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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Table of Contents
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans which are secured by multi-family residential properties, single family residential properties and
commercial real estate, including churches. The remainder of the loan portfolio consists of commercial business loans, construction loans and
consumer loans. At December 31, 2018, our net loan portfolio, excluding loans held for sale, totaled $355.6 million, or 87% of total assets.
We
emphasize the origination of adjustable-rate mortgage loans ("ARMs"), most of which are hybrid ARM loans (ARM loans having an initial fixed rate period, followed by an adjustable rate period), for
our portfolio of loans held for investment. We originate these loans in order to maintain a high percentage of loans that are subject to periodic repricing, thereby reducing our exposure to interest
rate risk. At December 31, 2018, more than 99% of our mortgage loans had adjustable rate features. However, most of our adjustable rate loans behave like fixed rate loans for periods of time
because the loans may still be in their initial fixed-rate period or may be subject to interest rate floors. Loans in their initial fixed-rate period totaled $297.6 million or 83% of our gross
loan portfolio at December 31, 2018.
The
types of loans that we originate are subject to federal laws and regulations. The interest rates that we charge on loans are affected by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, including the
FRB, and legislative tax policies.
The
following table details the composition of our portfolio of loans held for investment by type, dollar amount and percentage of loan portfolio at the dates indicated:
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December 31,
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2018
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2017
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2016
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2015
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2014
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Amount
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Percent
of total
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Amount
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Percent
of total
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Amount
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Percent
of total
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Amount
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Percent
of total
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Amount
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Percent
of total
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(Dollars in thousands)
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Single family
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$
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91,835
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25.69%
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$
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111,085
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32.93%
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$
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104,807
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27.42%
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$
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130,891
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42.50%
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$
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39,792
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14.03%
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Multi-family
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231,870
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64.86%
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187,455
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55.57%
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229,566
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60.05%
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118,616
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38.52%
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171,792
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60.58%
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Commercial real estate
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5,802
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1.62%
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6,089
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1.80%
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8,914
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2.33%
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11,442
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3.72%
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16,722
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5.90%
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Church
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25,934
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7.25%
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30,848
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9.14%
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37,826
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9.90%
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46,390
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15.06%
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54,599
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19.26%
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Construction
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1,876
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0.52%
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1,678
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0.50%
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837
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0.22%
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343
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0.11%
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387
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0.14%
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Commercial
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226
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0.06%
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192
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0.06%
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308
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0.08%
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270
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0.09%
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262
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0.09%
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Consumer
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5
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0.00%
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7
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0.00%
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6
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0.00%
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4
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0.00%
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9
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0.00%
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Gross loans
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357,548
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100.00%
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337,354
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100.00%
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382,264
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100.00%
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307,956
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100.00%
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283,563
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100.00%
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Plus:
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Premiums on loans purchased
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259
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360
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510
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709
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228
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Deferred loan costs, net
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721
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1,220
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1,297
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349
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1,333
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Less:
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Unamortized discounts
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43
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14
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14
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15
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16
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Allowance for loan losses
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2,929
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4,069
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4,603
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4,828
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8,465
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Total loans held for investment
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$
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355,556
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$
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334,851
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$
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379,454
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$
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304,171
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$
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276,643
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2
Table of Contents
Multi-Family and Commercial Real Estate Lending
Our primary lending emphasis has been on the origination of loans for apartment buildings with five or more units. These multi-family loans amounted to
$231.9 million and $187.5 million at December 31, 2018 and 2017, respectively. Multi-family loans represented 65% of our gross loan portfolio at December 31, 2018 compared
to 56% of our gross loan portfolio at December 31, 2017. The vast majority of our multi-family loans amortize over 30 years. As of December 31, 2018, our single largest
multi-family credit had an outstanding balance of $3.9 million, was current, and was secured by a 15-unit apartment complex in Garden Grove, California. At December 31, 2018, the average
balance of a loan in our multi-family portfolio was $873 thousand.
Our
commercial real estate loans amounted to $5.8 million and $6.1 million at December 31, 2018 and 2017, respectively. Commercial real estate loans represented 2% of our gross
loan portfolio at December 31, 2018 and 2017. All of the commercial real estate loans outstanding at December 31, 2018 were ARMs. Most commercial real estate loans are originated
with principal repayments on a 30 year amortization schedule, but are due in 15 years. As of December 31, 2018, our single largest commercial real estate credit had an outstanding
principal balance of $1.5 million, was current and was secured by a commercial building located in Van Nuys, California. At December 31, 2018, the average balance of a loan in our
commercial real estate portfolio was $419 thousand.
The
interest rates on multi-family and commercial ARM loans are based on a variety of indices, including the 6-Month London InterBank Offered Rate Index ("6-Month LIBOR"), the 1-Year Constant Maturity
Treasury Index ("1-Yr CMT"), the 12-Month Treasury Average Index ("12-MTA"), the 11th District Cost of Funds Index ("COFI"), and the Wall Street Journal Prime Rate ("Prime Rate"). We currently
offer adjustable rate loans with interest rates that adjust either semi-annually or semi-annually upon expiration of a three- or five-year fixed rate period. Borrowers are required to make monthly
payments under the terms of such loans.
Loans
secured by multi-family and commercial properties are granted based on the income producing potential of the property and the financial strength of the borrower. The primary factors considered
include, among other things, the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to required
principal and interest payments, or debt service), and the ratio of the loan amount to the lower of the purchase price or the appraised value of the collateral.
We
seek to mitigate the risks associated with multi-family and commercial real estate loans by applying appropriate underwriting requirements, which include limitations on loan-to-value ratios and
debt service coverage ratios. Under our underwriting policies, loan-to-value ratios on our multi-family and commercial real estate loans usually do not exceed 75% of the lower of the purchase price or
the appraised value of the underlying property. We also generally require minimum debt service coverage ratios of 120% for multi-family loans and 125% for commercial real estate loans. Properties
securing multi-family and
commercial real estate loans are appraised by management-approved independent appraisers. Title insurance is required on all loans.
Multi-family
and commercial real estate loans are generally viewed as exposing the lender to a greater risk of loss than single family residential loans and typically involve higher loan principal
amounts than loans secured by single family residential real estate. Because payments on loans secured by multi-family and commercial real properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or general economy. Adverse economic conditions in our primary lending market area
could result in reduced cash flows on multi-family and commercial real estate loans, vacancies and reduced rental rates on such properties. We seek to reduce these risks by originating such loans on a
selective basis and generally restrict such loans to our general market area. In 2008, we ceased out-of-state lending for all types of loans. As of December 31, 2018, our out-of-state loans
totaled $1.9 million and our single largest out-of-state credit had an outstanding principal balance of $620 thousand, was current, and was secured by a church building located in
Tacoma, Washington.
3
Table of Contents
Our
church loans totaled $25.9 million and $30.8 million at December 31, 2018 and 2017, respectively. Church loans represented 7% of our gross loan portfolio at
December 31, 2018, compared to 9% of our gross loan portfolio at December 31, 2017. We ceased originating church loans in 2010. As of December 31, 2018, our single largest church
loan had an outstanding balance of $1.6 million, was current, and was secured by a church building in Richmond, California. At December 31, 2018, the average balance of a loan in our
church loan portfolio was $480 thousand.
Single Family Mortgage Lending
While we have been primarily a multi-family and commercial real estate lender, we also purchase ARM loans secured by single family residential properties,
including investor-owned properties, with maturities of up to 30 years. Single family loans totaled $91.8 million and $111.1 million at December 31, 2018 and 2017,
respectively. Of the single family residential mortgage loans that we had outstanding at December 31, 2018, more than 99% had adjustable rate features. During 2018, we did not purchase any
loans. During 2017, we purchased $24.6 million principal amount of single-family loans, which were secured by properties primarily located in Northern California. Of the $91.8 million of
single family loans at December 31, 2018, $7.1 million are secured by investor-owned properties.
The
interest rates for our single family ARMs are indexed to COFI, 1-Month LIBOR, 6-Month LIBOR, 12-MTA and 1-Yr. CMT. We currently offer loans with interest rates that adjust either
semi-annually or semi-annually upon expiration of a three- or five-year fixed rate period. Borrowers are required to make monthly payments under the terms of such loans. Some of our adjustable rate
loans behave like fixed rate loans because the loans may still be in their initial fixed rate period or may be subject to interest rate floors.
We
qualify our ARM borrowers based upon the fully indexed interest rate (LIBOR or other index plus an applicable margin, rounded to the nearest one-eighth of 1%) provided by the terms of the loan.
However, we may discount the initial rate paid by the borrower to adjust for market and other competitive factors. The ARMs that we offer have a lifetime adjustment limit that is set at the
time that the loan is approved. In addition, because of interest rate caps and floors, market rates may exceed or go below the respective maximum or minimum rates payable on our ARMs.
The
mortgage loans that we originate generally include due-on-sale clauses, which provide us with the contractual right to declare the loan immediately due and payable in the event that the borrower
transfers ownership of the property.
Construction Lending
Construction loans totaled $1.9 million and $1.7 million at December 31, 2018 and 2017, respectively, representing less than 1% of our
gross loan portfolio. We provide loans for the construction of single family, multi-family and commercial real estate projects and for land development. We generally make construction and land loans
at variable interest rates based upon the Prime Rate. Generally, we require a loan-to-value ratio not exceeding 75% to 80% and a loan-to-cost ratio not exceeding 70% to 80% on construction loans.
Construction
loans involve risks that are different from those for completed project lending because we advance loan funds based upon the security and estimated value at completion of the project
under construction. If the borrower defaults on the loan, we may have to advance additional funds to finance the project's completion before the project can be sold. Moreover, construction projects
are affected by uncertainties inherent in estimating construction costs, potential delays in construction schedules, market demand and the accuracy of estimates of the value of the completed project
considered in the loan approval process. In addition, construction projects can be risky as they transition to completion and lease-up. Tenants who may have been interested in leasing a unit or
apartment may not be able to afford the space when the building is completed, or may fail to lease the space for other reasons such as more attractive terms offered by competing lessors, making it
difficult for the building to
4
Table of Contents
generate
enough cash flow for the owner to obtain permanent financing. No new construction loans were originated in 2018. Two construction participation loans totaling $3.5 million were
originated during 2017.
Commercial Lending
Prior to 2015, we originated non-real estate commercial loans that are secured by business assets, the franchise value of the business, if applicable, and
individual assets such as deposit accounts, securities and automobiles. Most of these loans were originated with maturities of up to 5 years. Our commercial loans amounted to
$226 thousand and $192 thousand at December 31, 2018 and 2017, respectively, representing less than 1% of our gross loan portfolio.
Loan Originations, Purchases and Sales
The following table summarizes loan originations, purchases, sales and principal repayments for the periods indicated:
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2018
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2017
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2016
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(In thousands)
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Gross loans (1):
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Beginning balance
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$
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359,686
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$
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382,264
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$
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307,956
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Loans originated:
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Single family
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-
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-
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-
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Multi-family
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96,034
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114,489
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136,794
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Commercial Real Estate
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1,017
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-
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-
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Construction
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1,861
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841
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837
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Commercial
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48
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69
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45
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Total loans originated
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98,960
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115,399
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137,676
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Loans purchased:
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Single family
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-
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24,640
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-
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Total loans purchased
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-
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24,640
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-
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Less:
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Principal repayments
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75,542
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65,169
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63,368
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Sales of loans
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19,332
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96,945
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-
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Loan charge-offs
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-
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-
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-
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Lower of Cost or Market (LOCOM) held for sale
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11
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-
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-
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Transfer of loans to real estate owned
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-
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503
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-
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Ending balance (2)
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$
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363,761
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$
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359,686
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$
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382,264
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-
(1)
-
Amount
is before deferred origination costs, purchase premiums and discounts.
-
(2)
-
Includes
loans receivable held for sale totaling $6.2 million at December 31, 2018, exclusive of $18 thousand in deferred origination costs and
$11 thousand marked down to market.
Loan
originations are derived from various sources including our loan personnel, local mortgage brokers, advertising and referrals from customers. For all loans that we originate, upon receipt of a
loan application from a prospective borrower, a credit report is ordered and certain other information is verified by an independent credit agency and, if necessary, additional financial information
is requested. An appraisal of the real estate intended to secure the proposed loan is required, which appraisal is performed by an independent licensed or certified appraiser designated and approved
by us. The Bank's Board of Directors (the "Board")
annually reviews our appraisal policy. Management reviews annually the qualifications and performance of independent appraisers that we use.
5
Table of Contents
It
is our policy to obtain title insurance on all real estate loans. Borrowers must also obtain hazard insurance naming Broadway Federal as a loss payee prior to loan closing. If the original loan
amount exceeds 80% on a sale or refinance of a first trust deed loan, we may require private mortgage insurance and the borrower is required to make payments to a mortgage impound account from which
we make disbursements to pay private mortgage insurance premiums, property taxes and hazard and flood insurance as required.
The
Board has authorized the following loan approval limits: if the total of the borrower's existing loans and the loan under consideration is $1,000,000 or less, the new loan may be approved by a
Senior Underwriter plus a Loan Committee member, including the Chief Executive Officer or Chief Credit Officer of the Bank; if the total of the borrower's existing loans and the loan under
consideration is from $1,000,001 to $2,000,000, the new loan must be approved by a Senior Underwriter plus two Loan Committee members, including the Chief Executive Officer or Chief Credit Officer of
the Bank; if the total of the borrower's existing loans and the loan under consideration is from $2,000,001 to $7,000,000, the new loan must be approved by a Senior Underwriter, the Chief Executive
Officer and Chief Credit Officer of the Bank, plus a majority of the Board-appointed non-management Loan Committee members. In addition, it is our practice that all loans approved be reported to the
Loan Committee no later than the month following their approval, and be ratified by the Board.
From
time to time, we purchase loans originated by other institutions based upon our investment needs and market opportunities. The determination to purchase specific loans or pools of loans is
subject to our underwriting policies, which consider, among other factors, the financial condition of the borrowers, the location of the underlying collateral properties and the appraised value of the
collateral properties. We did not purchase any loans during the year ended December 31, 2018. During 2017, we purchased $24.6 million principal amount of single family loans, which are
being serviced by the seller.
We
originate loans for investment and for sale. Loan sales are generally made from the loans receivable held-for-sale portfolio and from loans originated during the period that are designated as held
for sale. During 2018, we originated $20.2 million of multi-family loans for sale, transferred $16.9 million of multi-family loans from held-for-sale to held-for-investment and sold
$19.3 million of multi-family loans in order to comply with regulatory loan concentration guidelines. During 2017, we originated $110.4 million of multi-family loans for sale,
transferred $9.8 million of multi-family loans from held-for-investment to held-for-sale and sold $96.9 million of multi-family loans.
We
receive monthly loan servicing fees on loans sold and serviced for others, primarily insured financial institutions. Generally, we collect these fees by retaining a portion of the loan collections
in an amount equal to an agreed percentage of the monthly loan installments, plus late charges and certain other fees paid by the borrowers. Loan servicing activities include monthly loan payment
collection, monitoring of insurance and tax payment status, responses to borrower information requests and dealing with loan delinquencies and defaults, including conducting loan foreclosures. At
December 31, 2018 and 2017, we were servicing $2.6 million and $3.6 million, respectively, of loans for others. The servicing rights associated with sold loans are recorded as
assets based upon their fair values. At December 31, 2018 and 2017, we had $18 thousand and $24 thousand, respectively, in mortgage servicing rights.
Loan Maturity and Repricing
The following table shows the contractual maturities of loans in our portfolio of loans held for investment at December 31, 2018, and does not reflect
the effect of prepayments or scheduled principal amortization.
6
Table of Contents
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|
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|
|
Single
family
|
|
Multi-
family
|
|
Commercial
real estate
|
|
Church
|
|
Construction
|
|
Commercial
|
|
Consumer
|
|
Gross
loans
receivable
|
|
|
|
(In thousands)
|
|
Amounts Due:
|
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After one year:
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|
|
|
|
|
|
|
|
|
|
|
|
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|
One year to five years
|
|
$
|
1,074
|
|
$
|
-
|
|
$
|
3,563
|
|
$
|
21,756
|
|
$
|
-
|
|
$
|
64
|
|
$
|
-
|
|
$
|
26,457
|
|
After five years
|
|
|
90,761
|
|
|
231,537
|
|
|
2,304
|
|
|
4,178
|
|
|
-
|
|
|
162
|
|
|
-
|
|
|
328,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total due after one year
|
|
|
91,835
|
|
|
231,537
|
|
|
5,866
|
|
|
25,934
|
|
|
-
|
|
|
226
|
|
|
-
|
|
|
355,399
|
|
One year or less
|
|
|
-
|
|
|
268
|
|
|
-
|
|
|
-
|
|
|
1,876
|
|
|
-
|
|
|
5
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,835
|
|
$
|
231,805
|
|
$
|
5,866
|
|
$
|
25,934
|
|
$
|
1,876
|
|
$
|
226
|
|
$
|
5
|
|
$
|
357,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Loans
in their initial fixed rate period totaled $298 million or 83% of our loan portfolio at December 31, 2018. The average initial fixed rate period as of December 31, 2018 was
3.1 years.
Asset Quality
General
The underlying credit quality of our loan portfolio is dependent primarily on each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral securing the loan, if any. A borrower's ability to pay typically is dependent, in the case of single family residential
loans and consumer loans, primarily on employment and other sources of income, and in the case of multi-family and commercial real estate loans, on the cash flow generated by the property, which in
turn is impacted by general economic conditions. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrower's ability to make loan payments.
Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, property maintenance and collection or foreclosure
delays.
Delinquencies
We perform a weekly review of all delinquent loans and loan delinquency reports are made monthly to the Internal Asset Review Committee of the Board of
Directors. When a borrower fails to make a required payment on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. The procedures
we follow with respect to delinquencies vary depending on the type of loan, the type of property securing the loan, and the period of delinquency. In
the case of residential mortgage loans, we generally send the borrower a written notice of non-payment promptly after the loan becomes past due. In the event payment is not received promptly
thereafter, additional letters are sent and telephone calls are made. If the loan is still not brought current and it becomes necessary for us to take legal action, we generally commence foreclosure
proceedings on all real property securing the loan. In the case of commercial real estate loans, we generally contact the borrower by telephone and send a written notice of intent to foreclose upon
expiration of the applicable grace period. Decisions not to commence foreclosure upon expiration of the notice of intent to foreclose for commercial real estate loans are made on a case-by-case basis.
We may consider loan workout arrangements with these types of borrowers in certain circumstances.
7
Table of Contents
The
following table shows our loan delinquencies by type and amount at the dates indicated:
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
December 31, 2016
|
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|
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|
|
|
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|
|
Loans delinquent
|
|
Loans delinquent
|
|
Loans delinquent
|
|
|
|
|
|
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|
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|
|
|
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|
|
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|
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|
|
60-89 Days
|
|
90 days or more
|
|
60-89 Days
|
|
90 days or more
|
|
60-89 Days
|
|
90 days or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Single family
|
|
|
1
|
|
$
|
35
|
|
|
-
|
|
$
|
-
|
|
|
1
|
|
$
|
50
|
|
|
-
|
|
$
|
-
|
|
|
1
|
|
$
|
64
|
|
|
-
|
|
$
|
-
|
|
Church
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1
|
|
$
|
35
|
|
|
-
|
|
$
|
-
|
|
|
1
|
|
$
|
50
|
|
|
-
|
|
$
|
-
|
|
|
1
|
|
$
|
64
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Gross Loans (1)
|
|
|
|
|
|
0.01%
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
0.01%
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
0.01%
|
|
|
|
|
|
0.00%
|
|
-
(1)
-
Includes
loans receivable held for sale at December 31, 2018 and 2017.
Non-Performing Assets
Non-performing assets ("NPAs") include non-accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure ("REO"). NPAs at
December 31, 2018 decreased to $1.7 million, or 0.43% of total assets, from $2.6 million, or 0.64% of total assets, at December 31, 2017.
Non-accrual
loans decreased by $855 thousand to $911 thousand at December 31, 2018, from $1.8 million at December 31, 2017. These loans consist of delinquent loans
that are 90 days or more past due and other loans, including troubled debt restructurings ("TDRs") that do not qualify for accrual status. As of December 31, 2018, $911 thousand ,
or 100% of our non-accrual loans, were current in their payments, but were treated as non-accrual primarily because of deficiencies in non-payment matters related to the borrowers, such as lack of
current financial information. The $855 thousand decrease in non-accrual loans was due to upgrades from non-accrual to accrual status of $659 thousand and repayments of
$196 thousand.
8
Table of Contents
The
following table provides information regarding our non-performing assets at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
302
|
|
$
|
736
|
|
Multi-family
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
779
|
|
|
1,618
|
|
Commercial real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259
|
|
|
1,174
|
|
Church
|
|
|
911
|
|
|
1,766
|
|
|
2,944
|
|
|
2,887
|
|
|
5,232
|
|
Commercial
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
911
|
|
|
1,766
|
|
|
2,944
|
|
|
4,227
|
|
|
8,862
|
|
Loans delinquent 90 days or more and still accruing
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Real estate owned acquired through foreclosure
|
|
|
833
|
|
|
878
|
|
|
-
|
|
|
360
|
|
|
2,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
1,744
|
|
$
|
2,644
|
|
$
|
2,944
|
|
$
|
4,587
|
|
$
|
10,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans as a percentage of gross loans, including loans receivable held for sale
|
|
|
0.25%
|
|
|
0.49%
|
|
|
0.77%
|
|
|
1.37%
|
|
|
2.93%
|
|
Non-performing assets as a percentage of total assets
|
|
|
0.43%
|
|
|
0.64%
|
|
|
0.69%
|
|
|
1.14%
|
|
|
3.12%
|
|
There
were no accrual loans that were contractually past due by 90 days or more at December 31, 2018 or 2017. We had no commitments to lend additional funds to borrowers whose loans were
on non-accrual status at December 31, 2018.
We
discontinue accruing interest on loans when the loans become 90 days delinquent as to their payment due date (missed three payments). In addition, we reverse all previously accrued and
uncollected interest for those loans through a charge to interest income. While loans are in non-accrual status, interest received on such loans is credited to principal, until the loans qualify for
return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
We
may agree to modify the contractual terms of a borrower's loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is
considered a TDR. Non-accrual loans modified in a TDR remain on non-accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the
borrower demonstrate performance according to the restructured terms, generally for a period of at least six months. Loans modified in a TDR that are included in non-accrual loans totaled
$591 thousand at December 31, 2018 and $1.4 million at December 31, 2017. Excluded from non-accrual loans are restructured loans that were not delinquent at the time of
modification or loans that have complied with the terms of their restructured agreement for six months or such longer period as management deems appropriate for particular loans, and therefore have
been returned to accruing status. Restructured accruing loans totaled $5.5 million at December 31, 2018 and $7.5 million at December 31, 2017.
During
2018, gross interest income that would have been recorded on non-accrual loans had they performed in accordance with their original terms, totaled $173 thousand. Actual interest
recognized on non-accrual loans and included in net income for the year 2018 was $40 thousand, primarily reflecting interest recoveries on non-accrual loans that were paid off.
9
Table of Contents
We update our estimates of collateral value on loans when they become 90 days past due and to the extent the loans remain delinquent, every nine months thereafter. We
obtain updated estimates of collateral value earlier than at 90 days past due for loans to borrowers who have filed for bankruptcy or for certain other loans when our Internal Asset Review
Committee believes repayment of such loans may be dependent on the value of the underlying collateral. For single family loans, updated estimates of collateral value are obtained through appraisals
and automated valuation models. For multi-family and commercial real estate properties, we estimate collateral value through appraisals or internal cash flow analyses when current financial
information is available, coupled with, in most cases, an inspection of the property. Our policy is to make a charge against our allowance for loan losses, and correspondingly reduce the book value of
a loan, to the extent that the collateral value of the property securing a loan is less than our recorded investment in the loan. See "Allowance for Loan Losses" for full discussion of the allowance
for loan losses.
REO
is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at fair value less estimated selling costs. Any excess of carrying value over fair value at the
time of acquisition is charged to the allowance for loan losses. Thereafter, we charge non-interest expense for the property maintenance and protection expenses incurred as a result of owning the
property. Any decreases in the property's estimated fair value after foreclosure are recorded in a separate allowance for losses on REO. During 2018, the Bank did not foreclose on any loans. During
2017, the Bank received a deed in lieu of foreclosure, which was recorded at fair value, net of estimated selling costs of $833 thousand at December 31, 2018, compared to
$878 thousand at December 31, 2017.
Classification of Assets
Federal regulations and our internal policies require that we utilize an asset classification system as a means of monitoring and reporting problem and
potential problem assets. We have incorporated asset classifications as a part of our credit monitoring system and thus classify potential problem assets as "Watch" and "Special Mention," and problem
assets as "Substandard," "Doubtful" or "Loss". An asset is considered "Watch" if the loan is current but temporarily presents higher than average risk and warrants greater than routine attention and
monitoring. An asset is considered "Special Mention" if the loan is current but there are some potential weaknesses that deserve management's close attention. An asset is considered "Substandard" if
it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not
warranted. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but that are considered to possess some weaknesses, are
designated "Special Mention." Our Internal Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to the Internal Asset Review Committee of our
Board of Directors monthly.
10
Table of Contents
The
following table provides information regarding our criticized loans (Watch and Special Mention) and classified assets (Substandard) at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Watch loans
|
|
|
2
|
|
$
|
673
|
|
|
3
|
|
$
|
813
|
|
Special mention loans
|
|
|
1
|
|
|
35
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total criticized loans
|
|
|
3
|
|
|
708
|
|
|
3
|
|
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard loans
|
|
|
15
|
|
|
5,487
|
|
|
17
|
|
|
6,395
|
|
REO
|
|
|
1
|
|
|
833
|
|
|
1
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total classified assets
|
|
|
16
|
|
|
6,320
|
|
|
18
|
|
|
7,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19
|
|
$
|
7,028
|
|
|
21
|
|
$
|
8,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified
assets decreased by $953 thousand to $6.3 million at December 31, 2018, from $7.3 million at December 31, 2017, primarily due to $45 thousand of
write-downs on REO, $280 thousand of payoffs, $328 thousand of paydowns, and $919 thousand of classification upgrades, offset by $619 thousand of classification downgrades.
Criticized assets decreased by $105 thousand to $708 thousand at December 31, 2018, from $813 thousand at December 31, 2017, due to $122 thousand of payoff
and $18 thousand of repayments offset by $35 thousand of classification downgrade.
Allowance for Loan Losses
In originating loans, we recognize that losses may be experienced on loans and that the risk of loss may vary as a result of many factors, including the type
of loan being made, the creditworthiness of the borrower, general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan. We are required to maintain an
adequate allowance for loan losses ("ALLL") in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). The ALLL represents our management's best estimate of probable
incurred credit losses in our loan portfolio as of the date of the consolidated financial statements. Our ALLL is intended to cover specifically identifiable loan losses, as well as estimated losses
inherent in our portfolio for which certain losses are probable, but not specifically identifiable. There can be no assurance, however, that actual losses incurred will not exceed the amount of
management's estimates.
Our
Internal Asset Review Department issues reports to the Board of Directors and continually reviews loan quality. This analysis includes a detailed review of the classification and categorization of
problem loans, potential problem loans and loans to be charged off, an assessment of the overall quality and collectability of the portfolio, and concentration of credit risk. Management then
evaluates the allowance, determines its appropriate level and the need for additional provisions, and presents its analysis to the Board of Directors which ultimately reviews management's
recommendation and, if deemed appropriate, then approves such recommendation.
The
ALLL is increased by provisions for loan losses which are charged to earnings and is decreased by recaptures of loan loss provision and charge-offs, net of recoveries. Provisions are recorded to
increase the ALLL to the level deemed appropriate by management. The Bank utilizes an allowance methodology that
considers a number of quantitative and qualitative factors, including the amount of non-performing loans, our loan loss experience, conditions in the real estate and housing markets, current economic
conditions and trends, particularly levels of unemployment, and changes in the size of the loan portfolio.
The
ALLL consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
11
Table of Contents
A
loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as
impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment
record, and the amount of the shortfall in relation to the principal and interest owed.
If
a loan is impaired, a portion of the allowance is allocated to the loan so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at
the fair value of collateral if repayment is expected solely from the collateral. TDRs are separately identified for impairment and are measured at the present value of estimated future cash flows
using the loan's effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated selling costs. For
TDRs that subsequently default, we determine the amount of any necessary additional charge-off based on internal analyses and appraisals of the underlying collateral securing these loans. At
December 31, 2018, impaired loans totaled $6.4 million and had an aggregate specific allowance allocation of $227 thousand.
The
general component of the ALLL covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Each month, we prepare an analysis which categorizes the entire
loan portfolio by certain risk characteristics such as loan type (single family, multi-family, commercial real estate, construction, commercial and consumer) and loan classification (pass, watch,
special mention, substandard and doubtful). With the use of a migration to loss analysis, we calculate our historical loss rate and assign estimated loss factors to the loan classification categories
on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to our historical loss experience,
levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and
depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
In
addition to loss experience and environmental factors, we use qualitative analyses to determine the adequacy of our ALLL. This analysis includes ratio analysis to evaluate the overall measurement
of the ALLL and comparison of peer group reserve percentages. The qualitative review is used to reassess the overall determination of the ALLL and to ensure that directional changes in the ALLL and
the provision for loan losses are supported by relevant internal and external data.
Based
on our evaluation of the housing and real estate markets and overall economy, including the unemployment rate, the levels and composition of our loan delinquencies and non-performing loans, our
loss history and the size and composition of our loan portfolio, we determined that an ALLL of $2.9 million, or 0.82% of loans held for investment was appropriate at December 31, 2018,
compared to $4.1 million, or 1.20% of loans held for investment at December 31, 2017. The decrease in ALLL compared to the prior year was due to the overall improvement in the loan
portfolio which had a favorable impact on the environmental factors used in the computation of the ALLL.
A
federally chartered savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, in conjunction
with the other federal banking agencies, provides guidance for financial institutions on the responsibilities of management for the assessment and establishment of adequate valuation allowances, as
well as guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and
12
Table of Contents
controls
to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectability of the portfolio in a reasonable manner and establish acceptable
allowance evaluation processes that meet the objectives of the guidelines issued by federal regulatory agencies. While we believe that the ALLL has been established and maintained at adequate levels,
future adjustments may be necessary if economic or other conditions differ materially from the conditions on which we based our estimates at December 31, 2018. In addition, there can be no
assurance that the OCC or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not require us to materially increase our ALLL, thereby affecting our financial condition
and earnings.
The
following table details our allocation of the ALLL to the various categories of loans held for investment and the percentage of loans in each category to total loans at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
Amount
|
|
|
Percent
of loans
in each
category
to total
loans
|
|
|
Amount
|
|
|
Percent
of loans
in each
category
to total
loans
|
|
|
Amount
|
|
|
Percent
of loans
in each
category
to total
loans
|
|
|
Amount
|
|
|
Percent
of loans
in each
category
to total
loans
|
|
|
Amount
|
|
|
Percent
of loans
in each
category
to total
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Single family
|
|
$
|
368
|
|
|
12.56%
|
|
$
|
594
|
|
|
32.93%
|
|
$
|
367
|
|
|
27.42%
|
|
$
|
597
|
|
|
42.50%
|
|
$
|
1,174
|
|
|
14.03%
|
|
Multi-family
|
|
|
1,880
|
|
|
64.19%
|
|
|
2,300
|
|
|
55.57%
|
|
|
2,659
|
|
|
60.05%
|
|
|
1,658
|
|
|
38.52%
|
|
|
2,726
|
|
|
60.58%
|
|
Commercial real estate
|
|
|
52
|
|
|
1.78%
|
|
|
71
|
|
|
1.80%
|
|
|
215
|
|
|
2.33%
|
|
|
469
|
|
|
3.72%
|
|
|
496
|
|
|
5.90%
|
|
Church
|
|
|
604
|
|
|
20.62%
|
|
|
1,081
|
|
|
9.14%
|
|
|
1,337
|
|
|
9.90%
|
|
|
2,083
|
|
|
15.06%
|
|
|
4,047
|
|
|
19.26%
|
|
Construction
|
|
|
19
|
|
|
0.65%
|
|
|
17
|
|
|
0.50%
|
|
|
8
|
|
|
0.22%
|
|
|
3
|
|
|
0.11%
|
|
|
7
|
|
|
0.14%
|
|
Commercial
|
|
|
6
|
|
|
0.20%
|
|
|
6
|
|
|
0.06%
|
|
|
17
|
|
|
0.08%
|
|
|
18
|
|
|
0.09%
|
|
|
12
|
|
|
0.09%
|
|
Consumer
|
|
|
-
|
|
|
0.00%
|
|
|
-
|
|
|
0.00%
|
|
|
-
|
|
|
0.00%
|
|
|
-
|
|
|
0.00%
|
|
|
3
|
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
2,929
|
|
|
100.00%
|
|
$
|
4,069
|
|
|
100.00%
|
|
$
|
4,603
|
|
|
100.00%
|
|
$
|
4,828
|
|
|
100.00%
|
|
$
|
8,465
|
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Table of Contents
The
following table shows the activity in our ALLL related to our loans held for investment for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(Dollars in thousands)
|
|
Allowance balance at beginning of year
|
|
$
|
4,069
|
|
$
|
4,603
|
|
$
|
4,828
|
|
$
|
8,465
|
|
$
|
10,146
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4
|
)
|
|
(133
|
)
|
Multi-family
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8
|
)
|
Church
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(85
|
)
|
|
(533
|
)
|
Commercial
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(89
|
)
|
|
(693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
|
-
|
|
|
30
|
|
|
47
|
|
|
129
|
|
|
2
|
|
Commercial real estate
|
|
|
-
|
|
|
-
|
|
|
248
|
|
|
-
|
|
|
-
|
|
Church
|
|
|
114
|
|
|
536
|
|
|
22
|
|
|
23
|
|
|
859
|
|
Commercial
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
-
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
114
|
|
|
566
|
|
|
325
|
|
|
152
|
|
|
1,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (recapture) charged to earnings
|
|
|
(1,254
|
)
|
|
(1,100
|
)
|
|
(550
|
)
|
|
(3,700
|
)
|
|
(2,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance balance at end of year
|
|
$
|
2,929
|
|
$
|
4,069
|
|
$
|
4,603
|
|
$
|
4,828
|
|
$
|
8,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) to average loans, excluding loans receivable held for sale
|
|
|
(0.04%
|
)
|
|
(0.16%
|
)
|
|
(0.10%
|
)
|
|
(0.02%
|
)
|
|
(0.46%
|
)
|
ALLL as a percentage of gross loans, excluding loans receivable held for sale
|
|
|
0.82%
|
|
|
1.20%
|
|
|
1.20%
|
|
|
1.56%
|
|
|
2.99%
|
|
ALLL as a percentage of total non-accrual loans
|
|
|
321.51%
|
|
|
230.41%
|
|
|
156.35%
|
|
|
114.22%
|
|
|
95.52%
|
|
ALLL as a percentage of total non-performing assets
|
|
|
167.94%
|
|
|
153.90%
|
|
|
156.35%
|
|
|
105.25%
|
|
|
77.35%
|
|
Investment Activities
The main objectives of our investment strategy are to provide a source of liquidity for deposit outflows, repayment of our borrowings and funding loan
commitments, and to generate a favorable return on investments without incurring undue interest rate or credit risk. Subject to various restrictions, our investment policy generally permits
investments in money market instruments such as Federal Funds Sold, certificates of deposit of insured banks and savings institutions, direct obligations of the U. S. Treasury, Federal Agency
securities, government Agency-issued securities and mortgage-backed securities, mutual funds, municipal obligations, corporate bonds and marketable equity securities. Mortgage-backed securities
consist principally of FNMA, FHLMC and GNMA securities backed by 30-year amortizing hybrid ARM loans, structured with fixed interest rates for periods of three to seven years, after which time the
loans convert to one-year or six-month adjustable rate mortgage loans. At December 31, 2018, our securities portfolio, consisting primarily of federal agency debt and mortgage-backed
securities, totaled $14.7 million, or 3.6% of total assets.
14
Table of Contents
We
classify investments as held-to-maturity or available-for-sale at the date of purchase based on our assessment of our internal liquidity requirements. Securities purchased to meet
investment-related objectives such as liquidity management or mitigating interest rate risk and which may be sold as necessary to implement management strategies, are designated as available-for-sale
at the time of purchase. Securities in
the held-to-maturity category consist of securities purchased for long-term investment in order to enhance our ongoing stream of net interest income. Securities deemed held-to-maturity are classified
as such because we have both the intent and ability to hold these securities to maturity. Held-to-maturity securities are reported at cost, adjusted for amortization of premium and accretion of
discount. Available-for-sale securities are reported at fair value. We currently have no securities classified as held-to-maturity securities.
The
table below presents the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2018. The table reflects stated final maturities and does
not reflect scheduled principal payments or expected payoffs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
|
|
One Year or less
|
|
More than one
year
to five years
|
|
More than five
years
to ten years
|
|
More than
ten years
|
|
Total
|
|
|
|
Carrying
amount
|
|
Weighted
average
yield
|
|
Carrying
amount
|
|
Weighted
average
yield
|
|
Carrying
amount
|
|
Weighted
average
yield
|
|
Carrying
amount
|
|
Weighted
average
yield
|
|
Carrying
amount
|
|
Weighted
average
yield
|
|
|
|
(Dollars in thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency mortgage-backed securities
|
|
$
|
-
|
|
|
- %
|
|
$
|
50
|
|
|
3.89%
|
|
$
|
2,649
|
|
|
2.53%
|
|
$
|
6,809
|
|
|
3.16%
|
|
$
|
9,508
|
|
|
2.99%
|
|
Federal agency debt
|
|
|
1,979
|
|
|
2.00%
|
|
|
-
|
|
|
- %
|
|
|
-
|
|
|
- %
|
|
|
3,235
|
|
|
2.71%
|
|
|
5,214
|
|
|
2.44%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,979
|
|
|
2.00%
|
|
$
|
50
|
|
|
3.89%
|
|
$
|
2,649
|
|
|
2.53%
|
|
$
|
10,044
|
|
|
3.02%
|
|
$
|
14,722
|
|
|
2.79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2018, the mortgage-backed securities in our portfolio have an estimated remaining life of 4.5 years.
Sources of Funds
General
Deposits are our primary source of funds for supporting our lending and other investment activities and general business purposes. In addition to deposits, we
obtain funds from the amortization and prepayment of loans and investment securities, sales of loans and investment securities, advances from the FHLB of San Francisco, and cash flows generated by
operations.
Deposits
We offer a variety of deposit accounts featuring a range of interest rates and terms. Our deposits principally consist of savings accounts, checking accounts,
NOW accounts, money market accounts, and fixed-term certificates of deposit. The maturities of term certificates generally range from one month to five years. We accept deposits from customers within
our market area based primarily on posted rates, but from time to time we will negotiate the rate based on the amount of the deposit. We primarily rely on customer service and long-standing customer
relationships to attract and retain deposits. We seek to maintain and increase our retail "core" deposit relationships, consisting of savings accounts, checking accounts and money market accounts
because we believe these deposit
15
Table of Contents
accounts
tend to be a stable funding source and are available at a lower cost than term deposits. However, market interest rates, including rates offered by competing financial institutions, the
availability of other investment alternatives, and general economic conditions significantly affect our ability to attract and retain deposits.
We
also open deposit accounts for customers throughout the United States through the Internet and deposit listing services. Deposits from the Internet and deposit listing services totaled
$3.6 million and $12.3 million, respectively, at December 31, 2018 compared to $4.7 million and $9.2 million, respectively, at December 31, 2017.
We
participate in a deposit program called the Certificate of Deposit Account Registry Service ("CDARS"). CDARS is a deposit placement service that allows us to place our customers' funds in
FDIC-insured certificates of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network ("CDARS Reciprocal"). We may also accept
deposits from other institutions when we have no reciprocal deposit ("CDARS One-Way Buy"). We had approximately $33.7 million in CDARS Reciprocal and $42.5 million in CDARS One-Way Buy
at December 31, 2018, compared to $9.5 million in CDARS Reciprocal and $43.3 million in CDARS One-Way Buy at December 31, 2017.
The
following table details the maturity periods of our certificates of deposit in amounts of $250 thousand or more at December 31, 2018.
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Amount
|
|
Weighted
average rate
|
|
|
|
(Dollars in thousands)
|
|
Certificates maturing:
|
|
|
|
|
|
|
|
Less than three months
|
|
$
|
1,253
|
|
|
0.79%
|
|
Three to six months
|
|
|
3,653
|
|
|
2.08%
|
|
Six to twelve months
|
|
|
9,747
|
|
|
2.13%
|
|
Over twelve months
|
|
|
9,368
|
|
|
2.28%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,021
|
|
|
2.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the distribution of our average deposits for the years indicated and the weighted average interest rates during the year for each category of deposits presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
Average
balance
|
|
Percent
of total
|
|
Weighted
average
rate
|
|
Average
balance
|
|
Percent
of total
|
|
Weighted
average
rate
|
|
Average
balance
|
|
Percent
of total
|
|
Weighted
average
rate
|
|
|
|
(Dollars in thousands)
|
|
Money market deposits
|
|
$
|
37,489
|
|
|
13.45%
|
|
|
1.07%
|
|
$
|
38,318
|
|
|
13.14%
|
|
|
0.70%
|
|
$
|
27,399
|
|
|
10.06%
|
|
|
0.58%
|
|
Passbook deposits
|
|
|
41,936
|
|
|
15.03%
|
|
|
0.38%
|
|
|
39,064
|
|
|
13.39%
|
|
|
0.32%
|
|
|
36,611
|
|
|
13.45%
|
|
|
0.32%
|
|
NOW and other demand deposits
|
|
|
34,818
|
|
|
12.48%
|
|
|
0.09%
|
|
|
32,275
|
|
|
11.07%
|
|
|
0.07%
|
|
|
29,959
|
|
|
11.00%
|
|
|
0.07%
|
|
Certificates of deposit
|
|
|
164,703
|
|
|
59.04%
|
|
|
1.49%
|
|
|
181,993
|
|
|
62.40%
|
|
|
1.09%
|
|
|
178,292
|
|
|
65.49%
|
|
|
1.06%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
278,946
|
|
|
100.00%
|
|
|
1.10%
|
|
$
|
291,650
|
|
|
100.00%
|
|
|
0.82%
|
|
$
|
272,261
|
|
|
100.00%
|
|
|
0.80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Table of Contents
Borrowings
We utilize short-term and long-term advances from the FHLB of San Francisco as an alternative to retail deposits as a funding source for asset growth. FHLB
advances are generally secured by mortgage loans and mortgage-backed securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range
of maturities. The maximum amount that the FHLB will advance to member institutions fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 2018, we had
$70.0 million in FHLB advances and had the ability to borrow up to an additional $54.6 million based on available and pledged collateral.
The
following table summarizes information concerning our FHLB advances at or for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding during the year
|
|
$
|
77,729
|
|
$
|
89,279
|
|
$
|
71,940
|
|
Maximum amount outstanding at any month-end during the year
|
|
$
|
98,000
|
|
$
|
104,000
|
|
$
|
85,000
|
|
Balance outstanding at end of year
|
|
$
|
70,000
|
|
$
|
65,000
|
|
$
|
85,000
|
|
Weighted average interest rate at end of year
|
|
|
2.51
|
%
|
|
1.86
|
%
|
|
1.94
|
%
|
Average cost of advances during the year
|
|
|
2.13
|
%
|
|
1.97
|
%
|
|
2.13
|
%
|
Weighted average maturity (in months)
|
|
|
24
|
|
|
18
|
|
|
13
|
|
On
March 17, 2004, we issued $6.0 million of Floating Rate Junior Subordinated Debentures (the "Debentures") in a private placement to a trust that was capitalized to purchase
subordinated debt and preferred stock of multiple community banks. Interest on the Debentures is payable quarterly at a rate per annum equal to the 3-Month LIBOR plus 2.54%. The interest rate is
determined as of each March 17, June 17, September 17, and December 17, and was 5.30% at December 31, 2018. On October 16, 2014, we made payments of
$900 thousand of principal on the Debentures, executed a Supplemental Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024, and modified the
payment terms of the remaining $5.1 million principal amount thereof. The modified terms of the Debentures require quarterly payments of interest only through March 2019 at the original rate of
3-Month LIBOR plus 2.54%. Starting in June 2019, we will be required to make quarterly payments of equal amounts of principal, plus interest, until the Debentures are fully amortized on
March 17, 2024. The Debentures may be called for redemption at any time by the Company.
Market Area and Competition
Broadway Federal is a community-oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. Our
retail banking network includes full service banking offices, automated teller machines and Internet banking capabilities that are available using our website at www.broadwayfederalbank.com. We have
two banking offices in Los Angeles and one banking office located in the nearby City of Inglewood.
The
Los Angeles metropolitan area is a highly competitive banking market for making loans and attracting deposits. Although our offices are primarily located in low-to-moderate income communities that
have historically been under-served by other financial institutions, we face significant competition for deposits and loans in our immediate market areas, including direct competition from mortgage
banking companies, commercial banks and savings and loan associations. Most of these financial institutions are significantly larger than we are and have greater financial resources, and many have a
regional, statewide or national presence.
17
Table of Contents
Personnel
At December 31, 2018, we had 65 employees, which included 61 full-time and 4 part-time employees. We believe that we have good relations with our
employees and none are represented by a collective bargaining group.
Regulation
General
Broadway Federal Bank, f.s.b, is regulated by the OCC, as its primary federal regulator, and by the FDIC, as its deposit insurer. The Bank is also a member of
the FHLB System and is subject to the regulations of the FRB concerning reserves required to be maintained against deposits, transactions with affiliates, Truth in Lending and other consumer
protection requirements and certain other matters. Broadway Financial Corporation is regulated, examined and supervised by the FRB and is also required to file certain reports and otherwise comply
with the rules and regulations of the SEC under the federal securities laws.
The
OCC regulates and examines most of our Bank's business activities, including, among other things, capital standards, general investment authority, deposit taking and borrowing authority, mergers
and other business combination transactions, establishment of branch offices, and permitted subsidiary investments and activities. The OCC has primary enforcement responsibility over federal savings
banks and has substantial discretion to impose enforcement actions on an institution that fails to comply with applicable regulatory requirements, including with respect to capital requirements. In
addition, the FDIC has the authority to recommend to the OCC that enforcement actions be taken with respect to a particular federal savings bank and, if recommended action is not taken by the OCC, the
FDIC has authority to take such action under certain circumstances. In certain cases, the OCC has the authority to refer matters relating to federal fair lending laws to the U.S. Department of Justice
("DOJ") or the U.S. Department of Housing and Urban Development ("HUD") if the OCC determines violations of the fair lending laws may have occurred.
Changes
in the applicable laws or regulations of the OCC, the FDIC, the FRB or other regulatory authorities, or changes in interpretations of such regulations or in agency policies or priorities,
could have a material adverse impact on the Bank and the Company, their operations, and the value of the Company's debt and equity securities. The Company and its stock are also subject to rules and
regulations issued by The
NASDAQ Stock Market, LLC ("NASDAQ"), the principal exchange on which the Company's common stock is traded. Failure of the Company to conform to NASDAQ's rules and regulations could have an
adverse impact on the Company and the value of the Company's equity securities.
The
following paragraphs summarize certain laws and regulations that apply to the Company and the Bank. These descriptions of statutes and regulations and their possible effects do not purport to be
complete descriptions of all of the provisions of those statutes and regulations and their possible effects on us, nor do they purport to identify every statute and regulation that applies to us.
Dodd-Frank Wall Street Reform and Consumer Protection Act
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act is intended to
address perceived weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises.
As
a result of the Dodd-Frank Act, on July 21, 2011, the Office of Thrift Supervision ("OTS"), our former primary federal regulator, was merged into the OCC, which has taken over the regulation
and supervision of all federal savings associations. The FRB acquired the OTS's authority over all savings and loan holding companies.
18
Table of Contents
The
Dodd-Frank Act established increased compliance obligations across a number of areas in the banking business and, among other changes, required the federal banking agencies to establish
consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and certain non-bank financial companies that are no less
stringent than those to which insured depository institutions had been previously subject. Under an existing FRB policy statement, bank holding companies with less than $500 million in total
consolidated assets were not subject to consolidated capital requirements. In guidance effective as of May 15, 2015, the FRB formally applied the policy statement to savings and loan holding
companies, such as the Company, and raised the applicable asset threshold to $1 billion. The Dodd-Frank Act requires savings and loan holding companies to serve as a source of financial
strength for any subsidiary of the holding company that is a depository institution by providing financial assistance in the event of the financial distress of the depository institution.
The
Dodd-Frank Act also includes provisions changing the assessment base for federal deposit insurance from the amount of insured deposits to the amount of consolidated assets less tangible capital,
and making permanent the $250,000 limit for federal deposit insurance that had initially been established on a temporary basis in reaction to the economic downturn in 2008.
The
Dodd-Frank Act also established the Consumer Financial Protection Bureau ("CFPB"). The CFPB has authority to supervise compliance with and enforce consumer protection laws. The CFPB has broad
rule-making authority for a wide range of consumer protection laws that apply to banks and savings institutions of all sizes, including the authority to prohibit "unfair, deceptive or abusive" acts
and practices. Over the past several years, the CFPB has been active in bringing enforcement actions against banks and nonbank financial institutions to enforce federal consumer financial laws, and
has developed a number of new enforcement theories and applications of these laws. The CFPB's supervisory authority does not generally extend to insured depository institutions having less than
$10 billion in assets. The other federal financial regulatory agencies, however, as well as state attorneys general and state banking agencies and other state financial regulators, have been
increasingly active in this area with respect to institutions over which they have jurisdiction.
The
Dodd-Frank Act also includes other provisions that require or permit further rulemaking by the federal bank regulatory agencies, which may affect our future operations. We will not be able to
determine the impact of any such provisions until final rules are promulgated and other regulatory guidance is provided interpreting these provisions.
Capital Requirements
In July 2013, the federal banking regulators approved final rules (the "Basel III Capital Rules") implementing the Basel III framework as well as certain
provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to depository institutions including Broadway Federal. As stated
above, the Company is a small savings and loan holding company that is exempt from consolidated capital requirements.
The
Basel III Capital Rules, among other things, (i) introduce a new capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consists of
CET1 and "Additional Tier 1 capital" instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions and adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions and adjustments to capital as compared to existing regulations.
Under
the Basel III Capital Rules, the current minimum capital ratios effective as of January 1, 2015 are:
-
-
4.5% CET1 to risk-weighted assets;
-
-
6.0% Tier 1 capital (calculated as CET1 plus Additional Tier 1 capital) to
risk-weighted assets;
-
-
8.0% Total capital (calculated as Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
19
Table of Contents
-
-
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 the minimum risk-weighted capital to assets ratios. The implementation of the
capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on January 1 of each subsequent year, until it reached 2.5% on January 1, 2019. As
fully phased in, the Basel III Capital Rules now require the Bank to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to
risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least
10.5%, and (iv) a minimum leverage ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required
risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on
dividends, equity repurchases and compensation based on the amount of the shortfall.
The
Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant
investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In
addition, under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded automatically; however, Broadway Federal Bank qualified to make a
one-time permanent election to continue to exclude these items. It made this election to avoid significant variations in the level of its capital that might otherwise occur as a result of the impact
of interest rate fluctuations on the fair value of its available-for-sale securities portfolio.
The
Basel III Capital Rules prescribe a standardized approach for risk weightings that expands both the number of risk-weighting categories and the risk sensitivity of many categories. The risk
weights assigned to a particular category of assets will depend on the nature of the assets, and range from 0% for U.S. government and agency securities to 600% for certain equity exposures. On
balance, the new standards result in higher risk weights for a number of asset categories.
The
Basel III Capital Rules also revise the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under "Prompt Corrective
Action." Management believes that, as of December 31, 2018, the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such
requirements had been in effect.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended ("FDIA"), requires the federal banking agencies to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. The OCC performs this function with respect to the Bank. The FDIA includes the following five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized."
Generally,
a capital restoration plan must be filed with the OCC within 45 days after the date a depository institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to
the institution, including restrictions on growth of assets and other forms of expansion.
20
Table of Contents
The Basel III Capital Rules included revisions to the prompt corrective action framework. Under the prompt corrective action requirements, insured depository institutions are
now required to meet the following increased capital level requirements in order to qualify as "well capitalized:" (i) a new CET1 capital to risk weighted assets of 6.5%; (ii) a
Tier 1 capital to risk weighted assets of 8% (increased from 6%); (iii) a total capital to risk weighted assets of 10% (unchanged from previous rules); and (iv) a Tier 1
leverage ratio of 5% (unchanged from previous rules).
At
December 31, 2018, the Bank's level of capital exceeded all regulatory capital requirements and its regulatory capital ratios were above the minimum levels required to be considered well
capitalized for regulatory purposes. Actual and required capital amounts and ratios at December 31, 2018 and 2017 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital
Requirements
|
|
Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (Leverage)
|
|
$
|
49,433
|
|
|
12.03%
|
|
$
|
16,439
|
|
|
4.00%
|
|
$
|
20,549
|
|
|
5.00%
|
|
Common Equity Tier 1
|
|
$
|
49,433
|
|
|
19.32%
|
|
$
|
18,494
|
|
|
4.50%
|
|
$
|
16,634
|
|
|
6.50%
|
|
Tier 1
|
|
$
|
49,433
|
|
|
19.32%
|
|
$
|
24,659
|
|
|
6.00%
|
|
$
|
20,472
|
|
|
8.00%
|
|
Total Capital
|
|
$
|
52,417
|
|
|
20.48%
|
|
$
|
32,879
|
|
|
8.00%
|
|
$
|
25,590
|
|
|
10.00%
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (Leverage)
|
|
$
|
47,838
|
|
|
11.39%
|
|
$
|
16,798
|
|
|
4.00%
|
|
$
|
20,997
|
|
|
5.00%
|
|
Common Equity Tier 1
|
|
$
|
47,838
|
|
|
18.63%
|
|
$
|
11,557
|
|
|
4.50%
|
|
$
|
16,693
|
|
|
6.50%
|
|
Tier 1
|
|
$
|
47,838
|
|
|
18.63%
|
|
$
|
15,409
|
|
|
6.00%
|
|
$
|
20,545
|
|
|
8.00%
|
|
Total Capital
|
|
$
|
51,059
|
|
|
19.88%
|
|
$
|
20,545
|
|
|
8.00%
|
|
$
|
25,681
|
|
|
10.00%
|
|
Deposit Insurance
The FDIC is an independent federal agency that insures deposits of federally insured banks, including federal savings banks, up to prescribed statutory limits
for each depositor. Pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased to $250,000 per depositor, per ownership category.
The
FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to the FDIC's Deposit Insurance Fund ("DIF"). The Bank's DIF assessment is
calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the Bank. The initial base
assessment rate is based on an institution's capital level, and capital adequacy, asset quality, management, earnings, liquidity and sensitivity ("CAMELS") ratings, certain financial measures to
assess an institution's ability to withstand asset related stress and funding related stress, and in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors.
The
FDIC's overall premium rate structure is subject to change from time to time to reflect its actual and anticipated loss experience. The financial crisis that began in 2008 resulted in
substantially higher levels of bank failures than had occurred in the immediately preceding years. These failures dramatically increased the resolution costs of the FDIC and substantially reduced the
available amount of the DIF.
As
required by the Dodd-Frank Act, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan increased the minimum designated DIF
reserve ratio from 1.15% to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the
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assessments
necessary to meet the new requirement, the FDIC is required to offset the effect of this provision on insured depository institutions with total consolidated assets of less than
$10 billion, so that more of the cost of raising the reserve ratio will be borne by institutions with more than $10 billion in assets. With the increase of the DIF reserve ratio to 1.17%
on June 30, 2016, the range of initial assessment rates has declined for all banks from five to 35 basis points on an annualized basis to three to 30 basis points on an annualized basis. In
order to reach a DIF reserve ratio of 1.35%, insured depository institutions with $10 billion or more in total assets are required to pay a quarterly surcharge equal to an annual rate of 4.5
basis points, in addition to regular assessments. In the event that the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall on large banks in the first
quarter of 2019. The FDIC will provide assessment credits to insured depository institutions, like Broadway Federal, with total consolidated assets of less than $10 billion for the portion of
their regular assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the
regular deposit insurance assessments of institutions with credits.
The
FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or
unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank's depositors.
Guidance on Commercial Real Estate Lending
In December 2015, the federal banking agencies released a statement titled "Statement on Prudent Risk Management for Commercial Real Estate Lending" (the "CRE
Statement"). The CRE Statement expresses the banking agencies' concerns with banking institutions that ease their commercial real estate underwriting standards, directs financial institutions to
maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicates that the agencies will continue to pay special attention to
commercial real estate lending activities and concentrations going forward. The banking agencies previously issued guidance titled "Prudent Commercial Real Estate Loan Workouts" which provides
guidance for financial institutions that are working with commercial real estate ("CRE") borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged
delays in selling or renting commercial properties and details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework
of financial accuracy, transparency, and timely loss recognition. The banking agencies had also issued previous guidance titled "Interagency Guidance on Concentrations in Commercial Real Estate"
stating that a banking institution will be considered to be potentially exposed to significant CRE concentration risk, and should employ enhanced risk management practices, if total CRE loans
represent 300% or more of its total capital and the outstanding balance of the institution's CRE loan portfolio has increased by 50% or more during the preceding 36 months.
In
October 2009, the federal banking agencies adopted a policy statement supporting workouts of CRE loans, which is referred to as the "CRE Policy Statement". The CRE Policy Statement provides
guidance for examiners, and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in
selling or renting commercial properties. The CRE Policy Statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the
framework of financial accuracy, transparency, and timely loss recognition. The CRE Policy Statement states that financial institutions that implement prudent loan workout arrangements after
performing comprehensive reviews of the financial condition of borrowers will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in
adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse
classification solely because the value of the underlying collateral declined. The CRE Policy Statement reiterates existing guidance that examiners are expected to take a balanced approach in
assessing an institution's risk-management practices for loan workout activities.
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In
September 2018, the OCC provided the Bank with a letter of "no supervisory objection" to management's request to increase the Bank's multi-family residential loan concentration limit of 450% of
Tier 1 Capital plus ALLL to 500% of Tier 1 Capital plus ALLL, In October of 2018, the OCC provided the Bank with an amended letter of "no supervisory objection" permitting the Bank to
increase the non-multifamily commercial real estate loan concentration limit to 100 percent of Tier 1 Capital plus ALLL, including a sublimit of 50% for land/construction loans, which
brought the total CRE loan concentration limit to 600% of Tier 1 Capital plus ALLL.
Loans to One Borrower
Federal savings banks generally are subject to the lending limits that are applicable to national banks. With certain limited exceptions, the maximum amount
that a federal savings banks may lend to any borrower (including certain related persons or entities of such borrower) is an amount equal to 15% of the savings institution's unimpaired capital and
unimpaired surplus, or $7.9 million for Broadway Federal at December 31, 2018, plus an additional 10% for loans fully secured by readily marketable collateral. Real estate is not
included within the definition of "readily marketable collateral" for this purpose. We are in compliance with the limits that are applicable to loans to any one borrower. At December 31, 2018,
our largest aggregate amount of loans to one borrower totaled $7.0 million. Both of the loans for the largest borrower were performing in accordance with their terms and the borrower had no
affiliation with Broadway Federal.
Community Reinvestment Act and Fair Lending
The Community Reinvestment Act, as implemented by OCC regulations ("CRA"), requires each federal savings bank, as well as other lenders, to make efforts to
meet the credit needs of the communities they serve, including low- and moderate-income neighborhoods. The CRA requires the OCC to assess an institution's performance in meeting the credit needs of
its communities as part of its examination of the institution, and to take such assessments into consideration in reviewing applications for mergers, acquisitions and other transactions. An
unsatisfactory CRA rating may be the basis for denying an application. Community groups have successfully protested applications on CRA grounds. In connection with the assessment of a savings
institution's CRA performance, the OCC assigns ratings of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." The Bank's "outstanding" rating was reaffirmed in its most
recent CRA examination in 2016.
The
Bank is also subject to federal fair lending laws, including the Equal Credit Opportunity Act ("ECOA") and the Federal Housing Act ("FHA"), which prohibit discrimination in credit and residential
real estate transactions on prohibited bases, including race, color, national origin, gender, and religion, among others. A lender may be liable under one or both of these acts in the event of overt
discrimination, disparate treatment, or a disparate impact on a prohibited basis. The compliance of federal savings banks of the Bank's size with these acts is primarily supervised and enforced by the
OCC. If the OCC determines that a lender has engaged in a pattern or practice of discrimination in violation of ECOA, the OCC refers the matter to the DOJ. Similarly, HUD is notified of violations of
the FHA.
Qualified Thrift Lender Test
The Home Owners Loan Act ("HOLA") requires all federal savings banks to meet a Qualified Thrift Lender ("QTL") test. Under the QTL test, a
federal savings bank is required to maintain at least 65% of its portfolio assets (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including
goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments" on a monthly basis during at least 9 out of every 12 months. Qualified
thrift investments include, in general, loans, securities and other investments that are related to housing, shares of stock issued by any Federal Home Loan Bank, loans for educational purposes, loans
to small businesses, loans made through credit cards or credit card accounts and certain other permitted thrift investments. The failure of a federal savings bank to remain a QTL may result in
required conversion of the institution to a bank charter, which would change the federal savings bank's permitted business activities in various respects, including operation under certain
restrictions, such as limitations on new investments
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and
activities, the imposition of restrictions on branching and the payment of dividends that apply to national banks. At December 31, 2018, the Bank was in compliance with the QTL test
requirements.
The USA Patriot Act, Bank Secrecy Act ("BSA"), and Anti-Money Laundering ("AML")
Requirements
The USA PATRIOT Act was enacted after September 11, 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and
international money laundering, and has resulted in the promulgation of several regulations that have a direct impact on savings associations. Financial institutions must have a number of programs in
place to comply with this law, including: (i) a program to manage BSA/AML risk; (ii) a customer identification program designed to determine the true identity of customers, document and
verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations; and (iii) a program for monitoring
for the timely detection and reporting of suspicious activity and reportable transactions. Failure to comply with these requirements may result in regulatory action, including the issuance of cease
and desist orders, impositions of civil money penalties and adverse changes in an institution's regulatory ratings, which could adversely affect its ability to obtain regulatory approvals for business
combinations or other desired business objectives.
Privacy Protection
Broadway Federal is subject to OCC regulations implementing the privacy protection provisions of federal law. These regulations require Broadway Federal to
disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The
regulations also require Broadway Federal to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of
such information is not covered by an exception, Broadway Federal is required to provide its customers with the ability to "opt-out" of having Broadway Federal share their nonpublic personal
information with unaffiliated third parties.
Broadway
Federal is also subject to regulatory guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies' expectations for the creation,
implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and
the nature and scope of its activities.
The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the
security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Cybersecurity
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We
employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools
to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the
threat from cybersecurity attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a
significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under
constant threat and it is possible that we could experience a significant event in the future.
The
federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a banking
organization's the board of
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Table of Contents
directors.
These guidelines, along with related regulatory materials, increasingly focus on risk management, processes related to information technology and operational resiliency, and the use of
third parties in the provision of financial services.
Risks
and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to
the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
Savings and Loan Holding Company Regulation
As a savings and loan holding company, we are subject to the supervision, regulation, and examination of the FRB. In addition, FRB has enforcement authority
over the Company and our subsidiary Broadway Federal. Applicable statutes and regulations administered by FRB place certain restrictions on our activities and investments. Among other things, we are
generally prohibited, either directly or indirectly, from acquiring more than 5% of the voting shares of any savings association or savings and loan holding company that is not a subsidiary of the
Company.
The
Change in Bank Control Act prohibits a person, acting directly or indirectly or in concert with one or more persons, from acquiring control of a savings and loan holding company unless the FRB has
been given 60 days prior written notice of such proposed acquisition and within that time period the FRB has not issued a notice disapproving the proposed acquisition or extending for up to
another 30 days the period during which a disapproval may be issued. The term "control" is defined for this purpose to include ownership or control of, or holding with power to vote, 25% or
more of any class of a savings and loan holding company's voting securities. Under a rebuttable presumption contained in the regulations of the FRB, ownership or control of, or holding with power to
vote, 10% or more of any class of voting securities of a savings and loan holding company will be deemed control for purposes of the Change in Bank Control Act if the institution (i) has
registered securities under Section 12 of the Exchange Act, or (ii) no person will own, control, or have the power to vote a greater percentage of that class of voting securities
immediately after the transaction. In addition, any company acting directly or indirectly or in concert with one or more persons or through one or more subsidiaries would be required to obtain the
approval of the FRB under the Home Owners' Loan Act before acquiring control of a savings and loan holding company. For this purpose, a company is deemed to have control of a savings and loan holding
company if the company (i) owns, controls, holds with power to vote, or holds proxies representing, 25% or more of any class of voting shares of the holding company, (ii) contributes
more than 25% of the holding company's capital, (iii) controls in any manner the election of a majority of the holding company's directors, or (iv) directly or indirectly exercises a
controlling influence over the management or policies of the savings bank or other company. The FRB may also determine, based on the relevant facts and circumstances, that a company has otherwise
acquired control of a savings and loan holding company.
Restrictions on Dividends and Other Capital Distributions
In general, the prompt corrective action regulations prohibit a federal savings bank from declaring any dividends, making any other capital distribution, or
paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized
categories. In addition to the prompt corrective action restriction on paying dividends, OCC regulations limit certain "capital distributions" by savings associations. Capital distributions are
defined to include, among other things, dividends and payments for stock repurchases and payments of cash to stockholders in mergers.
Under
the OCC capital distribution regulations, a federal savings bank that is a subsidiary of a savings and loan holding company must notify the OCC at least 30 days prior to the declaration
of any capital distribution by its federal savings bank subsidiary. The 30-day period provides the OCC an opportunity to object to the proposed dividend if it believes that the dividend would not be
advisable.
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An
application to the OCC for approval to pay a dividend is required if: (i) the total of all capital distributions made during that calendar year (including the proposed distribution) exceeds
the sum of the institution's year-to-date net income and its retained income for the preceding two years; (ii) the institution is not entitled under OCC regulations to "expedited treatment"
(which is generally available to institutions the OCC regards as well run and adequately capitalized); (iii) the institution would not be at least "adequately capitalized" following the
proposed capital distribution; or (iv) the distribution would violate an applicable statute, regulation, agreement, or condition imposed on the institution by the OCC.
The
Bank's ability to pay dividends to the Company is also subject to the restriction that the Bank is not permitted to pay dividends to the Company if its regulatory capital would be reduced below
the amount required for the liquidation account established in connection with the conversion of the Bank from the mutual to the stock form of organization.
See
Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and Note 13 of the Notes to Consolidated Financial Statements
for a further description of dividend and other capital distribution limitations to which the Company and the Bank are subject.
Tax Matters
Federal Income Taxes
We report our income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other
corporations with certain exceptions, including particularly the Bank's tax reserve for bad debts. The Bank has qualified under provisions of the Internal Revenue Code (the "Code") that in the past
allowed qualifying savings institutions to establish reserves for bad debts, and to make additions to such reserves, using certain preferential methodologies. In December 2017, Congress passed the Tax
Cuts and Jobs Act of 2017, which lowered our federal income tax rate to 21% from 34% starting in year 2018. See Note 11 of the Notes to Consolidated Financial Statements for a further
description of tax matters applicable to our business.
California Taxes
As a savings and loan holding company filing California franchise tax returns on a combined basis with its subsidiaries, the Company is subject to California
franchise tax at the rate applicable to "financial corporations." The applicable statutory tax rate is 10.84%.