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 September 30, 2017
[ ] 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 |
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95-4547287 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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5055 Wilshire Boulevard, Suite 500 |
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90036 |
(Address of principal executive offices) |
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(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 o
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 o
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 |
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o |
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Accelerated filer |
o |
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Non-accelerated filer |
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o (Do not check if a smaller reporting company) |
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Smaller reporting company |
x |
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Emerging growth company |
o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o 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 November 3, 2017, 18,694,823 shares of the Registrant’s voting common stock and 8,756,396 shares of the Registrant’s non-voting common stock were outstanding.
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PART I. |
FINANCIAL INFORMATION |
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Item 1. |
Consolidated Financial Statements (Unaudited) |
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Consolidated Statements of Financial Condition as of September 30, 2017 and December 31, 2016 |
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1 |
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2 | |
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Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 |
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3 |
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4 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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22 | |
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30 | ||
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30 | ||
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31 | ||
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31 | ||
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31 | ||
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31 | ||
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31 | ||
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31 | ||
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31 | ||
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32 |
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands, except share and per share amounts)
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September 30, 2017 |
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December 31, 2016 | ||||
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(Unaudited) |
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Assets |
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Cash and due from banks |
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$ |
2,166 |
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$ |
1,516 |
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Interest-bearing deposits in other banks |
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66,179 |
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16,914 |
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Cash and cash equivalents |
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68,345 |
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18,430 |
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Securities available-for-sale, at fair value |
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11,474 |
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13,202 |
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Loans receivable held for sale, at lower of cost or fair value |
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22,521 |
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- |
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Loans receivable held for investment, net of allowance of $4,213 and $4,603, respectively |
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320,522 |
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379,454 |
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Accrued interest receivable |
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1,113 |
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1,178 |
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Federal Home Loan Bank (FHLB) stock |
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2,916 |
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2,573 |
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Office properties and equipment, net |
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2,462 |
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2,479 |
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Bank owned life insurance |
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2,981 |
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2,940 |
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Deferred tax assets, net |
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5,696 |
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6,907 |
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Real estate owned (REO) |
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958 |
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- |
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Other assets |
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1,664 |
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1,920 |
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Total assets |
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$ |
440,652 |
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$ |
429,083 |
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Liabilities and stockholders’ equity |
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Liabilities: |
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Deposits |
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$ |
294,920 |
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$ |
287,427 |
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FHLB advances |
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86,000 |
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85,000 |
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Junior subordinated debentures |
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5,100 |
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5,100 |
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Advance payments by borrowers for taxes and insurance |
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1,537 |
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828 |
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Accrued expenses and other liabilities |
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4,980 |
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5,202 |
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Total liabilities |
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392,537 |
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383,557 |
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Stockholders’ Equity: |
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Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued or outstanding |
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- |
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- |
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Common stock, $.01 par value, voting, authorized 50,000,000 shares at September 30, 2017 and December 31, 2016; issued 21,312,649 shares at September 30, 2017 and 21,282,647 shares at December 31, 2016; outstanding 18,694,823 shares at September 30, 2017 and 18,664,821 shares at December 31, 2016 |
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213 |
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212 |
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Common stock, $.01 par value, non-voting, authorized 25,000,000 shares at September 30, 2017 and December 31, 2016; issued and outstanding 8,756,396 shares at September 30, 2017 and December 31, 2016 |
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87 |
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87 |
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Additional paid-in capital |
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46,073 |
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45,819 |
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Retained earnings |
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8,281 |
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6,013 |
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Unearned Employee Stock Ownership Plan (ESOP) shares |
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(1,112 |
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(1,176 |
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Accumulated other comprehensive income (loss) |
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(101 |
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(103 |
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Treasury stock-at cost, 2,617,826 shares at September 30, 2017 and December 31, 2016 |
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(5,326 |
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(5,326 |
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Total stockholders’ equity |
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48,115 |
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45,526 |
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Total liabilities and stockholders’ equity |
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$ |
440,652 |
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$ |
429,083 |
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See accompanying notes to unaudited consolidated financial statements.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
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Three Months Ended |
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Nine Months Ended | |||||||||||||
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2017 |
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2016 |
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2017 |
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2016 |
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(In thousands, except per share) |
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Interest income: |
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Interest and fees on loans receivable |
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$ |
4,127 |
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$ |
3,835 |
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$ |
12,035 |
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$ |
10,855 |
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Interest on mortgage-backed and other securities |
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69 |
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80 |
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217 |
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247 |
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Other interest income |
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148 |
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98 |
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365 |
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299 |
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Total interest income |
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4,344 |
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4,013 |
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12,617 |
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11,401 |
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Interest expense: |
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Interest on deposits |
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611 |
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568 |
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1,782 |
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1,596 |
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Interest on borrowings |
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494 |
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419 |
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1,515 |
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1,267 |
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Total interest expense |
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1,105 |
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987 |
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3,297 |
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2,863 |
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Net interest income |
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3,239 |
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3,026 |
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9,320 |
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8,538 |
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Loan loss provision recapture |
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300 |
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- |
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950 |
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550 |
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Net interest income after loan loss provision recapture |
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3,539 |
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3,026 |
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10,270 |
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9,088 |
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Non-interest income: |
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Service charges |
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117 |
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119 |
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338 |
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365 |
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Gain on sale of loans |
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160 |
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- |
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383 |
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- |
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CDFI grant |
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- |
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- |
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- |
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265 |
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Income from litigation settlement |
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- |
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- |
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1,183 |
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- |
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Other |
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28 |
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25 |
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82 |
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256 |
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Total non-interest income |
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305 |
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144 |
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1,986 |
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886 |
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Non-interest expense: |
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Compensation and benefits |
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1,878 |
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1,729 |
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5,193 |
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5,341 |
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Occupancy expense |
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333 |
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301 |
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953 |
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883 |
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Information services |
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202 |
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199 |
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610 |
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585 |
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Professional services |
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120 |
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170 |
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525 |
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617 |
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Office services and supplies |
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72 |
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74 |
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225 |
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216 |
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FDIC assessments |
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34 |
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68 |
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118 |
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151 |
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Other |
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418 |
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302 |
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1,144 |
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900 |
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Total non-interest expense |
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3,057 |
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2,843 |
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8,768 |
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8,693 |
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Income before income taxes |
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787 |
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327 |
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3,488 |
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1,281 |
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Income taxes |
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284 |
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- |
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1,220 |
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2 |
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Net income |
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$ |
503 |
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$ |
327 |
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$ |
2,268 |
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$ |
1,279 |
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Other comprehensive income (loss), net of tax: |
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Unrealized gains (losses) on securities available-for-sale arising during the period |
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$ |
- |
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$ |
(68 |
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$ |
3 |
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$ |
95 |
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Income tax |
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- |
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(28 |
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1 |
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39 |
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Other comprehensive income (loss), net of tax |
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- |
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(40 |
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2 |
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56 |
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Comprehensive income |
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$ |
503 |
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$ |
287 |
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$ |
2,270 |
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$ |
1,335 |
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Earnings per common share-basic |
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$ |
0.02 |
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$ |
0.01 |
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$ |
0.09 |
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$ |
0.04 |
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Earnings per common share-diluted |
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$ |
0.02 |
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$ |
0.01 |
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$ |
0.08 |
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$ |
0.04 |
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See accompanying notes to unaudited consolidated financial statements.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended September 30, | ||||||
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2017 |
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2016 |
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(In thousands) | ||||||
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Cash flows from operating activities: |
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Net income |
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$ |
2,268 |
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$ |
1,279 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Loan loss provision recapture |
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(950 |
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(550 |
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Depreciation |
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194 |
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187 |
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Net amortization of deferred loan origination costs |
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216 |
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223 |
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Net amortization of premiums on mortgage-backed securities |
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23 |
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38 |
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Amortization of investment in affordable housing limited partnership |
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146 |
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145 |
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Stock-based compensation expense |
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240 |
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23 |
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ESOP compensation expense |
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79 |
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62 |
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Earnings on bank owned life insurance |
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(41 |
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(44 |
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Originations of loans receivable held for sale |
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(94,972 |
) |
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- |
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Repayments on loans receivable held for sale |
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318 |
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- |
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Proceeds from sales of loans receivable held for sale |
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81,853 |
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- |
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Gain on sale of loans receivable held for sale |
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(383 |
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- |
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Net gain on sale of REOs |
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- |
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(22 |
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Net change in deferred taxes |
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1,210 |
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(8 |
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Net change in accrued interest receivable |
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65 |
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(23 |
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Net change in other assets |
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110 |
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129 |
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Net change in advance payments by borrowers for taxes and insurance |
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709 |
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402 |
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Net change in accrued expenses and other liabilities |
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(222 |
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(1,845 |
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Net cash used in operating activities |
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(9,137 |
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(4 |
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Cash flows from investing activities: |
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Net change in loans receivable held for investment |
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49,371 |
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(40,235 |
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Purchase of available-for-sale securities |
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- |
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(2,505 |
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Principal payments on available-for-sale securities |
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1,708 |
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2,365 |
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Proceeds from sales of REO |
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- |
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382 |
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Purchase of FHLB stock |
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(343 |
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- |
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Additions to office properties and equipment |
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(177 |
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(45 |
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Net cash provided by (used in) investing activities |
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50,559 |
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(40,038 |
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Cash flows from financing activities: |
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Net change in deposits |
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7,493 |
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12,484 |
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Proceeds from FHLB advances |
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29,500 |
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- |
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Repayments of FHLB advances |
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(28,500 |
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(2,000 |
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Net cash provided by financing activities |
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8,493 |
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10,484 |
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Net change in cash and cash equivalents |
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49,915 |
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(29,558 |
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Cash and cash equivalents at beginning of the period |
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18,430 |
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|
67,839 |
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Cash and cash equivalents at end of the period |
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$ |
68,345 |
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$ |
38,281 |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
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$ |
3,168 |
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$ |
2,835 |
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Cash paid for income taxes |
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20 |
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8 |
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Supplemental disclosures of cash flow information: |
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Transfers of loans receivable held for investment to REO |
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$ |
958 |
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$ |
- |
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Transfers of loans receivable held for investment to loans receivable held for sale |
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9,337 |
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- |
|
See accompanying notes to unaudited consolidated financial statements.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2017
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, 2016 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 and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
Recently Adopted Accounting Pronouncement
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. Under the new guidance, all excess tax benefits and deficiencies that occur when an award vests, is exercised, or expires are recognized in income tax expense as discrete period items. Previously, these transactions were typically recorded directly within equity. Consistent with this change, excess tax benefits and deficiencies are no longer included within estimated proceeds when performing the calculation for diluted earnings per share. The presentation of excess tax benefits in the statement of cash flows shifted to an operating activity from the prior classification as a financing activity. ASU 2016-09 also provides an accounting policy election to recognize forfeitures of awards as they occur when estimating stock-based compensation expense rather than the previous requirement to estimate forfeitures from inception. ASU 2016-09 became effective for the Company for reporting periods after January 1, 2017. The actual effects of adoption in 2017 primarily depends upon the share price of the Company’s stock, probability of exercise of certain stock options and the magnitude of windfalls for all awards upon either vesting or exercise. The effects on earnings per share calculations and election to account for forfeitures as incurred have not been significant.
Recently Issued Accounting Pronouncements (Not Yet Effective)
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 replaced existing revenue recognition guidance for contracts to provide goods or services to customers. The new guidance clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company’s revenue is mainly comprised of net interest income from financial assets and liabilities and to a lesser degree, noninterest income. The scope of ASU 2014-09 explicitly excludes net interest income as well as other revenues associated with financial assets and liabilities, including loans and securities. Accordingly, the majority of the Company’s revenues will not be affected. The Company will continue to evaluate the effect that this guidance will have on other revenue streams within its scope, as well as changes in disclosures required by the new guidance. However, adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 (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 securities. 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. While the Company is currently evaluating the impact of this standard, the Company does not expect its adoption 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, as defined) 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 adoption is permitted. 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 has identified certain contracts with respect to leased real estate and office equipment that are within the scope of ASU 2016-02. As a lessee in operating lease arrangements that are not considered short-tem, effective January 1, 2019, the Company expects a gross-up of its Consolidated Statements of Condition as a result of recognizing lease liabilities and right of use assets. However, it will likely not have a significant impact on the Company’s Consolidated Statements of Income and Comprehensive Income or Cash Flows but will have a minor impact on the Bank’s regulatory capital.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses over the life of the related financial assets. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public business entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. While the Company is still evaluating the impact on its consolidated financial statements, the Company expects that ASU 2016-13 may result in an increase in the allowance for credit losses due to the following factors: 1) the allowance for credit losses will increase to provide for expected credit losses over the remaining expected life of the loan portfolio, and will consider expected future changes in macroeconomic conditions; and 2) an allowance may be established for estimated credit losses on available-for-sale debt securities. The amount of increase will be impacted by the portfolio composition and quality, as well as the economic conditions and forecasts as of the adoption date. While the Company has begun its implementation efforts by identifying key interpretive issues, and assessing its processes and identifying the system requirements against the new guidance to determine what modifications may be required, the Company cannot yet determine the overall impact of the new standard on its consolidated financial statements.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 provides guidance on the classification of certain cash receipts and payments on the consolidated statement of cash flows in order to reduce diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, where the guidance should be applied using a retrospective transition method to each period presented. Early adoption is permitted. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE (2) – Earnings Per Share of Common Stock
Basic earnings per share of common stock is computed pursuant to the two-class method by dividing net income available to common stockholders less dividends paid on participating securities (unvested shares of restricted common stock) and any undistributed earnings attributable to participating securities by the weighted average common shares outstanding during the period. The weighted average common shares outstanding includes the weighted average number of shares of common stock outstanding less the weighted average number of unvested shares of restricted common stock. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per share of common stock includes the dilutive effect of unvested stock awards and additional potential common shares issuable under stock options.
The following table shows how the Company computed basic and diluted earnings per share of common stock for the periods indicated:
|
|
For the three months ended |
|
|
For the nine months ended | |||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 | |||||
|
|
(Dollars in thousands, except per share) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
503 |
|
|
$ |
327 |
|
|
$ |
2,268 |
|
|
$ |
1,279 |
|
Less net income attributable to participating securities |
|
1 |
|
|
- |
|
|
5 |
|
|
- |
| ||||
Income available to common stockholders |
|
$ |
502 |
|
|
$ |
327 |
|
|
$ |
2,263 |
|
|
$ |
1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding for basic earnings per common share |
|
26,702,564 |
|
|
29,076,708 |
|
|
26,662,344 |
|
|
29,076,708 |
| ||||
Add: dilutive effects of unvested restricted stock awards |
|
42,345 |
|
|
- |
|
|
56,552 |
|
|
- |
| ||||
Add: dilutive effects of assumed exercises of stock options |
|
79,898 |
|
|
- |
|
|
3,748 |
|
|
- |
| ||||
Weighted average common shares outstanding for diluted earnings per common share |
|
26,824,807 |
|
|
29,076,708 |
|
|
26,722,644 |
|
|
29,076,708 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share - basic |
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.09 |
|
|
$ |
0.04 |
|
Earnings per common share - diluted |
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
Stock options for 90,625 shares of common stock for the three and nine months ended September 30, 2017 and for 540,625 shares of common stock for the three and nine months ended September 30, 2016 were not considered in computing diluted earnings per common share because they were anti-dilutive.
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 |
|
Gross |
|
Fair Value |
| ||||
|
|
(In thousands) |
| ||||||||||
September 30, 2017: |
|
|
|
|
|
|
|
|
| ||||
Federal agency mortgage-backed securities |
|
$ |
9,280 |
|
$ |
216 |
|
$ |
(11) |
|
$ |
9,485 |
|
Federal agency debt |
|
1,971 |
|
18 |
|
- |
|
1,989 |
| ||||
Total available-for-sale securities |
|
$ |
11,251 |
|
$ |
234 |
|
$ |
(11) |
|
$ |
11,474 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2016: |
|
|
|
|
|
|
|
|
| ||||
Federal agency mortgage-backed securities |
|
$ |
11,022 |
|
$ |
227 |
|
$ |
(35) |
|
$ |
11,214 |
|
Federal agency debt |
|
1,960 |
|
28 |
|
- |
|
1,988 |
| ||||
Total available-for-sale securities |
|
$ |
12,982 |
|
$ |
255 |
|
$ |
(35) |
|
$ |
13,202 |
|
At September 30, 2017, the Bank had one federal agency security with an amortized cost and an estimated fair value of $2.0 million and a contractual maturity of October 2, 2019. The Bank also had 24 federal agency mortgage-backed securities with an amortized cost of $9.3 million, an estimated fair value of $9.5 million and an estimated average remaining life of 4.1 years. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
At September 30, 2017 and December 31, 2016, securities pledged to secure public deposits had a carrying amount of $533 thousand and $629 thousand, respectively. At September 30, 2017 and December 31, 2016, 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 or nine months ended September 30, 2017 and 2016.
We held two securities with unrealized losses at September 30, 2017 and three securities with unrealized losses at December 31, 2016. Securities in unrealized loss positions are analyzed as part of our ongoing assessment of other-than-temporary impairment. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair value has been less than the cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. All of the Bank’s securities were issued by the federal government or its agencies. The unrealized losses on our available-for-sale securities at September 30, 2017 were primarily caused by movements in market interest rates subsequent to the purchase of such securities. We do not consider these unrealized losses to be other than temporary impairment.
NOTE (4) – Loans Receivable Held for Sale
Loans receivable held for sale at September 30, 2017 totaled $22.5 million and consisted of multi-family loans. As part of the Bank’s loan concentration risk management program, $9.3 million of multi-family loans were transferred from the held-for-investment portfolio to the held-for-sale portfolio during the nine months ended September 30, 2017. The Bank also allocated $94.7 million, or 96%, of its total loan originations during the period as held-for-sale and completed sales of $81.1 million of multi-family loans during the nine months ended September 30, 2017 for a total gain of $383 thousand. There were no loans held for sale at December 31, 2016.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
NOTE (5) – Loans Receivable Held for Investment
Loans receivable held for investment were as follows as of the periods indicated:
|
|
September 30, 2017 |
|
December 31, 2016 |
| ||
|
|
(In thousands) |
| ||||
Real estate: |
|
|
|
|
| ||
Single family |
|
$ |
89,521 |
|
$ |
104,807 |
|
Multi-family |
|
194,483 |
|
229,566 |
| ||
Commercial real estate |
|
6,129 |
|
8,914 |
| ||
Church |
|
31,188 |
|
37,826 |
| ||
Construction |
|
1,394 |
|
837 |
| ||
Commercial – other |
|
351 |
|
308 |
| ||
Consumer |
|
7 |
|
6 |
| ||
Gross loans receivable before deferred loan costs and premiums |
|
323,073 |
|
382,264 |
| ||
Unamortized net deferred loan costs and premiums |
|
1,662 |
|
1,793 |
| ||
Gross loans receivable |
|
324,735 |
|
384,057 |
| ||
Allowance for loan losses |
|
(4,213) |
|
(4,603) |
| ||
Loans receivable, net |
|
$ |
320,522 |
|
$ |
379,454 |
|
The following tables present the activity in the allowance for loan losses by loan type for the periods indicated:
|
|
Three Months Ended September 30, 2017 | |||||||||||||||||||||||||||||||
|
|
Real Estate |
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
Single |
|
Multi- |
|
Commercial |
|
Church |
|
Construction |
|
Commercial |
|
Consumer |
|
Total | |||||||||||||||||
|
|
(In thousands) | |||||||||||||||||||||||||||||||
Beginning balance |
|
$ |
320 |
|
$ |
2,719 |
|
$ |
77 |
|
$ |
1,104 |
|
$ |
9 |
|
$ |
17 |
|
$ |
- |
|
$ |
4,246 | |||||||||
Provision for (recapture of) loan losses |
|
219 |
|
(297) |
|
(4) |
|
(214) |
|
5 |
|
(9) |
|
- |
|
(300) | |||||||||||||||||
Recoveries |
|
- |
|
- |
|
- |
|
267 |
|
- |
|
- |
|
- |
|
267 | |||||||||||||||||
Loans charged off |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- | |||||||||||||||||
Ending balance |
|
$ |
539 |
|
$ |
2,422 |
|
$ |
73 |
|
$ |
1,157 |
|
$ |
14 |
|
$ |
8 |
|
$ |
- |
|
$ |
4,213 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
|
Three Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
|
|
Real Estate |
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
Single |
|
Multi- |
|
Commercial |
|
Church |
|
Construction |
|
Commercial |
|
Consumer |
|
Total | |||||||||||||||||
|
|
(In thousands) | |||||||||||||||||||||||||||||||
Beginning balance |
|
$ |
441 |
|
$ |
2,247 |
|
$ |
240 |
|
$ |
1,596 |
|
$ |
3 |
|
$ |
17 |
|
$ |
1 |
|
$ |
4,545 | |||||||||
Provision for (recapture of) loan losses |
|
(68) |
|
200 |
|
2 |
|
(133) |
|
- |
|
(1) |
|
- |
|
- | |||||||||||||||||
Recoveries |
|
47 |
|
- |
|
- |
|
4 |
|
- |
|
1 |
|
- |
|
52 | |||||||||||||||||
Loans charged off |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- | |||||||||||||||||
Ending balance |
|
$ |
420 |
|
$ |
2,447 |
|
$ |
242 |
|
$ |
1,467 |
|
$ |
3 |
|
$ |
17 |
|
$ |
1 |
|
$ |
4,597 | |||||||||
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
|
|
Nine Months Ended September 30, 2017 | |||||||||||||||||||||||||||||||
|
|
Real Estate |
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
Single |
|
Multi- |
|
Commercial |
|
Church |
|
Construction |
|
Commercial |
|
Consumer |
|
Total | |||||||||||||||||
|
|
(In thousands) | |||||||||||||||||||||||||||||||
Beginning balance |
|
$ |
367 |
|
$ |
2,659 |
|
$ |
215 |
|
$ |
1,337 |
|
$ |
8 |
|
$ |
17 |
|
$ |
- |
|
$ |
4,603 | |||||||||
Provision for (recapture of) loan losses |
|
142 |
|
(237) |
|
(142) |
|
(710) |
|
6 |
|
(9) |
|
- |
|
(950) | |||||||||||||||||
Recoveries |
|
30 |
|
- |
|
- |
|
530 |
|
- |
|
- |
|
- |
|
560 | |||||||||||||||||
Loans charged off |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- | |||||||||||||||||
Ending balance |
|
$ |
539 |
|
$ |
2,422 |
|
$ |
73 |
|
$ |
1,157 |
|
$ |
14 |
|
$ |
8 |
|
$ |
- |
|
$ |
4,213 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
|
Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
|
|
Real Estate |
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
Single |
|
Multi- |
|
Commercial |
|
Church |
|
Construction |
|
Commercial |
|
Consumer |
|
Total | |||||||||||||||||
|
|
(In thousands) | |||||||||||||||||||||||||||||||
Beginning balance |
|
$ |
597 |
|
$ |
1,658 |
|
$ |
469 |
|
$ |
2,083 |
|
$ |
3 |
|
$ |
18 |
|
$ |
- |
|
$ |
4,828 | |||||||||
Provision for (recapture of) loan losses |
|
(224) |
|
789 |
|
(475) |
|
(632) |
|
- |
|
(9) |
|
1 |
|
(550) | |||||||||||||||||
Recoveries |
|
47 |
|
- |
|
248 |
|
16 |
|
- |
|
8 |
|
- |
|
319 | |||||||||||||||||
Loans charged off |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- | |||||||||||||||||
Ending balance |
|
$ |
420 |
|
$ |
2,447 |
|
$ |
242 |
|
$ |
1,467 |
|
$ |
3 |
|
$ |
17 |
|
$ |
1 |
|
$ |
4,597 | |||||||||
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 and for the periods indicated:
|
|
September 30, 2017 | ||||||||||||||||||||||
|
|
Real Estate |
|
|
|
|
|
| ||||||||||||||||
|
|
Single |
|
Multi- |
|
Commercial |
|
Church |
|
Construction |
|
Commercial |
|
Consumer |
|
Total | ||||||||
|
|
(In thousands) | ||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Individually evaluated for impairment |
|
$ |
102 |
|
$ |
1 |
|
$ |
- |
|
$ |
521 |
|
$ |
- |
|
$ |
5 |
|
$ |
- |
|
$ |
629 |
Collectively evaluated for impairment |
|
437 |
|
2,421 |
|
73 |
|
636 |
|
14 |
|
3 |
|
- |
|
3,584 | ||||||||
Total ending allowance balance |
|
$ |
539 |
|
$ |
2,422 |
|
$ |
73 |
|
$ |
1,157 |
|
$ |
14 |
|
$ |
8 |
|
$ |
- |
|
$ |
4,213 |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loans individually evaluated for impairment |
|
$ |
631 |
|
$ |
630 |
|
$ |
- |
|
$ |
8,435 |
|
$ |
- |
|
$ |
65 |
|
$ |
- |
|
$ |
9,761 |
Loans collectively evaluated for impairment |
|
89,348 |
|
195,398 |
|
6,136 |
|
22,418 |
|
1,381 |
|
286 |
|
7 |
|
314,974 | ||||||||
Total ending loans balance |
|
$ |
89,979 |
|
$ |
196,028 |
|
$ |
6,136 |
|
$ |
30,853 |
|
$ |
1,381 |
|
$ |
351 |
|
$ |
7 |
|
$ |
324,735 |
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
|
|
December 31, 2016 | ||||||||||||||||||||||
|
|
Real Estate |
|
|
|
|
|
| ||||||||||||||||
|
|
Single |
|
Multi- |
|
Commercial |
|
Church |
|
Construction |
|
Commercial |
|
Consumer |
|
Total | ||||||||
|
|
(In thousands) | ||||||||||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Individually evaluated for impairment |
|
$ |
125 |
|
$ |
- |
|
$ |
- |
|
$ |
516 |
|
$ |
- |
|
$ |
15 |
|
$ |
- |
|
$ |
656 |
Collectively evaluated for impairment |
|
242 |
|
2,659 |
|
215 |
|
821 |
|
8 |
|
2 |
|
- |
|
3,947 | ||||||||
Total ending allowance balance |
|
$ |
367 |
|
$ |
2,659 |
|
$ |
215 |
|
$ |
1,337 |
|
$ |
8 |
|
$ |
17 |
|
$ |
- |
|
$ |
4,603 |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loans individually evaluated for impairment |
|
$ |
644 |
|
$ |
642 |
|
$ |
- |
|
$ |
10,545 |
|
$ |
- |
|
$ |
66 |
|
$ |
- |
|
$ |
11,897 |
Loans collectively evaluated for impairment |
|
104,688 |
|
230,798 |
|
8,921 |
|
26,678 |
|
827 |
|
242 |
|
6 |
|
372,160 | ||||||||
Total ending loans balance |
|
$ |
105,332 |
|
$ |
231,440 |
|
$ |
8,921 |
|
$ |
37,223 |
|
$ |
827 |
|
$ |
308 |
|
$ |
6 |
|
$ |
384,057 |
The following table presents information related to loans individually evaluated for impairment by loan type as of the periods indicated:
|
|
September 30, 2017 |
|
December 31, 2016 |
| ||||||||||||||
|
|
Unpaid |
|
Recorded |
|
Allowance |
|
Unpaid |
|
Recorded |
|
Allowance |
| ||||||
|
|
(In thousands) |
| ||||||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Multi-family |
|
$ |
295 |
|
$ |
295 |
|
$ |
- |
|
$ |
642 |
|
$ |
642 |
|
$ |
- |
|
Church |
|
5,181 |
|
3,398 |
|
- |
|
5,946 |
|
3,589 |
|
- |
| ||||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Single family |
|
631 |
|
631 |
|
102 |
|
644 |
|
644 |
|
125 |
| ||||||
Multi-family |
|
335 |
|
335 |
|
1 |
|
- |
|
- |
|
- |
| ||||||
Church |
|
5,077 |
|
5,037 |
|
521 |
|
7,330 |
|
6,956 |
|
516 |
| ||||||
Commercial - other |
|
65 |
|
65 |
|
5 |
|
66 |
|
66 |
|
15 |
| ||||||
Total |
|
$ |
11,584 |
|
$ |
9,761 |
|
$ |
629 |
|
$ |
14,628 |
|
$ |
11,897 |
|
$ |
656 |
|
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.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
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 September 30, 2017 |
|
Nine Months Ended September 30, 2017 | ||||||||||||||||
|
|
Average |
|
Cash Basis |
|
Average |
|
Cash Basis | ||||||||||||
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
| ||||||||
Single family |
|
|
$ |
634 |
|
|
|
$ |
7 |
|
|
|
$ |
638 |
|
|
|
$ |
21 |
|
Multi-family |
|
|
631 |
|
|
|
5 |
|
|
|
636 |
|
|
|
28 |
| ||||
Commercial real estate |
|
|
- |
|
|
|
- |
|
|
|
397 |
|
|
|
104 |
| ||||
Church |
|
|
9,038 |
|
|
|
256 |
|
|
|
9,674 |
|
|
|
592 |
| ||||
Commercial – other |
|
|
65 |
|
|
|
2 |
|
|
|
65 |
|
|
|
4 |
| ||||
Total |
|
|
$ |
10,368 |
|
|
|
$ |
270 |
|
|
|
$ |
11,410 |
|
|
|
$ |
749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Three Months Ended September 30, 2016 |
|
Nine Months Ended September 30, 2016 | ||||||||||||||||
|
|
Average |
|
Cash Basis |
|
Average |
|
Cash Basis | ||||||||||||
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
| ||||||||
Single family |
|
|
$ |
780 |
|
|
|
$ |
232 |
|
|
|
$ |
878 |
|
|
|
$ |
246 |
|
Multi-family |
|
|
804 |
|
|
|
92 |
|
|
|
997 |
|
|
|
144 |
| ||||
Commercial real estate |
|
|
425 |
|
|
|
4 |
|
|
|
1,277 |
|
|
|
271 |
| ||||
Church |
|
|
10,766 |
|
|
|
122 |
|
|
|
10,966 |
|
|
|
369 |
| ||||
Commercial –other |
|
|
66 |
|
|
|
2 |
|
|
|
66 |
|
|
|
4 |
| ||||
Total |
|
|
$ |
12,841 |
|
|
|
$ |
452 |
|
|
|
$ |
14,184 |
|
|
|
$ |
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans and interest recoveries on non-accrual loans that were paid off. 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 or paid off. When a loan is returned to accrual status, the interest payments that were previously applied to principal are deferred and amortized over the remaining life of the loan.
The following tables present the aging of the recorded investment in past due loans by loan type as of the periods indicated:
|
|
September 30, 2017 | |||||||||||||||||||||||
|
|
30-59 |
|
60-89 |
|
Greater than |
|
Total |
|
Current | |||||||||||||||
|
|
(In thousands) | |||||||||||||||||||||||
Loans receivable held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family |
|
|
$ |
- |
|
|
|
$ |
54 |
|
|
|
$ |
- |
|
|
|
$ |
54 |
|
|
|
$ |
89,925 |
|
Multi-family |
|
|
- |
|
|
|
295 |
|
|
|
- |
|
|
|
295 |
|
|
|
195,733 |
| |||||
Commercial real estate |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,136 |
| |||||
Church |
|
|
17 |
|
|
|
- |
|
|
|
371 |
|
|
|
388 |
|
|
|
30,465 |
| |||||
Construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,381 |
| |||||
Commercial - other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
351 |
| |||||
Consumer |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
| |||||
Total |
|
|
$ |
17 |
|
|
|
$ |
349 |
|
|
|
$ |
371 |
|
|
|
$ |
737 |
|
|
|
$ |
323,998 |
|
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
|
|
December 31, 2016 | |||||||||||||||||||||||
|
|
30-59 |
|
60-89 |
|
Greater than |
|
Total |
|
Current | |||||||||||||||
|
|
(In thousands) | |||||||||||||||||||||||
Loans receivable held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family |
|
|
$ |
- |
|
|
|
$ |
64 |
|
|
|
$ |
- |
|
|
|
$ |
64 |
|
|
|
$ |
105,268 |
|
Multi-family |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
231,440 |
| |||||
Commercial real estate |
|
|
1,324 |
|
|
|
- |
|
|
|
- |
|
|
|
1,324 |
|
|
|
7,597 |
| |||||
Church |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37,223 |
| |||||
Construction |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
827 |
| |||||
Commercial - other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
308 |
| |||||
Consumer |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
| |||||
Total |
|
|
$ |
1,324 |
|
|
|
$ |
64 |
|
|
|
$ |
- |
|
|
|
$ |
1,388 |
|
|
|
$ |
382,669 |
|
The following table presents the recorded investment in non-accrual loans by loan type as of the periods indicated:
|
|
September 30, 2017 |
|
December 31, 2016 | ||||||
|
|
(In thousands) | ||||||||
Loans receivable held for investment: |
|
|
|
|
|
|
|
|
|
|
Multi-family |
|
|
$ |
295 |
|
|
|
$ |
- |
|
Church |
|
|
1,865 |
|
|
|
2,944 |
| ||
Total non-accrual loans |
|
|
$ |
2,160 |
|
|
|
$ |
2,944 |
|
There were no loans 90 days or more delinquent that were accruing interest as of September 30, 2017 or December 31, 2016.
Troubled Debt Restructurings
At September 30, 2017, loans classified as troubled debt restructurings (“TDRs”) totaled $9.4 million, of which $1.8 million were included in non-accrual loans and $7.6 million were on accrual status. At December 31, 2016, loans classified as TDRs totaled $11.5 million, of which $2.5 million were included in non-accrual loans and $9.0 million were on accrual status. The Company has allocated $629 thousand and $656 thousand of specific reserves for accruing TDRs as of September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, 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 or nine months ended September 30, 2017 and 2016.
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:
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
§ 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.
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 and/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:
|
|
September 30, 2017 |
| ||||||||||||||||
|
|
Pass |
|
Watch |
|
Special Mention |
|
Substandard |
|
Doubtful |
|
Loss |
| ||||||
|
|
(In thousands) |
| ||||||||||||||||
Single family |
|
$ |
89,967 |
|
$ |
- |
|
$ |
- |
|
$ |
12 |
|
$ |
- |
|
$ |
- |
|
Multi-family |
|
194,754 |
|
- |
|
- |
|
1,274 |
|
- |
|
- |
| ||||||
Commercial real estate |
|
6,013 |
|
123 |
|
- |
|
- |
|
- |
|
- |
| ||||||
Church |
|
24,692 |
|
695 |
|
- |
|
5,466 |
|
- |
|
- |
| ||||||
Construction |
|
1,381 |
|
- |
|
- |
|
- |
|
- |
|
- |
| ||||||
Commercial - other |
|
286 |
|
- |
|
- |
|
65 |
|
- |
|
- |
| ||||||
Consumer |
|
7 |
|
- |
|
- |
|
- |
|
- |
|
- |
| ||||||
Total |
|
$ |
317,100 |
|
$ |
818 |
|
$ |
- |
|
$ |
6,817 |
|
$ |
- |
|
$ |
- |
|
|
|
|
| ||||||||||||||||
|
|
December 31, 2016 |
| ||||||||||||||||
|
|
Pass |
|
Watch |
|
Special Mention |
|
Substandard |
|
Doubtful |
|
Loss |
| ||||||
|
|
(In thousands) |
| ||||||||||||||||
Single family |
|
$ |
105,332 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
Multi-family |
|
228,522 |
|
1,274 |
|
342 |
|
1,302 |
|
- |
|
- |
| ||||||
Commercial real estate |
|
6,965 |
|
- |
|
- |
|
1,956 |
|
- |
|
- |
| ||||||
Church |
|
27,560 |
|
1,143 |
|
823 |
|
7,697 |
|
- |
|
- |
| ||||||
Construction |
|
827 |
|
- |
|
- |
|
- |
|
- |
|
- |
| ||||||
Commercial - other |
|
242 |
|
- |
|
- |
|
66 |
|
- |
|
- |
| ||||||
Consumer |
|
6 |
|
- |
|
- |
|
- |
|
- |
|
- |
| ||||||
Total |
|
$ |
369,454 |
|
$ |
2,417 |
|
$ |
1,165 |
|
$ |
11,021 |
|
$ |
- |
|
$ |
- |
|
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
NOTE (6) — 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 3.86% at September 30, 2017. 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.
NOTE (7) — 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.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
Appraisals for collateral-dependent impaired loans 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.
Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:
|
|
Fair Value Measurement |
| ||||||||||
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
| ||||
|
|
(In thousands) |
| ||||||||||
At September 30, 2017: |
|
|
|
|
|
|
|
|
| ||||
Securities available-for-sale - federal agency mortgage-backed |
|
$ |
- |
|
$ |
9,485 |
|
$ |
- |
|
$ |
9,485 |
|
Securities available-for-sale - federal agency debt |
|
1,989 |
|
- |
|
- |
|
1,989 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
At December 31, 2016: |
|
|
|
|
|
|
|
|
| ||||
Securities available-for-sale - federal agency mortgage-backed |
|
$ |
- |
|
$ |
11,214 |
|
$ |
- |
|
$ |
11,214 |
|
Securities available-for-sale - federal agency debt |
|
1,988 |
|
- |
|
- |
|
1,988 |
|
There were no transfers between Level 1, Level 2, or Level 3 during the three and nine months ended September 30, 2017 and 2016.
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 statement of condition. 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.
|
|
September 30, 2017 |
|
December 31, 2016 |
| ||
|
|
(In thousands) |
| ||||
Impaired loans carried at fair value of collateral |
|
$ |
796 |
|
$ |
1,744 |
|
Real estate owned |
|
|
958 |
|
|
- |
|
There were no losses recognized on assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2017 and 2016.
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 September 30, 2017 and December 31, 2016:
|
|
Valuation |
|
Unobservable Input(s) |
|
Range |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017: |
|
|
|
|
|
|
|
|
|
Impaired loans |
|
Third Party Appraisals |
|
Adjustment for differences between the comparable sales |
|
-16% to 7% |
|
-4% |
|
|
|
|
|
|
|
|
|
|
|
Real estate owned – church |
|
Third Party Appraisals |
|
Adjustment for differences between the comparable sales |
|
-6% |
|
-6% |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016: |
|
|
|
|
|
|
|
|
|
Impaired loans |
|
Third Party Appraisals |
|
Adjustment for differences between the comparable sales |
|
-2% to 0% |
|
-1% |
|
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 September 30, 2017 |
| |||||||||||
|
|
Carrying |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |||||
|
|
(In thousands) |
| |||||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
68,345 |
|
$ |
68,345 |
|
$ |
- |
|
$ |
- |
|
$ |
68,345 |
|
Securities available-for-sale |
|
11,474 |
|
1,989 |
|
9,485 |
|
- |
|
11,474 |
| |||||
Loans receivable held for sale |
|
22,521 |
|
- |
|
22,910 |
|
- |
|
22,910 |
| |||||
Loans receivable held for investment |
|
320,522 |
|
- |
|
- |
|
319,012 |
|
319,012 |
| |||||
Accrued interest receivable |
|
1,113 |
|
63 |
|
89 |
|
961 |
|
1,113 |
| |||||
Federal Home Loan Bank stock |
|
2,916 |
|
2,916 |
|
- |
|
- |
|
2,916 |
| |||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
|
$ |
294,920 |
|
$ |
- |
|
$ |
286,025 |
|
$ |
- |
|
$ |
286,024 |
|
Federal Home Loan Bank advances |
|
86,000 |
|
- |
|
86,238 |
|
- |
|
86,268 |
| |||||
Junior subordinated debentures |
|
5,100 |
|
- |
|
- |
|
4,481 |
|
4,481 |
| |||||
Accrued interest payable |
|
283 |
|
- |
|
277 |
|
6 |
|
283 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
Fair Value Measurements at December 31, 2016 |
| |||||||||||
|
|
Carrying |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |||||
|
|
(In thousands) |
| |||||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
18,430 |
|
$ |
18,430 |
|
$ |
- |
|
$ |
- |
|
$ |
18,430 |
|
Securities available-for-sale |
|
13,202 |
|
1,988 |
|
11,214 |
|
- |
|
13,202 |
| |||||
Loans receivable held for investment |
|
379,454 |
|
- |
|
- |
|
382,717 |
|
382,717 |
| |||||
Accrued interest receivable |
|
1,178 |
|
64 |
|
29 |
|
1,085 |
|
1,178 |
| |||||
Federal Home Loan Bank stock |
|
2,573 |
|
2,573 |
|
- |
|
- |
|
2,573 |
| |||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
|
$ |
287,427 |
|
$ |
- |
|
$ |
278,254 |
|
$ |
- |
|
$ |
278,254 |
|
Federal Home Loan Bank advances |
|
85,000 |
|
- |
|
85,748 |
|
- |
|
85,748 |
| |||||
Junior subordinated debentures |
|
5,100 |
|
- |
|
- |
|
4,414 |
|
4,414 |
| |||||
Accrued interest payable |
|
154 |
|
- |
|
147 |
|
7 |
|
154 |
|
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 Sale
The Company’s loans receivable held for sale are carried at the lower of cost or fair value. The fair value of loans receivable held for sale is determined by pricing for comparable assets or by outstanding commitments from third party investors, resulting in a Level 2 classification.
(c) 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.
(d) FHLB Stock
The carrying value of FHLB stock approximates its fair value as the shares can only be redeemed by the FHLB at par.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
NOTE (8) – Stock-based Compensation
The Company issues stock-based compensation awards to its directors and employees under the 2008 Long-Term Incentive Plan (“2008 LTIP”). The 2008 LTIP permits the grant of non-qualified and incentive stock options, stock appreciation rights, full value awards and cash incentive awards for up to 2,000,000 shares of common stock. As of September 30, 2017, there were 1,308,890 shares available for future awards under the 2008 LTIP.
No stock options were granted during the nine months ended September 30, 2017, compared to 450,000 stock options granted to senior executive officers under the 2008 LTIP during the nine months ended September 30, 2016. These options have an exercise price of $1.62 per share, vest over five years and expire ten years from the grant date. 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 following table summarizes stock option activity during the nine months ended September 30, 2017 and 2016:
|
|
Shares |
|
Weighted |
|
Weighted |
|
Aggregate |
|
Nine Months Ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017 |
|
540,625 |
|
$ 2.18 |
|
|
|
|
|
Granted |
|
- |
|
- |
|
|
|
|
|
Exercised |
|
- |
|
- |
|
|
|
|
|
Forfeited |
|
- |
|
- |
|
|
|
|
|
Outstanding at September 30, 2017 |
|
540,625 |
|
$ 2.18 |
|
7.24 |
|
$ 315,000 |
|
Exercisable at September 30, 2017 |
|
180,625 |
|
$ 3.29 |
|
4.94 |
|
$ 63,000 |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016: |
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016 |
|
90,625 |
|
$ 4.95 |
|
|
|
|
|
Granted |
|
450,000 |
|
1.62 |
|
|
|
|
|
Exercised |
|
- |
|
- |
|
|
|
|
|
Forfeited |
|
- |
|
- |
|
|
|
|
|
Outstanding at September 30, 2016 |
|
540,625 |
|
$ 2.18 |
|
8.24 |
|
$ 63,000 |
|
Exercisable at September 30, 2016 |
|
90,625 |
|
$ 4.95 |
|
2.50 |
|
$ - |
|
The Company recorded $10 thousand of stock-based compensation expense related to stock options during the three months ended September 30, 2017 and the three months ended September 30, 2016, and $29 thousand and $23 thousand during the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, unrecognized compensation cost related to non-vested stock options granted under the plan was $132 thousand. The cost is expected to be recognized over a period of 3.4 years.
In March 2016, the Company awarded 120,483 shares of restricted stock to its Chief Executive Officer (“CEO”) under the 2008 LTIP. A restricted stock award is valued at the closing price of the Company’s stock on the date of such award. Subject to certain performance restrictions, 100,000 shares of restricted stock shall vest over a two-year period and the remaining 20,483 shares shall vest over a three-year period. Stock-based compensation expense is recognized on a straight-line basis over the vesting period. The Company recorded $26 thousand and $27 thousand of stock-based compensation expense related to this award during the three months ended September 30, 2017 and 2016, respectively, and $79 thousand and $53 thousand during the nine months ended
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
September 30, 2017 and 2016, respectively. As of September 30, 2017, unrecognized compensation cost related to non-vested restricted stock award was $66 thousand, of which $47 thousand is expected to be recognized over a period of six months and $19 thousand is expected to be recognized over a period of 18 months.
In April 2017, the Company awarded 30,002 shares of common stock to its directors under the 2008 LTIP, all of which are fully vested. The Company recorded $52 thousand of compensation expense based on the fair value of the stock, which was determined using the average of the high and the low price of the stock on the date of the award.
In April 2017, the Company also awarded 129,270 of cash-settled restricted stock units (“RSUs”) to its CEO under the 2008 LTIP. All RSUs vest at the end of two years from the date of the grant and are subject to forfeiture until vested. Each RSU entitles the CEO to receive cash equal to the fair market value of one share of common stock on the applicable payout date. Compensation expense is determined based on the fair value of the award and is re-measured at each reporting period. During the three and nine months ended September 30, 2017, the Company recorded compensation expense related to this award of $40 thousand and $62 thousand, respectively.
NOTE (9) – ESOP Plan
Employees participate in an Employee Stock Option Plan (“ESOP”) after attaining certain age and service requirements. In December 2016, the ESOP purchased 1,493,679 shares of the Company’s common stock at $1.59 per share, for a total cost of $2.4 million, of which $1.2 million was funded with a loan from the Company. The loan will be repaid from the Bank’s annual discretionary contributions to the ESOP, net of dividends paid, over a period of 20 years. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. When loan payments are made, shares are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from the suspense account, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital. Dividends on allocated shares increase participant accounts. At the end of employment, participants will receive shares for their vested balance. Compensation expense related to the ESOP was $31 thousand and $17 thousand for the three months ended September 30, 2017 and 2016, respectively, and $79 thousand and $62 thousand for the nine months ended September 30, 2017 and 2016, respectively.
Shares held by the ESOP were as follows:
|
|
September 30, 2017 |
|
December 31, 2016 | ||
|
|
(Dollars in thousands) | ||||
|
|
|
|
| ||
Allocated to participants |
|
1,154,809 |
|
1,114,683 | ||
Suspense shares |
|
699,622 |
|
739,748 | ||
Total ESOP shares |
|
1,854,431 |
|
1,854,431 | ||
Fair value of unearned shares |
|
$ |
1,623 |
|
$ |
1,213 |
In September 2017, the Company received its first loan payment from ESOP and 40,126 shares were released for allocation to participants. No shares were committed to being released as of September 30, 2017. The outstanding balance of unallocated shares at September 30, 2017 and December 31, 2016, was $1.1 million and $1.2 million, respectively, which is shown as Unearned ESOP shares in the equity section of the consolidated statements of financial condition.
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
NOTE (10) – 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).
The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). At September 30, 2017 and December 31, 2016, 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 |
|
Minimum Required To |
| |||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
|
|
(Dollars in thousands) |
| |||||||||||||
September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 (Leverage) |
|
$ |
47,993 |
|
11.07% |
|
$ |
17,342 |
|
4.0% |
|
$ |
21,678 |
|
5.0% |
|
Common Equity Tier 1 |
|
$ |
47,993 |
|
18.15% |
|
$ |
11,897 |
|
4.5% |
|
$ |
17,184 |
|
6.5% |
|
Tier 1 |
|
$ |
47,993 |
|
18.15% |
|
$ |
15,862 |
|
6.0% |
|
$ |
21,150 |
|
8.0% |
|
Total Capital |
|
$ |
51,310 |
|
19.41% |
|
$ |
21,150 |
|
8.0% |
|
$ |
26,437 |
|
10.0% |
|
December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Tier 1 (Leverage) |
|
$ |
43,954 |
|
10.60% |
|
$ |
16,594 |
|
4.0% |
|
$ |
20,742 |
|
5.0% |
|
Common Equity Tier 1 |
|
$ |
43,954 |
|
15.36% |
|
$ |
12,875 |
|
4.5% |
|
$ |
18,597 |
|
6.5% |
|
Tier 1 |
|
$ |
43,954 |
|
15.36% |
|
$ |
17,166 |
|
6.0% |
|
$ |
22,888 |
|
8.0% |
|
Total Capital |
|
$ |
47,544 |
|
16.62% |
|
$ |
22,888 |
|
8.0% |
|
$ |
28,610 |
|
10.0% |
|
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)
Effective as of May 15, 2015, the Federal Reserve Board (“FRB”) adopted a final rule that exempts bank holding companies and savings and loan holding companies with less than $1 billion in consolidated assets, such as the Company, from FRB’s consolidated regulatory capital requirements.
NOTE (11) – 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 evaluated 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. Based on this analysis, the Company determined that as of September 30, 2017, no valuation allowance was required on its deferred tax assets, which totaled $5.7 million. As of December 31, 2016, the Company recorded no valuation allowance on its deferred tax assets of $6.9 million.
NOTE (12) – Concentration of Credit Risk
The Bank has a significant concentration of deposits with a long-time customer that accounted for approximately 11% of its deposits as of September 30, 2017. The Bank expects to maintain this relationship with the customer.
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, 2016. 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.
Critical Accounting Policies and Estimates
Our significant accounting policies, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations, are described in the “Notes to Consolidated Financial Statements” and in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to our critical accounting policies.
Overview
Total assets increased by $11.6 million during the nine months ended September 30, 2017, primarily reflecting an increase of $49.9 million in cash and cash equivalents, an increase of $22.5 million in loans receivable held for sale and an increase of $958 thousand in REO, which were partially offset by a decrease of $58.9 million in net loans receivable held for investment, a decrease of $1.7 million in securities available-for-sale and a decrease of $1.2 million in deferred tax assets. The increase in cash and cash equivalents primarily resulted from loan sales completed prior to the end of September. We intend to re-invest cash generated from loan sales into purchases of prime single-family loans, and to a lesser extent, purchases of investment securities and originations of construction loans, to increase the Bank’s interest income.
During the nine months ended September 30, 2017, total deposits increased by $7.5 million and FHLB advances increased by $1.0 million.
We recorded net income of $503 thousand and $2.3 million for the three and nine months ended September 30, 2017, respectively, compared to $327 thousand and $1.3 million for the three and nine months ended September 30, 2016, respectively. The increase in net income during the three months ended September 30, 2017 compared to the third quarter of 2016 primarily resulted from an increase of $213 thousand in net interest income, a loan loss provision recapture of $300 thousand and a gain of $160 thousand on sale of loans. These increases were partially offset by an increase of $214 thousand in non-interest expense. In addition, the Company recorded income tax expense of $284 thousand during the third quarter of 2017, but did not report any income tax expense during the third quarter of 2016 because adjustments to the valuation allowance for deferred tax assets offset income tax expense during that period.
The increase in net income for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to an increase of $1.2 million in non-interest income, an increase of $782 thousand in net interest income and an increase of $400 thousand in loan loss provision recaptures. These increases were partially offset by higher non-interest expense of $75 thousand and an increase in income tax expense of $1.2 million. As noted above, the Company did not report material income tax expense during 2016 because adjustments to the valuation allowance for deferred tax assets offset income tax expense during that year.
Results of Operations
Net Interest Income
For the third quarter of 2017, net interest income increased by $213 thousand from the same period a year ago because of an increase in the average balance of interest earning assets. During the third quarter, the net interest margin increased slightly to 3.03% from 3.02% for the same period in 2016.
Interest income on loans increased by $292 thousand to $4.1 million for the third quarter of 2017, from $3.8 million for the third quarter of 2016. Higher interest income on loans for the third quarter of 2017 resulted from an increase of $32.9 million in the average balance of loans receivable, which increased interest income by $354 thousand. However, the average yield on loans during the third quarter of 2017 decreased by 7 basis points compared to the third quarter of 2016, which reduced interest income by $62 thousand. The decrease in the average yield on loans primarily resulted from the payoff of loans with higher rates than those originated over the last year. The lower rates on loan originations primarily reflect the overall continued low interest rate environment and competitive market conditions.
Interest income on securities and other short-term investments increased by $39 thousand to $217 thousand for the third quarter of 2017, from $178 thousand for the third quarter of 2016. Interest income on short-term investments increased by $60 thousand, primarily reflecting an increase of 85 basis points in the average yield on short-term investments, which was offset in part by a decrease of $11 thousand in interest income on securities and a decrease of $10 thousand in dividend income earned on our investment in FHLB stock.
Interest expense on deposits increased by $43 thousand to $611 thousand for the third quarter of 2017, from $568 thousand for the third quarter of 2016. Higher interest expense on deposits for the third quarter of 2017 primarily resulted from an increase of 4 basis points in the average cost of deposits, which increased interest expense by $42 thousand. The average balance of deposits increased by $8.0 million, which increased interest expense by $1 thousand.
Interest expense on borrowings increased by $75 thousand to $494 thousand for the third quarter of 2017, from $419 thousand for the third quarter of 2016. Higher interest expense on borrowings for the third quarter of 2017 primarily resulted from an increase of $20.9 million in the average balance of FHLB advances, which increased interest expense by $104 thousand, offset in part by a decrease of 19 basis points in the average cost of FHLB advances, which reduced interest expense by $36 thousand. Additionally, the interest rate on our junior subordinated debentures increased during the third quarter of 2017, resulting in additional interest expense of $7 thousand.
For the nine months ended September 30, 2017, net interest income increased by $782 thousand to $9.3 million from $8.5 million for the same period a year ago, as the impact of a higher average balance of interest-earning assets more than offset the impact of a lower net interest margin. Average interest-earning assets increased by $44.5 million to $432.6 million for the nine months ended September 30, 2017 from $388.1 million for the same period in 2016, primarily as a result of higher average balance of loans receivable. The net interest margin decreased by 6 basis points to 2.87% for the nine months ended September 30, 2017 from 2.93% for the same period in 2016, primarily due to the decline in average yield on loans.
During the nine months ended September 30, 2017, the average balance of loans receivable increased by $58.3 million, which increased interest income by $1.8 million. However, the average yield on loans decreased by 24 basis points compared to the corresponding period of 2016, which reduced interest income by $637 thousand.
The increase of $1.2 million in interest income on loans was partially offset by higher interest expense on deposits and borrowings for the nine months ended September 30, 2017 compared to the corresponding period in 2016. Interest expense on deposits increased by $186 thousand, primarily due to an increase of $23.9 million in the average balance of deposits and an increase of two basis points in the average cost of deposits compared to the nine months ended September 30, 2016. The higher average balance of deposits increased interest expense by $131 thousand and the higher average cost of deposits increased interest expense by $55 thousand. Interest expense on borrowings increased by $248 thousand, primarily due to an increase of $23.3 million in the average
balance of FHLB advances, which increased interest expense by $347 thousand, offset in part by a decrease of 21 basis points in the average cost of FHLB advances, which reduced interest expense by $119 thousand. Additionally, the cost of Debentures increased by 52 basis points and resulted in additional interest expense of $20 thousand.
The following tables set forth average balances, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status; however, the balance of these loans is included in the total average balance of loans receivable, which has the effect of reducing average loan yields.
|
|
For the three months ended |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
September 30, 2017 |
|
September 30, 2016 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning deposits |
|
$ |
29,576 |
|
$ |
97 |
|
1.31% |
|
$ |
6,384 |
|
$ |
5 |
|
0.31% |
|
Federal funds sold |
|
- |
|
- |
|
- |
|
25,724 |
|
32 |
|
0.50% |
| ||||
Securities |
|
11,801 |
|
69 |
|
2.34% |
|
15,094 |
|
80 |
|
2.12% |
| ||||
Loans receivable (1) |
|
383,919 |
|
4,127 |
|
4.30% |
|
351,035 |
|
3,835 |
|
4.37% |
| ||||
FHLB stock |
|
2,916 |
|
51 |
|
7.00% |
|
2,573 |
|
61 |
|
9.48% |
| ||||
Total interest-earning assets |
|
428,212 |
|
$ |
4,344 |
|
4.06% |
|
400,810 |
|
$ |
4,013 |
|
4.00% |
| ||
Non-interest-earning assets |
|
10,431 |
|
|
|
|
|
9,037 |
|
|
|
|
| ||||
Total assets |
|
$ |
438,643 |
|
|
|
|
|
$ |
409,847 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market deposits |
|
$ |
37,515 |
|
$ |
67 |
|
0.71% |
|
$ |
27,948 |
|
$ |
41 |
|
0.59% |
|
Passbook deposits |
|
38,593 |
|
31 |
|
0.32% |
|
36,197 |
|
28 |
|
0.31% |
| ||||
NOW and other demand deposits |
|
32,924 |
|
7 |
|
0.09% |
|
30,395 |
|
5 |
|
0.07% |
| ||||
Certificate accounts |
|
180,001 |
|
506 |
|
1.12% |
|
186,432 |
|
494 |
|
1.06% |
| ||||
Total deposits |
|
289,033 |
|
611 |
|
0.85% |
|
280,972 |
|
568 |
|
0.81% |
| ||||
FHLB advances |
|
91,141 |
|
444 |
|
1.95% |
|
70,250 |
|
376 |
|
2.14% |
| ||||
Junior subordinated debentures |
|
5,100 |
|
50 |
|
3.92% |
|
5,100 |
|
43 |
|
3.37% |
| ||||
Total interest-bearing liabilities |
|
385,274 |
|
$ |
1,105 |
|
1.15% |
|
356,322 |
|
$ |
987 |
|
1.11% |
| ||
Non-interest-bearing liabilities |
|
5,746 |
|
|
|
|
|
6,121 |
|
|
|
|
| ||||
Stockholders’ Equity |
|
47,623 |
|
|
|
|
|
47,404 |
|
|
|
|
| ||||
Total liabilities and stockholders’ equity |
|
$ |
438,643 |
|
|
|
|
|
$ |
409,847 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest rate spread (2) |
|
|
|
$ |
3,239 |
|
2.91% |
|
|
|
$ |
3,026 |
|
2.89% |
| ||
Net interest rate margin (3) |
|
|
|
|
|
3.03% |
|
|
|
|
|
3.02% |
| ||||
Ratio of interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
111.14% |
|
|
|
|
|
112.49% |
|
|
|
(1) Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs, loan premiums and loans receivable held for sale. We did not have any loans receivable held for sale during the three months ended September 30, 2016.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
|
|
For the nine months ended |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
September 30, 2017 |
|
September 30, 2016 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning deposits |
|
$ |
25,647 |
|
$ |
218 |
|
1.13% |
|
$ |
6,241 |
|
$ |
15 |
|
0.32% |
|
Federal funds sold |
|
- |
|
- |
|
- |
|
31,008 |
|
114 |
|
0.49% |
| ||||
Securities |
|
12,368 |
|
217 |
|
2.34% |
|
14,816 |
|
247 |
|
2.22% |
| ||||
Loans receivable (1) |
|
391,809 |
|
12,035 |
|
4.10% |
|
333,490 |
|
10,855 |
|
4.34% |
| ||||
FHLB stock |
|
2,809 |
|
147 |
|
6.98% |
|
2,573 |
|
170 |
|
8.81% |
| ||||
Total interest-earning assets |
|
432,633 |
|
$ |
12,617 |
|
3.89% |
|
388,128 |
|
$ |
11,401 |
|
3.92% |
| ||
Non-interest-earning assets |
|
10,718 |
|
|
|
|
|
9,157 |
|
|
|
|
| ||||
Total assets |
|
$ |
443,351 |
|
|
|
|
|
$ |
397,285 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market deposits |
|
$ |
34,126 |
|
$ |
170 |
|
0.66% |
|
$ |
26,102 |
|
$ |
109 |
|
0.56% |
|
Passbook deposits |
|
39,385 |
|
94 |
|
0.32% |
|
36,249 |
|
86 |
|
0.32% |
| ||||
NOW and other demand deposits |
|
32,018 |
|
14 |
|
0.06% |
|
29,995 |
|
15 |
|
0.07% |
| ||||
Certificate accounts |
|
185,785 |
|
1,504 |
|
1.08% |
|
175,090 |
|
1,386 |
|
1.06% |
| ||||
Total deposits |
|
291,314 |
|
1,782 |
|
0.82% |
|
267,436 |
|
1,596 |
|
0.80% |
| ||||
FHLB advances |
|
94,423 |
|
1,372 |
|
1.94% |
|
71,095 |
|
1,144 |
|
2.15% |
| ||||
Junior subordinated debentures |
|
5,100 |
|
143 |
|
3.74% |
|
5,100 |
|
123 |
|
3.22% |
| ||||
Total interest-bearing liabilities |
|
390,837 |
|
$ |
3,297 |
|
1.12% |
|
343,631 |
|
$ |
2,863 |
|
1.11% |
| ||
Non-interest-bearing liabilities |
|
5,681 |
|
|
|
|
|
6,681 |
|
|
|
|
| ||||
Stockholders’ Equity |
|
46,833 |
|
|
|
|
|
46,973 |
|
|
|
|
| ||||
Total liabilities and stockholders’ equity |
|
$ |
443,351 |
|
|
|
|
|
$ |
397,285 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest rate spread (2) |
|
|
|
$ |
9,320 |
|
2.77% |
|
|
|
$ |
8,538 |
|
2.81% |
| ||
Net interest rate margin (3) |
|
|
|
|
|
2.87% |
|
|
|
|
|
2.93% |
| ||||
Ratio of interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
110.69% |
|
|
|
|
|
112.95% |
|
|
|
(1) Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs, loan premiums and loans receivable held for sale. We did not have any loans receivable held for sale during the nine months ended September 30, 2016.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
Loan loss provision recapture
We recorded a loan loss provision recapture of $300 thousand for the third quarter of 2017, whereas no loan loss provision recapture was recorded for the third quarter of 2016. The loan loss provision recapture during the third quarter of 2017 was primarily due to payoffs and recoveries of problem loans, as well as continued improvement in the overall quality of our loan portfolio. See “Allowance for Loan Losses (ALLL)” below for additional information.
Non-interest Income
Non-interest income for the third quarter of 2017 totaled $305 thousand, compared to $144 thousand for the third quarter of 2016. The increase of $161 thousand in non-interest income primarily reflected a gain of $160 thousand from the sale of loans during the third quarter of 2017, whereas we did not sell any loans during the third quarter of 2016.
For the nine months ended September 30, 2017, non-interest income totaled $2.0 million, compared to $886 thousand for the same period a year ago. The increase of $1.1 million in non-interest income was primarily due to an insurance litigation settlement of $1.2 million and a gain of $383 thousand from the sale of loans during the nine months ended September 30, 2017. These increases were partially offset by a grant of $265 thousand that we received from the CDFI Fund during the nine months ended September 30, 2016. Additionally, the results for the nine months ended September 30, 2016 included an unusually large early withdrawal fee that generated income of $80 thousand, a loan extension fee of $50 thousand, and a foreclosure forbearance fee of $38 thousand.
Non-interest Expense
Non-interest expense for the third quarter of 2017 totaled $3.1 million, compared to $2.8 million for the third quarter of 2016. The increase of $214 thousand in non-interest expense during the third quarter of 2017 was primarily due to an increase of $149 thousand in compensation and benefits expense, primarily reflecting salary increases, higher staffing levels and a lower amount of salary deferred as loan origination costs, compared to the same period a year ago. Additionally, other expense increased by $116 thousand during the third quarter of 2017 primarily due to payment of $75 thousand of expenses related to the U.S. Treasury’s sale of a portion of its holdings of our shares to a Southern California- based bank and a provision of $41 thousand for unfunded commitments. The sale of shares by the U.S. Treasury, combined with three other sales by the U.S. Treasury over the past 10 months, lowered the U.S. Treasury’s holding to less than 10% of our equity interests. The increases in non-interest expense were partially offset by a decrease of $50 thousand in professional services expense, primarily legal expenses, during the third quarter of 2017 compared to the third quarter of 2016.
For the nine months ended September 30, 2017, non-interest expense totaled $8.8 million, compared to $8.7 million for the same period a year ago. The increase of $75 thousand in non-interest expense was primarily due to an increase of $244 thousand in other expense and an increase of $70 thousand in occupancy expense, which were partially offset by a decrease of $148 thousand in compensation and benefits expense and a decrease of $92 thousand in professional services expense. Other expense increased by $244 thousand primarily due to payments of $214 thousand for expenses related to three sales by the U.S. Treasury of a portion of its holdings of our shares. Compensation and benefits expense decreased by $148 thousand primarily due to a reversal to reduce a deferred compensation liability due to a former executive by $700 thousand, which was partially offset by a net increase of $85 thousand in stock based compensation expense and a net increase of $441 thousand in salary expense. Professional services expense decreased by $92 thousand during 2017 primarily due to the timing of third-party loan review costs.
Income Taxes
Income taxes are computed by applying the statutory federal income tax rate of 34.0% and the California income tax rate of 10.84% to taxable income. We recorded income tax expense of $284 thousand during the third quarter and $1.2 million for the nine months ended September 30, 2017, compared to $0 and $2 thousand for the comparable periods in 2016. Our effective income tax rate was 36.1% and 35.0% for the three and nine months ended September 30, 2017, respectively, compared to 0.0% for the comparable periods in 2016. The tax expense for 2016 primarily reflected the statutory minimum taxes payable to the State of California and the existence of and adjustment to the valuation allowance on deferred tax assets. We eliminated the balance of our valuation allowance on deferred tax assets at the end of 2016. The deferred tax assets totaled $5.7 million at September 30, 2017, and $6.9 million at December 31, 2016.
Financial Condition
Total Assets
Total assets increased by $11.6 million to $440.7 million at September 30, 2017 from $429.1 million at December 31, 2016. The growth in assets included an increase of $49.9 million in cash and cash equivalents, an increase of $22.5 million in loans receivable held for sale and an increase of $1.0 million in REO, which were partially offset by a decrease of $58.9 million in net loans receivable held for investment, a decrease of $1.7 million in securities available-for-sale and a decrease of $1.2 million in deferred tax assets. We intend to re-invest cash generated from the loans sold prior to the end of September into purchases of prime single-family loans and mortgage securities to increase our interest income.
Loans Receivable Held for Sale
Loans receivable held for sale at September 30, 2017 totaled $22.5 million and consisted of multi-family residential (“MFR”) loans. During the nine months ended September 30, 2017, we allocated $94.7 million, or 96%, of our originations during the period as held for sale and we transferred $9.3 million of MFR loans from the portfolio of loans held for investment to the portfolio of loans held for sale as part of our loan concentration risk management program. Also, during the nine months ended September 30, 2017, we completed sales of $81.1 million of MFR loans generating a gain of $383 thousand. Loan repayments on loans receivable held for sale totaled $318 thousand during the nine months ended September 30, 2017. We had no loans receivable held for sale during 2016.
Loans Receivable Held for Investment
Our gross loan portfolio (loans receivable held for investment before net deferred loan costs and premiums and ALLL) decreased by $59.2 million to $323.1 million at September 30, 2017 from $382.3 million at December 31, 2016, primarily due to loan repayments. The decrease in our loan portfolio during the nine months ended September 30, 2017 consisted of a decrease of $35.1 million in our MFR real estate loan portfolio, a decrease of $15.3 million in our single family residential real estate loan portfolio, a decrease of $6.6 million in our church loan portfolio, a decrease of $2.8 million in our commercial real estate loan portfolio and an increase of $557 thousand in our construction loan portfolio.
In order to comply with regulatory loan concentration guidelines, we decreased our MFR portfolio during the nine months ended September 30, 2017 and concentrated on originating MFR loans for sale rather than for investment. Therefore, loan repayments exceeded originations in our held for investment portfolio. We originated $4.7 million in MFR loans for that portfolio during the nine months ended September 30, 2017, compared to $90.8 million during the nine months ended September 30, 2016. Loan repayments during the nine months ended September 30, 2017 totaled $54.1 million, compared to $50.9 million during the nine months ended September 30, 2016. As mentioned above, we also transferred $9.3 million of MFR loans from held for investment to held for sale.
During the third quarter of 2017, we received a deed in lieu of foreclosure for a loan that had been written down to a carrying amount of $506 thousand. A new REO was recorded at fair value, net of estimated selling costs, of $958 thousand, which resulted in a recovery of $201 thousand for the prior charge-off of principal and interest income of $251 thousand for interest payments applied to principal balance while the loan was on non-accrual status.
Allowance for Loan Losses
The ALLL is adjusted through provisions for loan losses charged or credited to earnings to increase or decrease the ALLL to a level sufficient, in management’s judgment, to absorb probable incurred losses in the loan portfolio. At least quarterly, we conduct an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the size and composition of our loan portfolio, the levels and composition of our loan delinquencies, non-performing loans and net loan charge-offs, the value of underlying collateral on problem loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.
Our ALLL was $4.2 million, or 1.30% of our gross loans receivable held for investment, at September 30, 2017, decreasing from $4.6 million, or 1.20% of our gross loans receivable held for investment, at December 31, 2016, primarily due to loan loss provision recaptures of $950 thousand, which was partially offset by recoveries of $560 thousand. The reduction in ALLL at September 30, 2017 compared to December 31, 2016, and the loan loss provision recaptures during the nine months ended September 30, 2017, reflect the results of our quarterly review of the adequacy of the ALLL. We continue to maintain our ALLL at a level that we believe is appropriate, given the significant reduction in delinquencies and non-performing loans, the size of our loan portfolio, the continued improvement in our asset credit quality metrics and the high quality of our loan originations.
As of September 30, 2017, delinquent loans totaled $737 thousand, compared to $1.4 million at December 31, 2016. Non-performing loans (“NPLs”) consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings that do not qualify for accrual status. At September 30, 2017, NPLs totaled $2.2 million, compared to $2.9 million at December 31, 2016. The decrease of $784 thousand in NPLs during the nine months ended September 30, 2017 was primarily due to loan repayments of 573 thousand and a transfer to REO of $506 thousand, offset in part by the addition of a loan for $295 thousand to non-accrual status.
In connection with our review of the adequacy of our ALLL, we track the amount and percentage of our NPLs that are paying currently, but nonetheless must be classified as NPL for reasons unrelated to payments, such as lack of current financial information and an insufficient period of satisfactory performance. As of September 30, 2017, $1.5 million, or 80%, of our NPLs were current in their payments, compared to $2.9 million, or 100% of our NPLs, that were current at December 31, 2016. Also, in determining the ALLL, we consider the ratio of the ALLL to NPLs, which was 195.05% at September 30, 2017, compared to 156.35% at December 31, 2016.
When reviewing the adequacy of the ALLL, we also consider the impact of charge-offs, including the changes and trends in loan charge-offs. There were no loan charge-offs during the nine months ended September 30, 2017 and 2016. In determining charge-offs, we update our estimates of collateral values on NPLs by obtaining new appraisals at least every nine months. If the estimated fair value of the loan collateral less estimated selling costs is less than the recorded investment in the loan, a charge-off for the difference is recorded to reduce the loan to its estimated fair value, less estimated selling costs. Therefore, certain losses inherent in our total NPLs are recognized periodically through charge-offs. The impact of updating these estimates of collateral value and recognizing any required charge-offs is to increase charge-offs and reduce the ALLL required on these loans. Due to prior charge-offs and increases in collateral values, the average recorded investment in NPLs was only 44% of estimated fair value less estimated selling costs as of September 30, 2017.
Recoveries during the nine months ended September 30, 2017 and 2016 totaled $560 thousand and $319 thousand, respectively. Recoveries primarily resulted from payoffs of loans that had been previously partially charged off.
Impaired loans at September 30, 2017 were $9.8 million, compared to $11.9 million at December 31, 2016. The decrease of $2.1 million in impaired loans was primarily due to repayments of $1.6 million and one transfer to REO totaling $506 thousand. Specific reserves for impaired loans were $629 thousand, or 6.44% of the aggregate impaired loan amount at September 30, 2017, compared to $656 thousand, or 5.51%, at December 31, 2016. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non-impaired loans) was 1.30% at September 30, 2017, compared to 1.06% at December 31, 2016.
We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of September 30, 2017, but there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the ALLL as an integral part of their examination process. These agencies may require an increase in the ALLL based on their judgments of the information available to them at the time of their examinations.
Deposits
Deposits increased by $7.5 million to $294.9 million at September 30, 2017 from $287.4 million at December 31, 2016.
Core deposits (NOW, demand, money market and passbook accounts) increased by $7.4 million during the nine months ended September 30, 2017 and represented 37% and 35% of total deposits at September 30, 2017 and December 31, 2016, respectively. The increase in core deposits primarily resulted from our new money market product. During the nine months ended September 30, 2017, certificates of deposit (“CDs”) increased by $53 thousand and represented 63% and 65% of total deposits at September 30, 2017 and December 31, 2016, respectively. The increase in CDs during the nine months ended September 30, 2017 was primarily due to an increase of $27.8 million in Certificate of Deposit Account Registry Service (“CDARS”) accounts and an increase of $18.3 million in retail CDs, which were partially offset by a decrease of $46.0 million in QwickRate CDs. 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 Buy”). At September 30, 2017, we had approximately $14.0 million in CDARS Reciprocal and $43.331.1 million in CDARS One-Way Buy, compared to $6.9 million in CDARS Reciprocal and $21.7 million in CDARS One-Way Buy at December 31, 2016.
One customer relationship accounted for approximately 11% of our deposits at September 30, 2017. We expect to maintain this relationship with the customer for the foreseeable future.
Borrowings
FHLB advances increased to $86.0 million at September 30, 2017 from $85.0 million at December 31, 2016. The weighted average interest rate on FHLB advances increased 4 basis points to 1.98% at September 30, 2017, from 1.94% at December 31, 2016 primarily due to new advances totaling $29.5 million with an average interest rate of 1.78% and payoff of $28.5 million of advances with an average interest rate of 1.66%.
Subordinated debentures issued by the Company remained unchanged at $5.1 million at September 30, 2017 and December 31, 2016.
Stockholders’ Equity
Stockholders’ equity was $48.1 million, or 10.92% of the Company’s total assets, at September 30, 2017, compared to $45.5 million, or 10.61% of the Company’s total assets, at December 31, 2016. The Company’s book value was $1.75 per share as of September 30, 2017, compared to $1.66 per share as of December 31, 2016.
Liquidity
The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet our obligations on a timely and cost-effective basis. The Bank’s sources of funds include deposits, advances from the FHLB, other borrowings, proceeds from the sale of loans, REO, and investment securities, and payments of principal and interest on loans and investment securities. The Bank is currently approved by the FHLB to borrow up to 30% of total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. This approved limit and collateral requirement would have permitted the Bank to borrow an additional $29.0 million at September 30, 2017. In addition, the Bank has an $11.0 million line of credit with another financial institution.
The Bank’s primary uses of funds include withdrawals of and interest payments on deposits, originations of loans, purchases of investment securities, and the payment of operating expenses. Also, when the Bank has more funds than required for reserve requirements or short-term liquidity needs, the Bank invests in federal funds with the Federal Reserve Bank or in money market accounts with other financial institutions. The Bank’s liquid assets at September 30, 2017 consisted of $68.3 million in cash and cash equivalents and $10.9 million in securities available-for-sale that were not pledged, compared to $18.4 million in cash and cash equivalents and $12.6 million in securities available-for-sale that were not pledged at December 31, 2016.
The Company’s liquidity, separate from the Bank, is based primarily on the proceeds from financing transactions, such as the private placements completed in August 2013, October 2014 and December 2016 and a dividend received from the Bank in December 2016. The Bank is currently under no prohibition to pay dividends, but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines.
The Company recorded consolidated net cash outflows from operating activities of $9.1 million and $4 thousand during the nine months ended September 30, 2017 and 2016, respectively. Net cash outflows from operating activities during the nine months ended September 30, 2017 were primarily attributable to originations of multi-family loans for the Bank’s loans held for sale portfolio.
The Company recorded consolidated net cash inflows from investing activities of $50.6 million during the nine months ended September 30, 2017, compared to consolidated net cash outflows from investing activities of $40.0 million during the nine months ended September 30, 2016. Net cash inflows from investing activities during the nine months ended September 30, 2017 were primarily attributable to repayments on loans held for investment and securities available-for-sale.
The Company recorded consolidated net cash inflows from financing activities of $8.5 million and $10.5 million during the nine months ended September 30, 2017 and 2016, respectively. Net cash inflows from financing activities during the nine months ended September 30, 2017 were primarily attributable to increases in deposits.
Capital Resources and Regulatory Capital
Our principal subsidiary, Broadway Federal Bank, must comply with capital standards established by the OCC in the conduct of its business. Failure to comply with such capital requirements may result in significant limitations on its business or other sanctions. The Dodd-Frank Act requires 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 that are no less than those to which insured depository institutions have been previously subject. The current regulatory capital requirements are described in Note 10 of the Notes to Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was performed under the supervision of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as of September 30, 2017. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017. There were no significant changes during the quarter ended September 30, 2017 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None
Not Applicable
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. MINE SAFETY DISCLOSURES
Not Applicable
None
Exhibit |
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3.1 |
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3.2 |
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Bylaws of Registrant (Exhibit 3.2 to Form 10-K filed by Registrant on March 28, 2016) |
31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
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32.2 |
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101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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XBRL Taxonomy Extension Definitions Linkbase Document |
101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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* Exhibits followed by a parenthetical reference are incorporated by reference herein from the document filed by the Registrant with the SEC described therein. Except as otherwise indicated, the SEC File No. for each incorporated document is 000-27464.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2017 |
By: |
/s/ Wayne-Kent A. Bradshaw |
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Wayne-Kent A. Bradshaw |
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Chief Executive Officer |
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Date: November 14, 2017 |
By: |
/s/ Brenda J. Battey |
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Brenda J. Battey |
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Chief Financial Officer |