 

11.56%

 

$

15,923

 

4.0%

 

$

19,903

 

5.0%

 

Common Equity Tier 1

 

$

46,028

 

19.45%

 

$

10,650

 

4.5%

 

$

15,383

 

6.5%

 

Tier 1

 

$

46,028

 

19.45%

 

$

14,200

 

6.0%

 

$

18,933

 

8.0%

 

Total Capital

 

$

49,010

 

20.71%

 

$

18,933

 

8.0%

 

$

23,667

 

10.0%

 

 

NOTE (9) – Income Taxes

 

The Company and its subsidiary are subject to U.S. federal and state income taxes.  Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.  In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income and tax planning strategies.  This analysis is updated quarterly.  Based on this analysis, the Company determined that a valuation allowance of $2.4 million was required as of March 31, 2016, resulting in a $4.6 million net deferred tax assets.  The Company recorded a valuation allowance of $2.5 million and reported $4.6 million in net deferred tax assets as of December 31, 2015.

 

NOTE (10) – Concentration of Credit Risk

 

The Bank has a significant concentration of deposits with a long-time customer that accounted for approximately 13% of its deposits as of March 31, 2016.  The Bank expects to maintain this relationship with the customer.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.  Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I “Item 1, Financial Statements,” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015.  Certain statements herein are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the U.S. Securities Act of 1933, as amended, that reflect our current views with respect to future events and financial performance.  Forward-looking statements typically include the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” and other similar expressions.  These forward-looking statements are subject to risks and uncertainties, which could cause actual future results to differ materially from historical results or from those anticipated or implied by such statements.  Readers should not place undue reliance on these forward-looking statements, which speak only as of their dates or, if no date is provided, then as of the date of this Form 10-Q.  We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

 

Overview

 

We recorded net income of $633 thousand, or $0.02 per diluted share, for the first quarter of 2016, compared to net income of $1.3 million, or $0.04 per diluted share, for the first quarter of 2015.  The decrease of $665 thousand in net income during the first quarter of 2016 was primarily due to a decrease of $288 thousand in net interest income (before loan loss provision recapture), a decrease of $450 thousand in loan loss provision recapture and a decrease of $86 thousand in non-interest income, which were partially offset by a decrease of $159 thousand in non-interest expense.

 

The loan loss provision recapture reflects the substantial reduction in delinquencies and non-performing loans over the past three years. As of March 31, 2016, delinquencies and non-performing loans were at their lowest levels since 2009, and represented 0.29% and 1.06% of total assets. There were no loan charge-offs or loans transferred to REO during the first quarter of 2016 and the Bank owned no REO properties as of March 31, 2016.

 

Total assets decreased by $15.6 million during the first quarter of 2016, primarily because the Bank used cash to redeem $15.0 million of certificates of deposit.  Total cash and cash equivalents decreased $31.8 million, reflecting investments in loans receivable, which increased $15.7 million, and securities, which increased $1.1 million as we invested excess Federal Funds in multi-family residential loans and securities to improve the yield on interest-earning assets.

 

Results of Operations

 

Net Income

 

We recorded net income of $633 thousand for the first quarter of 2016, compared to $1.3 million for the first quarter of 2015.  Results during the first quarter of 2016 included a loan loss provision recapture of $300 thousand and a grant of $265 thousand from the U.S. Treasury Department’s Community Development Financial Institutions (“CDFI”) Fund.  During the first quarter of 2015, we recorded a loan loss provision recapture of $750 thousand, a grant of $355 thousand from the CDFI Fund and a gain on sale of loans of $134 thousand.

 

Net Interest Income

 

For the first quarter of 2016, net interest income totaled $2.7 million, representing a decrease of $288 thousand, or 10%, from the $3.0 million of net interest income reported for the first quarter of 2015.  The decrease in net interest income in the first quarter of 2016, compared to the first quarter of 2015 was due to lower interest income on loans.

 

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Table of Contents

 

Interest income and fees on loans for the first quarter of 2016 totaled $3.4 million, representing a decrease of $295 thousand, or 8%, from the $3.7 million of interest income and fees on loans for the first quarter of 2015.  The decrease in loan interest income in the first quarter of 2016, compared to the first quarter of 2015 was driven by a decrease of 60 basis points in the average yield on loans to 4.33% for the first quarter of 2016 from 4.93% for the first quarter of 2015, which reduced loan interest income by $469 thousand.  The average yield on loans for the first quarter of 2016 decreased primarily because the yields on the $99.7 million of single family loans that were purchased during the fourth quarter of 2015 and on loans that were originated during the first quarter of 2016 were lower than the average yields earned on th