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TABLE OF CONTENTS
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY Index to Consolidated Financial Statements Years ended December 31, 2018 and 2017

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark one)

[X]

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2018

[   ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission file number 000-27464

BROADWAY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware   95-4547287
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

5055 Wilshire Boulevard, Suite 500
Los Angeles, California

 

90036
(Address of principal executive offices)   (Zip Code)

(323) 634-1700
(Registrant's Telephone Number, Including Area Code)

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

Title of each class

 

Name of each exchange on which registered
Common Stock, par value $0.01 per share   The NASDAQ Stock Market, LLC

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ] No [X]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]

  Accelerated filer [   ]

Non-accelerated filer [X]

 

Smaller reporting company [X]

Emerging growth company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $55,598,000.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of March 8, 2019, 19,133,366 shares of the Registrant's voting common stock and 8,756,396 shares of the Registrant's non-voting common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement for its 2019 annual meeting of stockholders, which will be filed no later than April 30, 2019, are incorporated by reference in Part III, Items 10 through 14 of this report.


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TABLE OF CONTENTS

PART I    

Item 1.

  Business   1

Item 2.

  Properties   26

Item 3.

  Legal Proceedings   27

Item 4.

  Mine Safety Disclosure   27
PART II    

Item 5.

  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   28

Item 7.

  Management's Discussion and Analysis of Financial Condition and Results of Operations   30

Item 8.

  Financial Statements and Supplementary Data   40

Item 9.

  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   40

Item 9A.

  Controls and Procedures   40

Item 9B.

  Other Information   42
PART III    

Item 10.

  Directors, Executive Officers and Corporate Governance   42

Item 11.

  Executive Compensation   42

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   42

Item 13.

  Certain Relationships and Related Transactions, and Director Independence   42

Item 14.

  Principal Accountant Fees and Services   42
PART IV    

Item 15.

  Exhibits and Financial Statement Schedules   42

Signatures

 

45

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Forward-Looking Statements

Certain statements herein, including without limitation, certain matters discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Form 10-K, are forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, that reflect our current views with respect to future events and financial performance. Forward-looking statements typically include the words "anticipate," "believe," "estimate," "expect," "project," "plan," "forecast," "intend," and other similar expressions. These forward-looking statements are subject to risks and uncertainties, including those identified below, which could cause actual future results to differ materially from historical results or from those anticipated or implied by such statements. Readers should not place undue reliance on these forward-looking statements, which speak only as of their dates or, if no date is provided, then as of the date of this Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

The following factors, among others, could cause future results to differ materially from historical results or from those anticipated by forward-looking statements included in this Form 10-K: (1) the level of demand for mortgage loans, which is affected by such external factors as general economic conditions, market interest rate levels, tax laws and the demographics of our lending markets; (2) the direction and magnitude of changes in interest rates and the relationship between market interest rates and the yield on our interest-earning assets and the cost of our interest-bearing liabilities; (3) the rate and amount of loan losses incurred and projected to be incurred by us, increases in the amounts of our nonperforming assets, the level of our loss reserves and management's judgments regarding the collectability of loans; (4) changes in the regulation of lending and deposit operations or other regulatory actions, whether industry wide or focused on our operations, including increases in capital requirements or directives to increase loan loss allowances or make other changes in our business operations; (5) legislative or regulatory changes, including those that may be implemented by the current Administration in Washington, D.C.; (6) actions undertaken by both current and potential new competitors; (7) the possibility of adverse trends in property values or economic trends in the residential and commercial real estate markets in which we compete; (8) the effect of changes in economic conditions; (9) the effect of geopolitical uncertainties; (10) an inability to obtain and retain sufficient operating cash at our holding company; and (11) other risks and uncertainties detailed in this Form 10-K, including those described in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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PART I

ITEM 1. BUSINESS

General

Broadway Financial Corporation (the "Company") was incorporated under Delaware law in 1995 for the purpose of acquiring and holding all of the outstanding capital stock of Broadway Federal Savings and Loan Association ("Broadway Federal" or the "Bank") as part of the Bank's conversion from a federally chartered mutual savings association to a federally chartered stock savings bank. In connection with the conversion, the Bank's name was changed to Broadway Federal Bank, f.s.b. The conversion was completed, and the Bank became a wholly-owned subsidiary of the Company, in January 1996.

The Company is currently regulated by the Board of Governors of the Federal Reserve System ("FRB"). The Bank is currently regulated by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are insured up to applicable limits by the FDIC. The Bank is also a member of the Federal Home Loan Bank ("FHLB") of San Francisco. See "Regulation" for further descriptions of the regulatory systems to which the Company and the Bank are subject.

Available Information

Our internet website address is www.broadwayfederalbank.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports can be obtained free of charge by sending a written request to Broadway Financial Corporation, 5055 Wilshire Boulevard, Suite 500, Los Angeles, California 90036 Attention: Alice Wong. The above reports are available on our website as soon as reasonably practicable after we file such material with, or furnish such material to, the Securities and Exchange Commission ("SEC").

Business Overview

We are headquartered in Los Angeles, California and our principal business is the operation of our wholly-owned subsidiary, Broadway Federal, which has two offices in Los Angeles and one in the nearby city of Inglewood, California. Broadway Federal's principal business consists of attracting deposits from the general public in the areas surrounding our branch offices and investing those deposits, together with funds generated from operations and borrowings, primarily in mortgage loans secured by (i) residential properties with five or more units ("multi-family"), (ii) commercial real estate and (iii) residential properties with one-to-four units ("single family"). In addition, we invest in securities issued by federal government agencies, residential mortgage-backed securities and other investments.

Our revenue is derived primarily from interest income on loans and investments. Our principal costs are interest expenses that we incur on deposits and borrowings, together with general and administrative expenses. Our earnings are significantly affected by general economic and competitive conditions, particularly monetary trends and conditions, including changes in market interest rates and the differences in market interests rates for the interest bearing deposits and borrowings that are our principal funding sources and the interest yielding assets in which we invest, as well as government policies and actions of regulatory authorities.

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Lending Activities

General

Our loan portfolio is comprised primarily of mortgage loans which are secured by multi-family residential properties, single family residential properties and commercial real estate, including churches. The remainder of the loan portfolio consists of commercial business loans, construction loans and consumer loans. At December 31, 2018, our net loan portfolio, excluding loans held for sale, totaled $355.6 million, or 87% of total assets.

We emphasize the origination of adjustable-rate mortgage loans ("ARMs"), most of which are hybrid ARM loans (ARM loans having an initial fixed rate period, followed by an adjustable rate period), for our portfolio of loans held for investment. We originate these loans in order to maintain a high percentage of loans that are subject to periodic repricing, thereby reducing our exposure to interest rate risk. At December 31, 2018, more than 99% of our mortgage loans had adjustable rate features. However, most of our adjustable rate loans behave like fixed rate loans for periods of time because the loans may still be in their initial fixed-rate period or may be subject to interest rate floors. Loans in their initial fixed-rate period totaled $297.6 million or 83% of our gross loan portfolio at December 31, 2018.

The types of loans that we originate are subject to federal laws and regulations. The interest rates that we charge on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, including the FRB, and legislative tax policies.

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

 
  December 31,  
 
  2018   2017   2016   2015   2014  
 
  Amount   Percent
of total
  Amount   Percent
of total
  Amount   Percent
of total
  Amount   Percent
of total
  Amount   Percent
of total
 
 
  (Dollars in thousands)
 

Single family

  $ 91,835     25.69%   $ 111,085     32.93%   $ 104,807     27.42%   $ 130,891     42.50%   $ 39,792     14.03%  

Multi-family

    231,870     64.86%     187,455     55.57%     229,566     60.05%     118,616     38.52%     171,792     60.58%  

Commercial real estate

    5,802     1.62%     6,089     1.80%     8,914     2.33%     11,442     3.72%     16,722     5.90%  

Church

    25,934     7.25%     30,848     9.14%     37,826     9.90%     46,390     15.06%     54,599     19.26%  

Construction

    1,876     0.52%     1,678     0.50%     837     0.22%     343     0.11%     387     0.14%  

Commercial

    226     0.06%     192     0.06%     308     0.08%     270     0.09%     262     0.09%  

Consumer

    5     0.00%     7     0.00%     6     0.00%     4     0.00%     9     0.00%  

Gross loans

    357,548     100.00%     337,354     100.00%     382,264     100.00%     307,956     100.00%     283,563     100.00%  

Plus:

                                                             

Premiums on loans purchased

    259           360           510           709           228        

Deferred loan costs, net

    721           1,220           1,297           349           1,333        

Less:

                                                             

Unamortized discounts

    43           14           14           15           16        

Allowance for loan losses

    2,929           4,069           4,603           4,828           8,465        

Total loans held for investment

  $ 355,556         $ 334,851         $ 379,454         $ 304,171         $ 276,643        

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Multi-Family and Commercial Real Estate Lending

Our primary lending emphasis has been on the origination of loans for apartment buildings with five or more units. These multi-family loans amounted to $231.9 million and $187.5 million at December 31, 2018 and 2017, respectively. Multi-family loans represented 65% of our gross loan portfolio at December 31, 2018 compared to 56% of our gross loan portfolio at December 31, 2017. The vast majority of our multi-family loans amortize over 30 years. As of December 31, 2018, our single largest multi-family credit had an outstanding balance of $3.9 million, was current, and was secured by a 15-unit apartment complex in Garden Grove, California. At December 31, 2018, the average balance of a loan in our multi-family portfolio was $873 thousand.

Our commercial real estate loans amounted to $5.8 million and $6.1 million at December 31, 2018 and 2017, respectively. Commercial real estate loans represented 2% of our gross loan portfolio at December 31, 2018 and 2017. All of the commercial real estate loans outstanding at December 31, 2018 were ARMs. Most commercial real estate loans are originated with principal repayments on a 30 year amortization schedule, but are due in 15 years. As of December 31, 2018, our single largest commercial real estate credit had an outstanding principal balance of $1.5 million, was current and was secured by a commercial building located in Van Nuys, California. At December 31, 2018, the average balance of a loan in our commercial real estate portfolio was $419 thousand.

The interest rates on multi-family and commercial ARM loans are based on a variety of indices, including the 6-Month London InterBank Offered Rate Index ("6-Month LIBOR"), the 1-Year Constant Maturity Treasury Index ("1-Yr CMT"), the 12-Month Treasury Average Index ("12-MTA"), the 11th District Cost of Funds Index ("COFI"), and the Wall Street Journal Prime Rate ("Prime Rate"). We currently offer adjustable rate loans with interest rates that adjust either semi-annually or semi-annually upon expiration of a three- or five-year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans.

Loans secured by multi-family and commercial properties are granted based on the income producing potential of the property and the financial strength of the borrower. The primary factors considered include, among other things, the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to required principal and interest payments, or debt service), and the ratio of the loan amount to the lower of the purchase price or the appraised value of the collateral.

We seek to mitigate the risks associated with multi-family and commercial real estate loans by applying appropriate underwriting requirements, which include limitations on loan-to-value ratios and debt service coverage ratios. Under our underwriting policies, loan-to-value ratios on our multi-family and commercial real estate loans usually do not exceed 75% of the lower of the purchase price or the appraised value of the underlying property. We also generally require minimum debt service coverage ratios of 120% for multi-family loans and 125% for commercial real estate loans. Properties securing multi-family and commercial real estate loans are appraised by management-approved independent appraisers. Title insurance is required on all loans.

Multi-family and commercial real estate loans are generally viewed as exposing the lender to a greater risk of loss than single family residential loans and typically involve higher loan principal amounts than loans secured by single family residential real estate. Because payments on loans secured by multi-family and commercial real properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or general economy. Adverse economic conditions in our primary lending market area could result in reduced cash flows on multi-family and commercial real estate loans, vacancies and reduced rental rates on such properties. We seek to reduce these risks by originating such loans on a selective basis and generally restrict such loans to our general market area. In 2008, we ceased out-of-state lending for all types of loans. As of December 31, 2018, our out-of-state loans totaled $1.9 million and our single largest out-of-state credit had an outstanding principal balance of $620 thousand, was current, and was secured by a church building located in Tacoma, Washington.

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Our church loans totaled $25.9 million and $30.8 million at December 31, 2018 and 2017, respectively. Church loans represented 7% of our gross loan portfolio at December 31, 2018, compared to 9% of our gross loan portfolio at December 31, 2017. We ceased originating church loans in 2010. As of December 31, 2018, our single largest church loan had an outstanding balance of $1.6 million, was current, and was secured by a church building in Richmond, California. At December 31, 2018, the average balance of a loan in our church loan portfolio was $480 thousand.

Single Family Mortgage Lending

While we have been primarily a multi-family and commercial real estate lender, we also purchase ARM loans secured by single family residential properties, including investor-owned properties, with maturities of up to 30 years. Single family loans totaled $91.8 million and $111.1 million at December 31, 2018 and 2017, respectively. Of the single family residential mortgage loans that we had outstanding at December 31, 2018, more than 99% had adjustable rate features. During 2018, we did not purchase any loans. During 2017, we purchased $24.6 million principal amount of single-family loans, which were secured by properties primarily located in Northern California. Of the $91.8 million of single family loans at December 31, 2018, $7.1 million are secured by investor-owned properties.

The interest rates for our single family ARMs are indexed to COFI, 1-Month LIBOR, 6-Month LIBOR, 12-MTA and 1-Yr. CMT. We currently offer loans with interest rates that adjust either semi-annually or semi-annually upon expiration of a three- or five-year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans. Some of our adjustable rate loans behave like fixed rate loans because the loans may still be in their initial fixed rate period or may be subject to interest rate floors.

We qualify our ARM borrowers based upon the fully indexed interest rate (LIBOR or other index plus an applicable margin, rounded to the nearest one-eighth of 1%) provided by the terms of the loan. However, we may discount the initial rate paid by the borrower to adjust for market and other competitive factors. The ARMs that we offer have a lifetime adjustment limit that is set at the time that the loan is approved. In addition, because of interest rate caps and floors, market rates may exceed or go below the respective maximum or minimum rates payable on our ARMs.

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

Construction Lending

Construction loans totaled $1.9 million and $1.7 million at December 31, 2018 and 2017, respectively, representing less than 1% of our gross loan portfolio. We provide loans for the construction of single family, multi-family and commercial real estate projects and for land development. We generally make construction and land loans at variable interest rates based upon the Prime Rate. Generally, we require a loan-to-value ratio not exceeding 75% to 80% and a loan-to-cost ratio not exceeding 70% to 80% on construction loans.

Construction loans involve risks that are different from those for completed project lending because we advance loan funds based upon the security and estimated value at completion of the project under construction. If the borrower defaults on the loan, we may have to advance additional funds to finance the project's completion before the project can be sold. Moreover, construction projects are affected by uncertainties inherent in estimating construction costs, potential delays in construction schedules, market demand and the accuracy of estimates of the value of the completed project considered in the loan approval process. In addition, construction projects can be risky as they transition to completion and lease-up. Tenants who may have been interested in leasing a unit or apartment may not be able to afford the space when the building is completed, or may fail to lease the space for other reasons such as more attractive terms offered by competing lessors, making it difficult for the building to

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generate enough cash flow for the owner to obtain permanent financing. No new construction loans were originated in 2018. Two construction participation loans totaling $3.5 million were originated during 2017.

Commercial Lending

Prior to 2015, we originated non-real estate commercial loans that are secured by business assets, the franchise value of the business, if applicable, and individual assets such as deposit accounts, securities and automobiles. Most of these loans were originated with maturities of up to 5 years. Our commercial loans amounted to $226 thousand and $192 thousand at December 31, 2018 and 2017, respectively, representing less than 1% of our gross loan portfolio.

Loan Originations, Purchases and Sales

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

 
  2018   2017   2016  
 
  (In thousands)
 

Gross loans (1):

                   

Beginning balance

  $ 359,686   $ 382,264   $ 307,956  

Loans originated:

                   

Single family

    -     -     -  

Multi-family

    96,034     114,489     136,794  

Commercial Real Estate

    1,017     -     -  

Construction

    1,861     841     837  

Commercial

    48     69     45  

Total loans originated

    98,960     115,399     137,676  

Loans purchased:

                   

Single family

    -     24,640     -  

Total loans purchased

    -     24,640     -  

Less:

                   

Principal repayments

    75,542     65,169     63,368  

Sales of loans

    19,332     96,945     -  

Loan charge-offs

    -     -     -  

Lower of Cost or Market (LOCOM) – held for sale

    11     -     -  

Transfer of loans to real estate owned

    -     503     -  

Ending balance (2)

  $ 363,761   $ 359,686   $ 382,264  

(1)
Amount is before deferred origination costs, purchase premiums and discounts.
(2)
Includes loans receivable held for sale totaling $6.2 million at December 31, 2018, exclusive of $18 thousand in deferred origination costs and $11 thousand marked down to market.

Loan originations are derived from various sources including our loan personnel, local mortgage brokers, advertising and referrals from customers. For all loans that we originate, upon receipt of a loan application from a prospective borrower, a credit report is ordered and certain other information is verified by an independent credit agency and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required, which appraisal is performed by an independent licensed or certified appraiser designated and approved by us. The Bank's Board of Directors (the "Board") annually reviews our appraisal policy. Management reviews annually the qualifications and performance of independent appraisers that we use.

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It is our policy to obtain title insurance on all real estate loans. Borrowers must also obtain hazard insurance naming Broadway Federal as a loss payee prior to loan closing. If the original loan amount exceeds 80% on a sale or refinance of a first trust deed loan, we may require private mortgage insurance and the borrower is required to make payments to a mortgage impound account from which we make disbursements to pay private mortgage insurance premiums, property taxes and hazard and flood insurance as required.

The Board has authorized the following loan approval limits: if the total of the borrower's existing loans and the loan under consideration is $1,000,000 or less, the new loan may be approved by a Senior Underwriter plus a Loan Committee member, including the Chief Executive Officer or Chief Credit Officer of the Bank; if the total of the borrower's existing loans and the loan under consideration is from $1,000,001 to $2,000,000, the new loan must be approved by a Senior Underwriter plus two Loan Committee members, including the Chief Executive Officer or Chief Credit Officer of the Bank; if the total of the borrower's existing loans and the loan under consideration is from $2,000,001 to $7,000,000, the new loan must be approved by a Senior Underwriter, the Chief Executive Officer and Chief Credit Officer of the Bank, plus a majority of the Board-appointed non-management Loan Committee members. In addition, it is our practice that all loans approved be reported to the Loan Committee no later than the month following their approval, and be ratified by the Board.

From time to time, we purchase loans originated by other institutions based upon our investment needs and market opportunities. The determination to purchase specific loans or pools of loans is subject to our underwriting policies, which consider, among other factors, the financial condition of the borrowers, the location of the underlying collateral properties and the appraised value of the collateral properties. We did not purchase any loans during the year ended December 31, 2018. During 2017, we purchased $24.6 million principal amount of single family loans, which are being serviced by the seller.

We originate loans for investment and for sale. Loan sales are generally made from the loans receivable held-for-sale portfolio and from loans originated during the period that are designated as held for sale. During 2018, we originated $20.2 million of multi-family loans for sale, transferred $16.9 million of multi-family loans from held-for-sale to held-for-investment and sold $19.3 million of multi-family loans in order to comply with regulatory loan concentration guidelines. During 2017, we originated $110.4 million of multi-family loans for sale, transferred $9.8 million of multi-family loans from held-for-investment to held-for-sale and sold $96.9 million of multi-family loans.

We receive monthly loan servicing fees on loans sold and serviced for others, primarily insured financial institutions. Generally, we collect these fees by retaining a portion of the loan collections in an amount equal to an agreed percentage of the monthly loan installments, plus late charges and certain other fees paid by the borrowers. Loan servicing activities include monthly loan payment collection, monitoring of insurance and tax payment status, responses to borrower information requests and dealing with loan delinquencies and defaults, including conducting loan foreclosures. At December 31, 2018 and 2017, we were servicing $2.6 million and $3.6 million, respectively, of loans for others. The servicing rights associated with sold loans are recorded as assets based upon their fair values. At December 31, 2018 and 2017, we had $18 thousand and $24 thousand, respectively, in mortgage servicing rights.

Loan Maturity and Repricing

The following table shows the contractual maturities of loans in our portfolio of loans held for investment at December 31, 2018, and does not reflect the effect of prepayments or scheduled principal amortization.

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  Single
family
  Multi-
family
  Commercial
real estate
  Church   Construction   Commercial   Consumer   Gross
loans
receivable
 
 
  (In thousands)
 

Amounts Due:

                                                 

After one year:

                                                 

One year to five years                

  $ 1,074   $ -   $ 3,563   $ 21,756   $ -   $ 64   $ -   $ 26,457  

After five years                

    90,761     231,537     2,304     4,178     -     162     -     328,942  

Total due after one year                

    91,835     231,537     5,866     25,934     -     226     -     355,399  

One year or less                

    -     268     -     -     1,876     -     5     2,149  

Total

  $ 91,835   $ 231,805   $ 5,866   $ 25,934   $ 1,876   $ 226   $ 5   $ 357,548  

Loans in their initial fixed rate period totaled $298 million or 83% of our loan portfolio at December 31, 2018. The average initial fixed rate period as of December 31, 2018 was 3.1 years.

Asset Quality

General

The underlying credit quality of our loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral securing the loan, if any. A borrower's ability to pay typically is dependent, in the case of single family residential loans and consumer loans, primarily on employment and other sources of income, and in the case of multi-family and commercial real estate loans, on the cash flow generated by the property, which in turn is impacted by general economic conditions. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrower's ability to make loan payments. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, property maintenance and collection or foreclosure delays.

Delinquencies

We perform a weekly review of all delinquent loans and loan delinquency reports are made monthly to the Internal Asset Review Committee of the Board of Directors. When a borrower fails to make a required payment on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. The procedures we follow with respect to delinquencies vary depending on the type of loan, the type of property securing the loan, and the period of delinquency. In the case of residential mortgage loans, we generally send the borrower a written notice of non-payment promptly after the loan becomes past due. In the event payment is not received promptly thereafter, additional letters are sent and telephone calls are made. If the loan is still not brought current and it becomes necessary for us to take legal action, we generally commence foreclosure proceedings on all real property securing the loan. In the case of commercial real estate loans, we generally contact the borrower by telephone and send a written notice of intent to foreclose upon expiration of the applicable grace period. Decisions not to commence foreclosure upon expiration of the notice of intent to foreclose for commercial real estate loans are made on a case-by-case basis. We may consider loan workout arrangements with these types of borrowers in certain circumstances.

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

                                                                         
 
  December 31, 2018

  December 31, 2017

  December 31, 2016

 

                                                                         
 
  Loans delinquent

  Loans delinquent

  Loans delinquent

 

                                                                         
 
  60-89 Days

  90 days or more

  60-89 Days

  90 days or more

  60-89 Days

  90 days or more

 

    Number     Amount     Number     Amount     Number     Amount     Number     Amount     Number     Amount     Number     Amount
 

    (Dollars in thousands)  

Single family

    1   $ 35     -   $ -     1   $ 50     -   $ -     1   $ 64     -   $ -  

Church

    -     -     -     -     -     -     -     -     -     -     -     -  

Total

    1   $ 35     -   $ -     1   $ 50     -   $ -     1   $ 64     -   $ -  

% of Gross Loans (1)

          0.01%           0.00%           0.01%           0.00%           0.01%           0.00%  

(1)
Includes loans receivable held for sale at December 31, 2018 and 2017.

Non-Performing Assets

Non-performing assets ("NPAs") include non-accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure ("REO"). NPAs at December 31, 2018 decreased to $1.7 million, or 0.43% of total assets, from $2.6 million, or 0.64% of total assets, at December 31, 2017.

Non-accrual loans decreased by $855 thousand to $911 thousand at December 31, 2018, from $1.8 million at December 31, 2017. These loans consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings ("TDRs") that do not qualify for accrual status. As of December 31, 2018, $911 thousand , or 100% of our non-accrual loans, were current in their payments, but were treated as non-accrual primarily because of deficiencies in non-payment matters related to the borrowers, such as lack of current financial information. The $855 thousand decrease in non-accrual loans was due to upgrades from non-accrual to accrual status of $659 thousand and repayments of $196 thousand.

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

 
  December 31,  
 
  2018   2017   2016   2015   2014  
 
  (Dollars in thousands)
 

Non-accrual loans:

                               

Single family

  $ -   $ -   $ -   $ 302   $ 736  

Multi-family

    -     -     -     779     1,618  

Commercial real estate

    -     -     -     259     1,174  

Church

    911     1,766     2,944     2,887     5,232  

Commercial

    -     -     -     -     102  

Total non-accrual loans

    911     1,766     2,944     4,227     8,862  

Loans delinquent 90 days or more and still accruing

    -     -     -     -     -  

Real estate owned acquired through foreclosure

    833     878     -     360     2,082  

Total non-performing assets

  $ 1,744   $ 2,644   $ 2,944   $ 4,587   $ 10,944  

Non-accrual loans as a percentage of gross loans, including loans receivable held for sale

    0.25%     0.49%     0.77%     1.37%     2.93%  

Non-performing assets as a percentage of total assets

    0.43%     0.64%     0.69%     1.14%     3.12%  

There were no accrual loans that were contractually past due by 90 days or more at December 31, 2018 or 2017. We had no commitments to lend additional funds to borrowers whose loans were on non-accrual status at December 31, 2018.

We discontinue accruing interest on loans when the loans become 90 days delinquent as to their payment due date (missed three payments). In addition, we reverse all previously accrued and uncollected interest for those loans through a charge to interest income. While loans are in non-accrual status, interest received on such loans is credited to principal, until the loans qualify for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

We may agree to modify the contractual terms of a borrower's loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a TDR. Non-accrual loans modified in a TDR remain on non-accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the restructured terms, generally for a period of at least six months. Loans modified in a TDR that are included in non-accrual loans totaled $591 thousand at December 31, 2018 and $1.4 million at December 31, 2017. Excluded from non-accrual loans are restructured loans that were not delinquent at the time of modification or loans that have complied with the terms of their restructured agreement for six months or such longer period as management deems appropriate for particular loans, and therefore have been returned to accruing status. Restructured accruing loans totaled $5.5 million at December 31, 2018 and $7.5 million at December 31, 2017.

During 2018, gross interest income that would have been recorded on non-accrual loans had they performed in accordance with their original terms, totaled $173 thousand. Actual interest recognized on non-accrual loans and included in net income for the year 2018 was $40 thousand, primarily reflecting interest recoveries on non-accrual loans that were paid off.

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We update our estimates of collateral value on loans when they become 90 days past due and to the extent the loans remain delinquent, every nine months thereafter. We obtain updated estimates of collateral value earlier than at 90 days past due for loans to borrowers who have filed for bankruptcy or for certain other loans when our Internal Asset Review Committee believes repayment of such loans may be dependent on the value of the underlying collateral. For single family loans, updated estimates of collateral value are obtained through appraisals and automated valuation models. For multi-family and commercial real estate properties, we estimate collateral value through appraisals or internal cash flow analyses when current financial information is available, coupled with, in most cases, an inspection of the property. Our policy is to make a charge against our allowance for loan losses, and correspondingly reduce the book value of a loan, to the extent that the collateral value of the property securing a loan is less than our recorded investment in the loan. See "Allowance for Loan Losses" for full discussion of the allowance for loan losses.

REO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at fair value less estimated selling costs. Any excess of carrying value over fair value at the time of acquisition is charged to the allowance for loan losses. Thereafter, we charge non-interest expense for the property maintenance and protection expenses incurred as a result of owning the property. Any decreases in the property's estimated fair value after foreclosure are recorded in a separate allowance for losses on REO. During 2018, the Bank did not foreclose on any loans. During 2017, the Bank received a deed in lieu of foreclosure, which was recorded at fair value, net of estimated selling costs of $833 thousand at December 31, 2018, compared to $878 thousand at December 31, 2017.

Classification of Assets

Federal regulations and our internal policies require that we utilize an asset classification system as a means of monitoring and reporting problem and potential problem assets. We have incorporated asset classifications as a part of our credit monitoring system and thus classify potential problem assets as "Watch" and "Special Mention," and problem assets as "Substandard," "Doubtful" or "Loss". An asset is considered "Watch" if the loan is current but temporarily presents higher than average risk and warrants greater than routine attention and monitoring. An asset is considered "Special Mention" if the loan is current but there are some potential weaknesses that deserve management's close attention. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but that are considered to possess some weaknesses, are designated "Special Mention." Our Internal Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to the Internal Asset Review Committee of our Board of Directors monthly.

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

                         
 
  December 31, 2018

  December 31, 2017

 

    Number     Amount     Number     Amount
 

    (Dollars in thousands)  

Watch loans

    2   $ 673     3   $ 813  

Special mention loans

    1     35     -     -  

Total criticized loans

    3     708     3     813  

Substandard loans

    15     5,487     17     6,395  

REO

    1     833     1     878  

Total classified assets

    16     6,320     18     7,273  

Total

    19   $ 7,028     21   $ 8,086  

Classified assets decreased by $953 thousand to $6.3 million at December 31, 2018, from $7.3 million at December 31, 2017, primarily due to $45 thousand of write-downs on REO, $280 thousand of payoffs, $328 thousand of paydowns, and $919 thousand of classification upgrades, offset by $619 thousand of classification downgrades. Criticized assets decreased by $105 thousand to $708 thousand at December 31, 2018, from $813 thousand at December 31, 2017, due to $122 thousand of payoff and $18 thousand of repayments offset by $35 thousand of classification downgrade.

Allowance for Loan Losses

In originating loans, we recognize that losses may be experienced on loans and that the risk of loss may vary as a result of many factors, including the type of loan being made, the creditworthiness of the borrower, general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan. We are required to maintain an adequate allowance for loan losses ("ALLL") in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). The ALLL represents our management's best estimate of probable incurred credit losses in our loan portfolio as of the date of the consolidated financial statements. Our ALLL is intended to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable, but not specifically identifiable. There can be no assurance, however, that actual losses incurred will not exceed the amount of management's estimates.

Our Internal Asset Review Department issues reports to the Board of Directors and continually reviews loan quality. This analysis includes a detailed review of the classification and categorization of problem loans, potential problem loans and loans to be charged off, an assessment of the overall quality and collectability of the portfolio, and concentration of credit risk. Management then evaluates the allowance, determines its appropriate level and the need for additional provisions, and presents its analysis to the Board of Directors which ultimately reviews management's recommendation and, if deemed appropriate, then approves such recommendation.

The ALLL is increased by provisions for loan losses which are charged to earnings and is decreased by recaptures of loan loss provision and charge-offs, net of recoveries. Provisions are recorded to increase the ALLL to the level deemed appropriate by management. The Bank utilizes an allowance methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, our loan loss experience, conditions in the real estate and housing markets, current economic conditions and trends, particularly levels of unemployment, and changes in the size of the loan portfolio.

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

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A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a portion of the allowance is allocated to the loan so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. TDRs are separately identified for impairment and are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated selling costs. For TDRs that subsequently default, we determine the amount of any necessary additional charge-off based on internal analyses and appraisals of the underlying collateral securing these loans. At December 31, 2018, impaired loans totaled $6.4 million and had an aggregate specific allowance allocation of $227 thousand.

The general component of the ALLL covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Each month, we prepare an analysis which categorizes the entire loan portfolio by certain risk characteristics such as loan type (single family, multi-family, commercial real estate, construction, commercial and consumer) and loan classification (pass, watch, special mention, substandard and doubtful). With the use of a migration to loss analysis, we calculate our historical loss rate and assign estimated loss factors to the loan classification categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to our historical loss experience, levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

In addition to loss experience and environmental factors, we use qualitative analyses to determine the adequacy of our ALLL. This analysis includes ratio analysis to evaluate the overall measurement of the ALLL and comparison of peer group reserve percentages. The qualitative review is used to reassess the overall determination of the ALLL and to ensure that directional changes in the ALLL and the provision for loan losses are supported by relevant internal and external data.

Based on our evaluation of the housing and real estate markets and overall economy, including the unemployment rate, the levels and composition of our loan delinquencies and non-performing loans, our loss history and the size and composition of our loan portfolio, we determined that an ALLL of $2.9 million, or 0.82% of loans held for investment was appropriate at December 31, 2018, compared to $4.1 million, or 1.20% of loans held for investment at December 31, 2017. The decrease in ALLL compared to the prior year was due to the overall improvement in the loan portfolio which had a favorable impact on the environmental factors used in the computation of the ALLL.

A federally chartered savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, in conjunction with the other federal banking agencies, provides guidance for financial institutions on the responsibilities of management for the assessment and establishment of adequate valuation allowances, as well as guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and

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controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectability of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the guidelines issued by federal regulatory agencies. While we believe that the ALLL has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ materially from the conditions on which we based our estimates at December 31, 2018. In addition, there can be no assurance that the OCC or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not require us to materially increase our ALLL, thereby affecting our financial condition and earnings.

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

  December 31,    

  2018     2017     2016     2015     2014    

    Amount     Percent
of loans
in each
category
to total
loans
    Amount     Percent
of loans
in each
category
to total
loans
    Amount     Percent
of loans
in each
category
to total
loans
    Amount     Percent
of loans
in each
category
to total
loans
    Amount     Percent
of loans
in each
category
to total
loans
 

    (Dollars in thousands)  

Single family

  $ 368     12.56%   $ 594     32.93%   $ 367     27.42%   $ 597     42.50%   $ 1,174     14.03%  

Multi-family

    1,880     64.19%     2,300     55.57%     2,659     60.05%     1,658     38.52%     2,726     60.58%  

Commercial real estate

    52     1.78%     71     1.80%     215     2.33%     469     3.72%     496     5.90%  

Church

    604     20.62%     1,081     9.14%     1,337     9.90%     2,083     15.06%     4,047     19.26%  

Construction

    19     0.65%     17     0.50%     8     0.22%     3     0.11%     7     0.14%  

Commercial

    6     0.20%     6     0.06%     17     0.08%     18     0.09%     12     0.09%  

Consumer

    -     0.00%     -     0.00%     -     0.00%     -     0.00%     3     0.00%  

Total allowance for loan losses

  $ 2,929     100.00%   $ 4,069     100.00%   $ 4,603     100.00%   $ 4,828     100.00%   $ 8,465     100.00%  

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

 
  2018   2017   2016   2015   2014  
 
  (Dollars in thousands)
 

Allowance balance at beginning of year

  $ 4,069   $ 4,603   $ 4,828   $ 8,465   $ 10,146  

Charge-offs:

   
 
   
 
   
 
   
 
   
 
 

Single family

    -     -     -     (4 )   (133 )

Multi-family

    -     -     -     -     -  

Commercial real estate

    -     -     -     -     (8 )

Church

    -     -     -     (85 )   (533 )

Commercial

    -     -     -     -     (19 )

Total charge-offs

    -     -     -     (89 )   (693 )

Recoveries:

   
 
   
 
   
 
   
 
   
 
 

Single family

    -     30     47     129     2  

Commercial real estate

    -     -     248     -     -  

Church

    114     536     22     23     859  

Commercial

    -     -     8     -     1,083  

Total recoveries

    114     566     325     152     1,944  

Provision (recapture) charged to earnings

   
(1,254

)
 
(1,100

)
 
(550

)
 
(3,700

)
 
(2,932

)

Allowance balance at end of year

  $ 2,929   $ 4,069   $ 4,603   $ 4,828   $ 8,465  

Net charge-offs (recoveries) to average loans, excluding loans receivable held for sale

   
(0.04%

)
 
(0.16%

)
 
(0.10%

)
 
(0.02%

)
 
(0.46%

)

ALLL as a percentage of gross loans, excluding loans receivable held for sale

    0.82%     1.20%     1.20%     1.56%     2.99%  

ALLL as a percentage of total non-accrual loans

    321.51%     230.41%     156.35%     114.22%     95.52%  

ALLL as a percentage of total non-performing assets

    167.94%     153.90%     156.35%     105.25%     77.35%  

Investment Activities

The main objectives of our investment strategy are to provide a source of liquidity for deposit outflows, repayment of our borrowings and funding loan commitments, and to generate a favorable return on investments without incurring undue interest rate or credit risk. Subject to various restrictions, our investment policy generally permits investments in money market instruments such as Federal Funds Sold, certificates of deposit of insured banks and savings institutions, direct obligations of the U. S. Treasury, Federal Agency securities, government Agency-issued securities and mortgage-backed securities, mutual funds, municipal obligations, corporate bonds and marketable equity securities. Mortgage-backed securities consist principally of FNMA, FHLMC and GNMA securities backed by 30-year amortizing hybrid ARM loans, structured with fixed interest rates for periods of three to seven years, after which time the loans convert to one-year or six-month adjustable rate mortgage loans. At December 31, 2018, our securities portfolio, consisting primarily of federal agency debt and mortgage-backed securities, totaled $14.7 million, or 3.6% of total assets.

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We classify investments as held-to-maturity or available-for-sale at the date of purchase based on our assessment of our internal liquidity requirements. Securities purchased to meet investment-related objectives such as liquidity management or mitigating interest rate risk and which may be sold as necessary to implement management strategies, are designated as available-for-sale at the time of purchase. Securities in the held-to-maturity category consist of securities purchased for long-term investment in order to enhance our ongoing stream of net interest income. Securities deemed held-to-maturity are classified as such because we have both the intent and ability to hold these securities to maturity. Held-to-maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. Available-for-sale securities are reported at fair value. We currently have no securities classified as held-to-maturity securities.

The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2018. The table reflects stated final maturities and does not reflect scheduled principal payments or expected payoffs.

 
  At December 31, 2018  
 
  One Year or less   More than one
year
to five years
  More than five
years
to ten years
  More than
ten years
  Total  
 
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
 
 
  (Dollars in thousands)
 

Available-for-sale:

                                                             

Federal agency mortgage-backed securities

  $ -     - %   $ 50     3.89%   $ 2,649     2.53%   $ 6,809     3.16%   $ 9,508     2.99%  

Federal agency debt

    1,979     2.00%     -     - %     -     - %     3,235     2.71%     5,214     2.44%  

Total

  $ 1,979     2.00%   $ 50     3.89%   $ 2,649     2.53%   $ 10,044     3.02%   $ 14,722     2.79%  

At December 31, 2018, the mortgage-backed securities in our portfolio have an estimated remaining life of 4.5 years.

Sources of Funds

General

Deposits are our primary source of funds for supporting our lending and other investment activities and general business purposes. In addition to deposits, we obtain funds from the amortization and prepayment of loans and investment securities, sales of loans and investment securities, advances from the FHLB of San Francisco, and cash flows generated by operations.

Deposits

We offer a variety of deposit accounts featuring a range of interest rates and terms. Our deposits principally consist of savings accounts, checking accounts, NOW accounts, money market accounts, and fixed-term certificates of deposit. The maturities of term certificates generally range from one month to five years. We accept deposits from customers within our market area based primarily on posted rates, but from time to time we will negotiate the rate based on the amount of the deposit. We primarily rely on customer service and long-standing customer relationships to attract and retain deposits. We seek to maintain and increase our retail "core" deposit relationships, consisting of savings accounts, checking accounts and money market accounts because we believe these deposit

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accounts tend to be a stable funding source and are available at a lower cost than term deposits. However, market interest rates, including rates offered by competing financial institutions, the availability of other investment alternatives, and general economic conditions significantly affect our ability to attract and retain deposits.

We also open deposit accounts for customers throughout the United States through the Internet and deposit listing services. Deposits from the Internet and deposit listing services totaled $3.6 million and $12.3 million, respectively, at December 31, 2018 compared to $4.7 million and $9.2 million, respectively, at December 31, 2017.

We participate in a deposit program called the Certificate of Deposit Account Registry Service ("CDARS"). CDARS is a deposit placement service that allows us to place our customers' funds in FDIC-insured certificates of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network ("CDARS Reciprocal"). We may also accept deposits from other institutions when we have no reciprocal deposit ("CDARS One-Way Buy"). We had approximately $33.7 million in CDARS Reciprocal and $42.5 million in CDARS One-Way Buy at December 31, 2018, compared to $9.5 million in CDARS Reciprocal and $43.3 million in CDARS One-Way Buy at December 31, 2017.

The following table details the maturity periods of our certificates of deposit in amounts of $250 thousand or more at December 31, 2018.

 
  December 31, 2018  
 
  Amount   Weighted
average rate
 
 
  (Dollars in thousands)
 

Certificates maturing:

             

Less than three months

  $ 1,253     0.79%  

Three to six months

    3,653     2.08%  

Six to twelve months

    9,747     2.13%  

Over twelve months

    9,368     2.28%  

Total

  $ 24,021     2.11%  

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

 
  For the Year Ended December 31,  
 
  2018   2017   2016  
 
  Average
balance
  Percent
of total
  Weighted
average
rate
  Average
balance
  Percent
of total
  Weighted
average
rate
  Average
balance
  Percent
of total
  Weighted
average
rate
 
 
  (Dollars in thousands)
 

Money market deposits

  $ 37,489     13.45%     1.07%   $ 38,318     13.14%     0.70%   $ 27,399     10.06%     0.58%  

Passbook deposits

    41,936     15.03%     0.38%     39,064     13.39%     0.32%     36,611     13.45%     0.32%  

NOW and other demand deposits

    34,818     12.48%     0.09%     32,275     11.07%     0.07%     29,959     11.00%     0.07%  

Certificates of deposit

    164,703     59.04%     1.49%     181,993     62.40%     1.09%     178,292     65.49%     1.06%  

Total

  $ 278,946     100.00%     1.10%   $ 291,650     100.00%     0.82%   $ 272,261     100.00%     0.80%  

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Borrowings

We utilize short-term and long-term advances from the FHLB of San Francisco as an alternative to retail deposits as a funding source for asset growth. FHLB advances are generally secured by mortgage loans and mortgage-backed securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 2018, we had $70.0 million in FHLB advances and had the ability to borrow up to an additional $54.6 million based on available and pledged collateral.

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

 
  At or For the Year Ended  
 
  2018   2017   2016  
 
  (Dollars in thousands)
 

FHLB Advances:

                   

Average balance outstanding during the year

  $ 77,729   $ 89,279   $ 71,940  

Maximum amount outstanding at any month-end during the year

  $ 98,000   $ 104,000   $ 85,000  

Balance outstanding at end of year

  $ 70,000   $ 65,000   $ 85,000  

Weighted average interest rate at end of year

    2.51 %   1.86 %   1.94 %

Average cost of advances during the year

    2.13 %   1.97 %   2.13 %

Weighted average maturity (in months)

    24     18     13  

On March 17, 2004, we issued $6.0 million of Floating Rate Junior Subordinated Debentures (the "Debentures") in a private placement to a trust that was capitalized to purchase subordinated debt and preferred stock of multiple community banks. Interest on the Debentures is payable quarterly at a rate per annum equal to the 3-Month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 5.30% at December 31, 2018. On October 16, 2014, we made payments of $900 thousand of principal on the Debentures, executed a Supplemental Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024, and modified the payment terms of the remaining $5.1 million principal amount thereof. The modified terms of the Debentures require quarterly payments of interest only through March 2019 at the original rate of 3-Month LIBOR plus 2.54%. Starting in June 2019, we 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.

Market Area and Competition

Broadway Federal is a community-oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. Our retail banking network includes full service banking offices, automated teller machines and Internet banking capabilities that are available using our website at www.broadwayfederalbank.com. We have two banking offices in Los Angeles and one banking office located in the nearby City of Inglewood.

The Los Angeles metropolitan area is a highly competitive banking market for making loans and attracting deposits. Although our offices are primarily located in low-to-moderate income communities that have historically been under-served by other financial institutions, we face significant competition for deposits and loans in our immediate market areas, including direct competition from mortgage banking companies, commercial banks and savings and loan associations. Most of these financial institutions are significantly larger than we are and have greater financial resources, and many have a regional, statewide or national presence.

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Personnel

At December 31, 2018, we had 65 employees, which included 61 full-time and 4 part-time employees. We believe that we have good relations with our employees and none are represented by a collective bargaining group.

Regulation

General

Broadway Federal Bank, f.s.b, is regulated by the OCC, as its primary federal regulator, and by the FDIC, as its deposit insurer. The Bank is also a member of the FHLB System and is subject to the regulations of the FRB concerning reserves required to be maintained against deposits, transactions with affiliates, Truth in Lending and other consumer protection requirements and certain other matters. Broadway Financial Corporation is regulated, examined and supervised by the FRB and is also required to file certain reports and otherwise comply with the rules and regulations of the SEC under the federal securities laws.

The OCC regulates and examines most of our Bank's business activities, including, among other things, capital standards, general investment authority, deposit taking and borrowing authority, mergers and other business combination transactions, establishment of branch offices, and permitted subsidiary investments and activities. The OCC has primary enforcement responsibility over federal savings banks and has substantial discretion to impose enforcement actions on an institution that fails to comply with applicable regulatory requirements, including with respect to capital requirements. In addition, the FDIC has the authority to recommend to the OCC that enforcement actions be taken with respect to a particular federal savings bank and, if recommended action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. In certain cases, the OCC has the authority to refer matters relating to federal fair lending laws to the U.S. Department of Justice ("DOJ") or the U.S. Department of Housing and Urban Development ("HUD") if the OCC determines violations of the fair lending laws may have occurred.

Changes in the applicable laws or regulations of the OCC, the FDIC, the FRB or other regulatory authorities, or changes in interpretations of such regulations or in agency policies or priorities, could have a material adverse impact on the Bank and the Company, their operations, and the value of the Company's debt and equity securities. The Company and its stock are also subject to rules and regulations issued by The NASDAQ Stock Market, LLC ("NASDAQ"), the principal exchange on which the Company's common stock is traded. Failure of the Company to conform to NASDAQ's rules and regulations could have an adverse impact on the Company and the value of the Company's equity securities.

The following paragraphs summarize certain laws and regulations that apply to the Company and the Bank. These descriptions of statutes and regulations and their possible effects do not purport to be complete descriptions of all of the provisions of those statutes and regulations and their possible effects on us, nor do they purport to identify every statute and regulation that applies to us.

Dodd-Frank Wall Street Reform and Consumer Protection Act

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act is intended to address perceived weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises.

As a result of the Dodd-Frank Act, on July 21, 2011, the Office of Thrift Supervision ("OTS"), our former primary federal regulator, was merged into the OCC, which has taken over the regulation and supervision of all federal savings associations. The FRB acquired the OTS's authority over all savings and loan holding companies.

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The Dodd-Frank Act established increased compliance obligations across a number of areas in the banking business and, among other changes, required the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and certain non-bank financial companies that are no less stringent than those to which insured depository institutions had been previously subject. Under an existing FRB policy statement, bank holding companies with less than $500 million in total consolidated assets were not subject to consolidated capital requirements. In guidance effective as of May 15, 2015, the FRB formally applied the policy statement to savings and loan holding companies, such as the Company, and raised the applicable asset threshold to $1 billion. The Dodd-Frank Act requires savings and loan holding companies to serve as a source of financial strength for any subsidiary of the holding company that is a depository institution by providing financial assistance in the event of the financial distress of the depository institution.

The Dodd-Frank Act also includes provisions changing the assessment base for federal deposit insurance from the amount of insured deposits to the amount of consolidated assets less tangible capital, and making permanent the $250,000 limit for federal deposit insurance that had initially been established on a temporary basis in reaction to the economic downturn in 2008.

The Dodd-Frank Act also established the Consumer Financial Protection Bureau ("CFPB"). The CFPB has authority to supervise compliance with and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to banks and savings institutions of all sizes, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. Over the past several years, the CFPB has been active in bringing enforcement actions against banks and nonbank financial institutions to enforce federal consumer financial laws, and has developed a number of new enforcement theories and applications of these laws. The CFPB's supervisory authority does not generally extend to insured depository institutions having less than $10 billion in assets. The other federal financial regulatory agencies, however, as well as state attorneys general and state banking agencies and other state financial regulators, have been increasingly active in this area with respect to institutions over which they have jurisdiction.

The Dodd-Frank Act also includes other provisions that require or permit further rulemaking by the federal bank regulatory agencies, which may affect our future operations. We will not be able to determine the impact of any such provisions until final rules are promulgated and other regulatory guidance is provided interpreting these provisions.

Capital Requirements

In July 2013, the federal banking regulators approved final rules (the "Basel III Capital Rules") implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to depository institutions including Broadway Federal. As stated above, the Company is a small savings and loan holding company that is exempt from consolidated capital requirements.

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions and adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions and adjustments to capital as compared to existing regulations.

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

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The Basel III Capital Rules also introduced a new "capital conservation buffer", composed entirely of CET1, in addition to the minimum risk-weighted capital to assets ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on January 1 of each subsequent year, until it reached 2.5% on January 1, 2019. As fully phased in, the Basel III Capital Rules now require the Bank to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%, and (iv) a minimum leverage ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

In addition, under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded automatically; however, Broadway Federal Bank qualified to make a one-time permanent election to continue to exclude these items. It made this election to avoid significant variations in the level of its capital that might otherwise occur as a result of the impact of interest rate fluctuations on the fair value of its available-for-sale securities portfolio.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expands both the number of risk-weighting categories and the risk sensitivity of many categories. The risk weights assigned to a particular category of assets will depend on the nature of the assets, and range from 0% for U.S. government and agency securities to 600% for certain equity exposures. On balance, the new standards result in higher risk weights for a number of asset categories.

The Basel III Capital Rules also revise the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under "Prompt Corrective Action." Management believes that, as of December 31, 2018, the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements had been in effect.

Prompt Corrective Action

The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. The OCC performs this function with respect to the Bank. The FDIA includes the following five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized."

Generally, a capital restoration plan must be filed with the OCC within 45 days after the date a depository institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion.

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The Basel III Capital Rules included revisions to the prompt corrective action framework. Under the prompt corrective action requirements, insured depository institutions are now required to meet the following increased capital level requirements in order to qualify as "well capitalized:" (i) a new CET1 capital to risk weighted assets of 6.5%; (ii) a Tier 1 capital to risk weighted assets of 8% (increased from 6%); (iii) a total capital to risk weighted assets of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

At December 31, 2018, the Bank's level of capital exceeded all regulatory capital requirements and its regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. Actual and required capital amounts and ratios at December 31, 2018 and 2017 are presented below.

  Actual                            
 
   
   
  Minimum Capital
Requirements
  Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 

    Amount     Ratio     Amount     Ratio     Amount     Ratio
 

    (Dollars in thousands)  

December 31, 2018:

                                     

Tier 1 (Leverage)

  $ 49,433     12.03%   $ 16,439     4.00%   $ 20,549     5.00%  

Common Equity Tier 1

  $ 49,433     19.32%   $ 18,494     4.50%   $ 16,634     6.50%  

Tier 1

  $ 49,433     19.32%   $ 24,659     6.00%   $ 20,472     8.00%  

Total Capital

  $ 52,417     20.48%   $ 32,879     8.00%   $ 25,590     10.00%  

December 31, 2017:

                                     

Tier 1 (Leverage)

  $ 47,838     11.39%   $ 16,798     4.00%   $ 20,997     5.00%  

Common Equity Tier 1

  $ 47,838     18.63%   $ 11,557     4.50%   $ 16,693     6.50%  

Tier 1

  $ 47,838     18.63%   $ 15,409     6.00%   $ 20,545     8.00%  

Total Capital

  $ 51,059     19.88%   $ 20,545     8.00%   $ 25,681     10.00%  

Deposit Insurance

The FDIC is an independent federal agency that insures deposits of federally insured banks, including federal savings banks, up to prescribed statutory limits for each depositor. Pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased to $250,000 per depositor, per ownership category.

The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to the FDIC's Deposit Insurance Fund ("DIF"). The Bank's DIF assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the Bank. The initial base assessment rate is based on an institution's capital level, and capital adequacy, asset quality, management, earnings, liquidity and sensitivity ("CAMELS") ratings, certain financial measures to assess an institution's ability to withstand asset related stress and funding related stress, and in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors.

The FDIC's overall premium rate structure is subject to change from time to time to reflect its actual and anticipated loss experience. The financial crisis that began in 2008 resulted in substantially higher levels of bank failures than had occurred in the immediately preceding years. These failures dramatically increased the resolution costs of the FDIC and substantially reduced the available amount of the DIF.

As required by the Dodd-Frank Act, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan increased the minimum designated DIF reserve ratio from 1.15% to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the

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assessments necessary to meet the new requirement, the FDIC is required to offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by institutions with more than $10 billion in assets. With the increase of the DIF reserve ratio to 1.17% on June 30, 2016, the range of initial assessment rates has declined for all banks from five to 35 basis points on an annualized basis to three to 30 basis points on an annualized basis. In order to reach a DIF reserve ratio of 1.35%, insured depository institutions with $10 billion or more in total assets are required to pay a quarterly surcharge equal to an annual rate of 4.5 basis points, in addition to regular assessments. In the event that the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall on large banks in the first quarter of 2019. The FDIC will provide assessment credits to insured depository institutions, like Broadway Federal, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.

The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank's depositors.

Guidance on Commercial Real Estate Lending

In December 2015, the federal banking agencies released a statement titled "Statement on Prudent Risk Management for Commercial Real Estate Lending" (the "CRE Statement"). The CRE Statement expresses the banking agencies' concerns with banking institutions that ease their commercial real estate underwriting standards, directs financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicates that the agencies will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The banking agencies previously issued guidance titled "Prudent Commercial Real Estate Loan Workouts" which provides guidance for financial institutions that are working with commercial real estate ("CRE") borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties and details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition. The banking agencies had also issued previous guidance titled "Interagency Guidance on Concentrations in Commercial Real Estate" stating that a banking institution will be considered to be potentially exposed to significant CRE concentration risk, and should employ enhanced risk management practices, if total CRE loans represent 300% or more of its total capital and the outstanding balance of the institution's CRE loan portfolio has increased by 50% or more during the preceding 36 months.

In October 2009, the federal banking agencies adopted a policy statement supporting workouts of CRE loans, which is referred to as the "CRE Policy Statement". The CRE Policy Statement provides guidance for examiners, and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The CRE Policy Statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition. The CRE Policy Statement states that financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of the financial condition of borrowers will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. The CRE Policy Statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing an institution's risk-management practices for loan workout activities.

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In September 2018, the OCC provided the Bank with a letter of "no supervisory objection" to management's request to increase the Bank's multi-family residential loan concentration limit of 450% of Tier 1 Capital plus ALLL to 500% of Tier 1 Capital plus ALLL, In October of 2018, the OCC provided the Bank with an amended letter of "no supervisory objection" permitting the Bank to increase the non-multifamily commercial real estate loan concentration limit to 100 percent of Tier 1 Capital plus ALLL, including a sublimit of 50% for land/construction loans, which brought the total CRE loan concentration limit to 600% of Tier 1 Capital plus ALLL.

Loans to One Borrower

Federal savings banks generally are subject to the lending limits that are applicable to national banks. With certain limited exceptions, the maximum amount that a federal savings banks may lend to any borrower (including certain related persons or entities of such borrower) is an amount equal to 15% of the savings institution's unimpaired capital and unimpaired surplus, or $7.9 million for Broadway Federal at December 31, 2018, plus an additional 10% for loans fully secured by readily marketable collateral. Real estate is not included within the definition of "readily marketable collateral" for this purpose. We are in compliance with the limits that are applicable to loans to any one borrower. At December 31, 2018, our largest aggregate amount of loans to one borrower totaled $7.0 million. Both of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Broadway Federal.

Community Reinvestment Act and Fair Lending

The Community Reinvestment Act, as implemented by OCC regulations ("CRA"), requires each federal savings bank, as well as other lenders, to make efforts to meet the credit needs of the communities they serve, including low- and moderate-income neighborhoods. The CRA requires the OCC to assess an institution's performance in meeting the credit needs of its communities as part of its examination of the institution, and to take such assessments into consideration in reviewing applications for mergers, acquisitions and other transactions. An unsatisfactory CRA rating may be the basis for denying an application. Community groups have successfully protested applications on CRA grounds. In connection with the assessment of a savings institution's CRA performance, the OCC assigns ratings of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." The Bank's "outstanding" rating was reaffirmed in its most recent CRA examination in 2016.

The Bank is also subject to federal fair lending laws, including the Equal Credit Opportunity Act ("ECOA") and the Federal Housing Act ("FHA"), which prohibit discrimination in credit and residential real estate transactions on prohibited bases, including race, color, national origin, gender, and religion, among others. A lender may be liable under one or both of these acts in the event of overt discrimination, disparate treatment, or a disparate impact on a prohibited basis. The compliance of federal savings banks of the Bank's size with these acts is primarily supervised and enforced by the OCC. If the OCC determines that a lender has engaged in a pattern or practice of discrimination in violation of ECOA, the OCC refers the matter to the DOJ. Similarly, HUD is notified of violations of the FHA.

Qualified Thrift Lender Test

The Home Owners Loan Act ("HOLA") requires all federal savings banks to meet a Qualified Thrift Lender ("QTL") test. Under the QTL test, a federal savings bank is required to maintain at least 65% of its portfolio assets (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments" on a monthly basis during at least 9 out of every 12 months. Qualified thrift investments include, in general, loans, securities and other investments that are related to housing, shares of stock issued by any Federal Home Loan Bank, loans for educational purposes, loans to small businesses, loans made through credit cards or credit card accounts and certain other permitted thrift investments. The failure of a federal savings bank to remain a QTL may result in required conversion of the institution to a bank charter, which would change the federal savings bank's permitted business activities in various respects, including operation under certain restrictions, such as limitations on new investments

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and activities, the imposition of restrictions on branching and the payment of dividends that apply to national banks. At December 31, 2018, the Bank was in compliance with the QTL test requirements.

The USA Patriot Act, Bank Secrecy Act ("BSA"), and Anti-Money Laundering ("AML") Requirements

The USA PATRIOT Act was enacted after September 11, 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in the promulgation of several regulations that have a direct impact on savings associations. Financial institutions must have a number of programs in place to comply with this law, including: (i) a program to manage BSA/AML risk; (ii) a customer identification program designed to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations; and (iii) a program for monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Failure to comply with these requirements may result in regulatory action, including the issuance of cease and desist orders, impositions of civil money penalties and adverse changes in an institution's regulatory ratings, which could adversely affect its ability to obtain regulatory approvals for business combinations or other desired business objectives.

Privacy Protection

Broadway Federal is subject to OCC regulations implementing the privacy protection provisions of federal law. These regulations require Broadway Federal to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require Broadway Federal to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, Broadway Federal is required to provide its customers with the ability to "opt-out" of having Broadway Federal share their nonpublic personal information with unaffiliated third parties.

Broadway Federal is also subject to regulatory guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.

Cybersecurity

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cybersecurity attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future.

The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a banking organization's the board of

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directors. These guidelines, along with related regulatory materials, increasingly focus on risk management, processes related to information technology and operational resiliency, and the use of third parties in the provision of financial services.

Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Savings and Loan Holding Company Regulation

As a savings and loan holding company, we are subject to the supervision, regulation, and examination of the FRB. In addition, FRB has enforcement authority over the Company and our subsidiary Broadway Federal. Applicable statutes and regulations administered by FRB place certain restrictions on our activities and investments. Among other things, we are generally prohibited, either directly or indirectly, from acquiring more than 5% of the voting shares of any savings association or savings and loan holding company that is not a subsidiary of the Company.

The Change in Bank Control Act prohibits a person, acting directly or indirectly or in concert with one or more persons, from acquiring control of a savings and loan holding company unless the FRB has been given 60 days prior written notice of such proposed acquisition and within that time period the FRB has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which a disapproval may be issued. The term "control" is defined for this purpose to include ownership or control of, or holding with power to vote, 25% or more of any class of a savings and loan holding company's voting securities. Under a rebuttable presumption contained in the regulations of the FRB, ownership or control of, or holding with power to vote, 10% or more of any class of voting securities of a savings and loan holding company will be deemed control for purposes of the Change in Bank Control Act if the institution (i) has registered securities under Section 12 of the Exchange Act, or (ii) no person will own, control, or have the power to vote a greater percentage of that class of voting securities immediately after the transaction. In addition, any company acting directly or indirectly or in concert with one or more persons or through one or more subsidiaries would be required to obtain the approval of the FRB under the Home Owners' Loan Act before acquiring control of a savings and loan holding company. For this purpose, a company is deemed to have control of a savings and loan holding company if the company (i) owns, controls, holds with power to vote, or holds proxies representing, 25% or more of any class of voting shares of the holding company, (ii) contributes more than 25% of the holding company's capital, (iii) controls in any manner the election of a majority of the holding company's directors, or (iv) directly or indirectly exercises a controlling influence over the management or policies of the savings bank or other company. The FRB may also determine, based on the relevant facts and circumstances, that a company has otherwise acquired control of a savings and loan holding company.

Restrictions on Dividends and Other Capital Distributions

In general, the prompt corrective action regulations prohibit a federal savings bank from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition to the prompt corrective action restriction on paying dividends, OCC regulations limit certain "capital distributions" by savings associations. Capital distributions are defined to include, among other things, dividends and payments for stock repurchases and payments of cash to stockholders in mergers.

Under the OCC capital distribution regulations, a federal savings bank that is a subsidiary of a savings and loan holding company must notify the OCC at least 30 days prior to the declaration of any capital distribution by its federal savings bank subsidiary. The 30-day period provides the OCC an opportunity to object to the proposed dividend if it believes that the dividend would not be advisable.

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An application to the OCC for approval to pay a dividend is required if: (i) the total of all capital distributions made during that calendar year (including the proposed distribution) exceeds the sum of the institution's year-to-date net income and its retained income for the preceding two years; (ii) the institution is not entitled under OCC regulations to "expedited treatment" (which is generally available to institutions the OCC regards as well run and adequately capitalized); (iii) the institution would not be at least "adequately capitalized" following the proposed capital distribution; or (iv) the distribution would violate an applicable statute, regulation, agreement, or condition imposed on the institution by the OCC.

The Bank's ability to pay dividends to the Company is also subject to the restriction that the Bank is not permitted to pay dividends to the Company if its regulatory capital would be reduced below the amount required for the liquidation account established in connection with the conversion of the Bank from the mutual to the stock form of organization.

See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and Note 13 of the Notes to Consolidated Financial Statements for a further description of dividend and other capital distribution limitations to which the Company and the Bank are subject.

Tax Matters

Federal Income Taxes

We report our income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with certain exceptions, including particularly the Bank's tax reserve for bad debts. The Bank has qualified under provisions of the Internal Revenue Code (the "Code") that in the past allowed qualifying savings institutions to establish reserves for bad debts, and to make additions to such reserves, using certain preferential methodologies. In December 2017, Congress passed the Tax Cuts and Jobs Act of 2017, which lowered our federal income tax rate to 21% from 34% starting in year 2018. See Note 11 of the Notes to Consolidated Financial Statements for a further description of tax matters applicable to our business.

California Taxes

As a savings and loan holding company filing California franchise tax returns on a combined basis with its subsidiaries, the Company is subject to California franchise tax at the rate applicable to "financial corporations." The applicable statutory tax rate is 10.84%.

ITEM 2. PROPERTIES

We conduct our business through three branch offices and a corporate office. Our loan service operation is also conducted from one of our branch offices. Our administrative and corporate operations are conducted from our corporate facility located at 5055 Wilshire Boulevard, Suite 500, Los Angeles. There are no mortgages, material liens or encumbrances against any of our owned properties. We believe that all of the properties are adequately covered by insurance, and that our facilities are adequate to meet our present needs.

As of December 31, 2018, the net book value of our investment in premises, equipment and fixtures, excluding computer equipment, was $2.2 million. Total occupancy expense, inclusive of rental payments and furniture and

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equipment expense, for the year ended December 31, 2018 was $1.3 million. Total annual rental expense (exclusive of operating charges and real property taxes) was approximately $593 thousand during 2018.

Location
  Leased or
Owned

  Original
Date
Leased or
Acquired

  Date
of Lease
Expiration

Administrative/Loan Origination Center:
5055 Wilshire Blvd, Suite 500
Los Angeles, CA
  Leased   2013   April 2021

Branch Offices:
5055 Wilshire Blvd, Suite 100
Los Angeles, CA

 

Leased

 

2013

 

April 2021

170 N. Market Street
Inglewood, CA
(Branch Office/Loan Service Center)

 

Owned

 

1996

 

-

4001 South Figueroa Street
Los Angeles, CA

 

Owned

 

1996

 

-

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, we are defendants in various litigation matters from time to time. In our opinion, the disposition of any litigation and other legal and regulatory matters currently pending or threatened against us would not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under the symbol "BYFC." The table below shows the high and low sale prices for our common stock during the periods indicated.

2018   1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
High   $    2.55   $    2.44   $    2.20   $    1.60
Low   $    1.95   $    1.92   $    1.38   $    0.95

 

2017   1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
High   $    1.89   $    2.14   $    2.67   $    2.60
Low   $    1.47   $    1.63   $    1.91   $    2.00

The closing sale price for our common stock on the Nasdaq Capital Market on March 9, 2019 was $1.45 per share. As of March 8, 2019, we had 294 stockholders of record and 19,133,366 shares of voting common stock outstanding. At that date, we also had 8,756,396 shares of non-voting common stock outstanding. Our non-voting common stock is not listed for trading on the Nasdaq Capital Market, but is convertible into our voting common stock in connection with certain sale or other transfer transactions.

In general, we may pay dividends out of funds legally available for that purpose at such times as our Board of Directors determines that dividend payments are appropriate, after considering our net income, capital requirements, financial condition, alternate investment options, prevailing economic conditions, industry practices and other factors deemed to be relevant at the time. We suspended our prior policy of paying regular cash dividends in May 2010 in order to retain capital for reinvestment in the Company's business.

Our financial ability to pay permitted dividends is primarily dependent upon receipt of dividends from Broadway Federal. Broadway Federal is subject to certain requirements which may limit its ability to pay dividends or make other capital distributions. See Item 1 "Business – Regulation" and Note 13 of the Notes to Consolidated Financial Statements in Item 8 "Financial Statements and Supplementary Data" for an explanation of the impact of regulatory capital requirements on Broadway Federal's ability to pay dividends.

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Equity Compensation Plan Information

The following table provides information about the Company's common stock that may be issued under equity compensation plans as of December 31, 2018.

Plan category   Number of
securities to be
issued upon exercise
of outstanding
options
(a)
  Weighted average
exercise price of
outstanding options
(b)
  Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)
 
Equity compensation plans approved by security holders:                    

2008 Long Term Incentive Plan

    537,500   $ 2.19     -  

2018 Long Term Incentive Plan

    -     -     1,293,109  
Equity compensation plans not approved by security holders:                    

None

    -     -     -  

Total

    537,500   $ 2.19     1,293,109  

As of December 31, 2018, 120,483 shares of restricted stock and 48,908 shares of voting common stock had been issued under the 2008 Long Term Incentive Plan. In addition, the Company had also awarded 97,195 and 129,270 of cash-settled restricted stock units ("RSUs") under the 2008 LTIP. As of December 31, 2018, no shares had been issued under the 2018 LTIP. Our Board of Directors intends to consider issuing equity incentives to certain key employees as a form of long-term compensation that will help align the interests of senior management with those of our stockholders. However, our ability to issue options and other forms of equity incentives to our Chief Executive Officer is restricted pursuant to the terms of the agreements entered into in 2008 and 2009 pursuant to which the U.S. Treasury Department invested in the Company, and the related regulations under the Treasury Department's Troubled Asset Relief Program.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion 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 other factors that have affected our reported results of operations and financial condition or may affect our future results or financial condition. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

Overview

Total assets decreased by $4.3 million to $409.4 million at December 31, 2018 from $413.7 million at December 31, 2017. The decrease in total assets during 2018 primarily consisted of a decrease of $16.1 million in loans receivable held for sale, a decrease of $6.3 million in interest-bearing deposits held in other banks, and a decrease of $2.8 million in securities available for sale, offset by an increase of $20.7 million in net loans receivable held for investment driven, in part, by a decrease of $1.1 million in ALLL.

Total liabilities decreased by $5.0 million to $360.1 million at December 31, 2018 from $366.0 million at December 31, 2017. The decrease in total liabilities during 2018 resulted primarily from a decrease of $9.9 million in total deposits, offset by an increase of $5.0 million in FHLB advances

We recorded net income of $815 thousand for the year ended December 31, 2018 compared to $1.9 million for the year ended December 31, 2017. The decrease in net income during 2018 resulted primarily from a decrease in net interest income of $1.6 million and a decrease in non-interest income of $1.7 million, offset by a decrease in income tax expense of $1.8 million.

Comparison of Operating Results for the Years Ended December 31, 2018 and 2017

General

Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from our loans and investments (interest-earning assets) and interest expense is incurred from deposits and borrowings (interest-bearing liabilities). Typically, our results of operations are also affected by our provision for or recapture of loan losses, non-interest income generated from service charges and fees on loan and deposit accounts, gains or losses on the sale of loans and REO, non-interest expenses, and income taxes.

Net Interest Income

For the year ended December 31, 2018, net interest income decreased by $1.6 million to $10.3 million, from $11.9 million for the same period in 2017.

Interest and fees on loans receivable decreased by $1.1 million for the year ended December 31, 2018 compared to the same period a year ago, primarily due to a decrease of $14.8 million in the average balance of loans receivable, which decreased interest income by $588 thousand, and a decrease of 14 basis points in the average yield on loans receivable, which reduced loan interest income by $530 thousand. The decrease in the average balance of loans receivable reflected loan sales that the Bank completed in the second half of 2017 and early 2018to maintain compliance with the lower loan concentration limits that existed during that period.

Interest income on securities increased by $95 thousand for the year ended December 31, 2018 compared to the prior year, primarily due to an increase of $2.6 million in the average balance of securities, which increased interest

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income by $66 thousand, and an increase of 21 basis points in the average yield on securities, which increased interest income by $29 thousand.

Other interest income decreased by $27 thousand for the year ended December 31, 2018 compared to the prior year, primarily due to a decrease of $15.0 million of the average interest-earning deposits, which decreased other interest income by $232 thousand. This decrease was partially offset by an increase of 68 basis points in the average yield of interest-earning deposits, which increased other interest income by $153 thousand, and an increase of $52 thousand in the interest earning on FHLB stock, primarily due to a $47 thousand special dividend received during the fourth quarter of 2018.

Interest expense on deposits increased by $691 thousand for the year ended December 31, 2018 compared to the prior year, primarily due to an increase of 29 basis points in the average cost of deposits, which increased interest expense by $888 thousand. This increase was partially offset by the effects of a decrease of $12.7 million in the average balance of deposits, which decreased interest expense by $197 thousand.

Interest expense on borrowings decreased by $110 thousand for the year ended December 31, 2018 compared to the prior year, primarily due to a decrease of $14.6 million in the average balance of FHLB advances, which decreased interest expense on borrowings by $307 thousand. This decrease was partially offset by an increase of 16 basis points in the average cost of FHLB advances, which increased interest expense on borrowings by $141 thousand. The average cost of the Company's junior subordinated debentures increased by 110 basis points, which increased interest expense on borrowings by $56 thousand.

Analysis of Net Interest Income

Net interest income is the difference between income on interest-earning assets and the expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth average balances, average yields and costs, and certain other information for the years indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, deferred origination costs, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans that are on non-accrual status; however, the balance of these loans is included in the total average balance, which has the effect of reducing average loan yields.

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  For the year ended December 31,  
 
  2018   2017  
(Dollars in Thousands)
  Average Balance   Interest   Average
Yield/
Cost
  Average Balance   Interest   Average
Yield/
Cost
 

Assets

                                     

Interest-earning assets:

                                     

Interest-earning deposits and other short-term investments

  $ 15,470   $ 294     1.90%   $ 30,486   $ 373     1.22%  

Securities

    16,019     413     2.58%     13,408     318     2.37%  

Loans receivable (1)

    366,453     14,279  (2)   3.90%     381,293     15,397  (3)   4.04%  

FHLB stock

    2,916     251     8.61%     2,836     199     7.02%  

Total interest-earning assets

    400,858   $ 15,237     3.80%     428,023   $ 16,287     3.81%  

Non-interest-earning assets

    10,225                 10,747              

Total assets

  $ 411,083               $ 438,770              

Liabilities and Stockholders' Equity

   
 
   
 
   
 
   
 
   
 
   
 
 

Interest-bearing liabilities:

                                     

Money market deposits

  $ 37,489   $ 320     0.85%   $ 38,318   $ 268     0.70%  

Passbook deposits

    41,975     175     0.42%     39,064     125     0.32%  

NOW and other demand deposits

    34,779     31     0.09%     32,275     20     0.06%  

Certificate accounts

    164,703     2,563     1.56%     181,993     1,985     1.09%  

Total deposits

    278,946     3,089     1.11%     291,650     2,398     0.82%  

FHLB advances

    74,729     1,590     2.13%     89,279     1,756     1.97%  

Junior subordinated debentures

    5,100     250     4.90%     5,100     194     3.80%  

Total interest-bearing liabilities

    358,775   $ 4,929     1.37%     386,029   $ 4,348     1.13%  

Non-interest-bearing liabilities

    4,699                 5,587              

Stockholders' Equity

    47,609                 47,154              

Total liabilities and stockholders' equity

  $ 411,083               $ 438,770              

                                     

Net interest rate spread (4)

        $ 10,308     2.43%         $ 11,939     2.68%  

Net interest rate margin (5)

                2.57%                 2.79%  

Ratio of interest-earning assets to interest-bearing liabilities

          111.73%                 110.88%  

(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.
(2)
Includes non-accrual interest of $40 thousand, reflecting interest recoveries on non-accrual loans that were paid off, and deferred cost amortization of $503 thousand for the year ended December 31, 2018.
(3)
Includes non-accrual interest of $316 thousand, reflecting interest recoveries on non-accrual loans that were paid off, and deferred cost amortization of $301 thousand for the year ended December 31, 2017.
(4)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(5)
Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

Changes in our net interest income are a function of changes in both rates and volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in our interest income and expense for the years indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate

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(changes in rate multiplied by prior volume), and (iii) the total change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 
  Year ended December 31, 2018
Compared to
Year ended December 31, 2017
  Year ended December 31, 2017
Compared to
Year ended December 31, 2016
 
 
  Increase (Decrease) in Net
Interest Income
  Increase (Decrease) in Net
Interest Income
 
 
  Due to
Volume
  Due to
Rate
  Total   Due to
Volume
  Due to
Rate
  Total  
 
  (In thousands)
 

Interest-earning assets:

                                     

Interest-earning deposits and other short-term investments

  $ (232 ) $ 153   $ (79 ) $ (25 ) $ 230   $ 205  

Securities

    66     29     95     (27 )   22     (5 )

Loans receivable, net

    (588 )   (530 )   (1,118 )   1,638     (726 )   912  

FHLB stock

    6     46     52     29     (144 )   (115 )

Total interest-earning assets

    (748 )   (302 )   (1,050 )   1,615     (618 )   997  

Interest-bearing liabilities:

   
 
   
 
   
 
   
 
   
 
   
 
 

Money market deposits

    (6 )   58     52     72     38     110  

Passbook deposits

    10     40     50     8     -     8  

NOW and other demand deposits

    2     9     11     1     (1 )   -  

Certificate accounts

    (203 )   781     578     40     60     100  

Total deposits

    (197 )   888     691     121     97     218  

FHLB advances

    (302 )   141     (161 )   348     (122 )   226  

Junior subordinated debentures

    0     51     51     -     27     27  

Total interest-bearing liabilities

    (499 )   1080     581     469     2     471  

Change in net interest income

 
$

(249

)

$

(1,382

)

$

(1,631

)

$

1,146
 
$

(620

)

$

526
 

Loan Loss Provision Recapture

For the year ended December 31, 2018, we recorded a loan loss provision recapture of $1.3 million compared to $1.1 million for the year ended December 31, 2017. The loan loss provision recapture for 2018 was due to the overall improvement in the loan portfolio, which had a favorable impact on the environmental factors used in the Bank's analysis of the ALLL. See "Allowance for Loan Losses" for additional information.

Non-Interest Income

For the year ended December 31, 2018, non-interest income decreased by $1.7 million compared to the same period in 2017. The decrease in non-interest income was primarily due to a one-time insurance litigation settlement of $1.2 million received during 2017. In addition, gain on sale of loans decreased by $490 thousand during 2018 compared to 2017 due primarily to a decrease in the dollar amount of loans sold to $19.3 million in 2018 from $96.9 million in 2017.

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Non-Interest Expense

For the year ended December 31, 2018, our non-interest expense decreased by $281 thousand compared to the same period in 2017. The decrease in non-interest expense was primarily due to a decrease of $85 thousand in other expense as a result of a $214 thousand expense associated with the sale of a portion of the shares of the Company's common stock owned by the U.S. Treasury Department during 2017, partially offset by higher expenses of $88 thousand associated with the Bank's one foreclosed property. In addition, professional services expenses decreased by $63 thousand, corporate insurance decreased by $49 thousand, and compensation and benefits expenses decreased by $37 thousand during the year 2018 compared to 2017.

Income Taxes

We recorded an income tax income tax expense of $56 thousand for the year 2018. Income tax expense for the year 2018 resulted from a standard tax provision of $261 thousand, offset by tax credits of $205 thousand. For the year 2017, we recorded income tax expense of $1.9 million. The tax expense for the year 2017 included an adjustment of $519 thousand to record the Company's deferred tax assets at the lower federal corporate income tax rate of 21%.

The deferred tax asset totaled $5.0 million at December 31, 2018 and $5.1 million at December 31, 2017. See Note 1 "Summary of Significant Accounting Policies" and Note 11 "Income Taxes" of the Notes to Consolidated Financial Statements for a further discussion of income taxes and a reconciliation of income tax at the federal statutory tax rate to actual tax expense (benefit).

Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize net operating loss carryforwards, tax credit carryovers and other income tax attributes when there is an ownership change. Generally, the rules provide that an ownership change is deemed to have occurred when the cumulative increase of each 5% or more stockholder and certain groups of stockholders treated as 5% or more stockholders, as determined under Section 382, exceeds 50% over a specified "testing" period, generally equal to three years. Section 382 applies rules regarding the treatment of new groups of stockholders treated as 5% stockholders due to issuances of stock and other equity transactions, which may cause a change of control to occur. The Company has performed an analysis of the potential impact of Section 382 and has determined that the Company did not undergo an ownership change during 2018 or 2017 and any potential limitations imposed under Section 382 do not currently apply.

Comparison of Financial Condition at December 31, 2018 and 2017

Total Assets

Total assets decreased by $4.3 million to $409.4 million at December 31, 2018 from $413.7 million at December 31, 2017. The decline in total assets was primarily due to a decrease of $16.1 million in loans receivable held for sale, a decrease of $6.3 million in interest-bearing deposits in other banks, and a decrease in securities available for sale of $2.8 million, offset by an increase of $20.7 million in net loans receivable held for investment.

Loans Receivable Held for Sale

Loans receivable held for sale totaled $6.2 million as of December 31, 2018 compared to $22.4 million as of December 31, 2017. During 2018, the Bank originated $20.2 in loans held for sale during 2018, transferred $16.9 million to loans held for investment, sold $19.3 million in loans held for sale and received $159 thousand in loan repayments on loans held for sale.

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Loans Receivable Held for Investment

Loans receivable held for investment, net of the allowance for loan losses, totaled $355.6 million at December 31, 2018, compared to $334.9 million at December 31, 2017.

During 2018, the Bank originated $99.0 million in new loans, $96.0 million of which were multi-family loans. Of the multi-family loans originated, we allocated $75.8 million, or 79%, to loans held for investment and $20.2 million, or 21%, to loans held for sale. In addition, during 2018, we transferred $16.9 million of loans receivable held for sale to loans receivable held for investment. At the end of the third quarter of 2018, the Bank requested and received written non-objection from the OCC to increase the Bank's concentration of multi-family residential loans. The Bank also requested and received written non-objection from the OCC to increase its concentration of non-multifamily commercial real estate loans, including the sublimit for commercial land/construction loans.

There were no loan charge-offs during 2018 or 2017. During 2017, we received one deed in lieu of foreclosure and recorded an REO at fair value, net of estimated selling costs, of $878 thousand at December 31, 2017. During 2018 this property was written down by $45 thousand and is now recorded at a fair value, net of estimated selling costs of $833 thousand as of December 31, 2018. No loans were transferred to REO during 2018.

Allowance for Loan Losses

We record a provision for loan losses as a charge to earnings when necessary in order to maintain the ALLL at 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 decreased to $2.9 million or 0.82% of our gross loans receivable held for investment at December 31, 2018 compared to $4.1 million, or 1.20% of our gross loans receivable held for investment at December 31, 2017, primarily reflecting loan loss provision recaptures of $1.3 million, which were partially offset by recoveries of $114 thousand. The reduction in ALLL at December 31, 2018 compared to December 31, 2017, and the loan loss provision recaptures during 2018, reflect the results of our quarterly reviews 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 continued improvement in our asset credit quality metrics and the high quality of our loan originations.

Our loan delinquencies and non-performing loans ("NPLs") are at their lowest levels since December 2009. We had total delinquencies of $35 thousand at December 31, 2018 compared to $391 thousand at December 31, 2017. 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 December 31, 2018, NPLs totaled $911 thousand compared to $1.8 million at December 31, 2017. The decrease of $855 thousand in NPLs was primarily due to payoffs of $659 thousand, repayments of $196 thousand.

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 December 31, 2018, all of our $911 thousand of NPLs were current in their payments. Also, in determining the ALLL, we consider the ratio of the ALLL to NPLs, which increased to 321.51% at December 31, 2018 from 230.41% at December 31, 2017.

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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 2018 and 2017. 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 31%of estimated fair value less estimated selling costs as of December 31, 2018.

Recoveries during 2018 and 2017 totaled $114 thousand and $566 thousand, respectively. Recoveries during 2018 and 2017 primarily resulted from the payoffs of non-accrual loans which had been previously partially charged off.

Impaired loans at December 31, 2018 were $6.4 million, compared to $9.3 million at December 31, 2017. The decrease of $3.1 million in impaired loans was primarily due to payoffs and repayments. Specific reserves for impaired loans were $227 thousand or 3.56% of the aggregate impaired loan amount at December 31, 2018 compared to $585 thousand, or 6.29% of the aggregate impaired loan amount at December 31, 2017. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non-impaired loans) was 0.77% at December 31, 2018 compared to 1.06% at December 31, 2017. The decrease in the coverage ratio during 2018 was due to overall improvement in the credit quality of the loan portfolio, which had a favorable impact on the environmental factors used in our analysis of the ALLL.

We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of December 31, 2018, 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 decreased by $9.9 million to $281.4 million at December 31, 2018 from $291.3 million at December 31, 2017, which consisted of a decrease of $35.7 million in liquid deposits and an increase of $25.8 million in CDs. During 2018, one deposit relationship of $25.0 million was moved to CDs from a money market account. Excluding this transfer, liquid deposits decreased by $10.7 million and CDs increased by $775 thousand during 2018.

One customer relationship accounted for approximately 11% of our deposits at December 31, 2018. We expect to maintain this relationship with the customer for the foreseeable future.

Borrowings

Total borrowings at December 31, 2018 consisted of advances to the Bank from the FHLB of $70.0 million, and subordinated debentures issued by the Company of $5.1 million, compared to advances from the FHLB of $65.0 million and subordinated debentures of $5.1 million at December 31, 2017. During 2018, the Bank paid off $27.5 million in maturing FHLB advances and borrowed $32.5 million in new advances from the FHLB.

The weighted average cost of FHLB advances increased by 65 basis points to 2.51% at December 31, 2018 from 1.86% at December 31, 2017 primarily due to the higher interest rate environment and the lengthening of maturities from an average of 18 months as of December 31, 2017 to 24 months as of December 31, 2018.

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Stockholders' Equity

Stockholders' equity was $48.4 million, or 11.83% of the Company's total assets, at December 31, 2018, compared to $47.7 million, or 11.54% of the Company's total assets, at December 31, 2017. The Company's book value was $1.77 per share as of December 31, 2018, compared to $1.74 per share as of December 31, 2017.

Capital Resources

Our principal subsidiary, Broadway Federal, 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. As a "small bank holding company", we are not subject to consolidated capital requirements under the new Basel III capital rules. The current regulatory capital requirements and possible consequences of failure to maintain compliance are described in Part I, Item 1 "Business-Regulation" and in Note 13 of the Notes to Consolidated Financial Statements.

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 $54.6 million at December 31, 2018.

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 excess cash with the Federal Reserve Bank or other financial institutions. The Bank's liquid assets at December 31, 2018 consisted of $16.7 million in cash and cash equivalents and $14.7 million in securities available-for-sale that were not pledged, compared to $22.2 million in cash and cash equivalents and $17.0 million in securities available-for-sale that were not pledged at December 31, 2017. Currently, we believe that the Bank has sufficient liquidity to support growth over the foreseeable future.

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 dividends received from the Bank in 2018, 2017, and 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 inflows from operating activities of $234 thousand and net cash outflows from operating activities of $10.2 million during the years ended December 31, 2018 and 2017, respectively. Net cash inflows from operating activities during 2018 were primarily attributable to proceeds from sales and repayments of loans receivable held for sale of $19.6 million, offset by originations of loans receivable held for sale of $20.3 million and a loan loss provision recapture of $1.3 million. Net cash outflows from operating activities during 2017 were primarily attributable to originations of multi-family loans for the Bank's loans held for sale portfolio, which were partially offset by net proceeds from the sale of loans.

The Company recorded consolidated net cash outflows from investing activities of $818 thousand and net cash inflows from investing activities of $30.2 million during the years ended December 31, 2018 and 2017, respectively. Net cash outflows from investing activities during 2018 were primarily attributable to a net increase in loans receivable held for investment of $3.2 million, offset by principal repayments on available-for-sale securities of

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$2.4 million. Net cash inflows from investing activities during 2017 were primarily attributable to a net decrease in loans receivable held for investment, due primarily to repayments on loans held for investment and principal repayments on securities available-for-sale, which were partially offset by purchases of single-family loans and securities.

The Company recorded consolidated net cash outflows from financing activities of $5.0 million and $16.1 million during the years ended December 31, 2018 and 2017, respectively. Net cash outflows from financing activities during 2018 were primarily attributable to repayments on FHLB advances of $27.5 million and a net outflow of deposits of $9.9 million, offset by an increase in proceeds from FHLB advances of $32.5 million. Net cash outflows from financing activities during 2017 were primarily attributable to repayments on FHLB advances, offset by an increase in proceeds from FHLB advances.

Off-Balance-Sheet Arrangements and Contractual Obligations

We are party to financial instruments with off-balance-sheet risk in the normal course of our business, primarily in order to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments and lease commitments as described below.

Lending commitments include commitments to originate loans and to fund lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments.

In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancellable operating leases on buildings and land used for office space and banking purposes. The following table details our contractual obligations at December 31, 2018.

 
  Less than
one year
  More than
one year to
three years
  More than
three years to
five years
  More than
five years
  Total  
 
  (Dollars in thousands)
 

Certificates of deposit

  $ 133,654   $ 36,939   $ 1,930   $ 41   $ 172,564  

FHLB advances

    8,000     62,000     -     -     70,000  

Subordinated debentures

    765     2,040     2,040     255     5,100  

Commitments to originate loans

    10,875     -     -     -     10,875  

Commitments to fund unused lines of credit

    1,153     -     -     338     1,491  

Operating lease obligations

    516     711     -     -     1,227  

Total contractual obligations

  $ 154,963   $ 101,690   $ 3,970   $ 634   $ 261,257  

Impact of Inflation and Changing Prices

Our consolidated financial statements, including accompanying notes, have been prepared in accordance with GAAP which require the measurement of financial position and operating results primarily in terms of historical

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dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in increased costs of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. This discussion highlights those accounting policies that management considers critical. All accounting policies are important, however, and therefore you are encouraged to review each of the policies included in Note 1 "Summary of Significant Accounting Principles" of the Notes to Consolidated Financial Statements beginning at page F-8 to gain a better understanding of how our financial performance is measured and reported. Management has identified the Company's critical accounting policies as follows:

Allowance for Loan Losses

The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and the Board of Directors and is based on a periodic review of the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers' ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and feedback from regulatory examinations. See Item 1, "Business – Asset Quality – Allowance for Loan Losses" for a full discussion of the allowance for loan losses.

Real Estate Owned ("REO")

REO consists of property acquired through foreclosure or deed in lieu of foreclosure and is recorded at the fair value, less estimated costs to sell, at the time of acquisition. The excess, if any, of the loan balance over the fair value of the property at the time of transfer from loans to REO is charged to the allowance for loan losses. Subsequent to the transfer to REO, if the fair value of the property less estimated selling costs declines to an amount less than the carrying value of the property, the deficiency is charged to income as a provision expense and a valuation allowance is established. Operating costs after acquisition are expensed as incurred. Due to changing market conditions, there are inherent uncertainties in the assumptions made with respect to the estimated fair value of REO. Therefore, the amount ultimately realized may differ from the amounts reflected in the accompanying consolidated financial statements.

Income Taxes

Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, forecasts of future income and available tax planning strategies. This analysis is updated quarterly. Based on this analysis, we determined that no valuation allowance was required on our deferred tax assets, which totaled $5.0 million and $5.1 million at December 31, 2018 and 2017,

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respectively. See Note 11 "Income Taxes" of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data."

Fair Value Measurements

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.

Fair values are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5 of the Notes to Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements of Broadway Financial Corporation and Subsidiaries.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of December 31, 2018, an evaluation was performed under the supervision of the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2018.

Management's annual report on internal control over financial reporting

The management of Broadway Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Exchange Act. This system, which management has chosen to base on the framework set forth in Internal Control-Integrated Framework, published by the 1992 Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and which is effected by the Company's Board of Directors, management and other personnel, is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of

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financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the Directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.

With the participation of the Company's Chief Executive Officer and Chief Financial Officer, management has conducted an evaluation of the effectiveness of the Company's system of internal control over financial reporting. Based on this evaluation, management determined that the Company's system of internal control over financial reporting was effective as of December 31, 2018.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

Changes in internal control over financial reporting

There were no significant changes in the Company's internal control over financial reporting identified in connection with the evaluation of internal control over financial reporting that occurred during the fourth quarter of 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

/s/ Wayne-Kent A. Bradshaw

Wayne-Kent A. Bradshaw
Chief Executive Officer
(Principal Executive Officer)
  /s/ Brenda J. Battey

Brenda J. Battey
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

Los Angeles, CA
March 29, 2019

 

Los Angeles, CA
March 29, 2019

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ITEM 9B. OTHER INFORMATION

None


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement, under the captions "Election of Directors", "Executive Officers", "Code of Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance", to be filed with the Securities and Exchange Commission in connection with the Company's 2019 Annual Meeting of Stockholders (the "Company's Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, under the caption "Executive Compensation" and "Director Compensation".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management".

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, under the caption "Certain Relationships and Related Transactions" and "Election of Directors".

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement, under the caption "Ratification of the Appointment of the Independent Registered Public Accounting Firm".

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit
Number*
   
  3.1   Certificate of Incorporation of Registrant and all amendments thereto (Exhibit 3.1 to Form 10-Q filed by Registrant on November 13, 2014)

  3.2

 

Bylaws of Registrant (Exhibit 3.2 to Form 10-K filed by Registrant on March 28, 2016)

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Exhibit
Number*
   
10.1**   Broadway Federal Bank Employee Stock Ownership Plan (Exhibit 10.1 to Form 10-K filed by Registrant on March 28, 2016)

10.2**

 

Amended and Restated Broadway Financial Corporation 2008 Long Term Incentive Plan (Exhibit 10.3 to Form 10-Q filed by Registrant on August 12, 2016)

10.3**

 

Amended Form of Stock Option Agreement for stock options granted pursuant to Amended and Restated Broadway Financial Corporation 2008 Long-Term Incentive Plan (Exhibit 10.1 to Form 10-Q filed by Registrant on August 12, 2016)

10.4**

 

Award Agreement, dated March 30, 2016, for restricted stock granted to Wayne-Kent A. Bradshaw pursuant to Broadway Financial Corporation 2008 Long-Term Incentive Plan (Exhibit 10.2 to Form 10-Q filed by Registrant on August 12, 2016)

10.5**

 

Broadway Financial Corporation 2018 Long-Term Incentive Plan.

10.6**

 

Form of Award Agreement for grants of restricted stock pursuant to Broadway Financial Corporation 2018 Long-Term Incentive Plan.

10.7**

 

Employment Agreement, dated as of March 22, 2017, for Wayne-Kent A. Bradshaw.

10.8**

 

Award Agreement, dated as of April 26, 2017 for grant of restricted stock units to Wayne-Kent A. Bradshaw pursuant to Broadway Financial Corporation 2008 Long Term Incentive Plan.

10.9**

 

Award Agreement, dated as of February 21, 2018 for grant of restricted stock units to Wayne-Kent A. Bradshaw pursuant to Broadway Financial Corporation 2008 Long Term Incentive Plan.

10.10**

 

Award Agreement, dated as of February 27, 2019 for grant of restricted stock to Wayne-Kent A. Bradshaw pursuant to Broadway Financial Corporation 2018 Long-Term Incentive Plan.

10.11**

 

Employment Agreement, dated as of May 1, 2017, for Brenda J. Battey.

10.12**

 

Employment Agreement, dated as of May 1, 2017, for Norman Bellefeuille.

10.13**

 

Employment Agreement, dated as of May 1, 2017, for Ruth McCloud.

10.14**

 

Broadway Federal Bank Incentive Compensation Plan.

10.15

 

Securities Purchase Agreement, dated as of December 21, 2016, entered into among United States Treasury Department, Registrant, First Republic Bank and Broadway Federal Bank, f.s.b., Employee Stock Ownership Plan (Exhibit 10.7 to Form 10-K filed by Registrant on March 27, 2017)

10.16

 

Stock Purchase Agreement, dated as of December 21, 2016, entered into between First Republic Bank and Registrant (Exhibit 10.8 to Form 10-K filed by Registrant on March 27, 2017)

10.17

 

Exchange Agreement, dated as December 21, 2016, entered into between CJA Private Financial Restructuring Master Fund I L.P. and Registrant (Exhibit 10.9 to Form 10-K filed by Registrant on March 27, 2017)

10.18

 

Stock Purchase Agreement, dated as of December 21, 2016, entered into between Bank of Hope and Registrant (Exhibit 10.10 to Form 10-K filed by Registrant on March 27, 2017)

10.19

 

Stock Purchase and Exchange Agreement, dated as of December 21, 2016, entered into between National Community Investment Fund and Registrant (Exhibit 10.11 to Form 10-K filed by Registrant on March 27, 2017)

10.20

 

ESOP Loan Agreement and ESOP Pledge Agreement, each dated as of December 19, 2016, entered into between Registrant and Nicholas L. Saakvitne, as trustee for the Broadway Federal Bank, f.s.b., Employee Stock Ownership Plan Trust, and related Promissory Note, dated as of December 19, 2016 (Exhibit 10.12 to Form 10-K filed by Registrant on March 27, 2017)

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Exhibit
Number*
   
21.1   List of Subsidiaries (Exhibit 21.1 to Registration Statement on Form S-1 filed by Registrant on November 20, 2013)

23.1

 

Consent of Moss Adams LLP

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.4

 

Certification of Chief Executive Officer pursuant to Interim Final Rule – TARP Standards for Compensation and Corporate Governance at 31 CFR Part 30

99.5

 

Certification of Chief Financial Officer pursuant to Interim Final Rule – TARP Standards for Compensation and Corporate Governance at 31 CFR Part 30)

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

*
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.

**
Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    BROADWAY FINANCIAL CORPORATION

 

 

By:

 

/s/ Wayne-Kent A. Bradshaw

Wayne-Kent A. Bradshaw
Chief Executive Officer
    Date:   March 29, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

  /s/ Wayne-Kent A. Bradshaw

Wayne-Kent A. Bradshaw
Chief Executive Officer and President
(Principal Executive Officer)
  Date: March 29, 2019

 

/s/ Brenda J. Battey

Brenda J. Battey
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

 

Date: March 29, 2019

 

/s/ Virgil P. Roberts

Virgil P. Roberts
Chairman of the Board

 

Date: March 29, 2019

 

/s/ Robert C. Davidson, Jr.

Robert C. Davidson, Jr.
Director

 

Date: March 29, 2019

 

/s/ Jack T. Thompson

Jack T. Thompson
Director

 

Date: March 29, 2019

 

/s/ Daniel A. Medina

Daniel A. Medina
Director

 

Date: March 29, 2019

 

/s/ Dutch C. Ross III

Dutch C. Ross III
Director

 

Date: March 29, 2019

 

/s/ Erin Selleck

Erin Selleck
Director

 

Date: March 29, 2019

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Index to Consolidated Financial Statements

Years ended December 31, 2018 and 2017

Report of Independent Registered Public Accounting Firm

  F-1

Consolidated Statements of Financial Condition

 
F-2

Consolidated Statements of Income and Comprehensive Income

 
F-3

Consolidated Statements of Changes in Stockholders' Equity

 
F-4

Consolidated Statements of Cash Flows

 
F-5

Notes to Consolidated Financial Statements

 
F-6

Table of Contents


Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of
Broadway Financial Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Broadway Financial Corporation and Subsidiary (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Moss Adams LLP

San Francisco, California
March 29, 2019

We have served as the Company's auditor since 2014.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Financial Condition

 
  December 31, 2018   December 31, 2017  
 
  (In thousands, except share and per share)
 

Assets:

             

Cash and due from banks

  $ 4,124   $ 3,420  

Interest-bearing deposits in other banks

    12,527     18,799  

Cash and cash equivalents

    16,651     22,219  

Investment securities available-for-sale, at fair value

    14,722     17,494  

Loans receivable held for sale, at lower of cost or fair value

    6,231     22,370  

Loans receivable held for investment, net of allowance of $2,929 and $4,069

    355,556     334,851  

Accrued interest receivable

    1,143     1,073  

Federal Home Loan Bank (FHLB) stock

    2,916     2,916  

Office properties and equipment, net

    2,242     2,406  

Bank owned life insurance

    3,047     2,994  

Deferred tax assets, net

    5,045     5,110  

Investment in affordable housing limited partnership

    342     537  

Real estate owned (REO)

    833     878  

Other assets

    669     856  

Total assets

  $ 409,397   $ 413,704  

Liabilities and stockholders' equity

   
 
   
 
 

Liabilities:

   
 
   
 
 

Deposits

  $ 281,414   $ 291,290  

FHLB advances

    70,000     65,000  

Junior subordinated debentures

    5,100     5,100  

Advance payments by borrowers for taxes and insurance

    1,055     1,071  

Accrued expenses and other liabilities

    3,392     3,512  

Total liabilities

    360,961     365,973  

Commitments and Contingencies (Note 14)

   
 
   
 
 

Stockholders' Equity:

   
 
   
 
 

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

         

Common stock, $.01 par value, voting, authorized 50,000,000 shares at December 31, 2018 and December 31, 2017; issued 21,280,228 shares at December 31, 2018 and 21,312,649 shares at December 31, 2017; outstanding 18,662,402 shares at December 31, 2018 and 18,694,823 shares at December 31, 2017

    213     213  

Common stock, $.01 par value, non-voting, authorized 25,000,000 shares at December 31, 2018 and December 31, 2017; issued and outstanding 8,756,396 shares at December 31, 2018 and December 31, 2017

    87     87  

Additional paid-in capital

    46,141     46,117  

Retained earnings

    8,631     7,816  

Unearned Employee Stock Ownership Plan (ESOP) shares

    (1,027 )   (1,095 )

Accumulated other comprehensive loss

    (283 )   (81 )

Treasury stock-at cost, 2,617,826 shares at December 31, 2018 and at December 31, 2017

    (5,326 )   (5,326 )

Total stockholders' equity

    48,436     47,731  

Total liabilities and stockholders' equity

  $ 409,397   $ 413,704  

   

See accompanying notes to consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Income and Comprehensive Income

 
  Year Ended December 31,  
 
  2018   2017  
 
  (In thousands, except per share)
 

Interest Income:

             

Interest and fees on loans receivable

  $ 14,279   $ 15,397  

Interest on mortgage-backed securities and other securities

    413     318  

Other interest income

    545     572  

Total interest income

    15,237     16,287  

Interest Expense:

             

Interest on deposits

    3,089     2,398  

Interest on borrowings

    1,840     1,950  

Total interest expense

    4,929     4,348  

Net interest income before loan loss provision recapture

    10,308     11,939  

Loan loss provision recapture

    1,254     1,100  

Net interest income after loan loss provision recapture

    11,562     13,039  

Non-Interest Income:

             

Service charges

    449     446  

Net gain on sales of loans

    70     560  

CDFI grant

    233     227  

Income from litigation settlement

        1,183  

Other

    113     114  

Total non-interest income

    865     2,530  

Non-Interest Expense:

             

Compensation and benefits

    7,055     7,092  

Occupancy expense

    1,278     1,278  

Information services

    822     818  

Professional services

    653     716  

Office services and supplies

    289     302  

Loan related expenses

    167     205  

Corporate insurance

    147     196  

Amortization of investment in affordable housing limited partnership

    195     195  

Other

    950     1,035  

Total non-interest expense

    11,556     11,837  

Income before income taxes

    871     3,732  

Income tax expense

    56     1,863  

Net income

  $ 815   $ 1,869  

Other comprehensive loss, net of tax:

             

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

  $ (292 ) $ (98 )

Income tax benefit

    90     54  

Other comprehensive loss, net of tax

    (202 )   (44 )

Comprehensive income

  $ 613   $ 1,825  

Earnings per common share-basic

 
$

0.03
 
$

0.07
 

Earnings per common share-diluted

  $ 0.03   $ 0.07  

   

See accompanying notes to consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share and per share)

 
  Common
Shares
Issued
  Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Unearned
ESOP shares
  Accumulated
Other
Comprehensive
Loss, Net
  Treasury
Stock
  Total
Stockholders'
Equity
 

Balance at December 31, 2016

    30,039,043   $ 299   $ 45,819   $ 6,013   $ (1,176 ) $ (103 ) $ (5,326 ) $ 45,526  

Net income

    -     -     -     1,869     -     -     -     1,869  

Common stock issued for services

    30,002     1     52     -     -     -     -     53  

Release of unearned ESOP shares

    -     -     23     -     81     -     -     104  

Change in unrealized loss on securities available-for-sale, net of tax

    -     -     -     -     -     (44 )   -     (44 )

Reclassification from accumulated other comprehensive loss to retained earnings

    -     -     -     (66 )   -     66     -     -  

Restricted stock compensation expense

    -     -     184     -     -     -     -     184  

Stock-based compensation expense

    -     -     39     -     -     -     -     39  

Balance at December 31, 2017

   
30,069,045
   
300
   
46,117
   
7,816
   
(1,095

)
 
(81

)
 
(5,326

)
 
47,731
 

Net income

    -     -     -     815     -     -     -     815  

Common stock issued for services

    18,906     -     45     -     -     -     -     45  

Common stock repurchased for tax withholdings

    (51,327 )   -     (108 )   -     -     -     -     (108 )

Release of unearned ESOP shares

    -     -     12     -     68     -     -     80  

Change in unrealized loss on securities available-for-sale, net of tax

    -     -     -     -     -     (202 )   -     (202 )

Restricted stock compensation expense

    -     -     36     -     -     -     -     36  

Stock-based compensation expense

    -     -     39     -     -     -     -     39  

Balance at December 31, 2018

   
30,036,624
 
$

300
 
$

46,141
 
$

8,631
 
$

(1,027

)

$

(283

)

$

(5,326

)

$

48,436
 

   

See accompanying notes to consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

 
  Year Ended December 31  
 
  2018   2017  
 
  (In thousands)
 

Cash flows from operating activities:

             

Net income

  $ 815   $ 1,869  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

             

Loan loss provision recaptures

    (1,254 )   (1,100 )

Provision for losses on REO

    45     80  

Depreciation

    241     256  

Net amortization of deferred loan origination costs

    605     306  

Net amortization of premiums on mortgage-backed securities

    36     34  

Amortization of investment in affordable housing limited partnership

    195     195  

Stock-based compensation expense

    75     223  

Stocks granted to directors

    45     53  

ESOP compensation expense

    80     104  

Earnings on bank owned life insurance

    (53 )   (54 )

Originations of loans receivable held for sale

    (20,288 )   (110,829 )

Proceeds from sales and repayments of loans receivable held for sale

    19,626     98,356  

Gain on sale of loans receivable held for sale

    (70 )   (560 )

Changes in operating assets and liabilities

             

Net change in deferred taxes

    155     1,851  

Net change in accrued interest receivable

    (70 )   105  

Net change in other assets

    187     332  

Net change in advance payments by borrowers for taxes and insurance

    (16 )   243  

Net change in accrued expenses and other liabilities

    (120 )   (1,690 )

Net cash provided by (used in) operating activities

    234     (10,226 )

Cash flows from investing activities:

             

Net change in loans receivable held for investment

    (3,185 )   59,742  

Purchase of loans receivable held for investment

    -     (24,640 )

Purchase of available-for-sale securities

    -     (6,677 )

Principal payments on available-for-sale securities

    2,444     2,253  

Purchase of FHLB stock

    -     (343 )

Additions to office properties and equipment

    (77 )   (183 )

Net cash (used in) provided by investing activities

    (818 )   30,152  

Cash flows from financing activities:

             

Net change in deposits

    (9,876 )   3,863  

Proceeds from FHLB advances

    32,500     29,500  

Repayments on FHLB advances

    (27,500 )   (49,500 )

Payment for tax withholding for vesting of restricted stock

    (108 )   -  

Net cash used in financing activities

    (4,984 )   (16,137 )

Net change in cash and cash equivalents

    (5,568 )   3,789  

Cash and cash equivalents at beginning of the year

    22,219     18,430  

Cash and cash equivalents at end of the year

  $ 16,651   $ 22,219  

Supplemental disclosures of cash flow information:

   
 
   
 
 

Cash paid for interest

  $ 4,898   $ 4,199  

Cash paid for income taxes

    -     20  

Supplemental disclosures of non-cash investing and financing activities:

   
 
   
 
 

Transfers of loans receivable held for investment to REO

  $ -   $ 958  

Transfers of loans receivable held for investment to loans receivable held for sale

    -     9,337  

Transfers of loans receivable held for sale to loans receivable held for investment

    16,871     -  

   

See accompanying notes to consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 1 – Summary of Significant Accounting Policies

Nature of Operations and Principles of Consolidation

Broadway Financial Corporation (the "Company") is a Delaware corporation primarily engaged in the savings and loan business through its wholly owned subsidiary, Broadway Federal Bank, f.s.b. (the "Bank"). The Bank's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential and commercial real estate located in Southern California. At December 31, 2018, the Bank operated two retail-banking offices in Los Angeles, California and one in the nearby city of Inglewood, California. The Bank is subject to significant competition from other financial institutions, and is also subject to regulation by certain federal agencies and undergoes periodic examinations by those regulatory authorities.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Broadway Federal Bank, f.s.b. All significant inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ from these estimates. The allowance and provision for loan losses, specific reserves for impaired loans, fair value of real estate owned, deferred tax asset valuation allowance, and fair values of investment securities and other financial instruments are particularly subject to change.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash items in the process of collection, amounts due from correspondent banks and the Federal Reserve Bank, and interest-bearing deposits in other banks with initial terms of ninety days or less. The Company may be required to maintain reserve and clearing balances with the Federal Reserve Bank under the Federal Reserve Act. The reserve and clearing requirement balance was $0 at December 31, 2018. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, deferred income taxes and other assets and liabilities.

Investment Securities

Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. 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 the intent and ability of management to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition.

Loans Receivable Held for Sale

The Bank originates loans for sale, but may, from time-to-time, decide to sell certain loans that are held for investment in order to manage loan concentrations. When a decision is made to sell a loan(s), such loan(s) is transferred from held-for-investment portfolio to held-for-sale portfolio at the lower of cost or fair value. If a reduction in value is required at time of the transfer, a charge-off is recorded against the allowance for loan losses ("ALLL"). Any subsequent decline in value of the loan(s) is recorded as a valuation allowance with a corresponding charge to non-interest expense.

Transfers of loans are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been legally isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right), to pledge or exchange the transferred assets, and provides no more than a trivial benefit to the Bank, and (3) the Bank does not maintain effective control over the transferred assets.

Loans receivable held for sale are generally sold with servicing rights released. Gains and losses on sales of loans are based on the difference between the selling price and the carrying value of the related loan sold. When loans receivable held for sale are sold, existing deferred loan fees or costs are an adjustment of the gain or loss on sale.

Loans Receivable Held for Investment

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of allowance for loan losses, deferred loan fees and costs and unamortized premiums and discounts. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct loan origination costs, premiums and discounts are deferred, and recognized in income using the level-yield method without anticipating prepayments.

Interest income on all loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Concentration of Credit Risk

Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's lending activities are predominantly in real estate loans that are secured by properties located in Southern California and many of the borrowers reside in Southern California. Therefore, the Company's exposure to credit risk is significantly affected by changes in the economy and real estate market in the Southern California area.

The Company has a significant concentration of deposits with a long-time customer that accounted for approximately 11% of its deposits as of December 31, 2018. The Company expects to maintain this relationship with the customer for the near term.

Loans Purchased

The Bank purchases or participates in loans originated by other institutions from time to time. Subject to regulatory restrictions applicable to savings institutions, the Bank's current loan policies allow all loan types to be purchased. The determination to purchase specific loans or pools of loans is based upon the Bank's investment needs and market opportunities and is subject to the Bank's underwriting policies, which require consideration of the financial condition of the borrower and the appraised value of the property, among other factors. Premiums or discounts incurred upon the purchase of loans are recognized in income using the interest method over the estimated life of the loans, adjusted for actual prepayments. No loans were purchased during 2018 compared to the purchases of $24.6 million of single family loans at par in 2017.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent cash recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, could be charged off. In addition, the OCC and FDIC periodically review the allowance for loan losses as an integral part of their examination process. These agencies may require an increase in the allowance for loan losses based on their judgments of the information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings ("TDR") and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, either a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or alternatively a charge-off is taken to record the loan at the fair value of the collateral, less estimated selling costs, if repayment is expected solely from the collateral.

TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of any necessary additional charge-off based on internal analyses and appraisals of the underlying collateral securing these loans.

The general component covers loans that are collectively evaluated for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment with the use of a loss migration analysis and is based on the actual loss history experienced by the Company over the most recent five years. This actual loss experience is supplemented with information about other current economic factors based on the risks present for each portfolio segment. These current economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The following portfolio segments have been identified: one-to-four units ("single family"), five or more units ("multi-family"), commercial real estate, church, construction, commercial loans, and consumer loans. The risks in our various portfolio segments are as follows:

Single Family – Subject to adverse employment conditions in the local economy leading to increased default rate; decreased market values from oversupply in a geographic area; impact on borrowers' ability to maintain payments in the event of incremental rate increases on adjustable rate mortgages.

Multi-Family – Subject to adverse various market conditions that cause a decrease in market value or lease rates; change in personal funding sources for tenants; oversupply of units in a specific region; a shift in population; reputational risks.

Commercial Real Estate – Subject to adverse conditions in the local economy which may lead to reduced cash flows due to vacancies and reduced rental rates; decreases in the value of underlying collateral.

Church – Subject to adverse economic and employment conditions leading to reduced cash flows from members' donations and offerings; the stability, quality and popularity of church leadership.

Construction – Subject to adverse conditions in the local economy which may lead to reduced demand for new commercial, multi-family or single family buildings or reduced lease or sale opportunities once the building is complete.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Commercial – Subject to industry and economic conditions including decreases in product demand.

Consumer – Subject to adverse employment conditions in the local economy, which may lead to higher default rates.

Real Estate Owned

Assets acquired through, or instead of, loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through a provision that is charged to non-interest expense. Operating costs after acquisition are expensed as incurred.

Office Properties and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the lease term or the estimated useful life of the asset, whichever is shorter.

Federal Home Loan Bank (FHLB) stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income when declared.

Bank-Owned Life Insurance

The Bank has purchased life insurance policies on a former key executive. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Investment in Affordable Housing Limited Partnership

The Bank owns a less than 5% interest in an affordable housing limited partnership. The investment is recorded using the cost method and is being amortized over the life of the related tax credits. The tax credits are being recognized in income tax expense in the consolidated financial statements to the extent they are utilized on the Company's income tax returns. The investment is reviewed for impairment on an annual basis or on an interim basis if an event occurs that would trigger potential impairment.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Revenue Recognition

ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires the Company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. The Company's revenue stream that is within the scope of Topic 606 is primarily service charges on deposit accounts, which consist of monthly service fees, check orders, and other deposit account related fees. The Company's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transaction based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers' accounts.

Restricted Stock Units

The Company may grant cash-settled restricted stock units ("RSUs") to its employees. Compensation cost is recognized over the vesting period based on the fair value of the award, which is re-measured at each reporting period. The fair value of the award is classified as a liability in the consolidated statements of financial condition.

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.

Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company's accounting policy is to recognize forfeitures as they occur.

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 the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.

The Company recognizes interest related to income tax matters in interest expense and penalties related to tax matters in income tax expense.

Retirement Plans

Employee 401(k) expense is the amount of matching contributions made by the Company.

Employee Stock Ownership Plan

The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of shareholders' equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

Earnings Per Common Share

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.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available-for-sale, net of tax, which are also recognized as separate components of equity.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that any such matters existed as of the balance sheet date that will have a material effect on the consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Fair Value Measurements

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.

Fair values are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments

The Company operates as a single segment. The operating information used by management to assess performance and make operating decisions about the Company is the consolidated financial data presented in these financial statements. For the years ended 2018 and 2017, the Company had one active operating subsidiary, Broadway Federal Bank, f.s.b. The Company has determined that banking is its one reportable business segment.

Reclassifications

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

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company adopted ASU No. 2014-09 and all subsequent ASUs that modified Topic 606. The adoption did not have a material impact on the measurement or recognition of revenue; as such, a modified retrospective cumulative effect adjustment to beginning retained earnings was not deemed necessary. Results for reporting periods beginning after

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. The Company's revenue streams that are within the scope of Topic 606 are primarily services charges on deposit accounts, which consist of monthly service fees, check orders, and other deposit account related fees. The Company's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers' accounts.

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) amends existing guidance that requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. It requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption of this standard did not have a material impact on the Company's consolidated financial statements. In accordance with this standard, the Company measured the fair value of its financial assets and financial liabilities as of December 31, 2018 using an exit price notion (see Note 5 Fair Value).

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. Adoption of this standard did not 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 consolidated 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 did not have a material impact on the Company's consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

In February 2018, the FASB issued Accounting Standards Update ("ASU") 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)", which allows an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act. The amount of that reclassification should include the effect of changes of tax rate on the deferred tax amount, any related valuation allowance and other income tax effects on the items in AOCI. The standard requires an entity to state if an election to reclassify the tax effect to retained earnings is made along with the description of other income tax effects that are reclassified from AOCI. The guidance is effective for public business entities for annual periods beginning on or after December 15, 2018 and interim periods within those annual periods with early adoption permitted. The Company early adopted this amendment and has elected to reclassify $66 thousand from AOCI to retained earnings at December 31, 2017.

Recent Accounting Pronouncements Yet to Be Adopted

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which is intended to increase transparency and comparability in the accounting for lease transactions. Under ASU 2016-02, lessees will be required to recognize all leases longer than twelve months on the Consolidated Statements of Financial Condition as lease assets and lease liabilities and make quantitative and qualitative disclosures regarding key information about leasing arrangements. Under the new guidance, lessor accounting is largely unchanged. These amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. Based on leases outstanding at September 30, 2018, the Company does not expect the standard to have a material impact on the Company's Consolidated Statements of Income or Cash Flows, but does anticipate recording a liability of approximately $1.0 million as of March 31, 2019 for the remaining obligation under its lease agreements and a corresponding right-of-use asset in the Consolidated Statements of Financial Condition, which will have a minor impact on the Bank's regulatory capital ratios.

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 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For public business entities that meet the definition of an SEC filer, the standard will be effective for fiscal years beginning after Dec. 15, 2019, including interim periods in those fiscal years. All entities may early adopt for fiscal years beginning after Dec. 15, 2018, including interim periods in those fiscal years. For debt securities with other-than-temporary impairment, the guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has begun its implementation efforts by identifying key interpretive issues, assessing its processes and identifying the system requirements against the new guidance to

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

determine what modifications may be required. While the Company is still evaluating the overall impact on the new standard on its consolidated financial statements, the Company expects the adoption will result in an increase to the allowance for loan losses balance.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The ASU was issued to improve the effectiveness of disclosures surrounding fair value measurements. The ASU removes numerous disclosures from Topic 820 including; transfers between level 1 and 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation process for level 3 fair value measurements. The ASU also modified and added disclosure requirements in regards to changes in unrealized gains and losses included in other comprehensive income, as well as the range and weighted average of unobservable inputs for level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance is not expected to have a significant impact on the Company's consolidated financial statements.

Note 2 – Securities

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolios at December 31, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains (losses) which are recognized in accumulated other comprehensive income:

 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  
 
  (In thousands)
 

December 31, 2018:

                         

Federal agency mortgage-backed securities

  $ 9,575   $ 88   $ (155 ) $ 9,508  

Federal agency debt

    5,317     -     (103 )   5,214  

Total available-for-sale securities

  $ 14,892   $ 88   $ (258 ) $ 14,722  

December 31, 2017:

                         

Federal agency mortgage-backed securities

  $ 11,877   $ 168   $ (37 ) $ 12,008  

Federal agency debt

    5,495     2     (11 )   5,486  

Total available-for-sale securities

  $ 17,372   $ 170   $ (48 ) $ 17,494  

At December 31, 2018, the Bank had three federal agency debt securities with total amortized cost of $5.3 million and estimated total fair value of $5.2 million and an estimated average remaining life of 3.9 years. The Bank also had 24 federal agency mortgage-backed securities with total amortized cost of $9.6 million, estimated total fair value of $9.5 million and an estimated average remaining life of 4.5 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 December 31, 2018, there were no securities pledged to secure public deposits since those public deposits are under $250 thousand which are fully insured by FDIC. At December 31, 2017, securities pledged to secure public deposits had a carrying amount of $526 thousand. At December 31, 2018 and 2017, there were no holdings of

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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 years ended December 31, 2018 and 2017.

The Bank held ten securities with unrealized losses at December 31, 2018, compared to six securities with unrealized losses at December 31, 2017. 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 December 31, 2018 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 3 – Loans Receivable Held for Sale

Loans receivable held for sale at December 31, 2018 totaled $6.2 million and consisted of multi-family loans. As part of the Bank's loan concentration risk management program, $16.9 million of multi-family loans were transferred from the held-for-sale portfolio to the held-for-investment portfolio during the year ended December 31, 2018. The Bank also allocated $20.2 million, or 20%, of its total loan originations as held-for-sale and completed sales of $19.3 million of multi-family loans during the year ended December 31, 2018 for a total gain of $81 thousand. Loan repayments totaled $159 thousand during the year 2018. There were $22.4 million loans held for sale at December 31, 2017.

Note 4 – Loans Receivable Held for Investment

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

 
  December 31, 2018   December 31, 2017  
 
  (In thousands)
 

Real estate:

             

Single family

  $ 91,835   $ 111.085  

Multi-family

    231,870     187,455  

Commercial real estate

    5,802     6,089  

Church

    25,934     30,848  

Construction

    1,876     1,678  

Commercial – other

    226     192  

Consumer

    5     7  

Gross loans receivable before deferred loan costs and premiums

    357,548     337,354  

Unamortized net deferred loan costs and premiums

    937     1,566  

Gross loans receivable

    358,485     338,920  

Allowance for loan losses

    (2,929 )   (4,069 )

Loans receivable, net

  $ 355,556   $ 334,851  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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

 
  For the year ended December 31, 2018  
 
  Real Estate    
   
   
 
 
  Single
family
  Multi-
family
  Commercial
real estate
  Church   Construction   Commercial
– other
  Consumer   Total  
 
  (In thousands)
 

Beginning balance

  $ 594   $ 2,300   $ 71   $ 1,081   $ 17   $ 6   $ -   $ 4,069  

Provision for (recapture of) loan losses

    (225 )   (420 )   (19 )   (592 )   2     -     -     (1,254 )

Recoveries

    -     -     -     114     -     -     -     114  

Loans charged off

    -     -     -     -     -     -     -     -  

Ending balance

  $ 369   $ 1,880   $ 52   $ 603   $ 19   $ 6   $ -   $ 2,929  

 

 
  For the year ended December 31, 2017  
 
  Real Estate    
   
   
 
 
  Single
family
  Multi-
family
  Commercial
real estate
  Church   Construction   Commercial
– other
  Consumer   Total  
 
  (In thousands)
 

Beginning balance

  $ 367   $ 2,659   $ 215   $ 1,337   $ 8   $ 17   $ -   $ 4,603  

Provision for (recapture of) loan losses

    197     (359 )   (144 )   (792 )   9     (11 )   -     (1,100 )

Recoveries

    30     -     -     536     -     -     -     566  

Loans charged off

    -     -     -     -     -     -     -     -  

Ending balance

  $ 594   $ 2,300   $ 71   $ 1,081   $ 17   $ 6   $ -   $ 4,069  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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:

 
  December 31, 2018  
 
  Real Estate    
   
   
 
 
  Single
family
  Multi-
family
  Commercial
real estate
  Church   Construction   Commercial
– other
  Consumer   Total  
 
  (In thousands)
 

Allowance for loan losses:

                                                 

Ending allowance balance attributable to loans:

                               

Individually evaluated for impairment

  $ 53   $ -   $ -   $ 170   $ -   $ 4   $ -   $ 227  

Collectively evaluated for impairment

    316     1,880     52     433     19     2     -     2,702  

Total ending allowance balance

  $ 369   $ 1,880   $ 52   $ 603   $ 19   $ 6   $ -   $ 2,929  

Loans:

                                                 

Loans individually evaluated for impairment

  $ 610   $ 323   $ -   $ 5,383   $ -   $ 64   $ -   $ 6,380  

Loans collectively evaluated for impairment

    91,567     232,986     5,800     19,713     1,872     162     5     352,105  

Total ending loans balance

  $ 92,177   $ 233,309   $ 5,800   $ 25,096   $ 1,872   $ 226   $ 5   $ 358,485  

 

 
  December 31, 2017  
 
  Real Estate    
   
   
 
 
  Single
family
  Multi-
family
  Commercial
real estate
  Church   Construction   Commercial
– other
  Consumer   Total  
 
  (In thousands)
 

Allowance for loan losses:

                                                 

Ending allowance balance attributable to loans:

                                                 

Individually evaluated for impairment

  $ 100   $ 1   $ -   $ 479   $ -   $ 5   $ -   $ 585  

Collectively evaluated for impairment

    494     2,299     71     602     17     1     -     3,484  

Total ending allowance balance

  $ 594   $ 2,300   $ 71   $ 1,081   $ 17   $ 6   $ -   $ 4,069  

Loans:

                                                 

Loans individually evaluated for impairment

  $ 627   $ 333   $ -   $ 8,280   $ -   $ 65   $ -   $ 9,305  

Loans collectively evaluated for impairment

    110,897     188,585     6,096     22,232     1,671     127     7     329,615  

Total ending loans balance

  $ 111,524   $ 188,918   $ 6,096   $ 30,512   $ 1,671   $ 192   $ 7   $ 338,920  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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

 
  December 31, 2018   December 31, 2017  
 
  Unpaid
Principal
Balance
  Recorded
Investment
  Allowance
for Loan
Losses
Allocated
  Unpaid
Principal
Balance
  Recorded
Investment
  Allowance
for Loan
Losses
Allocated
 
 
  (In thousands)
 

With no related allowance recorded:

                                     

Multi-family

  $ 323   $ 323   $ -   $ -   $ -   $ -  

Church

    4,666     2,803     -     5,140     3,291     -  

With an allowance recorded:

                                     

Single family

    610     610     53     627     627     100  

Multi-family

    -     -     -     333     333     1  

Church

    2,580     2,580     170     5,028     4,989     479  

Commercial – other

    64     64     4     65     65     5  

Total

  $ 8,243   $ 6,380   $ 227   $ 11,193   $ 9,305   $ 585  

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

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

 
  For the year ended December 31, 2018   For the year ended December 31, 2017  
 
  Average
Recorded
Investment
  Cash Basis
Interest
Income
Recognized
  Average
Recorded
Investment
  Cash Basis
Interest
Income
Recognized
 
 
  (In thousands)
 

Single family

  $ 618   $ 30   $ 636   $ 28  

Multi-family

    329     23     589     44  

Commercial real estate

    -     -     305     104  

Church

    7,893     398     9,363     693  

Commercial – other

    64     4     65     6  

Total

  $ 8,904   $ 455   $ 10,958   $ 875  

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

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

returned to accrual status, the interest payments that were previously applied to principal are deferred and amortized over the remaining life of the loan. Foregone interest income that would have been recognized had loans performed in accordance with their original terms amounted to $280 thousand and $126 thousand for the years ended December 31, 2018 and 2017, respectively, and were not included in the consolidated results of operations.

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

 
  December 31, 2018    
 
 
  30-59
Days
Past Due
  60-89
Days
Past Due
  Greater than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
   
 

Loans receivable held for investment:

                                     

Single family

  $ 35   $ -   $ -   $ 35   $ 92,142   $ 92,177  

Multi-family

    -     -     -     -     233,309     233,309  

Commercial real estate

    -     -     -     -     5,800     5,800  

Church

    -     -     -     -     25,096     25,096  

Construction

    -     -     -     -     1,872     1,872  

Commercial – other

    -     -     -     -     226     226  

Consumer

    -     -     -     -     5     5  

Total

  $ 35   $ -   $ -   $ 35   $ 358,450   $ 358,485  

 

 
  December 31, 2017    
 
 
  30-59
Days
Past Due
  60-89
Days
Past Due
  Greater than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
   
 

Loans receivable held for investment:

                                     

Single family

  $ -   $ 50   $ -   $ 50   $ 111,474   $ 111,524  

Multi-family

    -     -     -     -     188,918     188,918  

Commercial real estate

    -     -     -     -     6,096     6,096  

Church

    341     -     -     341     30,171     30,512  

Construction

    -     -     -     -     1,671     1,671  

Commercial – other

    -     -     -     -     192     192  

Consumer

    -     -     -     -     7     7  

Total

  $ 341   $ 50   $ -   $ 391   $ 338,529   $ 338,920  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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

 
  December 31, 2018   December 31, 2017  
 
  (In thousands)
 

Loans receivable held for investment:

             

Church

  $ 911   $ 1,766  

Total non-accrual loans

  $ 911   $ 1,766  

There were no loans 90 days or more delinquent that were accruing interest as of December 31, 2018 or December 31, 2017.

Troubled Debt Restructurings

At December 31, 2018, loans classified as troubled debt restructurings ("TDRs") totaled $6.4 million, of which $591 thousand were included in non-accrual loans and $5.8 million were on accrual status. At December 31, 2017, loans classified as TDRs totaled $8.9 million, of which $1.4 million were included in non-accrual loans and $7.5 million were on accrual status. The Company has allocated $227 thousand and $585 thousand of specific reserves for accruing TDRs as of December 31, 2018 and 2017, 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 December 31, 2018 and 2017, 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 years ended December 31, 2018 and 2017.

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:

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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:

 
  December 31, 2018  
 
  Pass   Watch   Special Mention   Substandard   Doubtful   Loss  
 
  (In thousands)
 

Single family

  $ 92,132   $ -   $ 35   $ 10   $ -   $ -  

Multi-family

    232,642     -     -     667     -     -  

Commercial real estate

    5,800     -     -     -     -     -  

Church

    19,678     672     -     4,746     -     -  

Construction

    1,872     -     -     -     -     -  

Commercial – other

    162     -     -     64     -     -  

Consumer

    5     -     -     -     -     -  

Total

  $ 352,291   $ 672   $ 35   $ 5,487   $ -   $ -  

 

 
  December 31, 2017  
 
  Pass   Watch   Special Mention   Substandard   Doubtful   Loss  
 
  (In thousands)
 

Single family

  $ 111,513   $ -   $ -   $ 11   $ -   $ -  

Multi-family

    187,946     -     -     972     -     -  

Commercial real estate

    5,974     122     -     -     -     -  

Church

    24,474     691     -     5,347     -     -  

Construction

    1,671     -     -     -     -     -  

Commercial – other

    127     -     -     65     -     -  

Consumer

    7     -     -     -     -     -  

Total

  $ 331,712   $ 813   $ -   $ 6,395   $ -   $ -  

F-23


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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Note 5 – Fair Value

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

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

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

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

Appraisals for collateral-dependent impaired loans 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.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Assets Measured on a Recurring Basis

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

 
  Fair Value Measurement  
 
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total  
 
  (In thousands)
 

At December 31, 2018:

                         

Securities available-for-sale – federal agency mortgage-backed

  $ -   $ 9,508   $ -   $ 9,508  

Securities available-for-sale – federal agency debt

    1,979     3,235     -     5,214  

At December 31, 2017:

                         

Securities available-for-sale – federal agency mortgage-backed

  $ -   $ 12,008   $ -   $ 12,008  

Securities available-for-sale – federal agency debt

    1,976     3,510     -     5,486  

There were no transfers between Level 1, Level 2, or Level 3 during the years ended December 31, 2018 and 2017.

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.

 
  December 31, 2018   December 31, 2017  
 
  (In thousands)
 

Impaired loans carried at fair value of collateral

  $ 591   $ 742  

Real estate owned

    833     878  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

The following table provides information regarding losses recognized on assets measured at fair value on a non-recurring basis for the years ended December 31, 2018 and 2017.

 
  For the year ended December 31,  
 
  2018   2017  
 
  (In thousands)
 

Impaired loans carried at fair value of collateral

  $ -   $ -  

Real estate owned

    45     80  

Total

  $ 45   $ 80  

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2018 and 2017:

 
  Valuation Technique(s)   Unobservable Input(s)   Range   Weighted Average

December 31, 2018:

               

Impaired loans

 

Third Party
Appraisals

 

Adjustment for differences
between the comparable sales

 

–3% to –1%

 

–2.83%

Real estate owned – church

 

Third Party
Appraisals

 

Adjustment for differences
between the comparable sales

 

–11%

 

–10.85%

December 31, 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%

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

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 December 31, 2018  
 
  Carrying
Value
 
 
  Level 1   Level 2   Level 3   Total  
 
  (In thousands)
 

Financial Assets:

                               

Cash and cash equivalents

  $ 16,651   $ 16,651   $ -   $ -   $ 16,651  

Securities available-for-sale

    14,722     1,979     12,743     -     14,722  

Loans receivable held for sale

    6,231     -     6,270     -     6,270  

Loans receivable held for investment (1)

    355,556     -     -     354,792     354,792  

Accrued interest receivable

    1,143     78     43     1,022     1,143  

Financial Liabilities:

                               

Deposits

  $ 281,414   $ -   $ 269,418   $ -   $ 269,418  

Federal Home Loan Bank advances

    70,000     -     69,933     -     69,933  

Junior subordinated debentures

    5,100     -     -     4,481     4,481  

Accrued interest payable

    334     -     324     10     334  

 

 
   
  Fair Value Measurements at December 31, 2017  
 
  Carrying
Value
 
 
  Level 1   Level 2   Level 3   Total  
 
  (In thousands)
 

Financial Assets:

                               

Cash and cash equivalents

  $ 22,219   $ 22,219   $ -   $ -   $ 22,219  

Securities available-for-sale

    17,494     1,976     15,518     -     17.494  

Loans receivable held for sale

    22,370     -     22,626     -     22,626  

Loans receivable held for investment

    334,851     -     -     333,231     333,231  

Accrued interest receivable

    1,073     58     91     924     1,073  

Federal Home Loan Bank stock

    2,916     2,916     -     -     2,916  

Financial Liabilities:

                               

Deposits

  $ 291,290   $ -   $ 280,761   $ -   $ 280,761  

Federal Home Loan Bank advances

    65,000     -     64,887     -     64,887  

Junior subordinated debentures

    5,100     -     -     4,503     4,503  

Accrued interest payable

    304     -     296     8     304  

(1)
The estimated value of loans held for investment for December 31, 2018 reflects an exit price assumption. The December 31, 2017 fair value estimate is not based on an exit price assumption.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Note 6 – Office Properties and Equipment, net

Year-end office properties and equipment were as follows:

 
  2018   2017  
 
  (In thousands)
 

Land

  $ 572   $ 572  

Office buildings and improvements

    3,264     3,203  

Furniture, fixtures and equipment

    1,794     1,786  

    5,630     5,561  

Less accumulated depreciation

    (3,388 )   (3,155 )

Office properties and equipment, net

  $ 2,242   $ 2,406  

Depreciation expense was $241 thousand and $256 thousand for the years 2018 and 2017, respectively.

At December 31, 2018, the Company was obligated through 2021 under various non-cancelable operating leases on buildings and land used for office space and banking purposes. These operating leases contain escalation clauses which provide for increased rental expense, based primarily on increases in real estate taxes and cost-of-living-indices. The Company also leases certain office equipment. Rent expense under the operating leases was $593 thousand for 2018 and $587 thousand for 2017.

Minimum noncancelable lease commitments, before considering renewal options that generally are present, are as follows:

 
  Premises   Equipment   Total  
 
  (In thousands)
 

Year ending December 31:

                   

2019

  $ 481   $ 35   $ 516  

2020

    494     35     529  

2021

    167     15     182  

Total

  $ 1,142   $ 85   $ 1,227  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Note 7 – Deposits

Deposits are summarized as follows:

 
  December 31,  
 
  2018   2017  
 
  (In thousands)
 

NOW account and other demand deposits

  $ 10,307   $ 11,982  

Non-interest bearing demand deposits

    22,877     22,469  

Money market deposits

    29,948     68,019  

Passbook

    45,718     38,031  

Certificates of deposit

    172,564     150,789  

Total

  $ 281,414   $ 291,290  

The Bank accepts two types of deposits from a deposit placement service called the Certificate of Deposit Account Registry Service ("CDARS"). Reciprocal deposits are the Bank's own retail deposits in amounts in excess of the insured limits. The CDARS program allows banks to place their 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. These deposits totaled $33.7 million and $9.5 million at December 31, 2018 and 2017, respectively and are not considered to be brokered deposits.

One-way deposits are also available using the CDARS program. With the one-way program, the Bank accepts deposits from CDARS even though there is no customer account involved. These deposits totaled $32.6 million and $43.3 million at December 31, 2018 and 2017, respectively.

Brokered deposits (non-CDARS) totaled $9.9 million at December 31, 2018. The Bank did not have any brokered deposits at December 31, 2017.

Scheduled maturities of certificates of deposit for the next five years are as follows:

Maturity
  Amount  
 
  (In thousands)
 

2019

  $ 133,654  

2020

    34,819  

2021

    2,120  

2022

    1,712  

2023

    218  

Thereafter

    41  

  $ 172,564  

Certificates of deposit of $250 thousand or more totaled $33.9 million and $16.7 million at December 31, 2018 and 2017, respectively.

Deposits from principal officers, directors, and their affiliates totaled $1.8 million and $1.6 million at December 31, 2018 and 2017, respectively.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Note 8 – Federal Home Loan Bank Advances

The following table summarizes information relating to FHLB advances at or for the periods indicated:

 
  At or For the Year Ended  
 
  2018   2017  
 
  (Dollars in thousands)
 

FHLB Advances:

             

Average balance outstanding during the year

  $ 74,729   $ 89,279  

Maximum amount outstanding at any month-end during the year

  $ 98,000   $ 104,000  

Balance outstanding at end of year

  $ 70,000   $ 65,000  

Weighted average interest rate at end of year

    2.51 %   1.86 %

Average cost of advances during the year

    2.13 %   1.97 %

Weighted average contractual maturity (in months)

    24     18  

Each advance is payable at its maturity date, with a prepayment penalty. The advances were collateralized by $151.0 million and $128.4 million of first mortgage loans at year-end 2018 and 2017, respectively, under a blanket lien arrangement. Based on this collateral, the Company's holdings of FHLB stock and a general borrowing limit of 30% of total assets, the Company is eligible to borrow up to an additional $54.6 million at year-end 2018.

Required payments over the next five years are as follows:

 
  Amount  
 
  (In thousands)
 

2019

  $ 8,000  

2020

    29,500  

2021

    22,500  

2022

    5,000  

2023

    5,000  

  $ 70,000  

Note 9 – 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 5.34% at December 31, 2018. 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.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Scheduled principal repayments of junior subordinated debentures over the next six years are as follows:

 
  Amount  
 
  (In thousands)
 

2019

  $ 765  

2020

    1,020  

2021

    1,020  

2022

    1,020  

2023

    1,020  

2024

    255  

  $ 5,100  

Note 10 – Employee Benefit Plans

Broadway Federal 401(k) Plan

A 401(k) benefit plan allows employee contributions for substantially all employees up to 15% of their compensation, which are matched at a rate equal to 50% of the first 6% of the compensation contributed. Expense totaled $131 thousand and $132 thousand for 2018 and 2017.

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. Dividends on unallocated shares will be used to repay the loan. At the end of employment, participants will receive shares for their vested balance. Compensation expense related to the ESOP was $80 thousand for 2018 and $104 thousand for 2017.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Shares held by the ESOP were as follows:

 
  December 31,
2018
  December 31,
2017
 
 
  (Dollars in thousands)
 

Allocated to participants

    1,036,809     1,108,382  

Committed to be released

    10,580     10,752  

Suspense shares

    646,033     688,870  

Total ESOP shares

    1,693,422     1,808,004  

Fair value of unearned shares

  $ 678   $ 1,626  

During 2018 and 2017, 43,009 and 40,126 of ESOP shares were released for allocation to participants, respectively. The outstanding balance of unearned ESOP shares at December 31, 2018 and 2017 were $1.0 million and $1.1 million, respectively, which is shown as Unearned ESOP shares in the equity section of the consolidated statements of financial condition.

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.

Income tax expense was as follows:

 
  2018   2017  
 
  (In thousands)
 

Current

             

Federal

  $ (110 ) $ -  

State

    12     12  

Deferred

             

Federal

    68     1,455  

State

    86     396  

Change in valuation allowance

    -     -  

Total

  $ 56   $ 1,863  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Effective tax rates differ from the federal statutory rate of 21% for the year ended December 31, 2018 and 34% for the year ended December 31, 2017 applied to income before income taxes due to the following:

 
  2018   2017  
 
  (In thousands)
 

Federal statutory rate times financial statement net income

  $ 183   $ 1,269  

Effect of:

             

State taxes, net of federal benefit

    77     268  

Change in federal rate

    -     519  

Earnings from bank owned life insurance

    (16 )   (22 )

Low income housing credits

    (212 )   (212 )

Change in valuation allowance

    -     -  

Other, net

    24     41  

Total

  $ 56   $ 1,863  

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other items, the Tax Cuts and Jobs Act reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company has recorded a decrease related to its deferred tax assets of $519 thousand, with a corresponding increase to deferred income tax expense of $519 thousand for the year ended December 31, 2017.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Year-end deferred tax assets and liabilities were due to the following:

 
  2018   2017  
 
  (In thousands)
 

Deferred tax assets:

             

Allowance for loan losses

  $ 799   $ -  

Real estate owned

    65     5  

Accrued liabilities

    150     173  

State income taxes

    34     33  

Stock compensation

    165     182  

Net operating loss carryforward

    3,887     4,367  

Non-accrual loan interest

    3     4  

Partnership investment

    140     101  

General business credit

    1,661     1,458  

Alternative minimum tax credit

    151     256  

Unrealized appreciation AFS

    50     -  

Other

    28     14  

Total deferred tax assets

    7,133     6,593  

Deferred tax liabilities:

             

Section 481 Adjustments to bad debts

    (980 )   -  

Deferred loan fees/costs

    (775 )   (817 )

Allowance for loan losses

    -     (276 )

Basis difference on fixed assets

    (35 )   (49 )

Net unrealized appreciation on available-for-sale securities

    -     (36 )

FHLB stock dividends

    (266 )   (266 )

Mortgage servicing rights

    (5 )   (7 )

Prepaid expenses

    (27 )   (32 )

Total deferred tax liabilities

    (2,088 )   (1,483 )

Net deferred tax assets

  $ 5,045   $ 5,110  

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 December 31, 2018, no valuation allowance was required on its deferred tax assets, which totaled $5.0 million. As of December 31, 2017, the Company recorded no valuation allowance on its deferred tax assets of $5.1 million.

As of December 31, 2018, the Company has federal net operating loss carryforwards of $8.2 million and California net operating loss carryforwards of $25.3 million, which begin expiring in 2031 through 2037 and 2031 through 2036, respectively. The Company also has federal general business credits of $1.5 million, expiring beginning in 2030 through 2037, and alternative minimum tax credit carryforwards of $119 thousand, which can be carried forward indefinitely.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Federal income tax laws previously allowed the Company additional bad debt deductions based on the reserve method of computing the federal bad debt deduction. This method of computing the Company's federal bad debt deduction was permitted to be used by the Company until the end of 1987. As of December 31, 1987, the tax bad debt reserve balance totaled $3.0 million. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total approximately $632 thousand at year end 2018 and 2017. If the Bank were liquidated, or otherwise ceases to be a bank, the $3.0 million tax bad debt reserve may need to be recaptured into taxable income and income tax expense would need to be provided.

Prior to 2018, the Company computed its bad debt deduction for income tax purposes under the reserve method. In 2018, the Company requested a change in accounting method used for computing its tax bad debt deduction from the reserve method to the charge-off method as defined under Internal Revenue Code Section 166. Once the IRS has consented to the requested change in accounting method, the Company would compute its tax bad debt deduction under the new method and would recapture its tax bad debt reserve of $4.3 million into taxable income evenly over the next 4 years starting in 2018.

At December 31, 2018 and 2017, the Company had $475 thousand in unrecognized tax benefits. This amount, if recognized, would favorably affect the income tax provision in future periods. The Company expects that the total amount of unrecognized tax benefits may decrease significantly within the next twelve months due to expected settlement with the state taxing authorities. During 2018 and 2017, $5 thousand was accrued during each period for potential interest related to these unrecognized tax benefits.

Federal tax years 2015 through 2018 remain open for the assessment of Federal income tax. With the exception of the issues under protest for the years listed below, California tax years 2014 through 2018 remain open for the assessment of California income tax. The Company is currently under examination by the California Franchise Tax Board ("FTB") for the 2009, 2010, and 2011 tax years. The FTB has proposed adjustments to the Company's California net operating loss carryforwards for items which the Company has established an unrecognized tax benefit. The Company has protested the FTB's adjustments and does not expect that significant additional tax expense will result.

Note 12 – Stock-Based Compensation

Prior to July 25, 2018, the Company issued stock-based compensation awards to its directors and employees under the 2008 Long-Term Incentive Plan ("2008 LTIP"). The 2008 LTIP permitted 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 July 25, 2018, the Company ceased granting awards under the 2008 LTIP.

On July 25, 2018, the stockholders approved the 2018 Long-Term Incentive Plan ("2018 LTIP"). As with the 2008 LTIP, the 2018 LTIP permits the grant of non-qualified and incentive stock options, stock appreciation rights, full value awards and cash incentive awards. The plan will be in effect for ten years. The maximum number of shares that can be awarded under the plan is 1,293,109 shares of common stock. As of December 31, 2018, no shares had been awarded under the 2018 LTIP.

No stock options were granted during the years ended December 31, 2018 and December 31, 2017.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

The following table summarizes stock option activity during the years ended December 31, 2018 and 2017:

 
  2018   2017  
 
  Number
Outstanding
  Weighted
Average
Exercise
Price
  Number
Outstanding
  Weighted
Average
Exercise
Price
 

Outstanding at beginning of year

    537,500   $ 2.19     540,625   $ 2.18  

Granted during the year

    -     -     -     -  

Exercised during the year

    -     -     -     -  

Forfeited or expired during the year

    -     -     (3,125 )   4.80  

Outstanding at end of year

    537,500   $ 2.19     537,500   $ 2.19  

Exercisable at end of year

    267,500   $ 2.71     177,500   $ 3.26  

For each year of 2018 and 2017, the Company recorded $39 thousand of stock-based compensation expense related to stock options. As of December 31, 2018, unrecognized compensation cost related to nonvested stock options granted under the plan was $84 thousand. The cost is expected to be recognized over a period of 2.15 years.

Options outstanding and exercisable at year-end 2018 were as follows:

 
  Outstanding   Exercisable  
Grant Date
  Number
Outstanding
  Weighted
Average
Remaining
Contractual
Life
  Weighted
Average
Exercise
Price
  Aggregate
Intrinsic
Value
  Number
Outstanding
  Weighted
Average
Exercise
Price
  Aggregate
Intrinsic
Value
 

January 21, 2009

    7,500     0.05 years   $ 4.00           7,500   $ 4.00        

March 18, 2009

    75,000     0.21 years   $ 4.98           75,000   $ 4.98        

January 21, 2010

    5,000     1.05 years   $ 6.00           5,000   $ 6.00        

February 24, 2016

    450,000     7.15 years   $ 1.62           180,000   $ 1.62        

    537,500     6.02 years   $ 2.19   $ -     267,500   $ 2.71   $ -  

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 fully vested over a two-year period in 2018 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 $36 thousand and $105 thousand of stock-based compensation expense related to this award during the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, unrecognized compensation cost related to non-vested restricted stock award was $3 thousand which is expected to be recognized over a period of 3 months.

In January 2018 and April 2017, the Company awarded 18,906 and 30,002, respectively, shares of common stock to its directors under the 2008 LTIP, all of which are fully vested. The Company recorded $45 thousand and

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

$53 thousand of compensation expense during the years ended December 31, 2018 and 2017, respectively, 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 February 2018 and April 2017, the Company also awarded 97,195 and 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 and is classified as a liability in the consolidated statements of financial condition. The Company recorded $73 thousand and $102 thousand of compensation expense related to these awards during the years ended December 31, 2018 and 2017, respectively.

Note 13 – Capital and 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:

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 December 31, 2018 and 2017, 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

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

capitalized for regulatory purposes. Actual and required capital amounts and ratios as of the periods indicated are presented below.

                                     
 
  Actual
  Minimum Capital
Requirements
  Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 

    Amount     Ratio     Amount     Ratio     Amount     Ratio
 

    (Dollars in thousands)  

December 31, 2018:

                                     

Tier 1 (Leverage)

  $ 49,433     12.03%   $ 16,439     4.00%   $ 20,549     5.00%  

Common Equity Tier 1

  $ 49,433     19.32%   $ 18,494     4.50%   $ 16,634     6.50%  

Tier 1

  $ 49,433     19.32%   $ 24,659     6.00%   $ 20,472     8.00%  

Total Capital

  $ 52,417     20.48%   $ 32,879     8.00%   $ 25,590     10.00%  

December 31, 2017:

                                     

Tier 1 (Leverage)

  $ 47,838     11.39%   $ 16,798     4.00%   $ 20,997     5.00%  

Common Equity Tier 1

  $ 47,838     18.63%   $ 11,557     4.50%   $ 16,693     6.50%  

Tier 1

  $ 47,838     18.63%   $ 15,409     6.00%   $ 20,545     8.00%  

Total Capital

  $ 51,059     19.88%   $ 20,545     8.00%   $ 25,681     10.00%  

Note 14 – Loan Commitments and Other Related Activities

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk for credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance-sheet risk at year-end were as follows:

 
  2018   2017  
 
  (In thousands)
 

Commitments to make loans

  $ 10,875   $ 1,493  

Unused lines of credit – variable rates

    1,491     2,582  

Commitments to make loans are generally made for periods of 60 days or less. At year-end 2018, loan commitments consisted of six multi-family residential loans with initial five year interest rates ranging from 4.50% to 4.68%.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Note 15 – Parent Company Only Condensed Financial Information

Condensed financial information of Broadway Financial Corporation follows:


Condensed Balance Sheet
December 31,

 
  2018   2017  
 
  (In thousands)
 

Assets

             

Cash and cash equivalents

  $ 156   $ 400  

Investment in bank subsidiary

    51,221     50,594  

Other assets

    2,225     2,015  

Total assets

  $ 53,602   $ 53,009  

Liabilities and stockholders' equity

             

Junior subordinated debentures

  $ 5,100   $ 5,100  

Accrued expenses and other liabilities

    66     178  

Stockholders' equity

    48,436     47,731  

Total liabilities and stockholders' equity

  $ 53,602   $ 53,009  


Condensed Statements of Income
Years ended December 31,

 
  2018   2017  
 
  (In thousands)
 

Interest income

  $ 25   $ 28  

Interest expense

    (243 )   (194 )

Other expense

    (469 )   (730 )

Loss before income tax and undistributed subsidiary income

    (687 )   (896 )

Income tax benefit (expense)

    205     (326 )

Equity in undistributed subsidiary income

    1,297     3,091  

Net income

  $ 815   $ 1,869  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017


Condensed Statements of Cash Flows
Years ended December 31,

 
  2018   2017  
 
  (In thousands)
 

Cash flows from operating activities

             

Net income

  $ 815   $ 1,869  

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

             

Equity in undistributed subsidiary income

    (1,297 )   (3,091 )

Change in other assets

    (210 )   330  

Change in accrued expenses and other liabilities

    (112 )   (183 )

Net cash used in operating activities

    (804 )   (1,075 )

Cash flows from investing activities

             

Dividends from bank subsidiary

    600     500  

Net cash provided by investing activities

    600     500  

Cash flows from financing activities

             

Common stock repurchased for tax withholdings

    (108 )   -  

Proceeds from repayment of ESOP loan

    68     80  

Net cash (used in) provided by financing activities

    (40 )   80  

Net change in cash and cash equivalents

    (244 )   (495 )

Beginning cash and cash equivalents

    400     895  

Ending cash and cash equivalents

  $ 156   $ 400  

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (continued)

December 31, 2018 and 2017

Note 16 – Earnings Per Common Share

The factors used in the earnings per common share computation follow:

 
  2018   2017  
 
  (Dollars in thousands,
except share and per share)

 

Net income

  $ 815   $ 1,869  

Less net income attributable to participating securities

    (3 )   (5 )

Income available to common stockholders

  $ 812   $ 1,864  

Weighted average common shares outstanding for basic earnings per common share

    26,755,405     26,678,917  

Add: dilutive effects of assumed exercises of stock options

    -     27,117  

Add: dilutive effects of unvested restricted stock awards

    7,044     49,448  

Weighted average common shares outstanding for diluted earnings per common share

    26,762,449     26,755,482  

Earnings per common share – basic

  $ 0.03   $ 0.07  

Earnings per common share – diluted

  $ 0.03   $ 0.07  

Stock options for 267,500 shares and 87,500 shares of common stock for the years ended December 31, 2018 and 2017, respectively, were not considered in computing diluted earnings per common share because they were anti-dilutive.

Note 17 – Subsequent Events

There was no major subsequent event to be disclosed as of March 29, 2019.

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