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TABLE OF CONTENTS
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY Index to Consolidated Financial Statements Years ended December 31, 2017 and 2016

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark one)

[X]

 

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

 

 

For the fiscal year ended December 31, 2017

[   ]

 

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

For the transition period from                        to                       

Commission file number 000-27464

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

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

5055 Wilshire Boulevard, Suite 500
Los Angeles, California

 

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

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

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

Title of each class

 

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

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

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

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

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

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

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

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

Large accelerated filer [   ]

  Accelerated filer [   ]

Non-accelerated filer [   ]
(Do not check if a smaller reporting company)

 

Smaller reporting company [X]

Emerging growth company [   ]

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $52,798,000

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of March 8, 2018, 18,713,729 shares of the Registrant's voting common stock and 8,756,396 shares of the Registrant's non-voting common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement for its 2018 annual meeting of stockholders, which will be filed no later than April 30, 2018, are incorporated by reference in Part III, Items 10 through 14 of this report.


Table of Contents


TABLE OF CONTENTS

PART I    

Item 1.

  Business   1

Item 2.

  Properties   26

Item 3.

  Legal Proceedings   27

Item 4.

  Mine Safety Disclosure   27
PART II    

Item 5.

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

Item 7.

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

Item 8.

  Financial Statements and Supplementary Data   40

Item 9.

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

Item 9A.

  Controls and Procedures   40

Item 9B.

  Other Information   42
PART III    

Item 10.

  Directors, Executive Officers and Corporate Governance   42

Item 11.

  Executive Compensation   42

Item 12.

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

Item 13.

  Certain Relationships and Related Transactions, and Director Independence   42

Item 14.

  Principal Accountant Fees and Services   42
PART IV    

Item 15.

  Exhibits and Financial Statement Schedules   42

Signatures

 

45

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Forward-Looking Statements

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

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

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PART I

ITEM 1. BUSINESS

General

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

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

Available Information

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

Business Overview

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

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

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Lending Activities

General

Our loan portfolio is comprised primarily of mortgage loans which are secured by multi-family residential properties, single family residential properties and commercial real estate, including churches. The remainder of the loan portfolio consists of commercial business loans, construction loans and consumer loans. At December 31, 2017, our net loan portfolio, excluding loans held for sale, totaled $334.9 million, or 81% of total assets.

We emphasize the origination of adjustable-rate mortgage loans ("ARMs"), most of which are hybrid ARM loans (ARM loans having an initial fixed rate period, followed by an adjustable rate period, for our portfolio of loans held for investment. We originate these loans in order to maintain a high percentage of loans that are subject to periodic repricing, thereby reducing our exposure to interest rate risk. At December 31, 2017, more than 99% of our mortgage loans had adjustable rate features. However, most of our adjustable rate loans behave like fixed rate loans for periods of time because the loans may still be in their initial fixed-rate period or may be subject to interest rate floors. Loans in their initial fixed-rate period totaled $276.3 million or 82% of our gross loan portfolio at December 31, 2017.

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

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

 
  December 31,  
 
  2017   2016   2015   2014   2013  
 
  Amount   Percent
of total
  Amount   Percent
of total
  Amount   Percent
of total
  Amount   Percent
of total
  Amount   Percent
of total
 
 
  (Dollars in thousands)
 

Single family

  $ 111,085     32.93%   $ 104,807     27.42%   $ 130,891     42.50%   $ 39,792     14.03%   $ 46,459     18.09%  

Multi-family

    187,455     55.57%     229,566     60.05%     118,616     38.52%     171,792     60.58%     113,218     44.09%  

Commercial real estate

    6,089     1.80%     8,914     2.33%     11,442     3.72%     16,722     5.90%     26,697     10.39%  

Church

    30,848     9.14%     37,826     9.90%     46,390     15.06%     54,599     19.26%     67,934     26.45%  

Construction

    1,678     0.50%     837     0.22%     343     0.11%     387     0.14%     424     0.17%  

Commercial

    192     0.06%     308     0.08%     270     0.09%     262     0.09%     2,067     0.80%  

Consumer

    7     0.00%     6     0.00%     4     0.00%     9     0.00%     38     0.01%  

Gross loans

    337,354     100.00%     382,264     100.00%     307,956     100.00%     283,563     100.00%     256,837     100.00%  

Plus:

                                                             

Premiums on loans purchased

    360           510           709           228           272        

Deferred loan costs, net

    1,220           1,297           349           1,333           901        

Less:

                                                             

Unamortized discounts

    14           14           15           16           17        

Allowance for loan losses

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

Total loans held for investment

  $ 334,851         $ 379,454         $ 304,171         $ 276,643         $ 247,847        

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Multi-Family and Commercial Real Estate Lending

Our primary lending emphasis has been on the origination of loans for apartment buildings with five or more units. These multi-family loans amounted to $187.5 million and $229.6 million at December 31, 2017 and 2016, respectively. Multi-family loans represented 56% of our gross loan portfolio at December 31, 2017 compared to 60% of our gross loan portfolio at December 31, 2016. The vast majority of our multi-family loans amortize over 30 years. As of December 31, 2017, our single largest multi-family credit had an outstanding balance of $4.5 million, was current, and was secured by a 29-unit apartment complex in Whittier, California. At December 31, 2017, the average balance of a loan in our multi-family portfolio was $815 thousand.

Our commercial real estate loans amounted to $6.1 million and $8.9 million at December 31, 2017 and 2016, respectively. Commercial real estate loans represented 2% of our gross loan portfolio at December 31, 2017 and 2016. All of the commercial real estate loans outstanding at December 31, 2017 were ARMs. Most commercial real estate loans are originated with principal repayments on a 30 year amortization schedule, but are due in 15 years. As of December 31, 2017, our single largest commercial real estate credit had an outstanding principal balance of $1.6 million, was current and was secured by a commercial building located in Van Nuys, California. At December 31, 2017, the average balance of a loan in our commercial real estate portfolio was $320 thousand.

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

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

We seek to mitigate the risks associated with multi-family and commercial real estate loans by applying appropriate underwriting requirements, which include limitations on loan-to-value ratios and debt service coverage ratios. Under our underwriting policies, loan-to-value ratios on our multi-family and commercial real estate loans usually do not exceed 75% of the lower of the purchase price or the appraised value of the underlying property. We also generally require minimum debt service coverage ratios of 115% for multi-family loans and 125% for commercial real estate loans. Properties securing multi-family and commercial real estate loans are appraised by management-approved independent appraisers. Title insurance is required on all loans.

Multi-family and commercial real estate loans are generally viewed as exposing the lender to a greater risk of loss than single family residential loans and typically involve higher loan principal amounts than loans secured by single family residential real estate. Because payments on loans secured by multi-family and commercial real properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or general economy. Adverse economic conditions in our primary lending market area could result in reduced cash flows on multi-family and commercial real estate loans, vacancies and reduced rental rates on such properties. We seek to reduce these risks by originating such loans on a selective basis and generally restrict such loans to our general market area. In 2008, we ceased out-of-state lending for all types of loans. As of December 31, 2017, our out-of-state loans totaled $2.6 million and our single largest out-of-state credit had an outstanding principal balance of $654 thousand, was current, and was secured by a church building located in Chandler, Arizona.

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Our church loans totaled $30.8 million and $37.8 million at December 31, 2017 and 2016, respectively. Church loans represented 9% of our gross loan portfolio at December 31, 2017, compared to 10% of our gross loan portfolio at December 31, 2016. We ceased originating church loans in 2010. As of December 31, 2017, our single largest church loan had an outstanding balance of $2.0 million, was current, and was secured by a church building in Hawthorne, California. At December 31, 2017, the average balance of a loan in our church loan portfolio was $531 thousand.

Single Family Mortgage Lending

While we have been primarily a multi-family and commercial real estate lender, we also purchase ARM loans secured by single family residential properties, including investor-owned properties, with maturities of up to 30 years. Single family loans totaled $111.1 million and $104.8 million at December 31, 2017 and 2016, respectively. Of the single family residential mortgage loans that we had outstanding at December 31, 2017, more than 99% had adjustable rate features. During 2017, we purchased $24.6 million principal amount of single-family loans, which were secured by properties primarily located in Northern California. Of the $111.1 million of single family loans at December 31, 2017, $8.3 million are secured by investor-owned properties.

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

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

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

Construction Lending

Construction loans totaled $1.7 million and $837 thousand at December 31, 2017 and 2016, respectively, representing less than 1% of our gross loan portfolio. We provide loans for the construction of single family, multi-family and commercial real estate projects and for land development. We generally make construction and land loans at variable interest rates based upon the Prime Rate. Generally, we require a loan-to-value ratio not exceeding 75% to 80% and a loan-to-cost ratio of 70% to 80% on construction loans.

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

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totaling $3.5 million were originated during 2017. Of this amount, $483 thousand was disbursed as of December 31, 2017.

Commercial Lending

We have originated non-real estate commercial loans that are secured by business assets, the franchise value of the business, if applicable, and individual assets such as deposit accounts, securities and automobiles. Most of these loans are originated with maturities of up to 5 years. Commercial loans amounted to $192 thousand and $308 thousand at December 31, 2017 and 2016, respectively, representing less than 1% of our gross loan portfolio. We are not currently originating non-real estate commercial loans.

Loan Originations, Purchases and Sales

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

 
  2017   2016   2015  
 
  (In thousands)
 

Gross loans (1):

                   

Beginning balance

  $ 382,264   $ 307,956   $ 302,856  

Loans originated:

                   

Single family

    -     -     1,921  

Multi-family

    114,489     136,794     110,525  

Construction

    841     837     -  

Commercial

    69     45     75  

Total loans originated

    115,399     137,676     112,521  

Loans purchased:

                   

Single family

    24,640     -     99,663  

Total loans purchased

    24,640     -     99,663  

Less:

                   

Principal repayments

    65,169     63,368     41,690  

Sales of loans

    96,945     -     164,103  

Loan charge-offs

    -     -     89  

Transfer of loans to real estate owned

    503     -     1,202  

Ending balance (2)

  $ 359,686   $ 382,264   $ 307,956  

(1)
Amount is before deferred origination costs, purchase premiums and discounts.
(2)
Includes loans receivable held for sale totaling $22.3 million at December 31, 2017, exclusive of $38 thousand in deferred origination costs. We did not have any loans receivable held for sale at December 31, 2016 and 2015.

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

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

The Board has authorized the following loan approval limits: if the total of the borrower's existing loans and the loan under consideration is $1,000,000 or less, the new loan may be approved by a Senior Underwriter plus a Loan Committee member, including the Chief Executive Officer or Chief Credit Officer; if the total of the borrower's existing loans and the loan under consideration is from $1,000,001 to $2,000,000, the new loan must be approved by a Senior Underwriter plus two Loan Committee members, including the Chief Executive Officer or Chief Credit Officer; if the total of the borrower's existing loans and the loan under consideration is from $2,000,001 to $6,500,000, the new loan must be approved by a Senior Underwriter, the Chief Executive Officer and Chief Credit Officer, plus a majority of the Board-appointed non-management Loan Committee members. In addition, it is our practice that all loans approved be reported to the Loan Committee no later than the month following their approval, and be ratified by the Board.

From time to time, we purchase loans originated by other institutions based upon our investment needs and market opportunities. The determination to purchase specific loans or pools of loans is subject to our underwriting policies, which consider, among other factors, the financial condition of the borrowers, the location of the underlying collateral properties and the appraised value of the collateral properties. During 2017, we purchased $24.6 million principal amount of single family loans, which are being serviced by the seller. We did not purchase any loans during the year ended December 31, 2016.

We originate loans for investment and for sale. Loan sales are generally made from the loans receivable held-for-sale portfolio and from loans originated during the period that are designated as held for sale. During 2017, we originated $110.4 million of multi-family loans for sale, transferred $9.3 million of multi-family loans from held for investment to held-for-sale and sold $96.9 million of multi-family loans in order to comply with regulatory loan concentration guidelines. We did not originate any loans for sale, nor did we sell any loans during 2016.

We receive monthly loan servicing fees on loans sold and serviced for others, primarily insured financial institutions. Generally, we collect these fees by retaining a portion of the loan collections in an amount equal to an agreed percentage of the monthly loan installments, plus late charges and certain other fees paid by the borrowers. Loan servicing activities include monthly loan payment collection, monitoring of insurance and tax payment status, responses to borrower information requests and dealing with loan delinquencies and defaults, including conducting loan foreclosures. At December 31, 2017 and 2016, we were servicing $3.6 million and $4.1 million, respectively, of loans for others. The servicing rights associated with sold loans are recorded as assets based upon their fair values. At December 31, 2017 and 2016, we had $24 thousand and $32 thousand, respectively, in mortgage servicing rights.

Loan Maturity and Repricing

The following table shows the contractual maturities of loans in our portfolio of loans held for investment at December 31, 2017, and does not reflect the effect of prepayments or scheduled principal amortization.

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

Amounts Due:

                                                 

After one year:

                                                 

One year to five years                

  $ 273   $ 474   $ 2,006   $ 16,169   $ 119   $ 65   $   $ 19,106  

After five years                

    110,808     186,981     4,083     14,679         127         316,678  

Total due after one year           

    111,081     187,455     6,089     30,848     119     192         335,784  

One year or less

    4                 1,559         7     1,570  

Total

  $ 111,085   $ 187,455   $ 6,089   $ 30,848   $ 1,678   $ 192   $ 7   $ 337,354  

Loans in their initial fixed rate period totaled $276.3 million or 82% of our loan portfolio at December 31, 2017. The average initial fixed rate period as of December 31, 2017 was 3.2 years.

Asset Quality

General

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

Delinquencies

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

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

                                                                         
 
  December 31, 2017

  December 31, 2016

  December 31, 2015

 

                                                                         
 
  Loans delinquent

  Loans delinquent

  Loans delinquent

 

                                                                         
 
  60-89 Days

  90 days or more

  60-89 Days

  90 days or more

  60-89 Days

  90 days or more

 

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

    (Dollars in thousands)  

Single family

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

Church

    -     -     -     -     -     -     -     -     -     -     1     456  

Total

    1   $ 50     -   $ -     1   $ 64     -   $ -     -   $ -     1   $ 456  

% of Gross Loans (1)

          0.01%           0.00%           0.01%           0.00%           0.00%           0.15%  

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

Non-Performing Assets

Non-performing assets ("NPAs") include non-accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure ("REO"). NPAs at December 31, 2017 decreased to $2.6 million, or 0.64% of total assets, from $2.9 million, or 0.69% of total assets, at December 31, 2016.

Non-accrual loans decreased by $1.1 million to $1.8 million at December 31, 2017, from $2.9 million at December 31, 2016. These loans consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings ("TDRs") that do not qualify for accrual status. As of December 31, 2017, $1.4 million, or 81% of our non-accrual loans, were current in their payments, but were treated as non-accrual primarily because of deficiencies in non-payment matters related to the borrowers, such as lack of current financial information. The $1.1 million decrease in non-accrual loans was primarily due to transfer to REO of $503 thousand, payoffs of $340 thousand and repayments of $335 thousand.

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

 
  December 31,  
 
  2017   2016   2015   2014   2013  
 
  (Dollars in thousands)
 

Non-accrual loans:

                               

Single family

  $ -   $ -   $ 302   $ 736   $ 1,441  

Multi-family

    -     -     779     1,618     2,985  

Commercial real estate

    -     -     259     1,174     1,391  

Church

    1,766     2,944     2,887     5,232     11,735  

Commercial

    -     -     -     102     150  

Total non-accrual loans

    1,766     2,944     4,227     8,862     17,702  

Loans delinquent 90 days or more and still accruing

    -     -     -     -     -  

Real estate owned acquired through foreclosure

    878     -     360     2,082     2,084  

Total non-performing assets

  $ 2,644   $ 2,944   $ 4,587   $ 10,944   $ 19,786  

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

    0.49%     0.77%     1.37%     2.93%     6.89%  

Non-performing assets as a percentage of total assets

    0.64%     0.69%     1.14%     3.12%     5.95%  

There were no accrual loans that were contractually past due by 90 days or more at December 31, 2017 or 2016. We had no commitments to lend additional funds to borrowers whose loans were on non-accrual status at December 31, 2017.

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

We may agree to modify the contractual terms of a borrower's loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a TDR. Non-accrual loans modified in a TDR remain on non-accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the restructured terms, generally for a period of at least six months. Loans modified in a TDR that are included in non-accrual loans totaled $1.4 million at December 31, 2017 and $2.5 million at December 31, 2016. Excluded from non-accrual loans are restructured loans that were not delinquent at the time of modification or loans that have complied with the terms of their restructured agreement for six months or such longer period as management deems appropriate for particular loans, and therefore have been returned to accruing status. Restructured accruing loans totaled $7.5 million at December 31, 2017 and $9.0 million at December 31, 2016.

During 2017, gross interest income that would have been recorded on non-accrual loans had they performed in accordance with their original terms, totaled $376 thousand. Actual interest recognized on non-accrual loans and included in net income for the year 2017 was $316 thousand, primarily reflecting interest recoveries on non-accrual loans that were paid off.

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

REO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at fair value less estimated selling costs. Any excess of carrying value over fair value at the time of acquisition is charged to the allowance for loan losses. Thereafter, we charge non-interest expense for the property maintenance and protection expenses incurred as a result of owning the property. Any decreases in the property's estimated fair value after foreclosure are recorded in a separate allowance for losses on REO. During 2017, the Bank received a deed in lieu of foreclosure, which was recorded at fair value, net of estimated selling costs, of $878 thousand at December 31, 2017. We had no REO at December 31, 2016.

Classification of Assets

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

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

                         
 
  December 31, 2017

  December 31, 2016

 

    Number     Amount     Number     Amount
 

    (Dollars in thousands)  

Watch loans

    3   $ 813     3   $ 2,417  

Special mention loans

    -     -     3     1,165  

Total criticized loans

    3     813     6     3,582  

Substandard loans

    17     6,395     23     11,021  

REO

    1     878     -     -  

Total classified assets

    18     7,273     23     11,021  

Total

    21   $ 8,086     29   $ 14,603  

Classified assets decreased by $3.7 million to $7.3 million at December 31, 2017, from $11.0 million at December 31, 2016, primarily due to $2.3 million of payoffs and $1.4 million of classification upgrades. Criticized assets decreased by $2.8 million to $813 thousand at December 31, 2017, from $3.6 million at December 31, 2016, due to $551 thousand of payoffs and $2.6 million of classification upgrades, which were partially offset by $373 thousand of classification downgrades.

Allowance for Loan Losses

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

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

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

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

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

If a loan is impaired, a portion of the allowance is allocated to the loan so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. TDRs are separately identified for impairment and are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated selling costs. For TDRs that subsequently default, we determine the amount of any necessary additional charge-off based on internal analyses and appraisals of the underlying collateral securing these loans. At December 31, 2017, impaired loans totaled $9.3 million and had an aggregate specific allowance allocation of $585 thousand.

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

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

Based on our evaluation of the housing and real estate markets and overall economy, including the unemployment rate, the levels and composition of our loan delinquencies and non-performing loans, our loss history and the size and composition of our loan portfolio, we determined that an ALLL of $4.1 million, or 1.20% of loans held for investment was appropriate at December 31, 2017, compared to $4.6 million, or 1.20% of loans held for investment at December 31, 2016.

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

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collectability of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the guidelines issued by federal regulatory agencies. While we believe that the ALLL has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ materially from the conditions on which we based our estimates at December 31, 2017. In addition, there can be no assurance that the OCC or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not require us to materially increase our ALLL, thereby affecting our financial condition and earnings.

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

  December 31,    

  2017     2016     2015     2014     2013    

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

    (Dollars in thousands)  

Single family

  $ 594     32.93%   $ 367     27.42%   $ 597     42.50%   $ 1,174     14.03%   $ 1,930     18.09%  

Multi-family

    2,300     55.57%     2,659     60.05%     1,658     38.52%     2,726     60.58%     1,726     44.09%  

Commercial real estate

    71     1.80%     215     2.33%     469     3.72%     496     5.90%     1,473     10.39%  

Church

    1,081     9.14%     1,337     9.90%     2,083     15.06%     4,047     19.26%     4,949     26.45%  

Construction

    17     0.50%     8     0.22%     3     0.11%     7     0.14%     7     0.17%  

Commercial

    6     0.06%     17     0.08%     18     0.09%     12     0.09%     55     0.80%  

Consumer

    -     0.00%     -     0.00%     -     0.00%     3     0.00%     6     0.01%  

Total allowance for loan losses

  $ 4,069     100.00%   $ 4,603     100.00%   $ 4,828     100.00%   $ 8,465     100.00%   $ 10,146     100.00%  

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

 
  2017   2016   2015   2014   2013  
 
  (Dollars in thousands)
 

Allowance balance at beginning of year

  $ 4,603   $ 4,828   $ 8,465   $ 10,146   $ 11,869  

Charge-offs:

   
 
   
 
   
 
   
 
   
 
 

Single family

    -     -     (4 )   (133 )   (220 )

Multi-family

    -     -     -     -     (661 )

Commercial real estate

    -     -     -     (8 )   (1,180 )

Church

    -     -     (85 )   (533 )   (770 )

Commercial

    -     -     -     (19 )   -  

Total charge-offs

    -     -     (89 )   (693 )   (2,831 )

Recoveries:

   
 
   
 
   
 
   
 
   
 
 

Single family

    30     47     129     2     300  

Commercial real estate

    -     248     -     -     116  

Church

    536     22     23     859     25  

Commercial

    -     8     -     1,083     253  

Total recoveries

    566     325     152     1,944     694  

Provision (recapture) charged to earnings

   
(1,100

)
 
(550

)
 
(3,700

)
 
(2,932

)
 
414
 

Allowance balance at end of year

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

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

   
(0.16%

)
 
(0.10%

)
 
(0.02%

)
 
(0.46%

)
 
0.84%
 

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

    1.20%     1.20%     1.56%     2.99%     3.95%  

ALLL as a percentage of total non-accrual loans

    230.41%     156.35%     114.22%     95.52%     57.32%  

ALLL as a percentage of total non-performing assets

    153.90%     156.35%     105.25%     77.35%     51.28%  

Investment Activities

The main objectives of our investment strategy are to provide a source of liquidity for deposit outflows, repayment of our borrowings and funding loan commitments, and to generate a favorable return on investments without incurring undue interest rate or credit risk. Subject to various restrictions, our investment policy generally permits investments in money market instruments such as Federal Funds Sold, certificates of deposit of insured banks and savings institutions, direct obligations of the U. S. Treasury, Federal Agency securities, government Agency-issued securities and mortgage-backed securities, mutual funds, municipal obligations, corporate bonds and marketable equity securities. Mortgage-backed securities consist principally of FNMA, FHLMC and GNMA securities backed by 30-year amortizing hybrid ARM loans, structured with fixed interest rates for periods of three to seven years, after which time the loans convert to one-year or six-month adjustable rate mortgage loans. At December 31, 2017, our securities portfolio, consisting primarily of federal agency debt and mortgage-backed securities, totaled $17.5 million, or 4% of total assets.

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

The table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2017. The table reflects stated final maturities and does not reflect scheduled principal payments or expected payoffs.

 
  At December 31, 2017  
 
  One Year or less   More than one year
to five years
  More than five years
to ten years
  More than
ten years
  Total  
 
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
  Carrying
amount
  Weighted
average
yield
 
 
  (Dollars in thousands)
 

Available-for-sale:

                                                             

Federal agency mortgage-backed securities

  $ 4     2.90%   $ 175     4.23%   $ 3,402     2.48%   $ 8,427     2.88%   $ 12,008     2.78%  

Federal agency debt

    -     - %     1,976     2.00%     -     - %     3,510     2.68%     5,486     2.43%  

Total

  $ 4     2.90%   $ 2,151     2.18%   $ 3,402     2.48%   $ 11,937     2.82%   $ 17,494     2.67%  

At December 31, 2017, the mortgage- backed securities in our portfolio have an estimated remaining life of 4.6 years.

Sources of Funds

General

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

Deposits

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

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

We also open deposit accounts for customers throughout the United States through the Internet and deposit listing services. Deposits from the Internet and deposit listing services totaled $4.7 million and $9.2 million, respectively, at December 31, 2017 compared to $6.9 million and $56.0 million, respectively, at December 31, 2016.

During 2016, we rejoined a deposit program called Certificate of Deposit Account Registry Service ("CDARS"). CDARS is a deposit placement service that allows us to place our customers' funds in FDIC-insured certificates of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network ("CDARS Reciprocal"). We may also accept deposits from other institutions when we have no reciprocal deposit ("CDARS One-Way Buy"). We had approximately $9.5 million in CDARS Reciprocal and $43.3 million in CDARS One-Way Buy at December 31, 2017, compared to $6.9 million in CDARS Reciprocal and $21.7 million in CDARS One-Way Buy at December 31, 2016.

The following table details the maturity periods of our certificates of deposit in amounts of $250 thousand or more at December 31, 2017.

 
  December 31, 2017  
 
  Amount   Weighted
average rate
 
 
  (Dollars in thousands)
 

Certificates maturing:

             

Less than three months

  $ 3,069     1.02%  

Three to six months

    4,627     1.16%  

Six to twelve months

    7,435     1.22%  

Over twelve months

    1,578     1.24%  

Total

  $ 16,709     1.17%  

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

 
  For the Year Ended December 31,  
 
  2017   2016   2015  
 
  Average
balance
  Percent
of total
  Weighted
average
rate
  Average
balance
  Percent
of total
  Weighted
average
rate
  Average
balance
  Percent
of total
  Weighted
average
rate
 
 
  (Dollars in thousands)
 

Money market deposits

  $ 38,318     13.14%     0.70%   $ 27,399     10.06%     0.58%   $ 21,917     9.12%     0.50%  

Passbook deposits

    39,064     13.39%     0.32%     36,611     13.45%     0.32%     36,252     15.09%     0.32%  

NOW and other demand deposits

    32,275     11.07%     0.07%     29,959     11.00%     0.07%     28,813     11.99%     0.07%  

Certificates of deposit

    181,993     62.40%     1.09%     178,292     65.49%     1.06%     153,291     63.80%     1.09%  

Total

  $ 291,650     100.00%     0.82%   $ 272,261     100.00%     0.80%   $ 240,273     100.00%     0.79%  

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Borrowings

We utilize short-term and long-term advances from the FHLB of San Francisco as an alternative to retail deposits as a funding source for asset growth. FHLB advances are generally secured by mortgage loans and mortgage-backed securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 2017, we had $65.0 million in FHLB advances and had the ability to borrow up to an additional $42.9 million based on available and pledged collateral.

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

 
  At or For the Year Ended  
 
  2017   2016   2015  
 
  (Dollars in thousands)
 

FHLB Advances:

                   

Average balance outstanding during the year

  $ 89,279   $ 71,940   $ 80,875  

Maximum amount outstanding at any month-end during the year

  $ 104,000   $ 85,000   $ 84,500  

Balance outstanding at end of year

  $ 65,000   $ 85,000   $ 72,000  

Weighted average interest rate at end of year

    1.86 %   1.94 %   2.15 %

Average cost of advances during the year

    1.97 %   2.13 %   2.24 %

Weighted average maturity (in months)

    18     13     24  

On March 17, 2004, we issued $6.0 million of Floating Rate Junior Subordinated Debentures (the "Debentures") in a private placement to a trust that was capitalized to purchase subordinated debt and preferred stock of multiple community banks. Interest on the Debentures is payable quarterly at a rate per annum equal to the 3-Month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 4.15% at December 31, 2017. On October 16, 2014, we made payments of $900 thousand of principal on the Debentures, executed a Supplemental Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024, and modified the payment terms of the remaining $5.1 million principal amount thereof. The modified terms of the Debentures require quarterly payments of interest only through March 2019 at the original rate of 3-Month LIBOR plus 2.54%. Starting in June 2019, we will be required to make quarterly payments of equal amounts of principal, plus interest, until the Debentures are fully amortized on March 17, 2024. The Debentures may be called for redemption at any time by the Company.

Market Area and Competition

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

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

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Personnel

At December 31, 2017, we had 68 employees, which included 63 full-time and 5 part-time employees. We believe that we have good relations with our employees and none are represented by a collective bargaining group.

Regulation

General

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

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

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

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

Dodd-Frank Wall Street Reform and Consumer Protection Act

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

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

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

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

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

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

Capital Requirements

In July 2013, the federal banking regulators approved final rules (the "Basel III Capital Rules") implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to, among other entities, depository institutions including Broadway Federal. As stated above, the Company is exempt from consolidated capital requirements as a small savings and loan holding company. The Basel III Capital Rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).

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

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

    4.5% CET1 to risk-weighted assets;
    6.0% Tier 1 capital (calculated as CET1 plus Additional Tier 1 capital) to risk-weighted assets;

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    8.0% Total capital (calculated as 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").

The Basel III Capital Rules also introduced a new "capital conservation buffer", composed entirely of CET1, in addition to these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% on January 1 of each subsequent year, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Bank to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%; and (iv) a minimum leverage ratio of 4.0%.

The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over the following three years (beginning at 40% on January 1, 2015 and at an additional 20% each year thereafter).

In addition, under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded automatically; however, non-advanced approaches banking organizations, including Broadway Federal, are able to make a one-time permanent election to continue to exclude these items. The Bank has made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of their available-for-sale securities portfolio.

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

The Basel III Capital Rules also revise the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under "Prompt Corrective Action." Management believes that, as of December 31, 2017, the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements had been in effect.

Prompt Corrective Action

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

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

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

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

At December 31, 2017, the Bank's level of capital exceeded all regulatory capital requirements and its regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. Actual and required capital amounts and ratios at December 31, 2017 and 2016 are presented below.

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

    Amount     Ratio     Amount     Ratio     Amount     Ratio
 

    (Dollars in thousands)  

December 31, 2017:

                                     

Tier 1 (Leverage)

  $ 47,838     11.39%   $ 16,798     4.0%   $ 20,997     5.0%  

Common Equity Tier 1

  $ 47,838     18.63%   $ 11,557     4.5%   $ 16,693     6.5%  

Tier 1

  $ 47,838     18.63%   $ 15,409     6.0%   $ 20,545     8.0%  

Total Capital

  $ 51,059     19.88%   $ 20,545     8.0%   $ 25,681     10.0%  

December 31, 2016:

                                     

Tier 1 (Leverage)

  $ 43,954     10.60%   $ 16,594     4.0%   $ 20,742     5.0%  

Common Equity Tier 1

  $ 43,954     15.36%   $ 12,875     4.5%   $ 18,597     6.5%  

Tier 1

  $ 43,954     15.36%   $ 17,166     6.0%   $ 22,888     8.0%  

Total Capital

  $ 47,544     16.62%   $ 22,888     8.0%   $ 28,610     10.0%  

Deposit Insurance

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

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

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

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As required by the Dodd-Frank Act, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan increased the minimum designated DIF reserve ratio from 1.15% to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the assessments necessary to meet the new requirement, the FDIC is required to offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by institutions with more than $10 billion in assets. With the increase of the DIF reserve ratio to 1.17% on June 30, 2016, the range of initial assessment rates has declined for all banks from five to 35 basis points on an annualized basis to three to 30 basis points on an annualized basis. In order to reach a DIF reserve ratio of 1.35%, insured depository institutions with $10 billion or more in total assets are required to pay a quarterly surcharge equal to an annual rate of 4.5 basis points, in addition to regular assessments. In the event that the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall on large banks in the first quarter of 2019. The FDIC will provide assessment credits to insured depository institutions, like Broadway Federal, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.

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

Guidance on Commercial Real Estate Lending

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

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

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Loans to One Borrower

Federal savings banks generally are subject to the lending limits that are applicable to national banks. With certain limited exceptions, the maximum amount that a federal savings banks may lend to any borrower (including certain related persons or entities of such borrower) is an amount equal to 15% of the savings institution's unimpaired capital and unimpaired surplus, or $7.7 million for Broadway Federal at December 31, 2017, plus an additional 10% for loans fully secured by readily marketable collateral. Real estate is not included within the definition of "readily marketable collateral" for this purpose. We are in compliance with the limits that are applicable to loans to any one borrower. At December 31, 2017, our largest aggregate amount of loans to one borrower totaled $6.0 million. Both of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Broadway Federal.

Community Reinvestment Act and Fair Lending

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

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

Qualified Thrift Lender Test

The Home Owners Loan Act ("HOLA") requires all federal savings banks to meet a Qualified Thrift Lender ("QTL") test. Under the QTL test, a federal savings bank is required to maintain at least 65% of its portfolio assets (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments" on a monthly basis during at least 9 out of every 12 months. Qualified thrift investments include, in general, loans, securities and other investments that are related to housing, shares of stock issued by any Federal Home Loan Bank, loans for educational purposes, loans to small businesses, loans made through credit cards or credit card accounts and certain other permitted thrift investments. The failure of a federal savings bank to remain a QTL may result in required conversion of the institution to a bank charter, which would change the federal savings bank's permitted business activities in various respects, including operation under certain restrictions, such as limitations on new investments and activities, the imposition of restrictions on branching and the payment of dividends that apply to national banks. At December 31, 2017, the Bank was in compliance with the QTL test requirements.

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

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

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

Privacy Protection

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

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

Cybersecurity

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

The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a banking organization's the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management, processes related to information technology and operational resiliency, and the use of third parties in the provision of financial services.

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

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Savings and Loan Holding Company Regulation

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

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

Restrictions on Dividends and Other Capital Distributions

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

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

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

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

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

Tax Matters

Federal Income Taxes

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

California Taxes

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

ITEM 2. PROPERTIES

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

As of December 31, 2017, the net book value of our investment in premises, equipment and fixtures, excluding computer equipment, was $2.3 million. Total occupancy expense, inclusive of rental payments and furniture and

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equipment expense, for the year ended December 31, 2017 was $1.3 million. Total annual rental expense (exclusive of operating charges and real property taxes) was approximately $587 thousand during 2017.

Location
  Leased or
Owned

  Original
Date
Leased or
Acquired

  Date
of Lease
Expiration

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

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

 

Leased

 

2013

 

April 2021

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

 

Owned

 

1996

 

-

4001 South Figueroa Street
Los Angeles, CA

 

Owned

 

1996

 

-

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

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PART II

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

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

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

 

2016   1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
High   $    1.99   $    2.00   $    2.50   $    1.98
Low   $    1.35   $    1.79   $    1.42   $    1.42

The closing sale price for our common stock on the Nasdaq Capital Market on March 8, 2018 was $2.15 per share. As of March 8, 2018, we had 282 stockholders of record and 18,713,729 shares of voting common stock outstanding. At that date, we also had 8,756,396 shares of non-voting common stock outstanding. Our non-voting common stock is not listed for trading on the Nasdaq Capital Market, but is convertible into our voting common stock in connection with certain sale or other transfer transactions.

In general, we may pay dividends out of funds legally available for that purpose at such times as our Board of Directors determines that dividend payments are appropriate, after considering our net income, capital requirements, financial condition, alternate investment options, prevailing economic conditions, industry practices and other factors deemed to be relevant at the time. We suspended our prior policy of paying regular cash dividends in May 2010 in order to retain capital for reinvestment in the Company's business. In addition, pursuant to the Order issued to the Company in September 2010 (which was terminated by the FRB in February 2016), the Company could not declare or pay dividends or make other capital distributions, which term included repurchases of stock, without receipt of prior written notice of non-objection to such capital distribution from the FRB.

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

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Equity Compensation Plan Information

The following table provides information about the Company's common stock that may be issued under equity compensation plans as of December 31, 2017.

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

2008 Long Term Incentive Plan

    537,500   $ 2.19     1,312,015  
Equity compensation plans not approved by security holders:                    

None

    -     -     -  

Total

    537,500   $ 2.19     1,312,015  

As of December 31, 2017, 120,483 shares of restricted stock and 30,002 shares of voting common stock had been issued under the 2008 Long Term Incentive Plan. Our Board of Directors intends to consider issuing equity incentives to certain key employees as a form of long-term compensation that will help align the interests of senior management with those of our stockholders. However, our ability to issue options and other forms of equity incentives to our Chief Executive Officer was restricted pursuant to the terms of the agreements entered into in 2008 and 2009 pursuant to which the U.S. Treasury invested in the Company.

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

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

Overview

Total assets decreased by $15.4 million to $413.7 million at December 31, 2017 from $429.1 million at December 31, 2016. The decrease in total assets during 2017 primarily consisted of a decrease of $44.6 million in net loans receivable held for investment and a decrease of $1.8 million in deferred tax assets, which were partially offset by an increase of $22.4 million in loans receivable held for sale, an increase of $4.3 million in securities available-for-sale, an increase of $3.8 million in cash and cash equivalents and an increase of $878 thousand in REO.

During 2017, total deposits increased by $3.9 million, primarily reflecting an increase of $9.2 million in liquid deposits and a decrease of $5.3 million in CDs. FHLB advances decreased by $20.0 million during 2017 as we repaid $49.5 million in maturing advances and borrowed $29.5 million in new advances from the FHLB.

We recorded net income of $1.9 million for the year ended December 31, 2017, compared to $3.5 million for the year ended December 31, 2016. Our net income for the year 2017 included an additional income tax expense of $519 thousand resulting from the enactment of the Tax Cuts and Jobs Act of 2017, whereas in 2016, our net income was positively impacted by the reversal of the remaining valuation allowance on our deferred tax assets which resulted in an income tax benefit of $2.2 million. We also recorded higher non-interest income, interest income and loan loss provision recaptures during 2017 compared to 2016.

Comparison of Operating Results for the Years Ended December 31, 2017 and 2016

General

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

Net Income

We recorded net income of $1.9 million, or $0.07 per diluted share, for the year ended December 31, 2017, compared to net income of $3.5 million, or $0.12 per diluted share for the year ended December 31, 2016. The lower earnings during 2017 compared to 2016 resulted primarily from certain income tax adjustments in both years. Our income tax expense for the year ended December 31, 2017 totaled $1.9 million and included an additional tax expense of $519 thousand due to the enactment of the Tax Cuts and Jobs Act of 2017, which required adjustment of our deferred tax assets to recognize the decrease in the federal income tax rate to 21% from 34%. In comparison, for the year ended December 31, 2016, we recorded an income tax benefit of $2.2 million, which resulted from the reversal of the valuation allowance on our deferred tax assets. Pre-tax earnings increased by $2.5 million during

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2017, compared to 2016, primarily due to increases in non-interest income, net interest income, and loan loss provision recaptures.

Net Interest Income

For the year ended December 31, 2017, net interest income increased by $526 thousand to $11.9 million, from $11.4 million for the same period in 2016. Interest income on loans increased by $912 thousand to $15.4 million for the year ended December 31, 2017, from $14.5 million for the same period in 2016, primarily due to an increase of $40.0 million in the average balance of loans receivable, which increased to $381.3 million for 2017 from $341.3 million for 2016 and resulted in additional interest income of $1.6 million. Partially offsetting this increase was the impact of a decrease of 20 basis points in the average yield on loans to 4.04% for 2017, from 4.24% for 2016, which reduced loan interest income by $726 thousand.

Other interest income increased by $90 thousand to $572 thousand for the year ended December 31, 2017, from $482 thousand for the same period in 2016. The increase in other interest income was primarily due to an increase of $205 thousand in interest income on interest-bearing deposits, which was partially offset by a decrease of $115 thousand in dividend income earned on the Bank's investment in FHLB stock. The increase in interest income on interest-bearing deposits primarily resulted from higher interest rates earned on interest-bearing deposits during 2017. The decrease in dividend income earned on the Bank's investment in FHLB stock primarily resulted from the Bank not receiving special dividends in 2017, compared to $88 thousand of special dividends received during 2016.

Interest expense on deposits increased by $218 thousand to $2.4 million for the year ended December 31, 2017, from $2.2 million for the same period in 2016. The increase in interest expense on deposits was primarily due to an increase of $19.4 million in the average balance of deposits to $291.7 million for 2017 from $272.3 million for 2016, which increased interest expense by $121 thousand. Additionally, the average cost of deposits increased by 2 basis points to 0.82% for 2017, from 0.80% for 2016, which increased interest expense by $97 thousand.

Interest expense on borrowings increased by $253 thousand to $2.0 million for the year ended December 31, 2017, from $1.7 million for the same period in 2016. The increase in interest expense on borrowings was primarily due to an increase of $17.3 million in the average balance of FHLB borrowings, which increased interest expense by $348 thousand. Additionally, due to increases in LIBOR rates, the average cost of Debentures increased by 53 basis points to 3.80% for 2017, from 3.27% for 2016, which increased interest expense by $27 thousand. Partially offsetting these increases was the impact of a decrease of 16 basis points in the average cost of FHLB borrowings, primarily reflecting maturities of higher rate advances, which reduced interest expense by $122 thousand.

Analysis of Net Interest Income

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

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  For the year ended December 31,  
 
  2017   2016  
(Dollars in Thousands)
  Average Balance   Interest   Average Yield/
Cost
  Average Balance   Interest   Average Yield/
Cost
 

Assets

                                     

Interest-earning assets:

                                     

Interest-earning deposits and other short-term investments

  $ 30,486   $ 373     1.22%   $ 35,053   $ 168     0.48%  

Securities

    13,408     318     2.37%     14,578     323     2.22%  

Loans receivable (1)

    381,293     15,397  (2)   4.04%     341,324     14,485  (3)   4.24%  

FHLB stock

    2,836     199     7.02%     2,573     314     12.20%  

Total interest-earning assets

    428,023   $ 16,287     3.81%     393,528   $ 15,290     3.89%  

Non-interest-earning assets

    10,747                 9,113              

Total assets

  $ 438,770               $ 402,641              

Liabilities and Stockholders' Equity

   
 
   
 
   
 
   
 
   
 
   
 
 

Interest-bearing liabilities:

                                     

Money market deposits

  $ 38,318   $ 268     0.70%   $ 27,399   $ 158     0.58%  

Passbook deposits

    39,064     125     0.32%     36,611     117     0.32%  

NOW and other demand deposits

    32,275     20     0.06%     29,959     20     0.07%  

Certificate accounts

    181,993     1,985     1.09%     178,292     1,885     1.06%  

Total deposits

    291,650     2,398     0.82%     272,261     2,180     0.80%  

FHLB advances

    89,279     1,756     1.97%     71,940     1,530     2.13%  

Junior subordinated debentures

    5,100     194     3.80%     5,100     167     3.27%  

Total interest-bearing liabilities

    386,029   $ 4,348     1.13%     349,301   $ 3,877     1.11%  

Non-interest-bearing liabilities

    5,587                 6,405              

Stockholders' Equity

    47,154                 46,935              

Total liabilities and stockholders' equity

  $ 438,770               $ 402,641              

                                     

Net interest rate spread (4)

        $ 11,939     2.68%         $ 11,413     2.78%  

Net interest rate margin (5)

                2.79%                 2.90%  

Ratio of interest-earning assets to interest-bearing liabilities

          110.88%                 112.66%  

(1)
Amount is net of deferred loan fees, loan discounts and loans in process, and includes deferred origination costs, loan premiums and loans receivable held for sale.
(2)
Includes non-accrual interest of $316 thousand, reflecting interest recoveries on non-accrual loans that were paid off, and deferred cost amortization of $301 thousand for the year ended December 31, 2017.
(3)
Includes non-accrual interest of $493 thousand, reflecting interest recoveries on non-accrual loans that were paid off, and deferred cost amortization of $290 thousand for the year ended December 31, 2016.
(4)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(5)
Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

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

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

 
  Year ended December 31, 2017
Compared to
Year ended December 31, 2016
  Year ended December 31, 2016
Compared to
Year ended December 31, 2015
 
 
  Increase (Decrease) in Net
Interest Income
  Increase (Decrease) in Net
Interest Income
 
 
  Due to
Volume
  Due to
Rate
  Total   Due to
Volume
  Due to
Rate
  Total  
 
  (In thousands)
 

Interest-earning assets:

                                     

Interest-earning deposits and other short-term investments

  $ (25 ) $ 230   $ 205   $ (56 ) $ 93   $ 37  

Securities

    (27 )   22     (5 )   (22 )   (6 )   (28 )

Loans receivable, net

    1,638     (726 )   912     2,240     (1,985 )   255  

FHLB stock

    29     (144 )   (115 )   (88 )   (41 )   (129 )

Total interest-earning assets

    1,615     (618 )   997     2,074     (1,939 )   135  

Interest-bearing liabilities:

   
 
   
 
   
 
   
 
   
 
   
 
 

Money market deposits

    72     38     110     30     18     48  

Passbook deposits

    8     -     8     1     1     2  

NOW and other demand deposits

    1     (1 )   -     1     (2 )   (1 )

Certificate accounts

    40     60     100     265     (44 )   221  

Total deposits

    121     97     218     297     (27 )   270  

FHLB advances

    348     (122 )   226     (193 )   (85 )   (278 )

Junior subordinated debentures

    -     27     27     -     21     21  

Total interest-bearing liabilities

    469     2     471     104     (91 )   13  

Change in net interest income

 
$

1,146
 
$

(620

)

$

526
 
$

1,970
 
$

(1,848

)

$

122
 

Loan Loss Provision Recapture

For the year ended December 31, 2017, we recorded a loan loss provision recapture of $1.1 million compared to $550 thousand for the year ended December 31, 2016. The loan loss provision recapture during 2017 resulted from recoveries of $566 thousand, as partially charged off loans paid off in full, and from a decrease in ALLL requirements on the existing portfolio as loans paid off and as the overall credit quality of our loan portfolio continued to improve. See "Allowance for Loan Losses" for additional information.

Non-Interest Income

For the year ended December 31, 2017, non-interest income totaled $2.5 million, compared to $1.0 million for the same period in 2016. The increase of $1.5 million in non-interest income was primarily due to an insurance litigation settlement of $1.2 million. Additionally, we recorded a gain of $560 thousand from sale of loans during 2017, whereas we did not sell any loans during 2016. These increases were partially offset by an unusually large early withdrawal fee that generated income of $80 thousand, a loan extension fee of $50 thousand, and a foreclosure forbearance fee of $38 thousand that were included in our results for the year ended December 31, 2016.

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Non-Interest Expense

For the year ended December 31, 2017, non-interest expense totaled $11.8 million, relatively unchanged compared to the same period in 2016. Overall non-interest expense increased by $85 thousand, primarily due to increases in other expense of $378 thousand, occupancy expense of $81 thousand and compensation and benefits expense of $67 thousand, as partially offset by a decrease of $438 thousand in professional services expense. Other expense increased by $378 thousand primarily due to payments of $214 thousand for expenses related to three sales by the U.S. Treasury of a portion of its holdings of the Company's shares and an increase of $152 thousand in REO provision for losses and expenses. Professional services expense decreased by $438 thousand during 2017, primarily because in December 2016, we incurred $377 thousand of legal and consulting fees in connection with the repurchase of shares from the U.S. Treasury.

Income Taxes

We recorded an income tax expense of $1.9 million for the year ended December 31, 2017, compared to an income tax benefit of $2.2 million for the year ended December 31, 2016. The tax expense for 2017 includes an adjustment of $519 thousand to record our deferred tax assets at the lower federal tax rate of 21%. In contrast, we recorded an income tax benefit of $2.2 million for the comparable period in 2016, which resulted from the reversal of the remaining valuation allowance on our deferred tax assets, based on an analysis of the potential for full utilization of those assets. The deferred tax assets totaled $5.1 million at December 31, 2017, and $6.9 million at December 31, 2016. See Note 1 "Summary of Significant Accounting Policies" and Note 11 "Income Taxes" of the Notes to Consolidated Financial Statements for a further discussion of income taxes and a reconciliation of income tax at the federal statutory tax rate to actual tax expense (benefit).

Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize net operating loss carryforwards, tax credit carryovers and other income tax attributes when there is an ownership change. Generally, the rules provide that an ownership change is deemed to have occurred when the cumulative increase of each 5% or more stockholder and certain groups of stockholders treated as 5% or more stockholders, as determined under Section 382, exceeds 50% over a specified "testing" period, generally equal to three years. Section 382 applies rules regarding the treatment of new groups of stockholders treated as 5% stockholders due to issuances of stock and other equity transactions, which may cause a change of control to occur. The Company has performed an analysis of the potential impact of Section 382 and has determined that the Company did not undergo an ownership change during 2017 or 2016 and any potential limitations imposed under Section 382 do not currently apply.

Comparison of Financial Condition at December 31, 2017 and 2016

Total Assets

Total assets decreased by $15.4 million to $413.7 million at December 31, 2017 from $429.1 million at December 31, 2016. The decrease in total assets consisted of a decrease of $44.6 million in net loans receivable held for investment and a decrease of $1.8 million in deferred tax assets, which were partially offset by an increase of $22.4 million in loans receivable held for sale, an increase of $4.3 million in securities available-for-sale, an increase of $3.8 million in cash and cash equivalents and an increase of $878 thousand in REO.

Loans Receivable Held for Sale

Loans receivable held for sale at December 31, 2017 totaled $22.4 million and consisted of multi-family loans. We had no loans receivable held for sale at December 31, 2016. During 2017, we allocated $110.4 million, or 96%, of our loan originations to loans held for sale and transferred $9.3 million of multi-family loans from the portfolio of loans held for investment to the portfolio of loans held for sale as part of our loan concentration risk management program. Also, during 2017, we completed $96.9 million of multi-family loan sales that generated the gain on loan

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sales of $560 thousand mentioned above. We received $411 thousand in principal repayments on loans held for sale during 2017.

Loans Receivable

Our gross loan portfolio decreased by $44.9 million to $337.4 million at December 31, 2017, from $382.3 million at December 31, 2016. The decrease in our gross loan portfolio during 2017 primarily consisted of a decrease of $42.1 million in our multi-family residential real estate loan portfolio, an increase of $6.3 million in our single family residential real estate loan portfolio, a decrease of $7.0 million in our church loan portfolio, a decrease of $2.8 million in our commercial real estate loan portfolio and an increase of $841 thousand in our construction loan portfolio. At December 31, 2017, 55.6% of our loan portfolio consisted of multi-family loans, 32.9% consisted of single family residential loans, 9.1% consisted of church loans, and 2.4% consisted of commercial and other loans. In comparison, at December 31, 2016, 60.1% of our loan portfolio consisted of multi-family loans, 27.4% consisted of single family residential loans, 9.9% consisted of church loans, and 2.6% consisted of commercial and other loans.

For the year ended December 31, 2017, loans originated for investment totaled $5.0 million, compared to loans originated for investment of $137.7 million for the year ended December 31, 2016. During 2017, we purchased $24.6 million in single family loans. We did not purchase any loans during 2016. Loan repayments totaled $64.8 million for the year ended December 31, 2017, compared to $63.4 million for the year ended December 31, 2016.

There were no loan charge-offs during 2017 and 2016. During 2017, we received a deed in lieu of foreclosure and recorded an REO at fair value, net of estimated selling costs, of $878 thousand at December 31, 2017. No loans were transferred to REO during 2016.

Allowance for Loan Losses

We record a provision for loan losses as a charge to earnings when necessary in order to maintain the ALLL at a level sufficient, in management's judgment, to absorb probable incurred losses in the loan portfolio. At least quarterly we conduct an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the size and composition of our loan portfolio, the levels and composition of our loan delinquencies, non-performing loans and net loan charge-offs, the value of underlying collateral on problem loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.

Our ALLL decreased to $4.1 million, or 1.20% of our gross loans receivable held for investment, at December 31, 2017, from $4.6 million, or 1.20% of our gross loans receivable held for investment, at December 31, 2016, primarily reflecting loan loss provision recaptures of $1.1 million, which were partially offset by recoveries of $566 thousand. The reduction in ALLL at December 31, 2017 compared to December 31, 2016, and the loan loss provision recaptures during 2017, reflect the results of our quarterly reviews of the adequacy of the ALLL. We continue to maintain our ALLL at a level that we believe is appropriate, given the significant reduction in delinquencies and non-performing loans, the continued improvement in our asset credit quality metrics and the high quality of our loan originations.

Our loan delinquencies and non-performing loans ("NPLs") are at their lowest levels since December 2009. We had total delinquencies of $391 thousand at December 31, 2017 and $1.4 million at December 31, 2016. NPLs consist of delinquent loans that are 90 days or more past due and other loans, including troubled debt restructurings that do not qualify for accrual status. At December 31, 2017, NPLs totaled $1.8 million, compared to $2.9 million at

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December 31, 2016. The decrease of $1.1 million in NPLs was primarily due to payoffs of $340 million, repayments of $335 thousand and a transfer to REO of $503 thousand.

In connection with our review of the adequacy of our ALLL, we track the amount and percentage of our NPLs that are paying currently, but nonetheless must be classified as NPL for reasons unrelated to payments, such as lack of current financial information and an insufficient period of satisfactory performance. As of December 31, 2017, $1.4 million, or 81%, of our NPLs were current in their payments. Also, in determining the ALLL, we consider the ratio of the ALLL to NPLs, which increased to 230.41% at December 31, 2017 from 156.35% at December 31, 2016.

When reviewing the adequacy of the ALLL, we also consider the impact of charge-offs, including the changes and trends in loan charge-offs. There were no loan charge-offs during 2017 and 2016. In determining charge-offs, we update our estimates of collateral values on NPLs by obtaining new appraisals at least every nine months. If the estimated fair value of the loan collateral less estimated selling costs is less than the recorded investment in the loan, a charge-off for the difference is recorded to reduce the loan to its estimated fair value, less estimated selling costs. Therefore, certain losses inherent in our total NPLs are recognized periodically through charge-offs. The impact of updating these estimates of collateral value and recognizing any required charge-offs is to increase charge-offs and reduce the ALLL required on these loans. Due to prior charge-offs and increases in collateral values, the average recorded investment in NPLs was only 37% of estimated fair value less estimated selling costs as of December 31, 2017.

Recoveries during 2017 and 2016 totaled $566 thousand and $325 thousand, respectively. Recoveries during 2017 and 2016 primarily resulted from the payoffs of non-accrual loans which had been previously partially charged off.

Impaired loans at December 31, 2017 were $9.3 million, compared to $11.9 million at December 31, 2016. The decrease of $2.6 million in impaired loans was primarily due to repayments of $2.1 million and one transfer to REO totaling $503 thousand. Specific reserves for impaired loans were $585 thousand, or 6.29% of the aggregate impaired loan amount at December 31, 2017, compared to $656 thousand, or 5.51%, at December 31, 2016. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non-impaired loans) was 1.06% at December 31, 2017 and 2016.

We believe that the ALLL is adequate to cover probable incurred losses in the loan portfolio as of December 31, 2017, but there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the ALLL as an integral part of their examination process. These agencies may require an increase in the ALLL based on their judgments of the information available to them at the time of their examinations.

Deposits

Deposits increased by $3.9 million to $291.3 million at December 31, 2017 from $287.4 million at December 31, 2016, which consisted of an increase of $39.4 million in liquid deposits and a decrease of $35.5 million in CDs. During 2017, a CD account of $30.3 million from one deposit relationship was moved to a money market account. Excluding this transfer, liquid deposits increased by $9.2 million and CDs decreased by $5.3 million. The increase of $9.2 million in liquid deposits consisted of an increase of $5.9 million in money market accounts, an increase of $3.1 million in NOW accounts and an increase of $195 thousand in passbook accounts. The decrease of $5.3 million in CDs during 2017 was primarily due to a decrease of $46.8 million in QwickRate CDs, which was partially offset by an increase of $23.4 million in CDARS accounts and an increase of $18.1 million in retail CDs.

One customer relationship accounted for approximately 11% of our deposits at December 31, 2017. We expect to maintain this relationship with the customer for the foreseeable future.

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Borrowings

Total borrowings at December 31, 2017 consisted of advances to the Bank from the FHLB of $65.0 million, and subordinated debentures issued by the Company of $5.1 million, compared to advances from the FHLB of $85.0 million and subordinated debentures of $5.1 million at December 31, 2016. During 2017, the Bank paid off $49.5 million in maturing advances and borrowed $29.5 million in new advances from the FHLB.

The weighted average cost of FHLB advances decreased 8 basis points to 1.86% at December 31, 2017 from 1.94% at December 31, 2016 primarily due to maturities of $49.5 million of FHLB advances with an average interest rate of 1.95% and new advances totaling $29.5 million with an average interest rate of 1.78%.

Stockholders' Equity

Stockholders' equity was $47.7 million, or 11.54% of the Company's total assets, at December 31, 2017, compared to $45.5 million, or 10.61% of the Company's total assets, at December 31, 2016. The Company's book value was $1.74 per share as of December 31, 2017, compared to $1.66 per share as of December 31, 2016.

Capital Resources

Our principal subsidiary, Broadway Federal, must comply with capital standards established by the OCC in the conduct of its business. Failure to comply with such capital requirements may result in significant limitations on its business or other sanctions. As a "small bank holding company", we are not subject to consolidated capital requirements under the new Basel III capital rules. The current regulatory capital requirements and possible consequences of failure to maintain compliance are described in Part I, Item 1 "Business-Regulation" and in Note 13 of the Notes to Consolidated Financial Statements.

Liquidity

The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet our obligations on a timely and cost-effective basis. The Bank's sources of funds include deposits, advances from the FHLB, other borrowings, proceeds from the sale of loans, REO, and investment securities, and payments of principal and interest on loans and investment securities. The Bank is currently approved by the FHLB to borrow up to 30% of total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. This approved limit and collateral requirement would have permitted the Bank to borrow an additional $42.9 million at December 31, 2017.

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 sells federal funds to the Federal Reserve Bank or other financial institutions. The Bank's liquid assets at December 31, 2017 consisted of $22.2 million in cash and cash equivalents and $17.0 million in securities available-for-sale that were not pledged, compared to $18.4 million in cash and cash equivalents and $12.6 million in securities available-for-sale that were not pledged at December 31, 2016. 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 dividend received from the Bank in 2017 and 2016. The Bank is currently under no prohibition to pay dividends, but is subject to restrictions as to the amount of the dividends based on normal regulatory guidelines.

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The Company recorded consolidated net cash outflows from operating activities of $10.2 million and net cash inflows from operating activities of $930 thousand during the years ended December 31, 2017 and 2016, respectively. Net cash outflows from operating activities during 2017 were primarily attributable to originations of multi-family loans for the Bank's loans held for sale portfolio, which was partially offset by net proceeds from the sale of loans.

The Company recorded consolidated net cash inflows from investing activities of $30.2 million and net cash outflows from investing activities of $74.1 million during the years ended December 31, 2017 and 2016, respectively. Net cash inflows from investing activities during 2017 were primarily attributable to repayments on loans held for investment and securities available-for-sale, which were partially offset by purchases of single-family loans and securities.

The Company recorded consolidated net cash outflows from financing activities of $16.1 million and net cash inflows from financing activities of $23.8 million during the years ended December 31, 2017 and 2016, respectively. Net cash outflows from financing activities during 2017 were primarily attributable to repayment of advances from the FHLB.

Off-Balance-Sheet Arrangements and Contractual Obligations

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

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

In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancellable operating leases on buildings and land used for office space and banking purposes. The following table details our contractual obligations at December 31, 2017.

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

Certificates of deposit

  $ 131,716   $ 16,834   $ 2,207   $ 32   $ 150,789  

FHLB advances

    27,500     37,500     -     -     65,000  

Subordinated debentures

    -     1,785     2,040     1,275     5,100  

Commitments to originate loans

    1,493     -     -     -     1,493  

Commitments to fund unused lines of credit

    2,209     -     -     373     2,582  

Operating lease obligations

    517     1,045     182     -     1,744  

Total contractual obligations

  $ 163,661   $ 57,164   $ 4,203   $ 1,680   $ 226,708  

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Impact of Inflation and Changing Prices

Our consolidated financial statements, including accompanying notes, have been prepared in accordance with GAAP which require the measurement of financial position and operating results primarily in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in increased costs of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Critical Accounting Policies

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

Allowance for Loan Losses

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

Real Estate Owned ("REO")

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

Income Taxes

Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive

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and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, forecasts of future income and available tax planning strategies. This analysis is updated quarterly. Based on this analysis, we determined that no valuation allowance was required on our deferred tax assets, which totaled $5.1 million and $6.9 million at December 31, 2017 and 2016, respectively. See Note 11 "Income Taxes" of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data."

Fair Value Measurements

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

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

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of December 31, 2017, an evaluation was performed under the supervision of the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017.

Management's annual report on internal control over financial reporting

The management of Broadway Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Exchange Act.

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This system, which management has chosen to base on the framework set forth in Internal Control-Integrated Framework, published by the 1992 Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and which is effected by the Company's Board of Directors, management and other personnel, is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

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

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

With the participation of the Company's Chief Executive Officer and Chief Financial Officer, management has conducted an evaluation of the effectiveness of the Company's system of internal control over financial reporting. Based on this evaluation, management determined that the Company's system of internal control over financial reporting was effective as of December 31, 2017.

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

Changes in internal control over financial reporting

There were no significant changes in the Company's internal control over financial reporting identified in connection with the evaluation of internal control over financial reporting that occurred during the fourth quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

/s/ Wayne-Kent A. Bradshaw

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

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

Los Angeles, CA
March 26, 2018

 

Los Angeles, CA
March 26, 2018

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ITEM 9B. OTHER INFORMATION

None


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement, under the captions "Election of Directors", "Executive Officers", "Code of Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance", to be filed with the Securities and Exchange Commission in connection with the Company's 2018 Annual Meeting of Stockholders (the "Company's Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

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

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

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

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

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    (a)
    1. See Index to Consolidated Financial Statements.

      2. Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes included under Item 8, "Financial Statements and Supplementary Data."

    (b)
    List of Exhibits

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

10.2

 

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

10.3

 

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

10.4

 

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

10.5

 

Deferred Compensation Plan (Exhibit 10.14 to Registration Statement on Form S-1 filed by Registrant on November 20, 2013)

10.6

 

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

10.7

 

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

10.8

 

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

10.9

 

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

10.10

 

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

10.11

 

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

21.1

 

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

23.1

 

Consent of Moss Adams LLP

31.1

 

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

31.2

 

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

32.1

 

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

32.2

 

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

99.4

 

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

99.5

 

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

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Exhibit
Number*
   
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

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

    BROADWAY FINANCIAL CORPORATION

 

 

By:

 

/s/ Wayne-Kent A. Bradshaw

Wayne-Kent A. Bradshaw
Chief Executive Officer
    Date:   March 26, 2018

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

  /s/ Wayne-Kent A. Bradshaw

Wayne-Kent A. Bradshaw
Chief Executive Officer and President
(Principal Executive Officer)
  Date: March 26, 2018

 

/s/ Brenda J. Battey

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

 

Date: March 26, 2018

 

/s/ Virgil P. Roberts

Virgil P. Roberts
Chairman of the Board

 

Date: March 20, 2018

 

/s/ Robert C. Davidson, Jr.

Robert C. Davidson, Jr.
Director

 

Date: March 20, 2018

 

/s/ Albert Odell Maddox

Albert Odell Maddox
Director

 

Date: March 20, 2018

 

/s/ Daniel A. Medina

Daniel A. Medina
Director

 

Date: March 22, 2018

 

/s/ Dutch C. Ross III

Dutch C. Ross III
Director

 

Date: March 22, 2018

 

/s/ Erin Selleck

Erin Selleck
Director

 

Date: March 21, 2018

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Index to Consolidated Financial Statements

Years ended December 31, 2017 and 2016


Table of Contents


Report of Independent Registered Pubic Accounting Firm

To the Shareholders and Board of Directors of
Broadway Financial Corporation

Opinion on the Financial Statement

We have audited the accompanying consolidated statements of financial condition of Broadway Financial Corporation and Subsidiary (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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

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

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

/s/ Moss Adams LLP

San Francisco, California
March 26, 2018

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

F-1


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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Financial Condition

 
  December 31, 2017   December 31, 2016  
 
  (In thousands, except share and per share)
 

Assets:

             

Cash and due from banks

  $ 3,420   $ 1,516  

Interest-bearing deposits in other banks

    18,799     16,914  

Cash and cash equivalents

    22,219     18,430  

Securities available-for-sale, at fair value

    17,494     13,202  

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

    22,370     -  

Loans receivable held for investment, net of allowance of $4,069 and $4,603

    334,851     379,454  

Accrued interest receivable

    1,073     1,178  

Federal Home Loan Bank (FHLB) stock

    2,916     2,573  

Office properties and equipment, net

    2,406     2,479  

Bank owned life insurance

    2,994     2,940  

Deferred tax assets, net

    5,110     6,907  

Investment in affordable housing limited partnership

    537