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BROADWAY FINANCIAL CORP \DE\ - Quarter Report: 2020 June (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

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

 

For transition period from__________ to___________

 

Commission file number 001-39043

 

BROADWAY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

5055 Wilshire Boulevard, Suite 500

Los Angeles, California

 

90036

(Address of principal executive offices) (Zip Code)

 

(323) 634-1700

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Trading Symbol(s)   Name of each exchange on which registered:
Common Stock, par value $0.01 per share (including attached preferred stock purchase rights)   BYFC   The Nasdaq Stock Market LLC

 

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 and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, 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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 12, 2020, 19,282,571 shares of the Registrant’s voting common stock and 8,756,396 shares of the Registrant’s non-voting common stock were outstanding.

 

 

 

 

 

 

 


TABLE OF CONTENTS
      Page
PART I. FINANCIAL STATEMENTS    
         
  Item 1. Consolidated Financial Statements (Unaudited)    
         
    Consolidated Statements of Financial Condition as of June 30, 2020 and December 31, 2019   1
         
    Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019   2
         
    Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019   3
         
    Consolidated Statements of Changes in Stockholders’ Equity three and six months ended June 30, 2020 and 2019     4
         
    Notes to Consolidated Financial Statements   6
         
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   25
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   36
         
  Item 4. Controls and Procedures   36
         
PART II. OTHER INFORMATION    
         
  Item 1. Legal Proceedings   37
         
  Item 1A. Risk Factors   37
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   37
         
  Item 3. Defaults Upon Senior Securities   37
         
  Item 4. Mine Safety Disclosures   37
         
  Item 5. Other Information   37
         
  Item 6. Exhibits   37
         
  Signatures     38

 

 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Financial Condition

(In thousands, except share and per share amounts)

 

   June 30, 2020   December 31, 2019 
   (Unaudited)     
Assets:          
Cash and due from banks  $14,700   $3,016 
Interest-bearing deposits in other banks   25,148    12,550 
Cash and cash equivalents   39,848    15,566 
Securities available-for-sale, at fair value   10,192    11,006 
Loans receivable held for sale, at lower of cost or fair value   49,719    - 
Loans receivable held for investment, net of allowance of $3,215 and $3,182   374,417    397,847 
Accrued interest receivable   1,291    1,223 
Federal Home Loan Bank (FHLB) stock, at cost   3,586    2,916 
Office properties and equipment, net   2,730    2,783 
Bank owned life insurance   3,123    3,100 
Deferred tax assets, net   5,393    5,220 
Investment in affordable housing limited partnership   111    163 
Other assets   894    545 
Total assets  $491,304   $440,369 
           
Liabilities and stockholders’ equity          
           
Liabilities:          
Deposits  $315,778   $297,724 
FHLB advances   116,500    84,000 
Junior subordinated debentures   3,825    4,335 
Advance payments by borrowers for taxes and insurance   1,076    1,033 
Accrued expenses and other liabilities   4,605    4,429 
Total liabilities   441,784   $391,521 
           
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 June 30, 2020 and December 31, 2019; issued 21,900,397 shares at June 30, 2020 and 21,729,249 shares at December 31, 2019; outstanding 19,282,571 shares at June 30, 2020 and 19,111,423 shares at December 31, 2019   219    218 
Common stock, $.01 par value, non-voting, authorized 25,000,000 shares at June 30, 2020 and  December 31, 2019; issued and outstanding 8,756,396 shares at June 30, 2020 and December 31, 2019   87    87 
Additional paid-in capital   46,650    46,426 
Retained earnings   8,608    8,425 
Unearned Employee Stock Ownership Plan (ESOP) shares   (927)   (959)
Accumulated other comprehensive gain (loss), net of tax   209    (23)
Treasury stock-at cost, 2,617,826 shares at June 30, 2020 and at December 31, 2019   (5,326)   (5,326)
Total stockholders’ equity   49,520    48,848 
Total liabilities and stockholders’ equity  $491,304   $440,369 

 

See accompanying notes to unaudited consolidated financial statements.

 

 1 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2020   2019   2020   2019 
   (In thousands, except per share) 
Interest income:                    
Interest and fees on loans receivable  $4,429   $3,841   $8,788   $7,956 
Interest on mortgage-backed and other securities   65    95    135    193 
Other interest income   74    149    216    309 
Total interest income   4,568    4,085    9,139    8,458 
                     
Interest expense:                    
Interest on deposits   967    1,097    2,022    2,124 
Interest on borrowings   570    526    1,188    1,059 
Total interest expense   1,537    1,623    3,210    3,183 
                     
Net interest income   3,031    2,462    5,929    5,275 
Loan loss provision (recapture)   -    (158)   29    (348)
Net interest income after loan loss provision (recapture)   3,031    2,620    5,900    5,623 
                     
Non-interest income:                    
Service charges   94    115    238    237 
Gain on sale of loans   116    -    123    - 
CDFI Grant   -    -    -    233 
Other   32    24    78    45 
Total non-interest income   242    139    439    515 
                     
Non-interest expense:                    
Compensation and benefits   1,983    1,875    4,038    3,757 
Occupancy expense   320    312    635    620 
Information services   221    218    458    426 
Professional services   571    235    835    574 
Office services and supplies   87    67    163    135 
Loan related expenses   20    47    21    58 
Corporate insurance   32    34    64    69 
Amortization of investment in affordable housing limited partnership   8    49    53    98 
Other   160    185    284    345 
Total non-interest expense   3,402    3,022    6,551    6,082 
                     
(Loss) income before income taxes   (129)   (263)   (212)   56 
Income tax benefit   (345)   (128)   (395)   (86)
Net income (loss)  $216   $(135)  $183   $142 
                     
Other comprehensive income, net of tax:                    
Unrealized gains on securities available-for-sale arising during the period  $155   $157   $330   $353 
Income tax expense   46    46    98    104 
Other comprehensive income, net of tax   109    111    232    249 
                     
Comprehensive income (loss)  $325   $(24)  $415   $391 
                     
Earnings (loss) per common share-basic  $0.01   $(0.01)  $0.01   $0.01 
Earnings (loss) per common share-diluted  $0.01   $(0.01)  $0.01   $0.01 

 

See accompanying notes to unaudited consolidated financial statements.

 

 2 

 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

   Six Months Ended June 30, 
   2020   2019 
   (In thousands) 
Cash flows from operating activities:          
           
Net income  $183   $142 
Adjustments to reconcile net income to net cash used in operating activities:          
Loan loss provision (recapture)   29    (348)
Provision for losses on REOs   -    13 
Depreciation   115    115 
Net amortization of deferred loan origination costs   136    95 
Net amortization of premiums on mortgage-backed securities   19    13 
Amortization of investment in affordable housing limited partnership   53    98 
Director compensation expense-common stock   45    52 
Stock-based compensation expense   179    109 
ESOP compensation expense   32    28 
Earnings on bank owned life insurance   (23)   (26)
Originations of loans receivable held for sale   (110,908)   (10,280)
Proceeds from sales of loans receivable held for sale   60,997    - 
Repayments on loans receivable held for sale   315    46 
Gain on sale of loans receivable held for sale   (123)   - 
Change in assets and liabilities:          
Net change in deferred taxes   (271)   (31)
Net change in accrued interest receivable   (68)   (111)
Net change in other assets   (349)   107 
Net change in advance payments by borrowers for taxes and insurance   43    29 
Net change in accrued expenses and other liabilities   442    (281)
Net cash used in operating activities   (49,154)   (10,230)
           
Cash flows from investing activities:          
           
Net change in loans receivable held for investment   23,265    (7,153)
Principal payments on available-for-sale securities   1,125    952 
Proceeds from sales of REO   -    820 
Purchase of FHLB stock   (670)   - 
Purchase of office properties and equipment   (328)   (23)
Net cash provided by (used in) investing activities   23,392    (5,404)
           
Cash flows from financing activities:          
           
Net change in deposits   18,054    14,384 
Proceeds from FHLB advances   66,000    10,000 
Repayments of FHLB advances   (33,500)   (5,000)
Repayments of junior subordinated debentures   (510)   (255)
Net cash provided by financing activities   50,044    19,129 
           
Net change in cash and cash equivalents   24,282    3,495 
Cash and cash equivalents at beginning of the period   15,566    16,651 
Cash and cash equivalents at end of the period  $39,848   $20,146 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $3,290   $2,971 
Cash paid for income taxes   3    13 
Supplemental disclosures of non-cash investing and financing:          
Transfers of loans receivable held for sale to loans receivable held for investment  $-   $1,064 
Transfers of loans receivable held for investment to loans receivable held for sale   -    10,684 
Initial Recognition of Operating Lease Right-to-Use Assets   -    1,120 
Initial Recognition of Operating Lease Liabilities   -    1,120 

 

See accompanying notes to unaudited consolidated financial statements.

 

 3 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

   Three-Month Period Ended June 30, 2020 and 2019 
   Common
Stock
Voting
   Common
Stock
Non-Voting
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income
   Retained
Earnings
(Substantially
Restricted)
   Unearned
ESOP
Shares
   Treasury
Stock
   Total
Stockholders’
Equity
 
               (In thousands)                 
Balance at April 1, 2020  $219   $87   $46,550   $100   $8,392   $(942)  $(5,326)  $49,080 
Net income for the three months ended June 30, 2020   -    -    -    -    216    -    -    216 
Release of unearned ESOP shares   -    -    -    -    -    15    -    15 
Restricted stock Compensation expense   -    -    90    -    -    -    -    90 
Stock option compensation expense   -    -    10    -    -    -    -    10 
Other comprehensive income, net of tax   -    -    -    109    -    -    -    109 
Balance at June 30, 2020  $219   $87   $46,650   $209   $8,608   $(927)  $(5,326)  $49,520 
Balance at April 1, 2019  $218   $87   $46,219   $(145)  $8,908   $(1,010)  $(5,326)  $48,951 
Net income for the three months ended June 30, 2019   -    -    -    -    (135)   -    -    (135)
Release of unearned ESOP shares   -    -    (2)   -    -    16    -    14 
Restricted stock Compensation expense   -    -    65    -    -    -    -    65 
Stock option compensation expense   -    -    10    -    -    -    -    10 
Other comprehensive income, net of tax   -    -    -    111    -    -    -    111 
Balance at June 30, 2019  $218   $87   $46,292   $(34)  $8,773   $(994)  $(5,326)  $49,016 

 

See accompanying notes to unaudited consolidated financial statements.

 

 4 

 

 

   Six-Month Period Ended June 30, 2020 and 2019 
   Common
Stock
Voting
   Common
Stock
Non-Voting
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income
   Retained
Earnings
(Substantially
Restricted)
   Unearned
ESOP
Shares
   Treasury
Stock
   Total
Stockholders’
Equity
 
               (In thousands)                 
Balance at January 1, 2020  $218   $87   $46,426   $(23)  $8,425   $(959)  $(5,326)  $48,848 
Net income for the six months ended June 30, 2020   -    -    -    -    183    -    -    183 
Release of unearned ESOP shares   -    -    -    -    -    32    -    32 
Restricted stock Compensation expense   1    -    160    -    -    -    -    161 
Stock awarded to directors   -    -    45    -    -    -    -    45 
Stock option compensation expense   -    -    19    -    -    -    -    19 
Other comprehensive loss, net of tax   -    -    -    232    -    -    -    232 
Balance at June 30, 2020  $219   $87   $46,650   $209   $8,608   $(927)  $(5,326)  $49,520 
Balance at January 1, 2019  $213   $87   $46,141   $(283)  $8,631   $(1,027)  $(5,326)  $48,436 
Net income for the six months ended June 30, 2019   -    -    -    -    142    -    -    142 
Release of unearned ESOP shares   -    -    (5)   -    -    33    -    28 
Restricted stock Compensation expense   5    -    85    -    -    -    -    90 
Stock awarded to directors   -    -    52    -    -    -    -    52 
Stock option compensation expense   -    -    19    -    -    -    -    19 
Other comprehensive loss, net of tax   -    -    -    249    -    -    -    249 
Balance at June 30, 2019  $218   $87   $46,292   $(34)  $8,773   $(994)  $(5,326)  $49,016 

 

See accompanying notes to unaudited consolidated financial statements.

 

 5 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

June 30, 2020

 

NOTE (1) – Basis of Financial Statement Presentation

 

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

 

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for quarterly reports on Form 10-Q. These unaudited consolidated financial statements do not include all disclosures associated with the Company's consolidated annual financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019 and, accordingly, should be read in conjunction with such audited consolidated financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

Recent Accounting Pronouncements

 

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 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.

 

On October 16, 2019, the FASB voted to affirm the proposed amended effective date for ASU 2016-13 for smaller reporting companies (“SRCs”) as defined by the SEC. The final ASU, was issued in November 2019, delays the implementation date for ASU 2016-13 to fiscal years beginning after December 15, 2022. SRCs are defined as companies with less than $250 million of public float or less than $100 million in annual revenues for the previous year and no public float or public float of less than $700 million. The Company qualifies as an SRC, and management will implement ASU 2016-13 in the first quarter of 2023. The estimated financial impact has not yet been determined.

 

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU is effective January 1, 2020 and clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. The amendments to Topic 326 have the same effective dates as ASU 2016-13. This guidance did not have a significant impact on the Company's consolidated financial statements.

 

In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. The effective date for this ASU is the same as for ASU 2016-13. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.

 

 6 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

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 regarding 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 did not have a significant impact on the Company's consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments in this ASU are intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments are also intended to improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We are currently in the process of evaluating the impact of this ASU on the Company’s consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions regarding the accounting related to the modifications of certain contracts, relationships and other transactions that are affected by reference rate reform related to contracts that reference LIBOR or other reference rates that could be discontinued due to reference rate reform. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. This guidance did not have a significant impact on the Company's consolidated financial statements as of March 31, 2020.

 

NOTE (2) Earnings Per Share of Common Stock

 

Basic earnings per share of common stock is computed pursuant to the two-class method by dividing net income available to common stockholders less dividends paid on participating securities (unvested shares of restricted common stock) and any undistributed earnings attributable to participating securities by the weighted average common shares outstanding during the period. The weighted average common shares outstanding includes the weighted average number of shares of common stock outstanding less the weighted average number of unvested shares of restricted common stock. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per share of common stock includes the dilutive effect of unvested stock awards and additional potential common shares issuable under stock options.

 

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

 

   For the three months ended
June 30,
  

For the six months ended
June 30,

 
   2020   2019   2020   2019 
   (Dollars in thousands, except per share) 
Net income (loss)  $216   $(135)  $183   $142 
Less net income (loss) attributable to participating securities   2    (2)   2    2 
Income (loss) available to common stockholders  $214   $(133)  $181   $140 
                     
                     
Weighted average common shares outstanding for basic earnings (loss) per common share   27,143,340    26,858,018    27,055,750    26,711,043 
Add: dilutive effects of unvested restricted stock awards   307,376    -    337,097    396,331 
Weighted average common shares outstanding for diluted earnings (loss) per common share   27,450,716    26,858,018    27,392,847    27,107,374 
                     
Earnings (loss) per common share - basic  $0.01   $(0.01)  $0.01   $0.01 
Earnings (loss) per common share - diluted  $0.01   $(0.01)  $0.01   $0.01 

 

 7 

 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

Stock options for 450,000 shares of common stock for the three and six months ended June 30, 2020 and stock options for 455,000 shares of common stock for the three and six months ended June 30, 2019 were not considered in computing diluted earnings per common share because they were anti-dilutive.

 

NOTE (3) Securities

 

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

 

   Amortized Cost  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

   Fair Value 
   (In thousands) 
June 30, 2020:                    
Federal agency mortgage-backed securities  $6,812   $326   $-   $7,138 
Federal agency debt   2,850    204    -    3,054 
Total available-for-sale securities  $9,662   $530   $-   $10,192 
December 31, 2019:                    
Federal agency mortgage-backed securities  $7,792   $164   $-   $7,956 
Federal agency debt   3,014    36    -    3,050 
Total available-for-sale securities  $10,806   $200   $-   $11,006 

 

At June 30, 2020, the Bank had two federal agency debt securities with total amortized cost of $2.9 million, estimated total fair value of $3.1 million and an estimated average remaining life of 5.5 years. The Bank also had 22 federal agency mortgage-backed securities with total amortized cost of $6.8 million, estimated total fair value of $7.1 million and an estimated average remaining life of 3.1 years. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

There were no securities pledged to secure public deposits at June 30, 2020 and December 31, 2019. At June 30, 2020 and December 31, 2019, there were no holdings of securities by any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

There were no sales of securities during the three and six months ended June 30, 2020 and 2019.

 

The Bank held 24 securities with unrealized gains at June 30, 2020 and December 31, 2019. All of the Bank's securities were issued by the federal government or its agencies. The unrealized gains on our available-for-sale securities at June 30, 2020 were primarily caused by movements in market interest rates subsequent to the purchase of such securities.

 

NOTE (4) Loans Receivable Held for Sale

 

Loans receivable held for sale at June 30, 2020 totaled $49.7 million and consisted of multi-family loans. The Bank did not have any loans held for sale at December 31, 2019. During the first six months of 2020, the Bank originated $110.9 million of multi-family loans for sale and sold $60.9 million of loans held for sale. During the first six months of 2019, the Bank originated $10.3 million of multi-family loans for sale. There were no loan sales during the six months ended June 30, 2019. Loan repayments totaled $315 thousand and $46 thousand during the six months ended June 30, 2020 and 2019, respectively.

 

8

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

NOTE (5) Loans Receivable Held for Investment

 

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

 

   June 30, 2020   December 31, 2019 
   (In thousands) 
Real estate:          
Single family  $58,826   $72,883 
Multi-family   277,758    287,378 
Commercial real estate   18,672    14,728 
Church   19,489    21,301 
Construction   1,409    3,128 
Commercial – other   277    262 
Consumer   10    21 
Gross loans receivable before deferred loan costs and premiums   376,441    399,701 
Unamortized net deferred loan costs and premiums   1,191    1,328 
Gross loans receivable   377,632    401,029 
Allowance for loan losses   (3,215)   (3,182)
Loans receivable, net  $374,417   $397,847 

 

9

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

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

 

   Three Months Ended June 30, 2020 
   Real Estate             
   Single family   Multi-family   Commercial real estate   Church   Construction   Commercial - other   Consumer   Total 
   (In thousands) 
Beginning balance  $308   $2,408   $140   $323   $24   $7   $1   $3,211 
Provision for (recapture of) loan losses   -    16    29    (41)   (2)   (1)   (1)   - 
Recoveries   4    -    -    -    -    -    -    4 
Loans charged off   -    -    -    -    -    -    -    - 
Ending balance  $312   $2,424   $169   $282   $22   $6   $-   $3,215 

 

   Three Months Ended June 30, 2019 
   Real Estate             
   Single family   Multi-family   Commercial real estate   Church   Construction   Commercial - other   Consumer   Total 
   (In thousands) 
Beginning balance  $347   $1,990   $62   $507   $18   $5   $-   $2,929 
Provision for (recapture of) loan losses   (19)   (58)   (4)   (106)   26    -    3    (158)
Recoveries   -    -    -    -    -    -    -    - 
Loans charged off   -    -    -    -    -    -    -    - 
Ending balance  $328   $1,932   $58   $401   $44   $5   $3   $2,771 

 

   Six Months Ended June 30, 2020 
   Real Estate             
   Single family   Multi-family   Commercial real estate   Church   Construction   Commercial - other   Consumer   Total 
   (In thousands) 
Beginning balance  $312   $2,319   $133   $362   $48   $7   $1   $3,182 

Provision for (recapture of) loan losses

   (4)   105    36    (80)   (26)   (1)   (1)   29 
Recoveries   4    -    -    -    -    -    -    4 
Loans charged off   -    -    -    -    -    -    -    - 
Ending balance  $312   $2,424   $169   $282   $22   $6   $-   $3,215 

 

   Six Months Ended June 30, 2019 
   Real Estate             
   Single family   Multi-family   Commercial real estate   Church   Construction   Commercial - other   Consumer   Total 
   (In thousands) 
Beginning balance  $369   $1,880   $52   $603   $19   $6   $-   $2,929 
Provision for (recapture of) loan losses   (41)   52    6    (392)   25    (1)   3    (348)
Recoveries   -    -    -    190    -    -    -    190 
Loans charged off   -    -    -    -    -    -    -    - 
Ending balance  $328   $1,932   $58   $401   $44   $5   $3   $2,771 

 

10

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

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

 

   June 30, 2020 
   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  $71   $-   $-   $72   $-   $1   $-   $144 
Collectively evaluated for impairment   241    2,424    169    210    22    5    -    3,071 
Total ending allowance balance  $312   $2,424   $169   $282   $22   $6   $-   $3,215 
Loans:                                        
Loans individually evaluated for impairment  $592   $307   $-   $4,135   $-   $50   $-   $5,084 
Loans collectively evaluated for impairment   58,409    279,017    18,742    14,733    1,409    228    10    372,548 
Total ending loans balance  $59,001   $279,324   $18,742   $18,868   $1,409   $278   $10   $377,632 

 

   December 31, 2019 
   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  $60   $-   $-   $85   $-   $2   $-   $147 
Collectively evaluated for impairment   252    2,319    133    277    48    5    1    3,035 
Total ending allowance balance  $312   $2,319   $133   $362   $48   $7   $1   $3,182 
Loans:                                        
Loans individually evaluated for impairment  $611   $313   $-   $4,356   $-   $63   $-   $5,343 
Loans collectively evaluated for impairment   72,501    288,730    14,818    16,292    3,125    199    21    395,686 
Total ending loans balance  $73,112   $289,043   $14,818   $20,648   $3,125   $262   $21   $401,029 

 

11

 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

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

 

   June 30, 2020   December 31, 2019 
   Unpaid Principal Balance   Recorded Investment   Allowance for Loan Losses Allocated   Unpaid Principal Balance   Recorded Investment   Allowance for Loan Losses Allocated 
   (In thousands) 
With no related allowance recorded:                              
Single family  $10   $9   $-   $-   $-   $- 
Multi-family  $307   $307   $-    313    313    - 
Church  $3,048   $2,259   $-    3,491    2,446    - 
With an allowance recorded:                              
Single family   583    583    71    593    593    60 
Church   1,876    1,876    72    1,928    1,928    85 
Commercial - other   50    50    1    63    63    2 
Total  $5,874   $5,084   $144   $6,388   $5,343   $147 

 

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

 

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

 

   Three Months Ended June 30, 2020   Three Months Ended June 30, 2019 
   Average
Recorded
Investment
  

Cash Basis
Interest
Income
Recognized

   Average
Recorded
Investment
  

Cash Basis
Interest
Income
Recognized

 
   (In thousands) 
Single family  $597   $7   $638   $5 
Multi-family   308    5    320    5 
Church   4,160    74    4,741    402 
Commercial – other   59    1    63    - 
Total  $5,124   $87   $5,762   $412 

 

   Six Months Ended June 30, 2020   Six Months Ended June 30, 2019 
   Average
Recorded
Investment
  

Cash Basis
Interest
Income
Recognized

   Average
Recorded
Investment
  

Cash Basis
Interest
Income
Recognized

 
   (In thousands) 
Single family  $599   $14   $640   $15 
Multi-family   309    11    321    11 
Church   4,190    309    5,383    517 
Commercial – other   60    2    64    2 
Total  $5,158   $336   $6,408   $545 

 

12

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans and interest recoveries on non-accrual loans that were paid off. Interest payments collected on non-accrual loans are characterized as payments of principal rather than payments of the outstanding accrued interest on the loans until the remaining principal on the non-accrual loans is considered to be fully collectible or paid off. When a loan is returned to accrual status, the interest payments that were previously applied to principal are deferred and amortized over the remaining life of the loan. Foregone interest income that would have been recognized had loans performed in accordance with their original terms amounted to $22 thousand and $40 thousand for the three months ended June 30, 2020 and 2019, respectively, and $45 thousand and $80 thousand for the six months ended June 30, 2020 and 2019, respectively, and were not included in the consolidated results of operations.

 

There were no loans delinquent as of June 30, 2020. The following tables present the aging of the recorded investment in past due loans by loan type as of the periods indicated:

 

   June 30, 2020 
  

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  $-   $-   $-   $-   $59,001   $59,001 
Multi-family   -    -    -    -    279,324    279,324 
Commercial real estate   -    -    -    -    18,742    18,742 
Church   -    -    -    -    18,868    18,868 
Construction   -    -    -    -    1,409    1,409 
Commercial - other   -    -    -    -    278    278 
Consumer   -    -    -    -    10    10 
Total  $          -   $        -   $          -   $      -   $377,632   $377,632 

 

   December 31, 2019 
  

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  $18   $-   $-   $18   $73,094   $73,112 
Multi-family   -    -    -    -    289,043    289,043 
Commercial real estate   -    -    -    -    14,818    14,818 
Church   -    -    -    -    20,648    20,648 
Construction   -    -    -    -    3,125    3,125 
Commercial - other   -    -    -    -    262    262 
Consumer   -    -            -    -    21    21 
Total  $18   $     -   $-   $18   $401,011   $401,029 

 

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

 

   June 30, 2020   December 31, 2019 
   (In thousands) 
Loans receivable held for investment:          
Single-family residence  $9   $18 
Church  $837    406 
Total non-accrual loans  $846   $424 

 

There were no loans 90 days or more delinquent that were accruing interest as of June 30, 2020 or December 31, 2019. None of the church non-accrual loans were delinquent, but none qualified for accrual status as of the periods indicated.

 

13

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

Troubled Debt Restructurings

 

In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other insignificant payment delays, are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months or less is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as non-accrual loans during the term of the modification.

 

The Bank has implemented a loan modification program for the effects of COVID-19 on its borrowers. At the date of this filing, two borrowers have requested loan modifications. Both borrowers were current at the time modification program was implemented. To date, no modifications have been granted.

 

At June 30, 2020, loans classified as troubled debt restructurings (“TDRs”) totaled $4.5 million, of which $254 thousand were included in non-accrual loans and $4.2 million were on accrual status. At December 31, 2019, loans classified as TDRs totaled $4.7 million, of which $406 thousand were included in non-accrual loans and $4.3 million were on accrual status. The Company has allocated $144 thousand and $147 thousand of specific reserves for accruing TDRs as of June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019, the Company had no commitment to lend additional amounts to customers with outstanding loans that are classified as TDRs. No loans were modified during the three or six months ended June 30, 2020 and 2019.

 

Credit Quality Indicators

 

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

 

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

 

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

 

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

 

14

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

§Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

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

 

15

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Pass rated loans are generally well protected by the current net worth and paying capacity of the obligor 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:

 

   June 30, 2020 
   Pass   Watch   Special Mention   Substandard   Doubtful   Loss 
   (In thousands) 
Single family  $58,992   $-   $-   $9   $-   $- 
Multi-family   278,551    401    -    372    -    - 
Commercial real estate   17,242    1,500    -    -    -    - 
Church   14,741    1,302    -    2,825    -    - 
Construction   1,409    -    -    -    -    - 
Commercial - other   228    -    -    50    -    - 
Consumer   10    -    -    -    -    - 
Total  $371,173   $3,203   $-   $3,256   $-   $- 

 

   December 31, 2019 
   Pass   Watch   Special Mention   Substandard   Doubtful   Loss 
   (In thousands) 
Single family  $73,094   $-   $-   $18   $-   $- 
Multi-family   288,251    411    -    381    -    - 
Commercial real estate   14,818    -    -    -    -    - 
Church   16,546    411    -    3,691    -    - 
Construction   3,125    -    -    -    -    - 
Commercial - other   199    -    -    63    -    - 
Consumer   21    -    -    -    -    - 
Total  $396,054   $822   $-   $4,153   $-   $- 

 

NOTE (6) Leases

 

The Bank has a combined operating lease for its corporate headquarters and main retail branch and a photocopier lease. The ROU asset and operating lease liability are recorded in office properties and equipment and other liabilities, respectively, in the consolidated statements of financial condition.

 

Our ROU asset represents our right to use an underlying asset during the lease term. Operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the date of implementation of the new accounting standard.

 

The operating lease for our corporate headquarters and main retail branch has one 5-year extension option at the then fair market rate. As this extension option is not reasonably certain of exercise, it is not included in the lease term. The Bank had a ROU asset of $460 thousand and an operating lease liability of $468 thousand as of June 30, 2020. The Bank has no finance leases.

 

The Bank recorded operating lease expense costs of $121 thousand and $123 thousand for the quarters ended June 30, 2020 and June 30, 2019, respectively, and $242 thousand and $245 thousand for the first six months of 2020 and the first six months of 2019, respectively.

 

16

 

 

Additional information regarding our operating leases is summarized below as of or for the periods ended June 30, 2020 indicated (dollars in thousands):

 

   Quarter ended   Six Months ended 
   June 30, 2020   June 30, 2020 
Cash paid for amounts included in the measurement of lease liabilities for operating leases:  $88   $174 
           
Weighted average remaining lease term in months        10 
           
Weighted average discount rate        2.75%

 

The future minimum payments for operating leases with remaining terms of one year or more as of June 30, 2020 were as follows (in thousands):

 

Six months ended December 31, 2020  $279 
Year ended December 31, 2021   195 
Total Future Minimum Lease Payments   474 
Amounts Representing Interest   (6)
Present Value of Net Future Minimum Lease Payments  $468 

 

NOTE (7) Borrowings

 

At June 30, 2020 and December 31, 2019, the Bank had outstanding Advances from the Federal Home Loan Bank of San Francisco (“FHLB”) totaling $116.5 million and $84.0 million, respectively. The weighted rate interest rate was 1.84% and 2.32% as of June 30, 2020 and December 31, 2019, respectively. The weighted average contractual maturity was 31 months and 18 months as of June 30, 2020 and December 31, 2019, respectively. The advances were collateralized by $210.4 million and $156.1 million of first mortgage loans at June 30, 2020 and December 31, 2019, respectively.

 

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 2.86% at June 30, 2020. 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 began making quarterly payments of equal amounts of principal, plus interest, and will continue until the Debentures are fully amortized on March 17, 2024. At June 30, 2020, the Company had repaid a total of $1.3 million of the scheduled principal. The Debentures may be called for redemption at any time by the Company.

 

17

 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

NOTE (8) 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.

 

18

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

Assets Measured on a Recurring Basis

 

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

 

   Fair Value 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 June 30, 2020:                
Securities available-for-sale – federal agency mortgage-backed  $-   $7,138   $-   $7,138 
Securities available-for-sale – federal agency debt   -    3,054    -    3,054 
At December 31, 2019:                    
Securities available-for-sale – federal agency mortgage-backed  $-   $7,956   $-   $7,956 
Securities available-for-sale – federal agency debt   -    3,050    -    3,050 

 

There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2020 and 2019.

 

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 statements of financial 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.

 

   June 30, 2020   December 31, 2019 
   (In thousands) 
Impaired loans carried at fair value of collateral  $-   $130 

 

Fair Values of Financial Instruments

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of June 30, 2020 and December 31, 2019. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and due from banks, interest-bearing deposits in other banks, and accrued interest receivable/payable, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as Federal Home Loan Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

19

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

       Fair Value Measurements at June 30, 2020 
   Carrying
Value
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Financial Assets:                         
Loans receivable held for sale  $49,719   $-   $49,735   $-   $49,735 
Loans receivable held for investment   374,417    -    -    377,618    377,618 
                          
Financial Liabilities:                         
Time Deposits  $153,406   $-   $154,448   $-   $154,448 
Federal Home Loan Bank advances   116,500    -    120,788    -    120,788 
Junior subordinated debentures   3,825    -    -    3,261    3,261 

 

       Fair Value Measurements at December 31, 2019 
   Carrying
Value
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Financial Assets:                         
Loans receivable held for sale  $-   $-   $-   $-   $- 
Loans receivable held for investment  $397,847    -    -   $404,923   $404,923 
                          
Financial Liabilities:                         
Time Deposits  $190,235   $-   $190,353   $-   $190,353 
Federal Home Loan Bank advances   84,000    -    84,997    -    84,997 
Junior subordinated debentures   4,335    -    -    3,734    3,734 

 

In accordance with ASU No. 2016-01, the fair value of certain financial assets and liabilities, including loans, time deposits, and junior subordinated debentures, as of June 30, 2020 and December 31, 2019 was measured using an exit price notion. Although the exit price notion represents the value that would be received to sell an asset or paid to transfer a liability, the actual price received for a sale of assets or paid to transfer liabilities could be different from exit price disclosed.

 

NOTE (9) – Stock-based Compensation

 

On July 25, 2018, the stockholders approved the 2018 Long-Term Incentive Plan (“2018 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 is 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 June 30, 2020, 630,080 shares had been awarded and 663,029 shares are available under the 2018 LTIP.

 

In February 2020 and January 2019, the Company awarded 30,930 and 42,168 shares of common stock, respectively, to its directors under the 2018 LTIP, which are fully vested. The Company recorded $45 thousand and $52 thousand of compensation expense for the quarters ended March 31, 2020 and March 31, 2019, 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 2020 and 2019, the Company awarded 140,218 shares and 428,797 shares, respectively, of restricted stock to its officers and employees under the 2018 LTIP. Each restricted stock award is valued 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. These awarded shares of restricted stock are fully vested over a two-year period from their respective dates of grants. Stock based compensation expense is recognized on a straight-line basis over the vesting period. During the three and six months ended June 30, 2020, the Company recorded $90 and $161 thousand of stock based compensation expense related to these awards, respectively. As of June 30, 2020, unrecognized compensation cost related to non-vested restricted stock awards was $320 thousand which is expected to be recognized over a period of 20 months.

 

20

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

No stock options were granted during the three and six months ended June 30, 2020 and 2019.

 

The following table summarizes stock option activity during the six months ended June 2020 and 2019:

 

  

Six Months Ended

June 30, 2020

  

Six Months Ended

June 30, 2019

 
   Number
Outstanding
  

Weighted
Average

Exercise

Price

   Number
Outstanding
  

Weighted
Average

Exercise

Price

 
Outstanding at beginning of period   455,000   $1.67    537,500   $2.19 
Granted during period   -    -    -    - 
Exercised during period   -    -    -    - 
Forfeited or expired during period   (5,000)   6.00    (82,500)   4.89 
Outstanding at end of period   450,000   $1.62    455,000   $1.67 
Exercisable at end of period   360,000   $1.62    275,000   $1.70 

 

The Company recorded $10 thousand and $19 thousand of stock-based compensation expense related to stock options during the three and six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the unrecognized compensation cost related to nonvested stock options granted under the plan was $26 thousand. The cost is expected to be recognized over a period of 8 months.

 

Options outstanding and exercisable at June 30, 2020 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
 
February 24, 2016   450,000   5.65 years  $1.62         360,000   $1.62      
    450,000   5.65 years  $1.62   $176    360,000   $1.62   $176 

 

NOTE (10) – 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. Any dividends on allocated shares increase participant accounts. Any dividends on unallocated shares will be used to repay the loan. Participants will receive shares for their vested balance at the end of their employment. Compensation expense related to the ESOP was $15 thousand and $14 thousand for the three months ended June 30, 2020 and 2019, respectively, and $32 thousand and $28 thousand for the six months ended June 30, 2020 and 2019, respectively.

 

21

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

 

Shares held by the ESOP were as follows:

 

   June 30, 2020   December 31, 2019 
   (Dollars in thousands) 
         
Allocated to participants    1,024,429    1,024,429 
Committed to be released   31,248    10,416 
Suspense shares   583,044    603,876 
Total ESOP shares   1,638,721    1,638,721 
Fair value of unearned shares  $1,230   $930 
           

 

Unearned shares, which are reported as Unearned ESOP shares in the equity section of the consolidated statements of financial condition, were $927 thousand and $959 thousand at June 30, 2020 and December 31, 2019, respectively.

 

22

 

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)

 

NOTE (11) – Regulatory Matters

 

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

 

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

 

4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets (known as the “leverage ratio”).

 

A capital conservation buffer is also required to be maintained above the regulatory minimum capital requirements. This capital conservation buffer was phased in on a schedule that began on January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until it reached its final level of 2.5% on January 1, 2019.

 

The Basel III Capital rules also revised the previously existing prompt corrective action regulatory 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 complement the capital conservation buffer, insured depository institutions are 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).

 

At June 30, 2020 and December 31, 2019, the Bank’s level of capital exceeded all regulatory capital requirements and its regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. Actual and required capital amounts and ratios as of the periods indicated are presented below.

 

   Actual   Minimum Capital
Requirements
   Minimum Required To
Be Well Capitalized
Under Prompt
Corrective Action
Provisions
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
June 30, 2020:                              
Tier 1 (Leverage)  $48,275    9.71%  $19,887    4.00%  $24,859    5.00%
Common Equity Tier 1  $48,275    16.07%  $13,518    4.50%  $19,526    6.50%
Tier 1  $48,275    16.07%  $18,024    6.00%  $24,032    8.00%
Total Capital  $51,526    17.15%  $24,032    8.00%  $30,040    10.00%
December 31, 2019:                              
Tier 1 (Leverage)  $48,541    11.56%  $16,798    4.00%  $20,997    5.00%
Common Equity Tier 1  $48,541    17.14%  $12,743    4.50%  $18,406    6.50%
Tier 1  $48,541    17.14%  $16,990    6.00%  $22,654    8.00%
Total Capital  $51,790    18.29%  $22,654    8.00%  $28,318    10.00%

 

23

 

 

BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements (continued)

 

NOTE (12) – Income Taxes

 

Income tax expense or benefit is computed by applying the statutory federal income tax rate of 21% and the California income tax rate of 10.84% to taxable income or loss. The Company recorded income tax benefits of $345 thousand and $395 thousand for the three and six months ended June 30, 2020, respectively, compared to income tax benefits of $128 thousand and $86 thousand for the three and six months ended June 30, 2019, respectively. The increase in income tax benefit during the second quarter and first six months of 2020 was primarily due to a tax adjustment of $273 thousand upon the resolution of an outstanding audit issue with the California Franchise Tax Board for tax years 2009 to 2013. In addition, the Company recorded low-income housing tax credits of $29 thousand and $58 thousand during the second quarter and six months ended June 30, 2020, compared to $50 thousand and $99 thousand during the second quarter and six months ended June 30, 2019.

 

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

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income and tax planning strategies. Based on this analysis, the Company determined that as of June 30, 2020, no valuation allowance was required on its deferred tax assets, which totaled $5.4 million.

 

 

NOTE (13) – Concentration of Credit Risk

 

The Bank has a significant concentration of deposits with a long-time customer that accounted for approximately 13% of its deposits as of June 30, 2020. The Bank expects to maintain this relationship with the customer.

 

24

 

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management of our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I “Item 1, Financial Statements,” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019. Certain statements herein are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the U.S. Securities Act of 1933, as amended, which reflect our current views with respect to future events and financial performance. Forward-looking statements typically include the words "anticipate," "believe," "estimate," "expect," "project," "plan," "forecast," "intend," and other similar expressions. These forward-looking statements are subject to risks and uncertainties, which could cause actual future results to differ materially from historical results or from those anticipated or implied by such statements. Readers should not place undue reliance on these forward-looking statements, which speak only as of their dates or, if no date is provided, then as of the date of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations, are described in the “Notes to Consolidated Financial Statements” and in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes since then to our critical accounting policies.

 

Overview

 

Since early March 2020, the effects from the spread of the COVID-19 virus (the “COVID-19 Pandemic”) permeated virtually every aspect of society, and required management to quickly plan and implement multiple changes to Broadway’s operations to protect the health and welfare of the Bank’s employees and customers, while minimizing disruptions to the Bank’s ability to provide essential services. These changes were based on guidance from various governmental entities, including the Center for Disease Control and Prevention. Among the changes that the Bank implemented were the following: more intensive cleaning and maintenance of the branches, distribution of personal protection equipment to employees, creation of safe distancing measures within the branches and all work areas, guidance to all employees regarding other safe practices, amended benefit policies to ease the burden on employees with children at home, or those experiencing symptoms of disease, development of plans for certain employees or departments to work from home, and creation of contingency plans for potential further changes to operations. Broadway has not implemented layoffs or furloughs of any of our employees.

 

In addition, Broadway has developed plans and policies for providing financial relief to borrowers that may experience difficulties in meeting the terms of their loans, performed updated stress tests of the Bank’s loan portfolio using new assumptions reflecting potential significant impacts of the COVID-19 Pandemic and related governmental stay-at-home orders, created contingency plans in case various aspects of the credit markets cease to operate in a normal manner, and implemented new lending guidelines that are designed to moderate the Bank’s loan concentration and enhance liquidity. Management has been in regular communication with the Bank’s regulator regarding these new plans and policies.

 

Broadway decided not to participate as a lender in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) because management believes that it is more important and appropriate to maintain the Bank’s focus on existing clients, markets, and loan products. In addition, the Bank has historically not offered SBA loans and has not had a significant client base or portfolio of commercial and industrial loans for which the PPP would have represented a product line extension.

 

25

 

 

Total assets increased by $50.9 million to $491.3 million at June 30, 2020 from $440.4 million at December 31, 2019. The increase in total assets primarily consisted of an increase of $49.7 million in loans receivable held for sale and an increase of $24.3 million in cash and cash equivalents, offset by a decrease of $23.4 million in loans held for investment.

 

Total liabilities increased by $50.3 million to $441.8 million at June 30, 2020 from $391.5 million at December 31, 2019. The increase in total liabilities primarily consisted of increases in advances from FHLB of $32.5 million, in deposits of $18.1 million, in advance payments by borrowers for taxes and insurance of $43 thousand and in accrued expenses other liabilities of $176 thousand. These were partially offset by a decrease in junior subordinated debentures of $510 thousand.

 

We recorded net income of $216 thousand and $183 thousand for the three and six months ended June 30, 2020, respectively, compared to a net loss of $135 thousand and net income of $142 thousand for the three and six months ended June 30, 2019, respectively.

 

Our net income increased by $351 thousand during the second quarter of 2020 compared to the second quarter of 2019, primarily due to an income tax adjustment of $273 thousand recorded upon the resolution of an outstanding audit issue with the California Franchise Tax Board. In addition, during the second quarter of 2020, net interest income increased by $569 thousand and gain on sale of loans increased by $116 thousand compared to the second quarter of 2019. These increases were partially offset by higher non-interest expense of $380 thousand, including $152 thousand of expenses incurred to respond to actions by a former stockholder, during the second quarter of 2020, compared to the second quarter of 2019. Also, during the second quarter of 2019, the Bank recorded net loan loss provision recaptures of $158 thousand but did not record any net loan loss provision recaptures during the second quarter of 2020.

 

For the six months ended June 30, 2020, our net income increased by $41 thousand compared to the six months ended June 30, 2019, primarily due to the income tax adjustment of $273 thousand during the second quarter of 2020. In addition, during the first six months of 2020, net interest income increased by $654 thousand, gains on the sales of loans increased by $123 thousand, and miscellaneous loan income increased by $33 thousand compared to the first six months of 2019. These increases were offset by higher non-interest expenses of $469 thousand, including $200 thousand of expenses incurred to respond to actions by a former stockholder during the first six months of 2020, Also, during the first six months of 2019, the Bank recorded a loan loss recapture of $348 thousand compared to a loan loss provision of $29 thousand during the first six months of 2020, and the Bank received a grant of $233 thousand from the U.S. Department of the Treasury’s Community Development Financial Institution (“CDFI”) Fund, which it did not received during the first six months of 2020.

 

Results of Operations

 

Net Interest Income

 

Net interest income for the second quarter of 2020 totaled $3.0 million, compared to $2.5 million for the second quarter of 2019. The increase primarily resulted from an increase in interest income of $483 thousand during the second quarter of 2020 due to higher interest income and fees on loans receivable of $588 thousand, partially offset by a decrease in interest income on securities of $30 thousand and a decrease in other interest income of $75 thousand. Also, interest expense decreased by $86 thousand due to lower interest expense on deposits of $130 thousand, partially offset by higher interest expense on borrowings of $44 thousand. The average balance of interest-earning assets increased by $88.0 million during the second quarter of 2020 compared to the second quarter of the prior year, and the net interest margin increased by 3 basis points to 2.43% for the second quarter of 2020 compared to 2.40% for the second quarter of 2019. The net interest margin increased because the average rates paid on interest-bearing liabilities decreased by more than the average rates earned on interest-earning assets.

 

Interest income and fees on loans receivable increased by $588 thousand to $4.4 million for the second quarter of 2020, from $3.8 million for the second quarter of 2019 due to an increase of $66.6 million in the average balance of loans receivable (including loans held for sale), which increased interest income by $665 thousand. This was partially offset by a decrease of 8 basis points in the average yield on loans, which decreased interest income by $77 thousand.

 

26

 

 

Interest income on securities decreased by $30 thousand for the second quarter of 2020, compared to the second quarter of 2019. The decrease in interest income on securities during the second quarter of 2020 primarily resulted from a decrease of $3.8 million in the average balance of securities, which decreased interest income by $24 thousand and a decrease of 18 basis points in the average yield on securities, which decreased interest income by $6 thousand.

 

Other interest income decreased by $75 thousand for the second quarter of 2020, compared to the second quarter of 2019. The decrease was primarily due to a decrease of 202 basis points in the average yield on interest-earning deposits in other banks during the second quarter of 2020, which decreased interest income by $123 thousand, partially offset by an increase of $24.6 million in the average balance of interest-earning deposits in other banks, which increased interest income by $71 thousand. In addition, there was a decrease of $23 thousand in dividends earned on FHLB stock during the second quarter of 2020, compared to the second quarter of 2019.

 

Interest expense on deposits decreased by $130 thousand for the second quarter of 2020, compared to the second quarter of 2019. The decrease was attributable to a decrease of 37 basis points in the average cost of deposits, which caused interest expense on deposits to decrease by $173 thousand, partially offset by an increase in the average balance of total deposit by $45.7 million, which led to an increase in interest expense of $43 thousand.

 

Interest expense on borrowings increased by $44 thousand for the second quarter of 2020, compared to the second quarter of 2019. The higher interest expense on borrowings during the second quarter of 2020 reflected a net increase of $41.5 million in average borrowings, due to an increase of $42.6 million in the average balance of FHLB advances, which increased interest expense by $189 thousand, partially offset by a decrease of $1.1 million in the average balance of the Company’s junior subordinated debentures, which decreased interest expense by $12 thousand. In addition, the average cost of FHLB advances decreased by 59 basis points during the second quarter of 2020, which decreased interest expense by $112 thousand, and the average cost of the Company’s junior subordinated debentures decreased by 189 basis points during the second quarter of 2020, which decreased interest expense by $21 thousand.

 

For the six months ended June 30, 2020, net interest income increased by $654 thousand to $5.9 million compared to $5.3 million for the six months ended June 30, 2019. The increase in net interest income during the six months ended June 30, 2020 primarily resulted from an increase in interest income of $681 thousand due to higher interest income on loans receivable of $832 thousand, partially offset by a decrease in interest income on securities of $58 thousand and a decrease in other interest income of $93 thousand. Interest expense increased by $27 thousand during the six months ended June 30, 2020 due to an increase in in interest expense on borrowings of $129 thousand, which was partially offset by a decrease in interest expense on deposits of $102 thousand.

 

Interest income and fees on loans receivable increased by $832 thousand during the first six months of 2020 due to an increase of $59.0 million in the average balance of loans receivable (including loans held for sale), which increased interest income by $1.2 million, partially offset by a decrease of 19 basis points in the average yield on loans, which decreased interest income by $372 thousand. During the first half of 2020, the Bank recorded an interest recovery of $162 thousand upon the payoff of one non-accrual church loan, compared to interest recoveries of $351 thousand upon the payoff of two non-accrual church loans during the first half of 2019.

 

Interest income on securities decreased by $58 thousand for the first half of 2020, compared to the first half of 2019. The decrease in interest income on securities during the first half of 2020 primarily resulted from a decrease of $3.7 million in the average balance of securities, which decreased interest income by $48 thousand and a decrease of 15 basis points in the average yield on securities, which decreased interest income by $10 thousand.

 

Other interest income decreased by $93 thousand for the first half of 2020 compared to the first half of 2019. The decrease was primarily due to a decrease of 176 basis points in the average yield on interest-earning deposits in other banks during the first half of 2020, which decreased interest income by $205 thousand, partially offset by an increase of $17.8 million in the average balance of interest-earning deposits in other banks, which increased interest income by $130 thousand. In addition, there was a decrease of $18 thousand in dividends earned on FHLB stock during the first half of 2020, compared to the first half of 2019.

 

27

 

 

During the first half of 2020, interest expense on deposits decreased by $102 thousand due to a decrease of 23 basis points in the average cost of deposits attributable to lower rates paid on all deposit types, which caused interest expense on deposits to decrease by $201 thousand, partially offset by an increase of $36.0 million in the average balance of deposits, which caused interest expense to increase by $99 thousand.

 

During the first half of 2020, interest expense on borrowings increased by $129 thousand, compared to the first half of 2019. The higher interest expense on borrowings during the first half of 2020 reflected a net increase of $36.4 million in average borrowings, due to an increase of $37.4 million in the average balance of FHLB advances, which increased interest expense by $370 thousand, offset by a decrease of $932 thousand in the average balance of the Company’s junior subordinated debentures, which decreased interest expense by $22 thousand. In addition, the average cost of FHLB advances decreased by 47 basis points, which decreased interest expense by $186 thousand, and the average cost of the Company’s junior subordinated debentures decreased by 146 basis points, which decreased interest expense by $33 thousand.

 

The net interest margin decreased by 12 basis points to 2.45% for the six months ended June 30, 2020 from 2.57% for the same period in 2019, primarily due to a lower average loan yield.

 

28

 

 

 

The following tables set forth the average balances, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status, but the balance of these loans is included in the total average balance of loans receivable, which has the effect of reducing average loan yields.

 

   For the three months ended 
   June 30, 2020   June 30, 2019 
(Dollars in Thousands)  Average
Balance
   Interest   Average
Yield/
Cost
   Average
Balance
   Interest   Average
Yield/
Cost
 
Assets                        
Interest-earning assets:                              
Interest-earning deposits  $40,416   $46    0.46%  $15,810   $98    2.48%
                               
Securities   10,431    65    2.49%   14,242    95    2.67%
Loans receivable (1)   444,530    4,429    3.99%   377,906    3,841    4.07%
FHLB stock   3,518    28    3.18%   2,916    51    7.00%
Total interest-earning assets   498,895   $4,568    3.66%   410,874   $4,085    3.98%
Non-interest-earning assets   10,466              11,058           
Total assets  $509,361             $421,932           
                               
Liabilities and Stockholders’ Equity                              
Interest-bearing liabilities:                              
Money market deposits  $46,364   $112    0.97%  $25,416   $56    0.88%
Passbook deposits   53,167    81    0.61%   45,346    69    0.61%
NOW and other demand deposits   54,362    3    0.02%   33,578    3    0.04%
Certificate accounts   177,392    771    1.74%   181,280    969    2.14%
Total deposits   331,285    967    1.17%   285,620    1,097    1.54%
FHLB advances   119,315    536    1.80%   76,747    459    2.39%
Junior subordinated debentures   4,038    34    3.37%   5,091    67    5.26%
Total interest-bearing liabilities   454,638   $1,537    1.35%   367,458   $1,623    1.77%
Non-interest-bearing liabilities   5,523              5,505           
Stockholders’ Equity   49,200              48,969           
Total liabilities and stockholders’ equity  $509,361             $421,932           
                               
Net interest rate spread (2)       $3,031    2.31%       $2,462    2.21%
Net interest rate margin (3)             2.43%             2.40%
Ratio of interest-earning assets to interest-bearing liabilities             109.73%             111.82%

 

(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)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

 

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   For the six months ended 
   June 30, 2020   June 30, 2019 
(Dollars in Thousands)  Average
Balance
   Interest   Average
Yield/
Cost
   Average
Balance
   Interest   Average
Yield/
Cost
 
Assets                              
Interest-earning assets:                              
Interest-earning deposits  $34,250   $133    0.78%  $16,417   $208    2.53%
Federal funds sold   -    -    -    -    -    - 
Securities   10,689    135    2.53%   14,417    193    2.68%
Loans receivable (1)   435,388    8,788    4.04%   376,378    7,956    4.23%
FHLB stock   3,320    83    5.00%   2,916    101    6.93%
Total interest-earning assets   483,647   $9,139    3.78%   410,128   $8,458    4.12%
Non-interest-earning assets   10,464              10,862           
Total assets  $494,111             $420,990           
                               
Liabilities and Stockholders’ Equity                              
Interest-bearing liabilities:                              
Money market deposits  $42,130   $217    1.03%  $27,226   $120    0.88%
Passbook deposits   50,936    169    0.66%   45,390    134    0.59%
NOW and other demand deposits   48,545    6    0.02%   33,541    6    0.04%
Certificate accounts   180,106    1,630    1.81%   179,567    1,864    2.08%
Total deposits   321,717    2,022    1.26%   285,724    2,124    1.49%
FHLB advances   113,595    1,108    1.95%   76,232    924    2.42%
Junior subordinated debentures   4,164    80    3.84%   5,096    135    5.30%
Total interest-bearing liabilities   439,476   $3,210    1.46%   367,052   $3,183    1.73%
Non-interest-bearing liabilities   5,574              5,167           
Stockholders’ Equity   49,061              48,771           
Total liabilities and stockholders’ equity  $494,111             $420,990           
                               
Net interest rate spread (2)       $5,929    2.32%       $5,275    2.39%
Net interest rate margin (3)             2.45%             2.57%
Ratio of interest-earning assets to interest-bearing liabilities             110.05%             111.74%

 

 

(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)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

 

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Loan loss provision recapture

 

The Bank did not record a loan loss provision or recapture during the second quarter of 2020 and recorded a loan loss provision of $29 thousand during the first six months of 2020. During the first quarter of 2020 the Bank recorded additional provisions to increase the ALLL for economic uncertainties related to the COVID-19 Pandemic. During the second quarter of 2020, the Bank maintained its ALLL at $3.2 million, after adjusting for a loan loss recovery of $4 thousand, despite a net decrease of $6.9 million in the loans held for investment portfolio during the second quarter of 2020. No loan charge-offs were recorded during the second quarter or first half of 2020.

 

The Bank recorded loan loss provision recaptures of $158 thousand and $348 thousand, respectively, during the second quarter and first six months of 2019. The Bank recorded no cash recoveries during the second quarter of 2019 and recorded cash recoveries of $190 thousand during the first half of 2019. No loan charge-offs were recorded during the second quarter or first half of 2019.

 

Non-interest Income

 

Non-interest income for the second quarter of 2020 totaled $242 thousand, compared to $139 thousand for the second quarter of 2019. Non-interest income increased by $103 thousand primarily because the Bank recorded a gain on sale of loans of $116 thousand during the second quarter of 2020; the Bank did not record any gain on sales of loans during the first half of 2019. This increase was partially offset by a net decrease in other components of non-interest income of $13 thousand during the second quarter of 2020, compared to the second quarter of 2019.

 

For the six months ended June 30, 2020, non-interest income totaled $439 thousand compared to $515 thousand for the same period one year ago. The decrease of $76 thousand in non-interest income was primarily due to a grant of $233 thousand from the CDFI Fund received during the first quarter of 2019, offset by gain on sale of loans of $123 thousand recorded during the first half of 2020.

 

Non-interest Expense

 

Non-interest expense for the second quarter of 2020 totaled $3.4 million, compared to $3.0 million for the second quarter of 2019. The increase of $380 thousand in non-interest expense during the second quarter of 2020 compared to the same quarter of 2019 was primarily due to increases of $336 thousand in professional services expense, $108 thousand in compensation and benefits expense and $20 thousand in office services and supplies, offset by decreases of $41 thousand in amortization of investment in affordable housing limited partnership, $27 thousand in loan related expenses, and $25 thousand in other non-interest expenses primarily due to a lower provision for off-balance sheet loan commitments. The increase of $336 thousand in professional services expense was due to an increase of $248 thousand in legal fees and an increase of $109 thousand in consulting services fees, offset by a decrease of $21 thousand in audit fees. The increase in legal and consulting fees during the second quarter included $152 thousand of expenses incurred to respond to activities conducted by a former stockholder against the Company. The related litigation was subsequently withdrawn by the former stockholder early in the third quarter.

 

For the six months ended June 30, 2020, non-interest expense totaled $6.6 million, compared to $6.1 million for the same period a year ago. The increase of $469 thousand in non-interest expense was primarily due to increases of $281 thousand in compensation and benefits expense, $261 thousand in professional services expenses, $32 thousand in information services expense, $28 thousand in office services and supplies and $15 thousand in occupancy expense, offset by decreases of $45 thousand in amortization of investment in affordable housing limited partnership, $37 thousand in loan related expenses, and $61 thousand in other non-interest expense, primarily due to a lower provision for off-balance sheet loan commitments. The increase of $261 thousand in professional services expense was due to an increase of $233 thousand in legal fees and an increase of $142 thousand in consulting services fees, offset by a decrease of $114 thousand in audit fees. The increase in legal and consulting fees during the first half of 2020 included $200 thousand of legal expenses incurred to respond to activities conducted by a former stockholder against the Company.

 

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Income Taxes

 

Income tax expense or benefit is computed by applying the statutory federal income tax rate of 21% and the California income tax rate of 10.84% to taxable income or loss. The Company recorded income tax benefits of $345 thousand and $395 thousand for the three and six months ended June 30, 2020, respectively, compared to income tax benefits of $128 thousand and $86 thousand for the three and six months ended June 30, 2019, respectively. The increase in income tax benefit during the second quarter and first six months of 2020 was primarily due to a tax adjustment of $273 thousand upon the resolution of an outstanding audit issue with the California Franchise Tax Board for tax years 2009 to 2013. In addition, the Company recorded low-income housing tax credits of $29 thousand and $58 thousand during the second quarter and six months ended June 30, 2020, compared to $50 thousand and $99 thousand during the second quarter and six months ended June 30, 2019. The Company had no valuation allowance on its deferred tax assets, which totaled $5.4 million at June 30, 2020 and $5.2 million at December 31, 2019.

 

Financial Condition

 

Total Assets

 

Total assets increased by $50.9 million to $491.3 million at June 30, 2020 from $440.4 million at December 31, 2019. The increase in total assets was comprised primarily of an increase of $49.7 million in loans receivable held for sale, an increase of $24.3 million in cash and cash equivalents and an increase of $670 thousand in FHLB stock. These increases were offset by a decrease of $23.4 million in loans held for investment and a decrease of $814 thousand in securities available-for-sale.

 

Loans Receivable Held for Sale

 

Loans receivable held for sale totaled $49.7 million at June 30, 2020. There were no loans held for sale as of December 31, 2019. During the first half of 2020, the Bank originated $110.9 million of multi-family loans for sale and sold $60.9 million of loans held for sale for a gain of $123 thousand. Repayments of loans receivable held for sale totaled $315 thousand during the first half of 2020.

 

Loans Receivable Held for Investment

 

Loans receivable held for investment, net of the allowance for loan losses, totaled $374.4 million at June 30, 2020, compared to $397.8 million at December 31, 2019. During the first half of 2020, the Bank originated $4.1 million in commercial real estate loans and $728 thousand in construction loans for the loans held-for-investment portfolio. Loan repayments during the first half of 2020 totaled $28.2 million.

 

Allowance for Loan Losses

 

As a small banking institution, Broadway is not required to adopt the CECL accounting standard until 2023; consequently, the Bank’s allowance for loan and lease losses (“ALLL”) is based on evidence available at the date of preparation of its financial statements, rather than projections of future economic conditions over the life of the loans. In determining the adequacy of the ALLL within the context of the current uncertainties posed by the COVID-19 Pandemic, management has considered the historical and current performance of the Bank’s portfolio, as well as various measures of the quality and safety of the portfolio, such as debt servicing and loan-to-value ratios. Management is continuing to monitor the loan portfolio and regularly communicating with borrowers to determine the continuing adequacy of the ALLL.

 

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.

 

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Our ALLL was $3.2 million or 0.85% of our gross loans receivable held for investment at June 30, 2020 compared to $3.2 million or 0.79% of our gross loans receivable held for investment at December 31, 2019. The levels of ALLL at June 30, 2020 and December 31, 2019 reflect the result of our quarterly review of the adequacy of the ALLL. During the second quarter of 2020, the Bank did not record a loan loss provision or recapture but recorded a loan loss provision of $29 thousand during the first six months of 2020. During the first quarter of 2020 the Bank recorded additional provisions to increase the ALLL for economic uncertainties related to the COVID-19 Pandemic.

 

As of June 30, 2020, we had experienced no delinquencies on any loans, compared to $18 thousand at December 31, 2019. Non-performing loans (“NPLs”) consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings that do not qualify for accrual status. At June 30, 2020, NPLs totaled $846 thousand, compared to $424 thousand at December 31, 2019. The increase of $422 thousand in NPLs was due to an addition of a non-accrual church loan, offset partially by repayments of the existing NPL loans.

 

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 June 30, 2020, all our non-performing loans were current in their payments. Also, in determining the ALLL, we considered the ratio of the ALLL to NPLs, which decreased to 379.6% at June 30, 2020 from 750.5% at December 31, 2019.

 

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 have been no loan charge-offs since 2015. In determining charge-offs, we update our estimates of collateral values on NPLs by obtaining new appraisals at least every twelve 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 increases in collateral values, the average recorded investment in NPLs was only 38% of estimated fair value less estimated selling costs as of June 30, 2020.

 

Recoveries during the first half of 2020 and 2019 totaled $4 thousand and $190 thousand, respectively. The recovery during the first half of 2020 resulted from the payoff of one single-family loan that had been previously partially charged off. Recoveries during the first half of 2019 resulted from the payoff of two church loans that had been previously partially charged off.

 

Impaired loans at June 30, 2020 were $5.1 million, compared to $5.3 million at December 31, 2019. The decrease of $259 thousand in impaired loans was primarily due to the sale of a non-accrual church loan and repayments. Specific reserves for impaired loans were $144 thousand, or 2.83% of the aggregate impaired loan amount at June 30, 2020, compared to $147 thousand, or 2.75% at December 31, 2019.

 

On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was signed into law by Congress. The CARES Act provides financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to Troubled Debt Restructurings (“TDR’s”) for a limited period of time to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms or other insignificant payment delays, are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months or less is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as non-accrual loans during the term of the modification.

 

The Bank has implemented a loan modification program for the effects of COVID-19 on its borrowers. At the date of this filing, two borrowers have requested loan modifications. Both borrowers were current at the time modification program was implemented. To date, no modifications have been granted.

 

33

 

 

In July of 2020, the $600 per week Federal stimulus payments that had been granted to individuals since the start of the Pandemic were terminated. As a result, some tenants may be unable to make their monthly rent payments. However, the risk to the Bank’s multi-family loan portfolio is mitigated by the low loan-to-value ratios (less than 59%) and high debt service coverage ratios (over 1.49%) of the multi-family loan portfolio as of June 30, 2020. In addition, the Bank’s borrowers generally have high cash reserves and sufficient net worth to service their loans.

 

We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of June 30, 2020, but because of the current uncertainties posed by the COVID-19 Pandemic, there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the Federal Deposit Insurance Corporation (“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.

 

Office Properties and Equipment

 

Net office properties and equipment decreased by $53 thousand to $2.7 million at June 30, 2020 from $2.8 million as of December 31, 2019. Due to the implementation of ASU 2016-02 “Leases (Topic 842)”, the Bank recorded a right of use (“ROU”) asset of $1.2 million as of January 1, 2019. After amortization, the ROU was $460 thousand as of June 30, 2020.

 

Total Liabilities

 

Total liabilities increased by $50.3 million to $441.8 million at June 30, 2020 from $391.5 million at December 31, 2019. The increase in total liabilities was comprised primarily of an increase of $32.5 million in FHLB advances and an increase of $18.1 million in deposits. These increases were offset by a decrease of $510 thousand in the Company’s junior subordinated debentures.

 

Deposits

 

Deposits increased by $18.1 million to $315.8 million at June 30, 2020 from $297.7 million at December 31, 2019, which consisted of an increase of $54.9 million in liquid deposits and a decrease of $36.8 million in certificates of deposit. Liquid deposits (NOW, demand, money market and passbook accounts) increased to $162.4 million at June 30, 2020, which represented 51% of total deposits, from $107.5 million which represented 36% of total deposits.

 

Certificates of deposit (“CDs”) decreased by $36.7 million during the first six months of 2020 to $153.4 million at June 30, 2020, which represented 49% of total deposits, from $190.2 million at December 31, 2019, which represented 64% of total deposits. The decrease in CDs was primarily due to net decreases in CDARS deposits of $36.2 million and a net decrease in accounts acquired through a deposit listing service of $8.9 million, offset by a net increase in retail CDs of $8.4 million. CDARS is a deposit placement service that allows us to place our customers’ funds in FDIC-insured certificates of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network (“CDARS Reciprocal”). We may also accept deposits from other institutions when we have no reciprocal deposit (“CDARS One-Way Buy”). At June 30, 2020, we had approximately $11.4 million in CDARS Reciprocal and $33.1 million in CDARS One-Way Buy, compared to 39.3 million in CDARS Reciprocal and $40.7 million in CDARS One-Way Buy at December 31, 2019.

 

One customer relationship accounted for approximately 13% and 10% of our deposits at June 30, 2020 and December 31, 2019, respectively. We expect to maintain this relationship with the customer for the foreseeable future.

 

Borrowings

 

Total borrowings increased by $32.0 million to $120.3 million at June 30, 2020 from $88.3 million at December 31, 2019 due to an increase of $32.5 million in advances from the FHLB, offset by a decrease of $510 thousand in our junior subordinated floating rate debentures.

 

The weighted average interest rate on the FHLB Advances decreased to 1.84% at June 30, 2020 from 2.32% at December 31, 2019, primarily due lower weighted average rate on new advances in replacements of the matured ones. The weighted average interest rate on the subordinated floating rate debentures decreased to 2.86% at June 30, 2020 from 4.44% at December 31, 2019, primarily due to decreases in LIBOR.

 

34

 

 

Stockholders’ Equity

 

Stockholders' equity was $49.5 million, or 10.08% of the Company’s total assets, at June 30, 2020, compared to $48.8 million, or 11.09% of the Company’s total assets at December 31, 2019. The Company’s book value was $1.77 per share as of June 30, 2020, compared to $1.75 per share as of December 31, 2019.

 

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 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 40% 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 $44.5 million at June 30, 2020. In addition, the Bank has an $11.0 million line of credit with another financial institution.

 

The Bank’s primary uses of funds include withdrawals of and interest payments on deposits, originations of loans, purchases of investment securities, and the payment of operating expenses. Also, when the Bank has more funds than required for reserve requirements or short-term liquidity needs, the Bank invests in federal funds with the Federal Reserve Bank or in money market accounts with other financial institutions. The Bank’s liquid assets at June 30, 2020 consisted of $39.8 million in cash and cash equivalents and $10.2 million in securities available-for-sale that were not pledged, compared to $15.6 million in cash and cash equivalents and $11.0 million in securities available-for-sale that were not pledged at December 31, 2019. 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 2020 and 2019. The Bank is currently under no prohibition to pay dividends, but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines.

 

The Company recorded consolidated net cash outflows from operating activities of $49.2 million during the six months ended June 30, 2020, compared to consolidated net cash outflows from operating activities of $10.2 million during the six months ended June 30, 2019. Net cash outflows from operating activities during the six months ended June 30, 2020 were primarily attributable to originations of loans receivable held for sale of $110.9 million, compared to $10.3 million during the six months ended June 30, 2019, offset primarily by proceeds from sales of loans receivable held for sale of $61.0 million during the six months ended June 30, 2020. The Company did not record any proceeds from sales of loans receivable held for sale during the six months ended June 30, 2019.

 

The Company recorded consolidated net cash inflows from investing activities of $23.4 million during the six months ended June 30, 2020, compared to consolidated net cash outflows of $5.4 million during the six months ended June 30, 2019. Net cash inflows from investing activities during the six months ended June 30, 2020 were primarily attributable to a net cash inflow of $23.3 million from loans receivable held for investment, compared to a net cash outflow of $7.2 million during the six months ended June 30, 2019. Net cash inflows from investing activities during the six months ended June 30, 2020 were offset primarily by net cash outflows of $670 thousand for the purchase of FHLB stock and $328 thousand for the purchase of office properties and equipment. The Company did not purchase FHLB stock during the six months ended June 30, 2019 and recorded a net cash outflow of $23 thousand for the purchase of office properties and equipment during the same period. In addition, the Company recorded $820 thousand in proceeds from sales of REO during the six months ended June 30, 2019, but the Company did not record any proceeds from sales of REO during the six months ended June 30, 2020.

 

35

 

 

The Company recorded consolidated net cash inflows from financing activities of $50.0 million during the six months ended June 30, 2020, compared to consolidated net cash outflows from financing activities of $19.1 million during the six months ended June 30, 2019. Net cash inflows from financing activities during the six months ended June 30, 2020 were primarily attributable to a net increase in deposits of $18.1 million and proceeds from FHLB advances of $66.0 million, offset by repayments of FHLB advances of $33.5 million and repayments of junior subordinated debentures of $510 thousand. During the six months ended June 30, 2019, the Company recorded a net increase in deposits of $14.4 million and proceeds from FHLB advances of $10.0 million, offset by repayments of FHLB advances of $5.0 million and repayments of junior subordinated debentures of $255 thousand.

 

Capital Resources and Regulatory Capital

 

Our principal subsidiary, Broadway Federal Bank, must comply with capital standards established by the OCC in the conduct of its business. Failure to comply with such capital requirements may result in significant limitations on its business or other sanctions. The Dodd-Frank Act requires the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and certain non-bank financial companies that are no less than those to which insured depository institutions have been previously subject. The current regulatory capital requirements are described in Note 11 of the Notes to Consolidated Financial Statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was performed under the supervision of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as of June 30, 2020. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020. There were no significant changes during the quarter ended June 30, 2020 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.LEGAL PROCEEDINGS

 

None

 

Item 1A.RISK FACTORS

 

Not Applicable

 

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

Item 3.DEFAULTS UPON SENIOR SECURITIES

 

None

 

Item 4.MINE SAFETY DISCLOSURES

 

Not Applicable

 

Item 5.OTHER INFORMATION

 

None

 

Item 6.EXHIBITS

 

Exhibit

Number*

 

 

3.1   Certificate of Incorporation of Registrant and 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)
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
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.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Date: August 14, 2020 By: /s/ Wayne-Kent A. Bradshaw
    Wayne-Kent A. Bradshaw
    Chief Executive Officer

 

Date: August 14, 2020 By: /s/ Brenda J. Battey
    Brenda J. Battey
    Chief Financial Officer

 

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