Edgar Filing: BROADWAY FINANCIAL CORP \DE\

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

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

For transition period from__________ to___________

Commission file number 000-27464

BROADWAY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

5055 Wilshire Boulevard, Suite 500 Los Angeles, California	90036
(Address of principal executive offices)	(Zip Code)

(323) 634-1700

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Smaller reporting company [X]

Emerging growth company [ ]

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

Yes [ ] No [ X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 4, 2017, 18,694,823 shares of the Registrant’s voting common stock and 8,756,396 shares of the Registrant’s non-voting common stock were outstanding.

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TABLE OF CONTENTS

			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Consolidated Financial Statements (Unaudited)

		Consolidated Statements of Financial Condition as of March 31, 2017 and December 31, 2016	1

		Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 and 2016	2

		Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	3

		Notes to Consolidated Financial Statements	4

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	29

	Item 1A.	Risk Factors	29

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

	Item 3.	Defaults Upon Senior Securities	29

	Item 4.	Mine Safety Disclosures	29

	Item 5.	Other Information	29

	Item 6.	Exhibits	29

	Signatures		30

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Financial Condition

(In thousands, except share and per share amounts)

(Unaudited)

	March 31, 2017			December 31, 2016

Assets
Cash and due from banks	$	2,584		$	1,516
Interest-bearing deposits in other banks	24,625			16,914
Cash and cash equivalents	27,209			18,430
Securities available-for-sale, at fair value	12,554			13,202
Loans receivable held for sale, at lower of cost or fair value	33,756			-
Loans receivable held for investment, net of allowance of $4,392 and $4,603, respectively	361,738			379,454
Accrued interest receivable	1,170			1,178
Federal Home Loan Bank (FHLB) stock	2,835			2,573
Office properties and equipment, net	2,494			2,479
Bank owned life insurance	2,953			2,940
Deferred tax assets, net	6,404			6,907
Other assets	3,022			1,920
Total assets	$	454,135		$	429,083

Liabilities and stockholders’ equity

Liabilities:
Deposits	$	296,564		$	287,427
FHLB advances	101,000			85,000
Junior subordinated debentures	5,100			5,100
Advance payments by borrowers for taxes and insurance	501			828
Accrued expenses and other liabilities	4,079			5,202
Total liabilities	407,244			383,557


Stockholders’ Equity:
Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued or outstanding	-			-
Common stock, $.01 par value, voting, authorized 50,000,000 shares at March 31, 2017 and December 31, 2016; issued 21,282,647 shares at March 31, 2017 and December 31, 2016; outstanding 18,664,821 shares at March 31, 2017 and December 31, 2016	213			212
Common stock, $.01 par value, non-voting, authorized 25,000,000 shares at March 31, 2017 and December 31, 2016; issued and outstanding 8,756,396 shares at March 31, 2017 and December 31, 2016	87			87
Additional paid-in capital	45,933			45,819
Retained earnings	7,245			6,013
Unearned Employee Stock Ownership Plan (ESOP) shares	(1,154		)	(1,176		)
Accumulated other comprehensive income (loss)	(107		)	(103		)
Treasury stock-at cost, 2,617,826 shares at March 31, 2017 and December 31, 2016	(5,326		)	(5,326		)
Total stockholders’ equity	46,891			45,526
Total liabilities and stockholders’ equity	$	454,135		$	429,083

See accompanying notes to unaudited consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
	2017			2016
	(In thousands, except per share)
Interest Income:
Interest and fees on loans receivable	$	3,964		$	3,429
Interest on mortgage-backed securities and other securities	75			83
Other interest income	98			103
Total interest income	4,137			3,615

Interest Expense:
Interest on deposits	574			517
Interest on borrowings	484			427
Total interest expense	1,058			944

Net interest income before loan loss provision recapture	3,079			2,671
Loan loss provision recapture	350			300
Net interest income after loan loss provision recapture	3,429			2,971

Non-Interest Income:
Service charges	121			126
Gain on sale of loans	27			-
CDFI grant	-			265
Income from litigation settlement	1,183			-
Other	28			152
Total non-interest income	1,359			543

Non-Interest Expense:
Compensation and benefits	1,987			1,903
Occupancy expense	305			293
Information services	200			206
Professional services	174			127
FDIC assessments	43			25
Office services and supplies	72			70
Other	262			255
Total non-interest expense	3,043			2,879

Income before income taxes	1,745			635
Income taxes	513			2
Net income	$	1,232		$	633

Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities available-for-sale arising during the period	$	(6	)	$	120
Income tax (benefit) expense	(2		)	29
Other comprehensive (loss) income, net of tax	(4		)	91

Comprehensive income	$	1,228		$	724

Earnings per common share-basic	$	0.05		$	0.02
Earnings per common share-diluted	$	0.05		$	0.02

See accompanying notes to unaudited consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2017			2016
	(In thousands)

Cash flows from operating activities:

Net income	$	1,232		$	633
Adjustments to reconcile net income to net cash used in operating activities:
Loan loss provision recapture	(350		)	(300		)
Depreciation	65			61
Net amortization of deferred loan origination costs	50			61
Net amortization of premiums on mortgage-backed securities	9			9
Amortization of investment in affordable housing limited partnership	49			48
Stock-based compensation expense	137			3
Earnings on bank owned life insurance	(13		)	(15		)
Originations of for-sale loans receivable	(48,605		)	-
Proceeds from sales of loans receivable held for sale	14,876			-
Gain on sale of loans	(27		)	-
Net gain on sale of REOs	-			(22		)
Net change in deferred taxes	505			-
Net change in accrued interest receivable	8			(14		)
Net change in other assets	(1,151		)	107
Net change in advance payments by borrowers for taxes and insurance	(327		)	(366		)
Net change in accrued expenses and other liabilities	(1,123		)	(788		)
Net cash used in operating activities	(34,665		)	(583		)

Cash flows from investing activities:

Net change in loans receivable held for investment	18,016			(15,471		)
Purchase of available-for-sale securities	-			(1,484		)
Prepayments on available-for-sale securities	633			526
Proceeds from sales of REO	-			382
Purchase of FHLB stock	(262		)	-
Additions to office properties and equipment	(80		)	(13		)
Net cash provided by (used in) investing activities	18,307			(16,060		)

Cash flows from financing activities:

Net change in deposits	9,137			(15,205		)
Proceeds from FHLB advances	26,000			-
Repayments of FHLB advances	(10,000		)	-
Net cash provided by (used in) financing activities	25,137			(15,205		)

Net change in cash and cash equivalents	8,779			(31,848		)
Cash and cash equivalents at beginning of the period	18,430			67,839
Cash and cash equivalents at end of the period	$	27,209		$	35,991

Supplemental disclosures of cash flow information:

Cash paid for interest	$	1,088		$	941
Cash paid for income taxes	-			-

See accompanying notes to unaudited consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2017

NOTE (1) – Basis of Financial Statement Presentation

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

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for quarterly reports on Form 10-Q. These unaudited consolidated financial statements do not include all disclosures associated with the Company’s consolidated annual financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2016 and, accordingly, should be read in conjunction with such audited consolidated financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

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

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 replaced existing revenue recognition guidance for contracts to provide goods or services to customers. The new guidance clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company’s revenue is mainly comprised of net interest income from financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and to a lesser degree, noninterest income. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-1, “Financial Instruments – Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-1 (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued are permitted as of the beginning of the fiscal year of adoption. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases, as defined) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company expects a gross-up of its Consolidated Statements of Condition as a result of recognizing lease liabilities and right of use assets. The Company does not expect a material impact to its recognition of operating lease expense on its Consolidated Statements of Income and Comprehensive Income.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The areas for simplification include income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company made an election account for forfeitures when they occur. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses over the life of the related financial assets. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public business entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. While the Company is still evaluating the impact on its consolidated financial statements, the Company expects that ASU 2016-13 may result in an increase in the allowance for credit losses due to the following factors: 1) the allowance for credit losses will increase to provide for expected credit losses over the remaining expected life of the loan portfolio, and will consider expected future changes in macroeconomic conditions; and 2) an allowance may be established for estimated credit losses on available-for-sale debt securities. The amount of increase will be impacted by the portfolio composition and quality, as well as the economic conditions and forecasts as of the adoption date. The Company has begun its implementation efforts by identifying key interpretive issues, and assessing its processes and identifying the system requirements against the new guidance to determine what modifications may be required.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 provides guidance on the classification of certain cash receipts and payments on the consolidated statement of cash flows in order to reduce diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, where the guidance should be applied using a retrospective transition method to each period presented. Early adoption is permitted. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE (2) – Earnings Per Share of Common Stock

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

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

	For the three months ended March 31,
	2017		2016
	(In thousands, except share and per share)
Net income	$	1,232	$	633
Less net income attributable to participating securities	(2)		-
Income available to common stockholders	$	1,230	$	633

Weighted average common shares outstanding for basic earnings per common share	26,616,704		29,076,708
Add: dilutive effects of assumed exercises of stock options	-		-
Add: dilutive effects of unvested restricted stock awards	70,759		-
Weighted average common shares outstanding for diluted earnings per common share	26,687,463		29,076,708
Earnings per common share – basic	$	0.05	$	0.02
Earnings per common share – diluted	$	0.05	$	0.02

Stock options for 540,625 shares of common stock for the three months ended March 31, 2017 and 2016 were not considered in computing diluted earnings per common share because they were anti-dilutive.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

NOTE (3) – Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
March 31, 2017:
Residential mortgage-backed	$	10,377	$	188	$	-	$	10,565
U.S. Government and federal agency	1,963		26		-		1,989
Total available-for-sale securities	$	12,340	$	214	$	-	$	12,554

December 31, 2016:
Residential mortgage-backed	$	11,022	$	192	$	-	$	11,214
U.S. Government and federal agency	1,960		28		-		1,988
Total available-for-sale securities	$	12,982	$	220	$	-	$	13,202

At March 31, 2017, the Bank had one U.S. Government and federal agency security with an amortized cost and an estimated fair value of $2.0 million and a contractual maturity of October 2, 2019. At March 31, 2017, the Bank had 24 residential mortgage-backed securities with an amortized cost of $10.4 million, an estimated fair value of $10.6 million and an estimated average remaining life of 4.4 years. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

At March 31, 2017 and December 31, 2016, securities pledged to secure public deposits had a carrying amount of $622 thousand and $629 thousand, respectively. At March 31, 2017 and December 31, 2016, there were no holdings of securities by any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

There were no sales of securities during the three months ended March 31, 2017 and 2016.

NOTE (4) – Loans Receivable Held for Sale

Loans receivable held for sale at March 31, 2017 totaled $33.8 million and consisted of multi-family loans. During the three months ended March 31, 2017, multi-family loans originated for sale totaled $48.7 million and sales of multi-family loans totaled $14.8 million. There were no loans held for sale at December 31, 2016.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

NOTE (5) – Loans Receivable Held for Investment

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

	March 31, 2017		December 31, 2016
	(In thousands)
Real estate:
Single family (1)	$	98,676	$	104,807
Multi-family	220,556		229,566
Commercial real estate	7,766		8,914
Church	36,153		37,826
Construction	862		837
Commercial – other	307		308
Consumer	15		6
Gross loans receivable before deferred loan costs and premiums	364,335		382,264
Unamortized net deferred loan costs and premiums	1,795		1,793
Gross loans receivable	366,130		384,057
Allowance for loan losses	(4,392)		(4,603)
Loans receivable, net	$	361,738	$	379,454

(1) Includes $78.5 million and $81.9 million of non-impaired purchased loans at March 31, 2017 and December 31, 2016, respectively, with no allowance for loan losses.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

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

	Three Months Ended March 31, 2017
	Real Estate
	Single family			Multi- family		Commercial real estate			Church			Construction			Commercial - other		Consumer			Total
	(In thousands)
Beginning balance	$	367		$	2,659	$	215		$	1,337		$		8	$	17	$	-		$		4,603
Provision for (recapture of) loan losses	(37)			52		(140)			(226)			1			(1)		1			(350)
Recoveries	-			-		-			139			-			-		-			139
Loans charged off	-			-		-			-			-			-		-			-
Ending balance	$	330		$	2,711	$	75		$	1,250		$		9	$	16	$	1		$		4,392

	Three Months Ended March 31, 2016
	Real Estate
	Single family			Multi- family		Commercial real estate			Church			Construction			Commercial - other		Consumer				Total
	(In thousands)
Beginning balance	$	597		$	1,658	$	469		$	2,083		$		3	$	18	$		-		$		4,828
Provision for (recapture of) loan losses	(69)			208		(25)			(413)			-			(1)		-			(300)
Recoveries	-			-		-			6			-			-		-			6
Loans charged off	-			-		-			-			-			-		-			-
Ending balance	$		528	$	1,866	$		444	$		1,676	$	3		$	17	$		-	$				4,534

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

	March 31, 2017
	Real Estate
	Single family		Multi- family		Commercial real estate		Church		Construction		Commercial - other		Consumer		Total
	(In thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	118	$	2	$	-	$	468	$	-	$	14	$	-	$	602
Collectively evaluated for impairment	212		2,709		75		782		9		2		1		3,790
Total ending allowance balance	$	330	$	2,711	$	75	$	1,250	$	9	$	16	$	1	$	4,392
Loans:
Loans individually evaluated for impairment	$	640	$	638	$	1,323	$	9,845	$	-	$	66	$	-	$	12,512
Loans collectively evaluated for impairment	98,539		221,740		6,449		25,779		855		241		15		353,618
Total ending loans balance	$	99,179	$	222,378	$	7,772	$	35,624	$	855	$	307	$	15	$	366,130

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

	December 31, 2016
	Real Estate
	Single family		Multi- family		Commercial real estate		Church		Construction		Commercial - other		Consumer		Total
	(In thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	125	$	-	$	-	$	516	$	-	$	15	$	-	$	656
Collectively evaluated for impairment	242		2,659		215		821		8		2		-		3,947
Total ending allowance balance	$	367	$	2,659	$	215	$	1,337	$	8	$	17	$	-	$	4,603
Loans:
Loans individually evaluated for impairment	$	644	$	642	$	-	$	10,545	$	-	$	66	$	-	$	11,897
Loans collectively evaluated for impairment	104,688		230,798		8,921		26,678		827		242		6		372,160
Total ending loans balance	$	105,332	$	231,440	$	8,921	$	37,223	$	827	$	308	$	6	$	384,057

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

	March 31, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Multi-family	$	-	$	-	$	-	$	642	$	642	$	-
Commercial real estate	1,323		1,323		-		-		-		-
Church	6,620		4,226		-		5,946		3,589		-
With an allowance recorded:
Single family	640		640		118		644		644		125
Multi-family	638		638		2		-		-		-
Church	5,780		5,619		468		7,330		6,956		516
Commercial - other	66		66		14		66		66		15
Total	$	15,067	$	12,512	$	602	$	14,628	$	11,897	$	656

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

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

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

	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
	Average Recorded Investment			Cash Basis Interest Income Recognized			Average Recorded Investment			Cash Basis Interest Income Recognized
	(In thousands)
Single family		$	642		$	7		$	951		$	7
Multi-family		640			11			1,206			41
Commercial real estate		331			-			1,933			56
Church		10,471			227			11,191			126
Commercial –other		66			1			67			-
Total		$	12,150		$	246		$	15,348		$	230

Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans and interest recoveries on non-accrual loans that were paid off. Interest payments collected on non-accrual loans are characterized as payments of principal rather than payments of the outstanding accrued interest on the loans until the remaining principal on the non-accrual loans is considered to be fully collectible or paid off. When a loan is returned to accrual status, the total interest payments that were previously applied to principal, is deferred and amortized over the remaining life of the loan. Foregone interest income that would have been recognized had loans performed in accordance with their original terms amounted to $46 thousand and $119 thousand for the three months ended March 31, 2017 and 2016, respectively, and were not included in the consolidated results of operations.

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

	March 31, 2017
	30-59 Days Past Due			60-89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Current
	(In thousands)
Loans receivable held for investment:
Single family		$	-		$	60		$	-		$	60		$	99,119
Multi-family		-			-			-			-			222,378
Commercial real estate		-			1,323			-			1,323			6,449
Church		412			-			-			412			35,212
Construction		-			-			-			-			855
Commercial - other		-			-			-			-			307
Consumer		-			-			-			-			15
Total		$	412		$	1,383		$	-		$	1,795		$	364,335

	December 31, 2016
	30-59 Days Past Due			60-89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Current
	(In thousands)
Loans receivable held for investment:
Single family		$	-		$	64		$	-		$	64		$	105,268
Multi-family		-			-			-			-			231,440
Commercial real estate		1,324			-			-			1,324			7,597
Church		-			-			-			-			37,223
Construction		-			-			-			-			827
Commercial - other		-			-			-			-			308
Consumer		-			-			-			-			6
Total		$	1,324		$	64		$	-		$	1,388		$	382,669

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

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

	March 31, 2017			December 31, 2016
	(In thousands)
Loans receivable held for investment:
Commercial real estate		$	1,323		$	-
Church		2,841			2,944
Total non-accrual loans		$	4,164		$	2,944

There were no loans 90 days or more delinquent that were accruing interest as of March 31, 2017 or December 31, 2016.

Troubled Debt Restructurings

At March 31, 2017, loans classified as troubled debt restructurings (“TDRs”) totaled $10.8 million, of which $2.4 million were included in non-accrual loans and $8.4 million were on accrual status. At December 31, 2016, loans classified as TDRs totaled $11.5 million, of which $2.5 million were included in non-accrual loans and $9.0 million were on accrual status. The Company has allocated $602 thousand and $656 thousand of specific reserves for accruing TDRs as of March 31, 2017 and December 31, 2016, respectively. TDRs on accrual status are comprised of loans that were accruing at the time of restructuring or loans that have complied with the terms of their restructured agreements for a satisfactory period of time and for which the Bank anticipates full repayment of both principal and interest. TDRs that are on non-accrual status can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments, as modified. A well-documented credit analysis that supports a return to accrual status based on the borrower’s financial condition and prospects for repayment under the revised terms is also required. As of March 31, 2017 and December 31, 2016, the Company had no commitment to lend additional amounts to customers with outstanding loans that are classified as TDRs. No loans were modified during the three months ended March 31, 2017 and 2016.

Credit Quality Indicators

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

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

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

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

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Pass rated loans are generally well protected by the current net worth and paying capacity of the obligor and/or by the value of the underlying collateral. Pass rated loans are not more than 59 days past due and are generally performing in accordance with the loan terms. Based on the most recent analysis performed, the risk categories of loans by loan type as of the periods indicated were as follows:

	March 31, 2017
	Pass		Watch		Special Mention		Substandard		Doubtful		Loss
	(In thousands)
Single family	$	99,179	$	-	$	-	$	-	$	-	$	-
Multi-family	220,746		-		340		1,292		-		-
Commercial real estate	6,449		-		-		1,323		-		-
Church	26,648		1,137		271		7,568		-		-
Construction	855		-		-		-		-		-
Commercial - other	241		-		-		66		-		-
Consumer	15		-		-		-		-		-
Total	$	354,133	$	1,137	$	611	$	10,249	$	-	$	-

	December 31, 2016
	Pass		Watch		Special Mention		Substandard		Doubtful		Loss
	(In thousands)
Single family	$	105,332	$	-	$	-	$	-	$	-	$	-
Multi-family	228,522		1,274		342		1,302		-		-
Commercial real estate	6,965		-		-		1,956		-		-
Church	27,560		1,143		823		7,697		-		-
Construction	827		-		-		-		-		-
Commercial - other	242		-		-		66		-		-
Consumer	6		-		-		-		-		-
Total	$	369,454	$	2,417	$	1,165	$	11,021	$	-	$	-

NOTE (6) – Junior Subordinated Debentures

On March 17, 2004, the Company issued $6.0 million of Floating Rate Junior Subordinated Debentures (the “Debentures”) in a private placement to a trust that was capitalized to purchase subordinated debt and preferred stock of multiple community banks. Interest on the Debentures is payable quarterly at a rate per annum equal to the 3-Month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 3.69% at March 31, 2017. On October 16, 2014, the Company made payments of $900 thousand of principal on Debentures, executed a Supplemental Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024, and modified the payment terms of the remaining $5.1 million principal amount thereof. The modified terms of the Debentures require quarterly payments of interest only through March 2019 at the original rate of 3-Month LIBOR plus 2.54%. Starting in June 2019, the Company will be required to make quarterly payments of equal amounts of principal, plus interest, until the Debentures are fully amortized on March 17, 2024. The Debentures may be called for redemption at any time by the Company.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

NOTE (7) – Fair Value

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

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

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

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

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

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

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

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

Appraisals for collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, an independent third-party licensed appraiser reviews the appraisals for accuracy and reasonableness, reviewing the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

Assets Measured on a Recurring Basis

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

	Fair Value Measurements at March 31, 2017
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets:
Securities available-for-sale - residential mortgage-backed	$	-	$	10,565	$	-	$	10,565
Securities available-for-sale - U.S. Government and federal agency	1,989		-		-		1,989

	Fair Value Measurements at December 31, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets:
Securities available-for-sale - residential mortgage-backed	$	-	$	11,214	$	-	$	11,214
Securities available-for-sale - U.S. Government and federal agency	1,988		-		-		1,988

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended March 31, 2017 and 2016.

Assets Measured on a Non-Recurring Basis

Assets are considered to be reflected at fair value on a non-recurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, a non-recurring valuation is the result of the application of other accounting pronouncements that require assets to be assessed for impairment or recorded at the lower of cost or fair value.

The following table provides information regarding the carrying values of our assets measured at fair value on a non-recurring basis as of the periods indicated. The fair value measurement for all of these assets falls within Level 3 of the fair value hierarchy.

	March 31, 2017		December 31, 2016
	(In thousands)
Impaired loans carried at fair value of collateral	$	1,683	$	1,744

There were no losses recognized on assets measured at fair value on a non-recurring basis for the three months ended March 31, 2017 and 2016.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2017 and December 31, 2016:

	March 31, 2017
	Valuation Technique(s)	Unobservable Input(s)	Range	Weighted Average

Impaired loans	Third Party Appraisals	Adjustment for differences between the comparable sales	-2% to 0%	-1%

	December 31, 2016
	Valuation Technique(s)	Unobservable Input(s)	Range	Weighted Average

Impaired loans	Third Party Appraisals	Adjustment for differences between the comparable sales	-2% to 0%	-1%

Fair Values of Financial Instruments

The carrying amounts and estimated fair values of financial instruments as of the periods indicated were as follows:

			Fair Value Measurements at March 31, 2017
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	27,209	$	27,209	$	-	$	-	$	27,209
Securities available-for-sale	12,554		1,989		10,565		-		12,554
Loans receivable held for sale	33,756		-		34,226		-		34,226
Loans receivable held for investment	361,738		-		-		364,723		364,723
Accrued interest receivable	1,170		71		28		1,071		1,170
Federal Home Loan Bank stock	2,835		2,835		-		-		2,835
Financial Liabilities:
Deposits	$	296,564	$	-	$	286,902	$	-	$	286,902
Federal Home Loan Bank advances	101,000		-		101,507		-		101,507
Junior subordinated debentures	5,100		-		-		4,436		4,436
Accrued interest payable	124		-		117		7		124

			Fair Value Measurements at December 31, 2016
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	18,430	$	18,430	$	-	$	-	$	18,430
Securities available-for-sale	13,202		1,988		11,214		-		13,202
Loans receivable held for investment	379,454		-		-		382,717		382,717
Accrued interest receivable	1,178		64		29		1,085		1,178
Federal Home Loan Bank stock	2,573		2,573		-		-		2,573
Financial Liabilities:
Deposits	$	287,427	$	-	$	278,254	$	-	$	278,254
Federal Home Loan Bank advances	85,000		-		85,748		-		85,748
Junior subordinated debentures	5,100		-		-		4,414		4,414
Accrued interest payable	154		-		147		7		154

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

(b) Loans Receivable Held For Sale

The Company’s loans receivable held for sale are carried at the lower of cost or fair value. The fair value of loans receivable held for sale is determined by pricing for comparable assets or by outstanding commitments from third party investors, resulting in a Level 2 classification.

(c) Loans Receivable Held For investment

Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) FHLB Stock

The carrying value of FHLB stock approximates its fair value as the shares can only be redeemed by the FHLB at par.

(e) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest receivable/payable approximate their fair value and are classified the same as the related asset.

(f) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using discounted cash flow calculations that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(g) Federal Home Loan Bank Advances

The fair values of the Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(h) Junior Subordinated Debentures

The fair values of the Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements (continued)

NOTE (8) – Stock-based Compensation

The Company issues stock-based compensation awards to its directors and employees under the 2008 Long-Term Incentive Plan (“2008 LTIP”). The 2008 LTIP permits the grant of non-qualified and incentive stock options, stock appreciation rights, full value awards and cash incentive for up to 2,000,000 shares of common stock. As of March 31, 2017, there were 1,338,892 shares available for future awards under the 2008 LTIP.

No options were granted during the three months ended March 31, 2017, compared to 450,000 stock options granted to senior executive officers under the 2008 LTIP during the three months ended March 31, 2016. These options have an exercise price of $1.62 per share, vest over five years and expire in ten years from grant date. The Company estimated the compensation costs and fair value per share of these stock options to be $194 thousand and $0.43 per share, respectively, using the Black-Scholes option pricing model and the following assumptions: (i) expected volatility of 27.36%; (ii) risk free interest rate of 1.21%; (iii) expected option term of five years; and (iv) 0% dividend yield.

The following table summarizes stock option activity during the three months ended March 31, 2017 and 2016:

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Three Months Ended March 31, 2017:
Outstanding at January 1, 2017	540,625	$ 2.18
Granted	-	-
Exercised	-	-
Forfeited	-	-
Outstanding at March 31, 2017	540,625	$ 2.18	7.74	$ 86,000
Exercisable at March 31, 2017	180,625	$ 3.29	5.44	$ 17,000

Three Months Ended March 31, 2016:
Outstanding at January 1, 2016	90,625	$ 4.95
Granted	450,000	1.62
Exercised	-	-
Forfeited	-	-
Outstanding at March 31, 2016	540,625	$ 2.18	7.74	$ 140,000
Exercisable at March 31, 2016	90,625	$ 4.95	3.00	$ -

The Company recorded $10 thousand and $3 thousand of stock-based compensation expense related to stock options during the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, unrecognized compensation cost related to nonvested stock options granted under the plan was $152 thousand. The cost is expected to be recognized over a period of 3.90 years.

In March 2016, the Company awarded 120,483 shares of restricted stock to its Chief Executive Officer under the 2008 LTIP. A restricted stock award is valued at the closing price of the Company’s stock on the date of such award. Subject to certain performance restrictions, 100,000 shares of restricted stock shall vest over a two-year period and the remaining 20,483 shares shall vest over a three-year period. Stock-based compensation expense is recognized on a straight-line basis over the vesting period. The Company recorded $26 thousand of stock-based compensation expense related to this award during the three months ended March 31, 2017. No stock-based compensation expense was recorded during the three months ended March 31, 2016. As of March 31, 2017, unrecognized compensation cost related to nonvested restricted stock award was $119 thousand. The cost is expected to be recognized over a period of 1.17 years.