Annual Report — Small Business — [x] Reg. S-B Item 405 — Form 10-KSB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10KSB40 Annual Report -- Small Business -- [x] Reg. S-B 98 448K
Item 405
2: EX-10.4 Material Contract 11 37K
3: EX-10.5 Material Contract 12 39K
4: EX-10.6 Material Contract 8 26K
5: EX-10.7 Material Contract 13 41K
6: EX-23.0 Consent of Experts or Counsel 1 6K
7: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 10K
8: EX-27.2 Financial Data Schedule (Pre-XBRL) 2 12K
9: EX-27.3 Financial Data Schedule (Pre-XBRL) 2 11K
10KSB40 — Annual Report — Small Business — [x] Reg. S-B Item 405
Document Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1997
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission file number 0-27464
BROADWAY FINANCIAL CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 95-4547287
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4800 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of Principal Executive Offices) (Zip Code)
(213) 634-1700
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PER SHARE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. $9,120,000.
State the aggregate market value of the voting stock held by
non-affiliates, based on the average bid and asked prices of such stock as of
March 19, 1998 as quoted on The Nasdaq Stock Market: $10,901,018.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 863,447 shares of Common
Stock at March 19, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrants' 1998
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BROADWAY FINANCIAL CORPORATION
Broadway Financial Corporation (the "Company"), was incorporated under
Delaware law on September 25, 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 (the "Conversion"). 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, on January 8, 1996. In connection with the
Conversion, the Company issued and sold to the public 892,688 shares of its
common stock, par value $0.01 per share (the "Common Stock"), and also issued
91,073 shares of its Noncumulative Perpetual Preferred Stock, Series A, par
value $0.01 per share (the "Preferred Stock"). The proceeds, net of
approximately $760,000 in conversion costs, received by the Company from the
Conversion (before deduction of $893,000 to fund employee stock plans)
totaled $9.1 million. The Company used 50% ($4.1 million) of the net Common
Stock proceeds and 100% ($911,000) of the Preferred Stock proceeds to
purchase the capital stock of Broadway Federal. The remaining proceeds were
retained by the Company.
The Company's principal business is serving as the holding company for
Broadway Federal. The Company is subject to regulation and examination by the
Office of Thrift Supervision ("OTS") as a savings and loan holding company.
Prior to the completion of the Conversion, the Company had no assets or
liabilities and did not conduct any business other than that of an
organizational nature. The executive offices of the Company are located at
4800 Wilshire Boulevard, Los Angeles, California 90010, telephone number
(213) 634-1700.
BROADWAY FEDERAL BANK, F.S.B.
GENERAL
Broadway Federal is a community-oriented savings institution dedicated to
serving the African-American, Hispanic and other communities of mid-city and
South Central Los Angeles, California. Broadway Federal conducts its
business from four banking offices located in Los Angeles and from a banking
office located in the nearby city of Inglewood, which also houses the Bank's
loan origination and loan service departments.
Broadway Federal's principal business consists of attracting retail deposits
from the general public in the areas surrounding its branch offices and
investing those deposits, together with funds generated from operations,
primarily in residential mortgage loans. To a lesser extent, Broadway
Federal invests in nonresidential real estate loans secured primarily by
church properties and certain other types of loans. In addition, Broadway
Federal invests in securities issued by the U.S. Government and agencies
thereof, mortgage-backed securities and other investments. Through its
wholly-owned subsidiary, Broadway Service Corporation ("BSC"), the Bank also
receives commissions from the sale of mortgage, life and fire insurance. BSC
also provides trustee services to Broadway Federal. Broadway Federal
originates and purchases loans for investment and for sale. Broadway Federal
retains the servicing rights with respect to virtually all loans sold.
Broadway Federal's revenues are derived principally from interest on its
mortgage loans and, to a lesser extent, mortgage loan servicing activities,
and interest and dividends on its investments. Broadway Federal's principal
expenses are interest paid on deposits, together with general and
administrative expenses. Broadway Federal's primary sources of funds are
deposits and principal and interest payments on loans and short-term
borrowings.
The Company and the Bank are regulated by the OTS and the Federal Deposit
Insurance Corporation ("FDIC") and Broadway Federal's deposits are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") of
the FDIC. Broadway Federal is also a member of the Federal Home Loan Bank
("FHLB") of San Francisco. See "--Regulation."
The Bank is currently classified as "well-capitalized" under the OTS capital
regulations.
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STRATEGIC OBJECTIVES
The Company's strategic objectives are to maintain the Bank's
well-capitalized regulatory capital status in order to take advantage of
future expansion and growth opportunities, including internal growth and
growth through acquisitions of branch offices or other institutions, while
managing such growth, maintaining a strong net interest margin, maintaining
asset quality, reducing expenses and non-performing assets and limiting
exposure to credit and interest rate risk. The Company seeks to accomplish
these objectives by: (i) utilizing retail deposits as its primary source of
funds (as these are considered to be more stable and of lower cost on average
than borrowings), principal and interest payments on loans and other sources
of funding; (ii) maintaining a substantial portion of its assets in loans
secured by residential real estate primarily located in Broadway Federal's
primary market area of South Central Los Angeles; (iii) retaining in its
portfolio primarily adjustable-rate mortgage loans ("ARM"s) to reduce
Broadway Federal's exposure to interest rate fluctuations; (iv) continuing to
improve Broadway Federal's visibility and market share in the communities it
serves through increased outreach efforts, branching and enhancement of the
services it offers; and (v) reducing Broadway Federal's non-interest expense
through more efficient operations to the extent consistent with its
commitment of service to the underserved communities of mid-city and South
Central Los Angeles.
MARKET AREA AND COMPETITION
The Los Angeles metropolitan area is a highly competitive market in which
Broadway Federal faces significant competition in making loans and, to a
lesser extent, in attracting deposits. Although Broadway Federal's offices
are located in low and moderate income minority areas that have historically
been underserved by other financial institutions, Broadway Federal is facing
increasing competition for deposits and residential mortgage lending in its
immediate market areas, including direct competition from a number of
financial institutions with branch offices or loan origination capabilities
in its market area. Most of these financial institutions are significantly
larger and have greater financial resources than Broadway Federal, and many
have a regional, state-wide or national presence. Management believes that
this competition has increased substantially, particularly with respect to
one- to four-family residential lending activities. Many larger
institutions, able to accept lower returns on loans in Broadway Federal's
market, do so to attract a sufficient volume of such loans in response to
increased emphasis by federal regulators on financial institutions'
fulfillment of their responsibilities under the Community Reinvestment Act.
See "--Regulation--Community Reinvestment Act."
For much of the period since World War II, the communities of mid-city and
South Central Los Angeles had a predominately African-American population
and, although there is significant variation among communities in South
Central Los Angeles, a substantial portion of the area has historically
consisted of low and moderate income neighborhoods and commercial areas.
While the area remains predominately low and moderate income in nature, in
more recent years the population has changed, with a rapidly growing Hispanic
community, as well as Asian and other ethnic communities.
Historically, there have been relatively few retail banking offices of other
financial institutions located in Broadway Federal's primary market area.
This fact, coupled with the fact that the deposit needs and preferences of
its customers tend to be for passbook or other transactional accounts, rather
than higher cost certificates of deposit, has enabled Broadway Federal to
maintain a significantly higher proportion of its deposit funding in such
accounts. Management believes that this results in Broadway Federal
realizing a substantially higher interest rate spread and margin than many
other savings institutions.
With respect to its lending activities, Broadway Federal also tailors its
business strategy to the communities it serves. Broadway Federal's loan
originations consist primarily of relatively low balance loans on one- to
four-family properties, loans on multi-family properties and, again
reflecting its community orientation, church properties. Broadway Federal's
borrowers often request low loan amounts which produce loans with relatively
low loan-to-value ratios. To facilitate loans to low and moderate income
borrowers, Broadway Federal utilizes flexible credit underwriting standards
and accepts various forms of alternative documentation substantiating the
prospective borrower's credit worthiness. For example, Broadway Federal will
accept higher ratios of housing expense and total expense to borrower income
because it believes that many low and moderate income borrowers are able to
devote a higher percentage of their income to housing without material
default experience. Broadway Federal will also, in cases it believes to be
appropriate, accept a greater incidence of late payments by
2
loan applicants on their other financial obligations if it can be
established that these events were beyond the control of the borrower and are
not likely to reoccur.
LENDING ACTIVITIES
GENERAL. Broadway Federal emphasizes the origination of adjustable-rate
loans primarily for retention in its portfolio in order to increase the
percentage of loans with more frequent repricing, thereby reducing Broadway
Federal's exposure to interest rate risk. At December 31, 1997,
approximately 82% of Broadway Federal's mortgage loans had adjustable rates.
Although Broadway Federal has continued to originate fixed-rate mortgage
loans in response to customer demand and Broadway Federal's need for certain
assets which do not reprice regularly, a large portion of the conforming
fixed-rate mortgage loans originated by Broadway Federal and some of its ARMS
are sold in the secondary market, primarily to the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC")
and other financial institutions. The decision as to whether the loans will
be retained in Broadway Federal's portfolio or sold is made at the time of
loan origination. At December 31, 1997, Broadway Federal had $222,000 in
fixed-rate loans classified as held for sale.
The types of loans that Broadway Federal originates are subject to federal
and state laws and regulations. Interest rates charged by Broadway Federal
on loans are affected by the demand for such loans and 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 Federal Reserve
Board, and legislative tax policies. Federal savings associations and
savings banks are not subject to usury or other interest rate limitations
under California law.
LOAN PORTFOLIO COMPOSITION. Broadway Federal's loan portfolio consists
primarily of first mortgage loans not insured or guaranteed by any government
agency. At December 31, 1997, Broadway Federal's loan portfolio totaled
$105.9 million, of which approximately 51.84% was secured by one- to
four-family residential properties, 29.82% was secured by multi-family
properties and 15.44% was secured by nonresidential properties, with
approximately 71% of such nonresidential properties being church
properties. At that same date, approximately 69.90% of Broadway Federal's
one- to four-family mortgage loans, 98.17% of its multi-family residential
mortgage loans, and 92.40% of its nonresidential mortgage loans had adjustable
rates.
3
The following table sets forth the composition of Broadway Federal's loan
portfolio in dollar amounts and as a percentage of Broadway Federal's total
loan portfolio by loan type at the dates indicated.
[Download Table]
DECEMBER 31,
......................................
1997 1996
.................. ..................
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
...... .......... ...... ..........
(DOLLARS IN THOUSANDS)
Real Estate:
Residential:
One-to Four-Units............... $ 54,902 51.84% $50,671 51.48%
Five or More Units.............. 31,588 29.82 29,573 30.05
Nonresidential.................... 16,356 15.44 16,449 16.71
Construction...................... 446 0.42 226 0.23
Land.............................. 315 0.30 -- --
Loans Secured by
Savings Accounts.................... 1,862 1.76 1,428 1.45
Other........................... 445 0.42 83 0.08
........ ....... ....... .......
Total Loans......................... $105,914 100.00% $98,430 100.00%
........ ....... ....... .......
Plus:
Premium on Loans Purchased...... 71 --
Less:
Allowance for Loan Losses....... 1,054 1,174
Loans in Process................ 143 130
Deferred Loan Fees, net......... 820 812
Unamortized Discounts........... 57 54
........ ......
103,911 92,260
Less:
Loans Held for Sale............. 222 --
........ ......
Total Loans Held for Investment..... $103,689 $96,260
........ .......
........ .......
4
LOAN MATURITY. The following table sets forth the contractual maturities of
Broadway Federal's total loans at December 31, 1997. The table does not
reflect the effect of scheduled principal repayments. Principal repayments
on loans totaled $9.2 million and $8.3 million for the years ended December
31, 1997 and 1996, respectively.
[Enlarge/Download Table]
DECEMBER 31, 1997
---------------------------------------------------------------------------
ONE-TO FIVE OR MORE TOTAL LOANS
FOUR-FAMILY UNITS NONRESIDENTIAL CONSTRUCTION OTHER RECEIVABLE
----------- ------------ -------------- ------------ ------ -----------
(IN THOUSANDS)
Amounts Due:
One year or less................ $ 455 $ 7 $ 9 $446 $1,937 $ 2,854
------- ------- ------- ---- ------ --------
After one year:
After one to three years...... 83 117 1,255 -- 18 1,473
After three to five years..... 624 272 526 -- 145 1,567
After five to ten years....... 1,611 2,714 1,299 -- 47 5,671
After ten to twenty years..... 9,971 24,514 13,451 -- 100 48,036
More than twenty years........ 42,158 3,964 130 -- 61 46,313
------- ------- ------- ---- ------ --------
Total due after one year...... 54,447 31,581 16,661 -- 371 103,060
------- ------- ------- ---- ------ --------
Total Amounts Due................. $54,902 $31,588 $16,670 $446 $2,308 $105,914
------- ------- ------- ---- ------ --------
------- ------- ------- ---- ------ --------
5
The following table sets forth the dollar amount of total loans receivable at
December 31, 1997 which are contractually due after December 31, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
[Download Table]
DECEMBER 31, 1997
------------------------------
ADJUSTABLE FIXED TOTAL
---------- ----- --------
(IN THOUSANDS)
Real Estate Loans:
One-to four-units................. $38,435 $16,012 $ 54,447
Five or more units................ 31,010 571 31,581
Nonresidential real estate........ 15,105 1,242 16,347
Construction and land............. 315 -- 315
Other............................. 161 209 370
------- ------- --------
Total............................. $85,026 $18,034 $103,060
------- ------- --------
------- ------- --------
ORIGINATION, PURCHASE, SALE AND SERVICING OF LOANS. Broadway Federal
originates and purchases loans for investment and for sale. Loan sales come
from loans held in Broadway Federal's portfolio designated as held for sale
and loans originated during the period that are so designated.
It is the current practice of Broadway Federal to sell most conforming
fixed-rate mortgage loans it originates, retaining a limited amount in its
portfolio. Broadway Federal also may sell ARMs that it originates based upon
its investment needs and market opportunities. Broadway Federal recognizes
the cash gain or loss on the sale of the loans at the time of sale based on
the difference between the net cash proceeds received and the carrying value
of the loans sold. In addition, excess servicing, which is the present value
of any difference between the interest rate charged to the borrower and the
interest rate paid to the purchaser after deducting a normal servicing fee,
is recognizable as an adjustment to the cash gain or loss. The excess
servicing gain or loss is dependent on prepayment estimates and discount rate
assumptions. Historically, such excess servicing gains or losses have not
been material to Broadway Federal. At December 31, 1997, Broadway Federal
had $222,000 in fixed-rate loans and no ARMs categorized as held for sale.
See "--Recent Accounting Pronouncements."
Broadway Federal retains the right to service most loans sold, for which it
receives monthly loan servicing fees that are payable by the loan purchaser
out of loan collections in an amount equal to an agreed percentage of the
monthly loan installments collected, 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, 1997,
Broadway Federal was servicing $8.2 million of loans owned by others.
From time to time, Broadway Federal has purchased residential loans
originated by other institutions based upon Broadway Federal's investment
needs and market opportunities. The determination to purchase specific loans
or pools of loans is subject to Broadway Federal's underwriting policies,
which consider the financial condition of the borrower, the location of the
underlying property and the appraised value of the property, among other
factors. During the years ended December 31, 1997 and 1996, $7.9 million and
$2.0 million, respectively, in loans were purchased by Broadway Federal.
6
The following table provides information concerning Broadway Federal's loan
origination, purchase, sale and principal repayment activity for the periods
indicated.
[Download Table]
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
------------ ----------
(IN THOUSANDS)
Gross Loans:
Beginning Balance:........................ $ 98,430 $91,213
Loans Originated:
One-to Four-Units....................... 6,164 5,005
Five or More Units...................... 3,849 9,630
Nonresidential.......................... 1,971 1,751
Construction............................ 321 205
Loans Secured by Savings Accounts....... 1,270 795
Other................................... 723 --
-------- -------
Total Loans Originated.................... 14,298 17,386
Loans Purchased............................. 7,923 2,001
-------- -------
Total New Loans........................... 22,221 19,387
-------- -------
Less:
Transfer to REO........................... 1,710 1,163
Principal Repayments...................... 9,224 8,337
Sales of Loans............................ 3,690 2,670
Loan Write-Offs........................... 113 --
-------- -------
$105,914 $98,430
-------- -------
-------- -------
ONE- TO FOUR-FAMILY MORTGAGE LENDING. Broadway Federal offers ARMs and FHA
fixed-rate loans secured by one- to four-family residences, with maturities
up to thirty years. Substantially all of such loans are secured by
properties located in Southern California, with most being in Broadway
Federal's primary market areas of mid-city and South Central Los Angeles.
Loan originations are generally obtained from Broadway Federal's loan
representatives, existing or past customers, and referrals from members of
churches or other organizations in the local communities where Broadway
Federal operates. Of the one- to four-family residential mortgage loans
outstanding at December 31, 1997, 30.38% were fixed-rate loans and 69.62%
were ARMs.
The interest rates for most of Broadway Federal's ARMs are indexed to the
11th District Cost of Funds Index ("COFI"),with others indexed to the 1-year
Treasury Index ("Treasury"). Broadway Federal currently offers loans with
interest rates that adjust both monthly and annually. Borrowers are required
to make monthly payments under the terms of such loans. Some of its loan
programs have payment schedules that permit negative amortization (that is,
portions of the interest on loans that have adjusted upward due to interest
rate index increases are not payable currently and are instead added to the
loan principal). Broadway Federal currently has approximately $13.2 million
in mortgage loans that may be subject to negative amortization. Negative
amortization may involve a greater risk to Broadway Federal because during
periods of high interest rates the loan principal may increase above the
amount originally advanced. Broadway Federal believes, however, that the
risk of default is not substantial due to Broadway Federal's underwriting
criteria, including relatively low loan-to-value ratios, and the relative
stability of the COFI.
Broadway Federal qualifies its ARM borrowers based upon the fully indexed
rate as of such date (COFI or other index plus the applicable margin, rounded
to the nearest one-eighth of 1%) provided by the terms of the loan. However,
the initial rate paid by the borrower
7
is often discounted to a rate determined by Broadway Federal in accordance
with market and competitive factors. As of December 31, 1997, the
introductory discount rate offered by Broadway Federal on ARMs that adjust
monthly was 3.75%, which was below the fully-indexed rate based on the COFI,
which was 4.96% at such date. For ARMs that adjust annually, the
introductory rate offered by Broadway Federal at December 31, 1997 was 1.75%
below the fully-indexed rate based on the Treasury, which was 5.49% at such
date. As of December 31, 1997, the fully-indexed rates on ARMs that adjust
annually and those that adjust monthly were 8.375% and 7.625%, respectively,
above COFI. Broadway Federal's annual ARMs adjust by a maximum of 2.0% per
adjustment. There is no adjustment limit on the monthly ARMs, other than on
election by the borrower to limit its payment increase to 7.50% annually,
which could result in negative amortization on the loan. Both annual and
monthly ARMs have a lifetime adjustment limit which is set at the time
the loan is approved. At December 31, 1997, Broadway Federal charged fees of
up to 1.5% of the original loan amount for its one- to four-family ARMs.
Because of interest rate caps, market rates may exceed the maximum rates
payable on Broadway Federal's ARMs.
Broadway Federal offers fixed-rate mortgage loans with terms of 5, 15 and 30
years, which are payable monthly. Interest rates charged on fixed-rate
mortgage loans are competitively priced based on market conditions and
Broadway Federal's cost of funds. Origination fees charged on fixed-rate
loans were up to 2.50% of the original loan amount at December 31, 1997.
Broadway Federal's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 95% (and under
certain circumstances up to 97%) of the value if private mortgage insurance
is obtained. Many of Broadway Federal's borrowers on one- to four-family
properties are older home owners who typically prefer to maintain lower than
the maximum permitted loan balances. However, subsequent declines in the
real estate values in Broadway Federal's primary market area have resulted in
increases in the loan-to-value ratios of Broadway Federal's existing one- to
four-family mortgage loans. Properties securing a loan are appraised by an
approved independent appraiser and title insurance is required on all loans.
Mortgage loans originated by Broadway Federal generally include due-on-sale
clauses which provide Broadway Federal with the contractual right to declare the
loan immediately due and payable in the event the borrower transfers
ownership of the property without Broadway Federal's consent. Due-on-sale
clauses are an important means of adjusting the rates on Broadway Federal's
fixed-rate mortgage loan portfolio.
MULTI-FAMILY LENDING. Broadway Federal originates multi-family mortgage
loans generally secured by five or more unit apartment buildings located in
Broadway Federal's primary market area. In reaching its decision on whether
to make a multi-family loan, Broadway Federal considers the qualifications of
the borrower as well as the underlying property securing the loan. The
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 debt service), and the
ratio of loan amount to the lower of the selling price and the appraised
value. At December 31, 1997 multi-family lending represented 29.82% of the
Bank's gross loan portfolio, compared to 30.05% of the Bank's portfolio at
December 31, 1996.
Multi-family lending is part of the Company's strategic focus on less
competitive, higher yielding loan products. Broadway believes that the risks
associated with multi-family loans (see below) are mitigated by more
stringent underwriting requirements, which include lower loan-to-value ratios
and increased debt service coverage ratios. Under Broadway Federal's
underwriting policies, a multi-family ARM may only be made in an amount up to
70% of the lower of the selling price or appraised value of the underlying
property. Subsequent declines in the real estate values in Broadway
Federal's primary market area, however, have resulted in increases in the
loan-to-value ratios on Broadway Federal's existing multi-family mortgage
loans. Broadway Federal also generally requires minimum debt service ratios
that range from 120% to 135%, depending on the credit profile of the borrower
and the underlying collateral. Properties securing a loan are appraised by
an approved independent appraiser and title insurance is required on all
loans.
When evaluating the qualifications of the borrower for a multi-family loan,
Broadway Federal considers, among other things, the financial resources and
income level of the borrower, the borrower's experience in owning or managing
similar property, and Broadway Federal's lending experience with the
borrower. Broadway Federal's underwriting policies require that the borrower
be able to demonstrate strong management skills and the ability to maintain
the property from current rental income. The borrower is required to present
evidence of the ability to repay the mortgage and a history of making
mortgage payments on a timely basis. In making its assessment of the
8
creditworthiness of the borrower, Broadway Federal generally reviews the
financial statements, employment and credit history of the borrower, as well
as other related documentation.
Broadway Federal's largest multi-family loan at December 31, 1997 was a
participation loan of which, Broadway Federal's portion totaled $670,000.
The loan is secured by a forty-unit property located in the Los Angeles
metropolitan area. This loan is currently performing according to its terms.
Broadway Federal's second largest multi-family loan at that date was secured
by a twenty-eight unit property located in Los Angeles. At December 31,
1997, this loan had an outstanding balance of $659,000 and is currently
performing according to its terms.
Multi-family loans are generally viewed as exposing the lender to a greater
risk of loss than one- to four-family residential loans and typically involve
higher loan principal amounts than loans secured by one- to four-family
residential real estate. Repayment of multi-family loans generally is
dependent, in large part, on sufficient income from the property to cover
operating expenses and debt service. As a result, adverse economic
conditions such as those experienced in recent years in Southern California,
which have had especially severe effects in Broadway Federal's primary market
areas in mid-city and in South Central Los Angeles, have resulted in declines
in real estate values of multi-family properties that are more pronounced
than for single family residential properties. Broadway Federal attempts to
offset the risks associated with multi-family lending through careful
application of its underwriting standards and procedures, and by generally
making such loans with lower loan-to-value ratios than the maximum ratios
permitted for one- to four-family loans. Economic events and government
regulations, which are outside the control of the borrower or lender, could
impact the value of the security for the loan or the future cash flow of the
affected properties.
NONRESIDENTIAL REAL ESTATE LENDING. Broadway Federal originates
nonresidential real estate loans that are generally secured by properties
used for churches or for business purposes such as small office buildings,
health care facilities and retail facilities located in Broadway Federal's
primary market area. Broadway Federal has limited the origination of
nonresidential real estate loans in recent years. Of the $16.3 million in
Broadway Federal's nonresidential real estate loan portfolio at December 31,
1997, $11.2 million were originated prior to 1993.
Broadway Federal's nonresidential real estate loans are generally made in
amounts up to 65% of the lower of the selling price or the appraised value of
the property. Subsequent declines in the real estate values in Broadway
Federal's primary market area have resulted in increases in the loan-to-value
ratios on Broadway Federal's existing nonresidential mortgage loans. These
loans may be made with amortizations and maturity dates of up to 30 years and
are indexed to the COFI. Broadway Federal's underwriting standards and
procedures are similar to those applicable to its multi-family loans.
Broadway Federal considers, among other things, the net operating income of
the property and the borrower's management expertise, credit history and
profitability. Broadway Federal has generally required that the properties
securing nonresidential real estate loans have debt service coverage ratios
of at least 135%. The underwriting standards for nonresidential loans
secured by church properties are slightly different than for non-church
nonresidential real estate in that the ratios used in evaluating the loan are
based upon the repayment source from church member contributions rather than
income generated by rents or leases. The largest nonresidential real estate
loan in Broadway Federal's portfolio was originated in 1987. It is secured
by church property located in Inglewood, California, and had an outstanding
balance at December 31, 1997 of $801,000. This loan is currently performing
according to its terms. The second largest nonresidential real estate loan
in Broadway Federal's portfolio is also secured by a church property, located
in Los Angeles, California, and had an outstanding balance at December 31,
1997 of $684,000. This loan is also performing according to its terms.
Originating loans secured by church properties is a market niche in which
Broadway Federal has been active since its inception. Although Broadway
Federal does experience delinquencies on some of these loans and has made
additions to its allowance for loan losses as a result thereof, this product
has produced higher yields than the residential loan portfolio and Broadway
Federal has incurred no losses from foreclosures of these loans to date.
Management of Broadway Federal believes that the importance of church
organizations in the social and economic structure of the communities it
serves makes church lending an important aspect of its community orientation.
Management further believes that the importance of churches in the lives of
the individual members of the respective congregations encourages donations
even in difficult economic times, thereby providing somewhat greater
assurance of financial resources to repay loans than for residential or
other types of nonresidential properties. Nonetheless, adverse economic
conditions can result in risks to loan repayment that are similar to those
encountered in other types of nonresidential lending and such lending is
subject to other risks not necessarily directly related to economic factors
such as the stability, quality and popularity of church leadership. Church
loans included in Broadway Federal's portfolio totaled $11.6 million and
$11.8 million at December 31, 1997 and 1996, respectively.
9
Loans secured by nonresidential real estate properties generally involve a
greater degree of risk than residential mortgage loans because payment on
loans secured by nonresidential real estate properties is typically dependent
on the successful operation or management of the properties and is thus
subject, to a greater extent than single family loans, to adverse conditions
in the real estate market or the economy. Additionally, the declines in real
estate values over the last few years in the Southern California regional
economy have been more pronounced with respect to nonresidential real estate.
Broadway Federal seeks to minimize these risks by originating such loans on a
selective basis and currently restricts such loans to its primary lending
area.
CONSUMER LENDING. Broadway Federal's consumer loans primarily consist of
loans secured by savings accounts. At December 31, 1997, loans secured by
savings accounts represented $1.9 million, or 1.76%, of Broadway Federal's
total loan portfolio. Loans secured by depositors' accounts are generally
made up to 90% of the current value of the pledged account, at an interest
rate at least 2% above the rate paid on the account and for a term expiring
the earlier of one year from origination or upon the maturity of the account.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies of Broadway Federal. The Loan Committee, which is
comprised of the Senior Vice President-Chief Loan Officer and at least three
members of the Board of Directors, one of whom is the President and Chief
Executive Officer, is primarily responsible for developing, implementing and
monitoring the lending policies of Broadway Federal and reviewing properties
offered as security. The Board of Directors has authorized the following
loan approval limits as of January 1998, based upon the amount of Broadway
Federal's total loans to each borrower: if the total of the borrower's
existing loans and the loan under consideration is below $227,150, the new
loan may be approved by either the Senior Vice President-Chief Loan Officer
or the President; if the total of the borrower's existing loans and the loan
under consideration is from $227,150 to $500,000, the new loan must be
approved by two Loan Committee members, which may include the Senior Vice
President-Chief Loan Officer and the President; if the total of the
borrower's existing loans and the loan under consideration is from $500,000
up to $900,000, the new loan must be approved by three Loan Committee
members; and if the total of existing loans and the loan under consideration
is $900,000 or more, the full Board of Directors must approve the new loan.
In addition, it is the practice of Broadway Federal that all loans approved
by one or two Management Loan Committee members be reviewed the following
month by the two outside directors on the Loan Committee.
For all loans originated by Broadway Federal, 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 either the staff appraiser of Broadway Federal or
by an independent licensed or certified appraiser designated and approved by
Broadway Federal. The Board annually approves the independent appraisers
used by Broadway Federal and approves Broadway Federal's appraisal policy.
It is Broadway Federal's policy to obtain title insurance on all real estate
loans. Borrowers must also obtain hazard insurance prior to loan closing.
If the original loan amount exceeds 80% on a sale or refinance of a first
trust deed loan, private mortgage insurance is typically required and the
borrower is required to make payments to a mortgage impound account from
which Broadway Federal makes disbursements for private mortgage insurance,
taxes and hazard and flood insurance as required.
DELINQUENCIES AND CLASSIFIED ASSETS. Management and the Board of Directors
perform a monthly review of all delinquent loans. The procedures followed by
Broadway Federal with respect to delinquencies vary depending on the nature
of the loan and the period of delinquency. When a borrower fails to make a
required payment on a loan, Broadway Federal takes a number of steps to
induce the borrower to cure the delinquency and restore the loan to current
status. In the case of residential mortgage loans, Broadway Federal
generally sends the borrower a written notice of nonpayment promptly after
the loan becomes past-due. In the event payment is not received promptly
thereafter, additional letters and telephone calls are made. If the loan is
still not brought current and it becomes necessary for Broadway Federal to
take legal action, Broadway Federal generally commences foreclosure
proceedings against all real property that secures the loan.
Broadway Federal ceases to accrue interest on all loans that are 90 days
past-due. When a loan first becomes 90 days past due, all previously accrued
but unpaid interest is deducted from interest income. In the event a
non-accrual loan subsequently becomes current, which would require that the
borrower pay all past due payments, late charges and any other delinquent
fees owed, all income is recognized by Broadway Federal and the loan is
returned to accrual status.
10
In the case of nonresidential real estate loans, Broadway Federal generally
contacts the borrower by telephone and sends a written notice of non-payment
upon expiration of the grace period. Decisions as to when to commence
foreclosure actions for nonresidential real estate loans are made on a
case-by-case basis. Broadway Federal may consider loan work-out arrangements
with these types of borrowers in certain circumstances.
If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the real property
securing the loan is sold at foreclosure by the trustee named in the deed of
trust. Property foreclosed upon and not purchased by a third party at the
foreclosure sale is held by Broadway Federal as real estate acquired through
foreclosure ("REO") and is carried in Broadway Federal's consolidated
financial statements at its estimated fair value less the costs estimated to
be necessary to sell the property.
Federal regulations and Broadway Federal's internal policies require that
Broadway Federal utilize an asset classification system as a means of
monitoring and reporting problem and potential problem assets. Broadway
Federal has incorporated asset classifications as a part of its credit
monitoring system and thus classifies problem assets and potential problem
assets as "Substandard," "Doubtful" or "Loss" assets. 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 Broadway Federal to
sufficient risk to warrant classification in one of the aforementioned
categories, but that are considered to possess some weaknesses, are
designated "Special Mention."
When a federally insured institution classifies one or more assets, or
portions thereof, as "Substandard" or "Doubtful," it is required to establish
an allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a federally
insured institution classifies one or more assets, or portions thereof, as
"Loss," it is required either to establish a specific allowance for losses
equal to 100% of the amount of the asset so classified or to charge off such
amount.
A financial institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional loss allowances. The
OTS, in conjunction with the other federal banking agencies, has adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of valuation guidelines. Generally, the policy
statement recommends that financial institutions have effective systems and
controls to identify, monitor and address asset quality problems, that
management analyze all significant factors that affect the collectibility of
the portfolio in a reasonable manner and that management establish acceptable
allowance evaluation processes that meet the objectives set forth in the
policy statement. Although management believes that adequate loan loss
allowances have been established, actual losses are dependent upon future
events and, as such, further material additions to the level of loan loss
allowances may become necessary. In addition, while Broadway Federal believes
that it has established an adequate allowance for loan losses at December 31,
1997, there can be no assurance that the OTS or the FDIC, in reviewing
Broadway Federal's loan portfolio, will not request Broadway Federal to
materially increase its allowance for loan losses based on such agencies'
evaluation of the facts available to the OTS or the FDIC at that time,
thereby negatively affecting Broadway Federal's financial condition and
earnings. However, as of the most recent OTS examination no adjustments to
the allowance were recommended.
At December 31, 1997, Broadway Federal had $2.3 million of loans classified
as Substandard, of which the largest loan so classified had a principal
balance of $315,000 and was secured by a multi-family residential property.
At December 31, 1997 there were $119,000 in loans classified as Doubtful and
$175,000 of loans classified as Loss. As of December 31, 1997, loans
designated as Special Mention included 22 loans totaling $3.7 million, which
were so
11
designated due to delinquencies or other identifiable weaknesses. At
December 31, 1997, the largest loan designated as "Special Mention" had a
principal balance of $538,000 and was secured by a nonresidential property.
Broadway Federal obtains appraisals on REO properties on an annual basis.
Broadway Federal generally conducts external inspections of REO properties
(excluding land) on at least a quarterly basis.
The following table sets forth delinquencies in Broadway Federal's loan
portfolio as of the dates indicated:
[Enlarge/Download Table]
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ---------------------- ---------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER OF BALANCE OF NUMBER OF BALANCE OF NUMBER OF BALANCE OF NUMBER OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
One- to four-family 7 $ 183 8 $ 606 7 $ 10 9 $ 971
Multi-family - - 1 214 - - 3 638
Construction and land - - - - - - - -
Other loans - - 1 101 - - 2 247
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total 7 $ 183 10 $ 921 7 $ 10 14 $1,856
--------- ---------- --------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Delinquent loans to total
gross loans 0.17% .87% 0.01% 1.89%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NON-ACCRUAL LOANS AND REO. Nonperforming assets, consisting of non-accrual
loans and REO, decreased from $2.8 million at December 31, 1996 to $2.1
million at December 31, 1997. The $742,000 decrease resulted from a
$953,000 decrease in non-accrual loans, offset by a $211,000 increase in REO.
As a percentage of total assets, nonperforming assets were 1.65% at December
31, 1997, as compared to 2.39% at December 31, 1996. The allowance for loan
losses was 114.44% of nonperforming loans at December 31, 1997, as compared
to 62.65% at December 31, 1996.
Included in the following table is information regarding Broadway Federal's
non-accrual loans and REO at the dates indicated. For the years ended
December 31, 1997 and 1996, the amount of interest income that would have
been recognized on non-accrual loans if such loans had continued to perform
in accordance with their contractual terms was $71,000 and $147,000,
respectively, as compared with the respective amounts actually received on
non-accrual loans of $28,000 and $68,000. Broadway Federal had no commitments
to lend additional funds to borrowers whose loans are non-accrual at December
31, 1997. There were no accruing loans contractually past due 90 days or more
at December 31, 1997.
12
[Download Table]
AT DECEMBER 31,
--------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Residential real estate:
One- to four-family $ 606 $ 987
Construction and Land - -
Other loans
315 887
-------- --------
Total non-performing loans 921 1,874
REO 1,144 933
-------- --------
Total non-performing assets $2,065 $2,807
-------- --------
-------- --------
Allowance for loan losses as a percentage
of total loans 1.00% 1.19%
Allowance for loan losses as a percentage
of total non-performing loans 114.44 62.65
Allowance for losses as a percentage of
total non-performing assets (1) 57.16 47.95
Non-performing loans as a percentage of
total loans 0.87 1.90
Non-performing assets as a percentage of
total assets 1.65 2.39
Net charge-offs to average loans 0.38 0.33
Impaired loans as a percentage of total
loans 1.70 2.03
------------------------------------
(1) Allowance for losses includes valuation allowances on loans and REO.
At December 31, 1997, the total recorded investment in impaired loans (a loan
is impaired when it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement) was
$1.8 million. Of this amount, $443,000 had a related impairment allowance
totaling $239,000 at December 31, 1997. All such provisions for losses and
any related recoveries are recorded as part of the provision for loan losses
in the accompanying consolidated statements of operations. During the year
ended December 31, 1997, Broadway Federal's average investment in impaired
loans was $1.4 million, and interest income recorded on impaired loans during
this period totaled $150,000. Impaired loans which are performing under
their contractual terms are reported as performing loans and cash payments
are allocated to principal and interest in accordance with the terms of the
loan.
ALLOWANCE FOR LOAN LOSSES
Broadway Federal's allowance for loan losses is established through
provisions for loan losses charged against income in amounts that are based
on Management's evaluation of the risks inherent in the loan portfolio and
the general economy. The allowance for loan losses is maintained at an amount
that Management considers adequate to cover losses in loans receivable which
are deemed probable and estimable. The Board of Directors of Broadway
Federal reviews the level and reasonableness of the monthly provision for
loan losses, as well as the matrix which supports the adequacy of the
allowance for loan losses. The allowance is based upon a number of factors,
including current
13
economic conditions, actual loss experience, industry trends, asset
classifications, levels of impaired loans, geographic concentrations,
estimated collateral values, Management's assessment of the credit risk
inherent in the portfolio, historical loan loss experience and Broadway
Federal's underwriting policies. To determine the overall allowance,
Management periodically reviews all loans by loan category (i.e., one- to
four-family, multi-family, nonresidential real estate, etc.). Adjustments to
the loan loss allowance are made by Broadway Federal based upon Management's
analysis of each category of loans and of the potential risk factors within
each category. The provision for loan losses may fluctuate on a monthly
basis as changes occur within the loan categories as a result of numerous
factors, including new loan originations, loan repayments, prepayments and
changes in asset classifications. Loan loss provisions may be recaptured for
a particular loan category if Management determines that the factors which
existed and required higher provisions are no longer present. Loan loss
provisions may be increased if Management becomes aware of factors elevating
the risk in that loan category.
As of December 31, 1997, Broadway Federal's allowance for loan losses was
1.00% of total loans, as compared to 1.19% as of December 31, 1996.
Broadway Federal had non-accrual loans $921,000 and $1.9 million at
December 31, 1997 and 1996, respectively. Broadway Federal seeks to
anticipate problems and take appropriate steps to resolve them through its
internal asset review procedures. Such procedures include a review of all
loans on which full collectibility may not be reasonably assured, and
consideration of, among other factors, debt service coverage ratios, vacancy
rates, the estimated value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Broadway Federal monitors and
modifies its allowance for loan losses as conditions dictate. Although
Broadway Federal maintains its allowance at a level which it considers
adequate to provide for potential losses, there can be no assurance that
losses will not exceed the estimated amounts. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review Broadway Federal's allowance for loan losses. Such agencies may
require Broadway Federal to make additional provisions for estimated loan
losses based upon judgments of the information available to them at the time
of the examination.
For loans transferred to REO, any excess of cost or recorded investment over
the estimated fair value of the asset at foreclosure is classified as a loss
and is charged off against the general loan loss allowance previously
established for those loans. REO is initially recorded at the estimated fair
value of the related assets at the date of foreclosure, less estimated costs
to sell. Thereafter, if there is further deterioration in value, Broadway
Federal either writes down the REO directly or provides a valuation allowance
and charges operations for the diminution in value. At December 31, 1997,
Broadway Federal had $1.1 million of REO, net of valuation allowances,
compared to $933,000 in 1996.
14
The following table sets forth Broadway Federal's allowances for loan and
real estate losses at the dates indicated:
[Download Table]
DECEMBER 31,
-----------------------
1997 1996
--------- ----------
(IN THOUSANDS)
Allowance for loan losses:
Balance at beginning of year $1,174 $896
Charge-offs, net:
One- to four-family 139 285
Multi-family 247 23
Construction and Land - -
Other - -
--------- ----------
Total Charge-offs, net (1) 386 308
Provision charged to income 266 586
--------- ----------
Balance at end of year 1,054 1,174
--------- ----------
Allowance for REO
Balance at beginning of year 181 218
Provision for losses 60 283
Charge-offs (114) (320)
--------- ----------
Balance at end of year 127 181
--------- ----------
Total $1,181 $1,355
--------- ----------
--------- ----------
------------------------
(1) There were recoveries during the years ended December 31, 1997 and 1996
totaling $1,000 and $5,000, respectively.
15
The following table sets forth the ratios of Broadway Federal's allowance for
loan losses to total loans, and the percentage of loans in each of the
categories listed to total loans.
[Enlarge/Download Table]
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------- --------------------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
PERCENTAGE OF LOANS IN EACH ALLOWANCE TO LOANS IN EACH
ALLOWANCE TO CATEGORY TO TOTAL CATEGORY TO
AMOUNT TOTAL ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ --------------- ------------- ------ ------------- -------------
(DOLLARS IN THOUSANDS)
One- to Four-family $ 338 32.07% 51.84% $ 272 23.17% 51.48%
Multi-family 254 24.10 29.82 342 29.13 30.05
Nonresidential 217 20.59 15.44 199 16.95 16.71
Construction and Land 10 0.95 0.72 2 0.17 0.23
Other 54 5.12 2.18 24 2.04 1.53
Unallocated 181 17.17 - 335 28.54 -
------ --------------- ------------- ------ ------------- -------------
Total valuation allowance $1,054 100.00% 100.00% $1,174 100.00% 100.00%
------ --------------- ------------- ------ ------------- -------------
------ --------------- ------------- ------ ------------- -------------
16
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest in commercial paper,
investment grade corporate debt securities and mutual funds whose assets are
limited to investments that a federally chartered savings institution is
authorized to make directly. Additionally, Broadway Federal must maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. See "-Regulation--Federal Home Loan Bank System" and
"--Liquidity." Historically, Broadway Federal has maintained liquid assets
above the minimum OTS requirements and at levels Management believes to be
adequate to support its normal daily activities.
The investment policy of the Company attempts to provide and maintain
liquidity, generate a favorable return on investments without incurring undue
interest-rate and credit risk, and complement the Bank's lending activities.
The Company's investment policy generally limits investments to government
and federal agency backed securities and other non-government guaranteed
securities, including certificates of deposit, mortgage-backed securities
issued by the FHLMC, the FNMA, the Government National Mortgage Association
("GNMA"), and municipal obligations that have a rating which exceeds or is
the equivalent of an "A" rating as determined by Standard and Poor's Ratings
Group or Moody's Investors Service. Bankers acceptances from any one issuer
are limited to 10% of the Company's capital and commercial paper is limited
to 1% of the Company's assets. The Company's policies provide the authority
to invest in marketable equity securities meeting the Company's guidelines
and further provide that all such investments be ratified by the Board of
Directors on a quarterly basis. At December 31, 1997 and 1996, the Company
had investment securities in the aggregate amount of $9.2 million and $10.3
million, respectively, with fair values of $9.2 and $10.3 million,
respectively. All investment securities were categorized as held-to-maturity
and none were categorized as available-for-sale.
17
The following table sets forth information regarding the carrying and fair
values of the Company's cash, federal funds sold and other short-term
investments and investment securities at the dates indicated.
[Enlarge/Download Table]
AT DECEMBER 31,
------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(IN THOUSANDS)
Cash and Cash Equivalents:
Cash on hand and in banks $ 3,731 $ 3,731 $ 1,530 $ 1,530
Federal funds sold 1,100 1,100 3,650 3,650
-------- -------- -------- --------
Total cash and cash equivalents $ 4,831 $ 4,831 $ 5,180 $ 5,180
-------- -------- -------- --------
-------- -------- -------- --------
Investment securities:
Held to maturity:
Mortgage-Backed Securities $ 3,208 $ 3,237 $ 425 $ 417
U.S. Government and Federal
agency obligations 5,999 5,983 $ 9,946 $ 9,924
-------- -------- -------- --------
Total investment securities $ 9,207 $ 9,220 $ 10,371 $ 10,341
-------- -------- -------- --------
-------- -------- -------- --------
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's federal
funds sold and other short-term investments and investment securities as of
December 31, 1997.
[Enlarge/Download Table]
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS TOTAL
-------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold $ 1,100 5.25% - - - - $ 1,100 5.25%
Investment securities:
Held to maturity:
Mortgage-Backed Securities - - $ 347 5.40% $2,861 6.83% 3,208 6.68
U.S. Government and
Federal Agency obligations 999 5.69 5,000 6.16 - - 5,999 6.08
-------- -------- -------- -------- -------- -------- -------- --------
Total investment securities $ 2,099 5.46% $ 5,347 6.11% $2,861 6.83% $10,307 6.18%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
SOURCES OF FUNDS
GENERAL. Deposits are a primary source of Broadway Federal's funds used for
lending and other investment activities and general business purposes. In
addition to deposits, Broadway Federal derives funds from loan
-18
repayments and prepayments, proceeds from sales of loans and investment
securities, maturities of investment securities, cash flows generated from
operations and, to a lesser extent, FHLB advances.
DEPOSITS. Broadway Federal offers a variety of deposit accounts with a range
of interest rates and terms. Broadway Federal's deposits principally consist
of passbook savings accounts, non-interest bearing checking accounts, NOW and
other demand accounts, money market accounts, and fixed-term certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Broadway Federal's deposits are obtained predominately from the
areas in which its branch offices are located. Broadway Federal relies
primarily on customer service and long-standing relationships with customers
to attract and retain these deposits. The Bank emphasizes its retail "core"
deposit relationships, consisting of passbook accounts, checking accounts and
non-interest bearing demand accounts, which Management believes tend to be
more stable and available at a lower cost than other, longer term types of
deposits. However, market interest rates, including rates offered by
competing financial institutions, significantly affect Broadway Federal's
ability to attract and retain deposits. Certificate accounts in excess of
$100,000 and out-of-state deposits are not actively solicited by the Bank.
As of December 31, 1997 out-of-state deposits totaled $5.6 million or 5.10%
of Broadway Federal's total deposit portfolio. Further, Broadway Federal
generally has not solicited deposit accounts by increasing the rates of
interest paid as quickly as some of its competitors nor has it emphasized
offering high dollar amount deposit accounts with higher yields to replace
deposit account runoff.
[Download Table]
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
Deposits $197,544 $171,545
Withdrawals 192,707 182,074
-------- --------
Net Deposits (Withdrawals) 4,837 (10,529)
Interest credited on deposits 3,036 2,803
-------- --------
Total Increase (Decrease) in deposits $ 7,873 $ (7,726)
-------- --------
-------- --------
-19-
The following table sets forth the distribution of Broadway Federal's deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
[Enlarge/Download Table]
DECEMBER 31,
-----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENTAGE AVERAGE AVERAGE PERCENTAGE AVERAGE
BALANCE OF TOTAL RATE BALANCE OF TOTAL RATE
------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Money market deposits $ 4,396 4.09% 2.23% $ 4,264 4.27% 2.24%
Passbook deposits 29,974 27.87 2.00 32,258 32.31 2.00
NOW and other demand deposits 11,099 10.32 0.62 10,782 10.80 0.56
-------- ------- ------- -------
Total 45,469 42.28 47,307 47.38
-------- ------- ------- -------
Certificate Accounts:
Three months or less - - - 1,817 1.81 3.75
Over three months
through six months 11,464 10.66 4.67 10,123 10.14 4.77
Over six through
twelve months 13,728 12.77 5.30 14,019 14.04 5.24
Over one to three years 19,508 18.14 5.51 11,459 11.48 5.56
Over three to five years 3,736 3.47 5.77 3,147 3.15 5.76
Over five to ten years 1,444 1.34 6.08 1,473 1.48 6.58
Certificates over $100,000 12,193 11.34 4.78 10,507 10.52 5.10
-------- ------- ------- -------
Total certificates 62,073 57.72 52,545 52.62
-------- ------- ------- -------
Total deposits $107,542 100.00% $99,852 100.00%
-------- ------- ------- -------
-------- ------- ------- -------
-20-
The following table presents, by various rate categories, the amounts of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997 and
1996.
[Enlarge/Download Table]
PERIOD TO MATURITY AT DECEMBER 31, 1997
-----------------------------------------------------------------------
LESS THAN ONE TO TWO TO AT DECEMBER 31,
ONE YEAR TWO YEARS THREE YEARS THEREAFTER TOTAL 1996
--------- --------- ----------- ---------- ------- ---------------
(DOLLARS IN THOUSANDS)
Certificate Accounts:
0 to 4.00% $ 2,117 $ 1,578 $ - $ - $ 3,695 $ 3,767
4.01 to 5.00% 11,686 880 129 - 12,695 15,680
5.01 to 6.00% 35,604 4,980 419 1,037 42,040 33,085
6.01 to 7.00% 540 3,411 1,234 950 6,135 4,137
7.01 to 8.00% - - - - - 269
8.01 to 9.00% - - - - - 252
Over 9.00% - - - - - -
-------- -------- ------- ------- ------- -------
Total $ 49,947 $10,849 $ 1,782 $ 1,987 $64,565 $57,190
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
BORROWINGS
From time to time Broadway Federal has obtained advances from the FHLB and
may do so in the future as an alternative to retail deposit funds. FHLB
advances are made to meet cash needs for operations, to fund loans or to
acquire such other assets as may be deemed appropriate for investment
purposes. Advances from the FHLB are secured primarily by mortgage loans.
See "--Regulation--Federal Home Loan Bank System." 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, including Broadway Federal, for purposes
other than meeting withdrawals, changes from time to time in accordance with
the policies of the OTS and the FHLB. At December 31, 1997 and 1996,
Broadway Federal had no advances outstanding from the FHLB and no other
borrowings.
The following table sets forth certain information regarding Broadway
Federal's borrowed funds at or for the periods indicated:
[Download Table]
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
----------- ----------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding $ 542 $ 83
Maximum amount outstanding
at any month-end period 3,500 1,000
Balance outstanding at
end of period - -
Weighted average interest rate
during the period 6.20% 5.67%
Weighted average interest rate
at end of period - -
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SUBSIDIARY ACTIVITIES
BSC provides trustee services for Broadway Federal and receives commissions
from the sale of mortgage, life and fire insurance. In the past, BSC has
been involved in real estate development projects. Broadway Federal does not
currently intend to engage in any future real estate development projects
through BSC or otherwise. As of December 31, 1997, and for the twelve months
then ended, BSC had total assets of $184,000 and net earnings of $11,000.
PERSONNEL
At December 31, 1997, Broadway Federal had 46 full-time employees and 13
part-time employees. Broadway Federal believes that it has good relations
with its employees and none are represented by a collective bargaining
group.
REGULATION
GENERAL
The Company is registered with the OTS as a savings and loan holding company
and is subject to regulation and examination as such by the OTS. Broadway
Federal is a federally chartered savings bank and, is a member of the FHLB
System. Its customer deposits are insured through the SAIF managed by the
FDIC. The Bank is subject to examination and regulation by the OTS with
respect to most of its business activities, including, among other things,
capital standards, general investment authority, deposit taking and borrowing
authority, mergers, establishment of branch offices, and permitted subsidiary
investments and activities. The OTS's operations, including examination
activities, are funded by assessments levied on its regulated institutions.
Broadway Federal is further subject to the regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board")
concerning reserves required to be maintained against deposits, transactions
with affiliates, Truth in Lending and other consumer protection requirements
and certain other matters. Financial institutions, including Broadway
Federal, are also subject, under certain circumstances, to potential
liability under various statutes and regulations applicable to property
owners generally, including statutes and regulations relating to the
environmental condition of real property and liability for the remediation of
certain adverse environmental conditions thereof.
The descriptions of the statutes and regulations applicable to the Company
and its subsidiaries and the effects thereof set forth below and elsewhere
herein do not purport to be a complete description of such statutes and
regulations and their effects on the Company, Broadway Federal and the
Company's other subsidiaries. The descriptions also do not purport to
identify every statute and regulation that may apply to the Company,
Broadway Federal and the Company's other subsidiaries.
The OTS has primary enforcement authority over savings institutions and their
holding companies, such authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist orders and to
initiate injunctive actions and removal and prohibition orders against
officers, directors and certain other "institution affiliated parties." In
general, enforcement actions may be initiated for violations of specific laws
and regulations and for unsafe or unsound conditions or practices.
The FDIC has authority to recommend that the OTS take any authorized
enforcement action with respect to any federally insured savings institution.
If the OTS does not take the recommended action or provide an acceptable plan
for addressing the FDIC's concerns within 60 days after receipt of a
recommendation from the FDIC, the FDIC may take such action if the FDIC Board
of Directors determines that the institution is in an unsafe or unsound
condition or that failure to take such action will result in the continuation
of unsafe or unsound practices in conducting the business of the institution.
The FDIC may also take action prior to the expiration of the 60-day time
period in exigent circumstances after giving notice to the OTS.
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The FDIC may also terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. In
addition, FDIC regulations provide that any insured institution that falls
below a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and the FDIC. The FDIC may
also suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
DEPOSIT INSURANCE
The FDIC administers two separate deposit insurance funds. The SAIF is the
insurance fund responsible for insuring the deposits of savings institutions,
the deposits of which were formerly insured by the Federal Savings and Loan
Insurance Corporation ("FSLIC"). The Bank Insurance Fund (the "BIF") is the
insurance fund responsible for insuring the deposits of commercial banks and
certain other institutions. Broadway Federal is a member of the SAIF.
The FDIC has the authority to set the respective deposit insurance premiums
of the SAIF and of the BIF at levels it determines to be appropriate to
maintain the SAIF or BIF reserves or to fund the administration of the FDIC.
In addition, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") authorizes emergency special assessments applicable to BIF and
SAIF members. The OTS Director is also authorized to impose assessments on
savings institutions to fund certain of the costs of administration of the
OTS.
Since January 1, 1993, FDIC deposit insurance premiums have been assessed
pursuant to a "risk-based" system. Under this risk-based assessment system,
institutions are classified on the basis of capital ratios, supervisory
evaluations by the institution's primary federal regulatory agency and other
information determined by the FDIC to be relevant to the institution's
financial condition and the risk posed to the insurance funds. Each of the
nine resulting risk category subgroups of institutions is assigned a deposit
insurance premium assessment rate which until, the third quarter of 1996,
ranged from 0.23% to 0.31%, as compared with the uniform 0.23% rate that had
previously been in effect. During 1997 and 1996, Broadway Federal's
assessment rates were 0.03% and 0.26%, respeactively.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIF
Act") was enacted which, among other things, recapitalized the SAIF through a
one-time special assessment for SAIF members, such as the Bank, at the rate
of $0.675 per $100 of estimated SAIF-deposits as of March 31, 1995.
Beginning January 1, 1997, the same risk-based assessment schedule applies to
both SAIF members and BIF members - $0.00 to $0.27 per $100 of deposits. The
DIF Act also provided for full pro rata sharing by all federally-insured
institutions by January 1, 2000 of the obligation, now borne entirely by
SAIF-insured institutions, to pay the interest on the bonds (commonly
referred to as the "FICO Bonds") that were issued by a specially created
federal corporation for the purpose of funding the resolution of failed
thrift institutions. From January 1, 1997 through January 1, 2000 (or
January 1, 1999 if the BIF and SAIF charters are then merged), FICO premiums
for BIF and SAIF insured deposits are $0.013 and $0.064 per $100 of deposits,
respectively. The DIF Act provides for the merger of the BIF and the SAIF on
January 1, 1999 into a newly created Deposit Insurance Fund, provided that
the bank and savings association charters are combined by that date. If the
charters have been merged and the Deposit Insurance Fund created, pro rata
FICO premium sharing will begin on January 1, 1999. While various legslative
proposals for this purpose have been introduced in Congress, none have been
enacted to date and no reliable prediction can be made as to whether or in
what form any such legislation may be enacted.
On a going forward basis, the DIF Act has resulted in a significant reduction
in the Bank's deposit insurance premiums. In addition, it is anticipated
that this reduction will diminish the competitive advantage that BIF-insured
institutions had prior to the passage of the Act due to their lower deposit
premium costs.
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CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the capital regulations of the OTS promulgated thereunder (the
"Capital Regulations") require savings institutions to meet three capital
requirements: a "leverage limit" (also referred to as the "core capital
requirement"), a "tangible capital requirement" and a "risk-based capital
requirement." In addition to the general standards, the OTS may establish, on
a case-by-case basis, individual minimum capital requirements for a savings
institution which vary from the requirements that would otherwise apply under
the Capital Regulations.
A savings institution that fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and
sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS Director requiring one or more of the following: an
increase in capital; a reduction of rates paid on savings accounts; cessation
of or limitations on operational expenditures; an increase in liquidity; and
such other actions as may be deemed necessary or appropriate by the OTS
Director. In addition, a conservator or receiver may be appointed under
appropriate circumstances.
The core capital requirement currently requires a savings institution to
maintain "core capital" of not less than 3% of adjusted total assets. "Core
capital" includes common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and any related surplus and
minority interests in the equity accounts of fully consolidated subsidiaries.
The amount of an institution's core capital is, in general, calculated in
accordance with generally accepted accounting principles ("GAAP"), with
certain exceptions. Among other exceptions, adjustments to an institution's
GAAP equity accounts that are required pursuant to Statement of Financial
Accounting Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES," to reflect changes in the market value of certain
securities held by the institution that are categorized "available-for-sale"
are not included in the calculation of core capital for regulatory capital
purposes. Intangible assets must be deducted from core capital, with certain
exceptions and limitations, including purchased and originated mortgage
servicing rights and certain other intangibles, which may be included on a
limited basis. "Originated mortgage servicing rights" consist of the
servicing rights with respect to loans that are originated and then sold by
the institution or that are categorized by it as held for sale.
A savings institution is required to maintain "tangible capital" in an amount
not less than 1.5% of adjusted total assets. "Tangible capital" is defined for
this purpose to mean core capital less any intangible assets, plus purchased
and originated mortgage servicing rights, subject to certain limitations.
The risk-based capital requirements, among other things, provide that the
capital ratios applicable to various classes of assets are to be adjusted to
reflect the degree of risk associated with such classes of assets. In
addition, the asset base for computing a savings institution's capital
requirement includes off-balance sheet items, including assets sold with
recourse. Generally, the Capital Regulations require savings institutions to
maintain "total capital" equal to 8.00% of risk-weighted assets. "Total
capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes, among other things, certain types of
preferred stock and subordinated debt and, subject to certain limitations,
loan and lease general valuation allowances. Such general valuation
allowances can generally be included up to 1.25% of risk-weighted assets. At
December 31, 1997 and 1996, Broadway Federal's general valuation allowance
included in supplementary capital was $879,000 and $905,000, respectively. A
savings institution's supplementary capital may be used to satisfy the
risk-based capital requirement only to the extent of that institution's core
capital.
The OTS, the FDIC and other federal banking agencies recently amended their
risk-based capital regulations to provide that an institution must hold
capital in excess of regulatory minimums to the extent that examiners find
either (i) significant exposure to concentration of credit risk such as risks
from higher interest rates, prepayments, significant off-balance sheet items
(especially standby letters of credit) or credit, or risks arising from
nontraditional activities, (ii) that the institution is not adequately
managing these risks, or (iii) significant exposure to market risk. For this
purpose, however, the agencies have stated that, in view of the statutory
requirements relating to permitted lending and investment activities of
savings institutions, the general concentration by such
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institutions, the general concentration by such institutions in real estate
lending activities would not, by itself, be deemed to constitute an exposure
to concentration of credit risk that would require greater capital levels.
The OTS has adopted a rule incorporating an interest rate risk ("IRR")
component into its risk-based capital rules. See
"Business--Regulation--Capital Requirements." Although this rule has been
adopted and published, it is not yet effective. Under the rule, an
institution with a greater than normal level of interest rate risk (as
determined by the OTS) will be subject to a deduction of its interest rate
component from total capital for purposes of calculating the institution's
risk-based capital requirement. An institution with a greater than normal
interest rate risk is defined as an institution that would suffer a loss of
net portfolio value ("NPV") exceeding 2% of the estimated market value of its
assets in the event of a 200 basis point parallel increase or decrease in
interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet
contracts. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct 50% of that excess
change from its capital. The rule provides that the OTS will calculate the
IRR component quarterly for each institution. At December 31, 1997 there was
no decrease in the Bank's NPV as a percentage of the present value of assets
at the 200 basis point level.
Following is a reconciliation of Broadway Federal's equity capital to the
minimum Federal regulatory capital requirements as of December 31, 1997 and
December 31, 1996:
[Enlarge/Download Table]
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
-------------------------------- --------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- ------- ---------- -------- ------- ----------
(IN THOUSANDS)
GAAP Capital $10,708 $10,708 $10,708 $10,299 $10,299 $10,299
Additional supplementary capital:
General valuation allowance - - 879 - - 905
------- ------- ------- ------- ------- -------
Regulatory capital amounts 10,708 10,708 11,587 10,299 10,299 11,204
Minimum requirement 1,861 3,722 6,266 1,720 3,440 5,791
------- ------- ------- ------- ------- -------
Excess over requirement $ 8,847 $ 6,986 $ 5,321 $ 8,579 $ 6,859 $ 5,413
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
The Federal Deposit Insurance Act contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking
agency to take prompt corrective action with respect to an institution which
becomes "undercapitalized" and to take additional actions if the institution
becomes "significantly undercapitalized" or "critically undercapitalized."
The PCA provisions expand the powers and duties of the OTS and the FDIC and
expressly authorize, or in many cases direct, regulatory intervention at an
earlier stage than was previously the case.
The OTS regulations implementing the PCA provisions define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10.00% or greater, has a Tier 1 risk-based
capital ratio (Tier 1 capital to total risk-weighted assets) of 6.00% or
greater, has a core capital ratio of 5.00% or greater and is not subject to
any written capital order or directive to meet and maintain a specific
capital level or any capital measure; (ii) an institution is "adequately
capitalized" if it has a total risk-based capital ratio of 8.00% or greater,
has a Tier 1 risk-based capital ratio of 4.00% or greater and has a core
capital ratio of 4.00% or greater (3.00% for certain highly rated
institutions); (iii) an institution is "undercapitalized" if it has a total
risk-based capital ratio of less than 8.00% or has either a Tier 1 risk-based
or a core capital ratio that is less than 4.00%; (iv) an institution is
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.00%, or has either a Tier 1 risk-based or core capital
ratio that is less than 3.00%; and (v) an institution is "critically
undercapitalized" if its "tangible equity" (defined in the PCA regulations to
mean core capital plus cumulative perpetual preferred stock) is equal to or
less than 2.00% of its total assets. The OTS also has authority, after an
opportunity for a hearing, to downgrade an institution from "well capitalized"
to "adequately capitalized," or to subject an "adequately capitalized" or
"undercapitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. At December 31, 1997,
Broadway Federal was a well-capitalized institution.
The table below presents Broadway Federal's capital ratios at December 31,
1997 and 1996:
[Download Table]
ACTUAL
--------------------------
(Dollars in Thousands) AMOUNT RATIO
--------------------------
Decemer 31, 1997:
Leverage/Tangible Ratio $ 10,708 8.63%
Tier I Risk-based ratio 10,708 13.67
Total Risk-based ratio 11,587 14.79
December 31, 1996:
Leverage/Tangible Ratio $ 10,299 9.06%
Tier I Risk-based ratio 10,299 14.23
Total Risk-based ratio 11,204 15.48
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Under the PCA provisions, an institution that is deemed to be
undercapitalized is subject to mandatory restrictions on capital
distributions (including cash dividends) and management fees, increased
supervisory monitoring by the OTS, growth restrictions, restrictions on
certain expansion proposals and capital restoration plan submission
requirements. If an institution is deemed to be significantly
undercapitalized, all of the foregoing mandatory restrictions apply, as well
as a restriction on compensation paid to senior executive officers.
Furthermore, the OTS must take one or more of the following actions: (i)
require the institution to sell shares (including voting shares) or
obligations; (ii) require the institution to be acquired or merge (if one or
more grounds for the appointment of a conservator or receiver exist); (iii)
implement various restrictions on transactions with affiliates; (iv) restrict
interest rates on deposits; (v) impose further asset growth restrictions or
require asset reductions; (vi) require the institution or a subsidiary to
alter, reduce or terminate activities considered risky; (vii) order a new
election of directors; (viii) dismiss directors and/or officers who have held
office for more than 180 days before the institution became undercapitalized;
(ix) require the hiring of qualified executives; (x) prohibit correspondent
bank deposits; (xi) require the institution to divest or liquidate a
subsidiary in danger of insolvency or a controlling company to divest any
affiliate that poses a significant risk, or is likely to cause a significant
dissipation of assets or earnings; (xii) require a controlling company to
divest the institution if it improves the institution's financial prospects;
or (xiii) require any other action the OTS determines fulfills the purposes
of the PCA provisions. In addition, subject to a limited exception, the OTS
is required to appoint a receiver or conservator for an institution that is
critically undercapitalized.
LOANS TO ONE BORROWER
Savings institutions are generally subject to the same loans to one borrower
limitations that are applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution may lend to one
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, 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. The term "unimpaired
capital and unimpaired surplus" is defined for this purpose by reference to
an institution's regulatory capital. In addition, the basic 15% of capital
lending limit includes as part of capital that portion of an institution's
general valuation allowances that is not includable in the institution's
regulatory capital for regulatory purposes. At December 31, 1997, the maximum
amount which Broadway Federal could lend to any one borrower (including
related persons and entities) under the current loans to one borrower limit
was $1.7 million. However, pursuant to Broadway Federal's loan to one
borrower policy, the maximum amount which Broadway Federal may lend to any
one borrower is $1,500,000. At December 31, 1997, the largest aggregate
amount of loans which Broadway Federal had outstanding to any one borrower
was $818,000.
FEDERAL HOME LOAN BANK SYSTEM
The FHLB system provides a central credit facility for member institutions.
As a member of the FHLB system, Broadway Federal is required to own capital
stock in its regional FHLB, the FHLB of San Francisco, in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations
at the end of each calendar year, or 5% of its outstanding FHLB advances
(borrowings).
26
LIQUIDITY
Federal Law and regulations required savings institutions to maintain, for each
calendar month, an average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances, and specified United States
Government, state or federal agency obligations) equal to at least a
specified percentage of the average daily balance of its net withdrawable
accounts plus short-term borrowings during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS Director to
an amount within a range of 4% to 10% of such accounts and borrowings
depending upon economic conditions and the deposit flows of savings
institutions.
Effective November 24, 1997, revised regulations now allow savings
institutions to maintain an average daily balance of liquid assets in each
calendar quarter of not less than 4%, down from the previous requirement of
5%. In addition, the new regulation provides that an institution may
calculate its liquidity based on either: (i) the amount of its liquidity base
at the end of the preceding calendar quarter; or (ii) the average daily
balance of its liquidity base during the preceding quarter. The average daily
balance of either liquid assets or liquidity base in a quarter is calculated
by adding the respective balance as of the close of each business day in a
quarter, and for any non-business day, as of the close of the nearest
preceding business day, and dividing the total by the number of days in the
quarter. The new regulations also require that in addition to meeting the
minimum requirement above, each savings institution must maintain sufficient
liquidity to ensure its safe and sound operation and that the OTS can permit
an institution to reduce its liquid assets below the minimum under certain
conditions. Under the revised regulations Broadway Federal's liquidity ratio
at December 31, 1997 was 12.06%, which exceeded the new requirement.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify the communities served by the
institution's offices and to identify the types of credit the institution is
prepared to extend within such communities. The CRA also requires the OTS to
assess, as part of its examination of a savings institution, the performance
of the institution in meeting the credit needs of its communities 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 such application. Community groups have successfully
protested applications on CRA grounds. In connection with the assessment of a
savings institution's CRA performance, the OTS will assign a rating of
"outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Broadway Federal was rated "outstanding" in its most recent
CRA exam.
QUALIFIED THRIFT LENDER TEST
Savings institutions regulated by the OTS are subject to a qualified thrift
lender ("QTL") test which requires such an institution to maintain on an
average basis at least 65% of its portfolio assets (as defined) in
"qualified thrift investments." 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 business, loans made through credit card or credit
card accounts and certain other permitted thrift investments. A savings
institution's failure to remain a QTL may result in conversion of the
institution to a bank charter or operation under certain restrictions
including: (i) limitations on new investments and activities; (ii)
imposition of branching restrictions; (iii) loss of FHLB borrowing
privileges; and (iv) limitations on the payment of dividends. At December 31,
1997, Broadway Federal was in compliance with its QTL test requirements.
27
SAVINGS AND LOAN HOLDING COMPANY REGULATION
As a savings and loan holding company, the Company is subject to certain
restrictions with respect to its activities and investments. Among other
things, the Company is 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 which is not a subsidiary of the Company.
Prior OTS approval is required for the Company to acquire an additional
savings association as a subsidiary.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Company or Broadway Federal. Control is conclusively presumed
to exist if, among other things, a person acquires more than 25% of any class
of voting stock of the institution or holding company or controls in any
manner the election of a majority of the directors of the insured institution
or the holding company.
The Company is considered an "affiliate" of Broadway Federal for regulatory
purposes. Savings institutions are subject to the rules relating to
transactions with affiliates and loans to insiders generally applicable to
commercial banks that are members of the Federal Reserve System and certain
additional limitations. In addition, savings institutions are generally
prohibited from extending credit to an affiliate, other than the
institution's subsidiaries, unless the affiliate is engaged only in
activities which the Federal Reserve Board has determined to be permissible
for bank holding companies and which the OTS has not disapproved.
A savings and loan holding company that controls only one savings institution
is exempt, if the institution meets its QTL test, from restrictions on the
conduct of unrelated business activities that are applicable to other savings
and loan holding companies and that are similar to the restrictions on the
conduct of unrelated business activities that are applicable to bank holding
companies under the Bank Holding Company Act.
SERVICE CORPORATIONS
Federal regulations permit federal savings institutions to invest in the
capital stock, obligations or other securities of certain types of
subsidiaries (referred to as "service corporations") that engage in certain
prescribed activities and to make loans to these corporations (and to
projects in which they participate) in an aggregate amount not to exceed 3%
of the institution's assets, as long as any investment over 2% serves
primarily community development or inner-city purposes. Additionally, federal
regulations permit an institution having regulatory capital in an amount at
least equal to the minimum requirements set forth in the applicable OTS
regulations to make additional loans to such subsidiaries in an aggregate
amount which, generally, may not exceed 100% of the regulatory capital in the
case of subsidiaries of which the institution owns or controls not more than
10% of the capital stock of certain limited partnership joint ventures and
50% of regulatory capital in the case of certain other subsidiaries or joint
ventures. Federal savings institutions are also permitted to invest in and
maintain so-called "operating subsidiaries" (generally, subsidiaries that are
engaged solely in activities the parent institution could conduct directly
and meeting certain other criteria) free of such investment limitations.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Savings institution subsidiaries of holding companies generally are required
to provide advance notice to their OTS Regional Director of any proposed
declaration of a dividend on the institution's stock. Any dividend declared
within the notice period, or without giving the prescribed notice, is invalid.
Limitations are imposed under OTS regulations on "capital distributions" by
savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, payments to stockholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulations establish a tiered system of regulation with
the greatest flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions, without prior OTS approval, during a
calendar year of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half
its "surplus capital ratio" at the beginning of the calendar year (the amount
by which the institution's actual capital exceeded its fully phased-in
capital requirement at that date) and (ii) 75% of its net income over the
most recent four-quarter period. An institution that meets its current
minimum capital requirements but not its fully phased-in capital requirements
may make capital
28
distributions, without prior OTS approval, of up to 75% of its net income
over the most recent four-quarter period, as reduced by the amounts of any
capital distributions previously made during such period. An institution that
does not meet its minimum regulatory capital requirements prior to, or on a
pro forma basis after giving effect to, a proposed capital distribution, or
that the OTS has notified as needing more than normal supervision, is not
authorized to make any capital distributions unless it receives prior written
approval from the OTS or the distributions are in accordance with the express
terms of an approved capital plan.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including
those occurring in connection with corporation reorganizations.
LENDING STANDARDS
The OTS and the other federal banking agencies have jointly adopted uniform
rules on real estate lending and related Interagency Guidelines for Real
Estate Lending Policies. The uniform rules require that institutions adopt
and maintain comprehensive written policies for real estate lending. The
policies must reflect consideration of the Interagency Guidelines and must
address relevant lending procedures, such as loan to value limitations, loan
administration procedures, portfolio diversification standards and
documentation, approval and reporting requirements. Although the uniform
rules do not impose specific maximum loan to value ratios, the related
Interagency Guidelines state that such ratio limits established by individual
institutions' boards of directors generally should not exceed levels set
forth in the Guidelines, which range from a maximum of 65% for loans secured
by unimproved land to 85% for improved property. No limit is set for single
family residence loans, but the Guidelines state that such loans exceeding a
90% loan to value ratio should have private mortgage insurance or some form
of credit enhancement. The Guidelines further permit a limited amount of
loans that do not conform to these criteria.
TAX MATTERS
FEDERAL INCOME TAX
GENERAL. The Company and Broadway Federal report their 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 Broadway Federal's tax reserve for bad
debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of
the tax rules applicable to Broadway Federal or the Company.
BAD DEBT RESERVE. In 1995 and prior years, Broadway Federal qualified under a
provision of the Code which allowed qualifying savings institutions to
establish reserves for bad debts, and make additions to such reserves, using
certain preferential methodologies. For 1996 and subsequent years, the Small
Business Job Protection Act of 1996 (the "Act") repealed the preferential bad
debt reserve methodologies previously allowed.
Pursuant to the 1996 Act, a small bank (a bank with $500 million or less of
assets) may continue to utilize a reserve method of accounting for bad debt,
under which additions to reserves are based on the institution's actual loss
experience. Broadway Federal qualifies as a small bank, and, in 1997,
utilized the reserve method of accounting for bad debts based on Broadway
Federal's actual loss experience.
The elimination of the preferential bad debt reserve methodologies allowed to
qualified savings institutions by the Small Business Job Protection Act of
1996 requires Broadway Federal to recapture into taxable income the amount
29
of which its bad debt reserve as of December 31, 1995 (other than its
supplemental reserve) exceeds the reserve allowable using a computation based
upon actual experience, or its 1987 reserve balance, if larger. Such excess
reserves (approximately $264,000) are required to be recaptured into taxable
income over a period of 6-years.
The balance of Broadway Federal's bad debt reserves accumulated prior to 1988
(approximately $3.0 million) will, in future years, be subject to recapture
in whole or in part upon the occurrence of certain events, such as a
distribution to shareholders in excess of Broadway Federal's current and
accumulated earnings and profits, a redemption of shares, a partial or
complete liquidation of Broadway Federal or the failure of Broadway Federal
to qualify as a "bank" for federal income tax purposes. However, dividends
paid out of Broadway Federal's current or accumulated earnings and profits,
as computed for federal income tax purposes, will not cause recapture.
Broadway Federal does not intend to make distributions to shareholders that
would result in recapture of any portion of its bad debt reserves.
CALIFORNIA TAX
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 tax rate is the rate on general corporations plus 2%. The tax
rate applicable to the Company's 1996 taxable year was 11.3% (9.3% plus 2%).
For income tax years beginning on or after January 1, 1997, the tax rate on
general corporations has been reduced to 8.84%, and, accordingly, the
Company's tax rate has been reduced to 10.84% (8.84% plus 2%). Under
California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six year average loss experience
method.
ITEM 2. DESCRIPTION OF PROPERTY
Broadway Federal conducts its business through four branch offices. Broadway
Federal's loan origination and service operations are also conducted from one
of its branch offices. Until March 1998, Broadway Federal's administrative
and corporate operations were conducted through temporary facilities in one
of the four branch offices. Such operations are now conducted in the
Company's new corporate facility, which also houses a fifth branch office.
Broadway Federal's administrative and corporate offices are located at 4800
Wilshire Boulevard, Los Angeles. Its former administrative and corporate
offices, which were destroyed during the 1992 civil disturbance, were located
at 4501 So. Broadway Boulevard, Los Angeles.
There are no mortgages, material liens or encumbrances against any of
Broadway Federal's owned properties. Management believes that all
properties are adequately covered by insurance, and that the carrying amount
of the properties approximates their fair values. Management also believes
that Broadway Federal's facilities are adequate to meet the present needs of
Broadway Federal and the Company, but that it may be necessary to lease or
construct other facilities to meet the longer term needs of Broadway Federal
and the Company.
30
[Enlarge/Download Table]
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL DATE LEASEHOLD
LEASED OR LEASED OR DATE OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
-------- --------- ------------- ------------- -----------------
ADMINISTRATIVE/BRANCH OFFICE:
4800 Wilshire Blvd.(1)(7) Owned 1997 - $1,644,000
Los Angeles, CA
BRANCH OFFICE:
4429 South Broadway Blvd.(1)(11) Leased 1997 Monthly -
Los Angeles, CA
4835 West Venice Blvd.(1)(7)(10) Building 1965 2013 142,000
Los Angeles, CA Owned on
Leased Land
3555 West Slauson Blvd.(1)(9) Leased 1997 1998 2,250
BRANCH OFFICE/LOAN ORIGINATION
AND SERVICE CENTER:
170 N. Market Street(1)(5) Owned 1996 - 956,000
Inglewood, CA
APPRAISAL DEPARTMENT:
8467 South Van Ness Ave.(2)(8) Owned 1994 - 127,000
Inglewood, CA
4429 West Adams Blvd.(4) Owned 1993 - 196,000
Los Angeles, CA
4001 South Figueroa Street(6) Owned 1996 - 551,000
Los Angeles, CA
------------------------
(1) These offices are used as savings branch facilities.
(2) Premises originally acquired by Broadway Federal through foreclosure in
1994. This asset was subsequently transferred to Broadway Federal premises
and renovated, and as of December 31, 1996 was used as Broadway
Federal's loan origination and service center. In February 1997 the
loan origination and service operations were relocated to the new
Inglewood branch facility at 170 N.Market Street. The Van Ness
property is now being used for appraisal department operations.
(3) The building previously located on this land was destroyed during the
1992 Los Angeles civil disturbance. This property was sold and leased
back from the purchasers in December of 1997. The lease payments are
$4,000 per month and the lease will continue on a month-to-month basis
until the completion of the new Broadway branch facility located at 4001
South Figueroa Street. The new facility is expected to be completed by
October of 1998.
(4) Broadway Federal acquired this property in 1993 in anticipation of
including it as part of a proposed new corporate facility. Adjacent
parcels, which were needed to begin construction on the corporate
facility, have not been acquired. This property will be sold at a
future date.
(5) In July 1996 the property located at 170 N. Market Street was
acquired in anticipation of relocating the former 110 S. La Brea
branch facility upon expiration of the lease on September 30, 1996.
The expired lease was not renewed and the branch was successfully
relocated to the new facility in January 1997. The cost of the
facility was $412,000 and Broadway Federal incurred renovation
costs of approximately $568,000.
(6) Broadway Federal acquired this property in December 1996. The
property is 19,200 square feet of unimproved real estate which will
be used to build the Bank's new branch facility. When complete,
the Bank's branch office currently housed in a modular facility,
located at 4429 South Broadway Blvd., will be relocated to this new
facility. The cost of the property was $415,000, and to date, the
cost of constructing
31
the new branch has not been determined. The source of funds for
this acquisition were the insurance proceeds received for property
that was destroyed during the 1992 Los Angeles civil disturbance.
(7) In February of 1998, the corporate and administrative offices were
transferred from 4835 W. Venice Blvd. to the newly acquired
property located at 4800 Wilshire Blvd. The property was purchased
in August of 1997 for $1,603,000 and renovations of $41,000 were
performed during 1997.
(8) In March of 1998, Broadway Federal sold the property located at 8467
Van Ness Avenue, Inglewood, CA and relocated the appraisal
department to the new corporate administrative offices on Wilshire
Boulevard.
(9) In July of 1997, Broadway Federal leased 200 square feet of space
from Nix Check Cashing, Inc. at $500 per month, to be used as a
branch facility. Renovations costing $2,250 were performed and the
Slauson Business Center began operations is July of 1997.
(10) In June of 1997, Broadway Federal leased 590 square feet of space
to the Automobile Club of Southern California for a term
of five years at $1,750 per month in the Venice branch facility.
(11) This property was sold in December 1997. Currently, the Bank
leases a portion of the facility from the new owner. The lease is on a
month-to-month basis and will continue until construction is
completed on property located at 4001 South Figueroa Street, at which
time the savings branch will relocate its operations.
Broadway Federal's property located at 4501 S. Broadway Boulevard, Los
Angeles (this property is adjacent to the branch at 4429 S. Broadway
Boulevard) served as Broadway Federal's main office until it was destroyed by
fire in April of 1992. Since that time, the administrative operations of
Broadway Federal had been conducted from shared office space at Broadway
Federal's branch office located on Venice Boulevard in the City of Los
Angeles. Although insurance proceeds were sufficient to cover the damages
from the fire, Management determined that it would not be practical to
rebuild the main office building on the same site. Therefore the
administrative offices have been transferred to the newly acquired Wilshire
facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any significant pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business,
none of which Management believes, net of insurance claims, are material to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the over-the-counter market and
is quoted by the National Association of Securities Dealers Automated
Quotation System-Small Cap ("NASDAQ-Small Cap") under the symbol "BYFC." The
Common Stock began trading on January 9, 1996. As of March 19, 1997, 863,447
shares of Common Stock were outstanding and held by approximately 441 holders
of record (not including the number of persons or entities holding stock in
nominee or street name through various brokerage firms). The following table
sets forth for the fiscal quarters indicated the range of high and low bid
prices per share of the Common Stock of the Company as reported on
NASDAQ-Small Cap.
[Download Table]
1997
-------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year Ended December 31, 1997
----------------------------
High.................... $ 13 3/8 $ 11 1/2 $ 11 1/4 $ 11 1/2
Low.................... 11 1/8 10 1/2 10 3/4 9 1/2
Year Ended December 31, 1996
High.................... $ 10 1/2 $ 10 $ 11 $ 10 3/4
Low.................... 9 9 5/8 10 10
32
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Delaware corporations. In general, dividends may be paid
only out of a Delaware corporation's surplus, as defined in the Delaware
General Corporation Law, or net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. "Surplus" is defined
for this purpose as the amount by which a corporations's net assets (total
assets minus total liabilities) exceed the amount designated by the Board of
Directors of the corporation in accordance with Delaware law as the
corporation's capital. The Company may pay dividends out of funds legally
available therefor at such times as the Board of Directors determines that
dividend payments are appropriate, after considering the Company's net
income, capital requirements, financial condition, alternate investment
options, prevailing economic conditions, industry practices and other factors
deemed to be relevant at the time. During 1997 and 1996 the Company paid
dividends to Common Stockholders at the rate of $0.05 per share, per
quarter. For the twelve months ended December 31, 1997 and 1996 dividends
paid totaled $171,000 and $178,000, respectively. The actual declaration and
payment of future dividends will be subject to determination by the Company's
Board of Directors, which will be based on and subject to the Board's
assessment of the Company's financial condition and results of operations,
along with other factors. There can be no assurance that dividends will in
fact be paid on Common Stock in the future.
Dividends from the Bank are a potential source of income for the Company. The
payment of dividends and other capital distributions by the Bank to the
Company is subject to regulation by the OTS. Currently, 30 days' prior notice
to the OTS is required before any capital distribution is made. The OTS has
promulgated a regulation that measures a savings institution's ability to
make a capital distribution according to the institution's capital position.
The rule established "safe-harbor" amounts of capital distributions that
institutions can make after providing notice to the OTS, but without needing
prior approval. Institutions can distribute amounts in excess of the safe
harbor only with the prior approval of the OTS. For institutions such as
Broadway Federal that meet their fully phased-in capital requirements the
safe harbor amount is the greater of (a) 75% of net income for the prior four
quarters, or (b) the sum of (1) net income to date during the current year
and (2) the amount that would reduce by one-half the Bank's surplus capital
ratio at the beginning of the current year.
The Bank's ability to pay dividends to the Company is also subject to
restriction arising from the existence of the liquidation account established
upon the conversion of the Bank from a mutual to stock form in January 1996.
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. See "Business--Regulation--Restrictions on Dividends and other
Capital Distributions" for information with respect to current restrictions
on the Company's and Bank's ability to pay dividends.
In addition to Common Stock, the Company, as part of the Bank's mutual to
stock conversion in January 1996, issued 91,073 shares of Series A Preferred
Stock ("Preferred Stock"). The Preferred Stock has a par value of $0.01 per
share and a liquidation preference of $10.00 per share. The Preferred Stock
was not underwritten and the stock was not publicly offered. The Preferred
Stock was issued to holders of nonwithdrawable Pledged Deposits held by the
Bank prior to conversion. The holders of the Pledged Deposits were allowed to
purchase the maximum amount of Common Stock permitted under the Plan of
Conversion, with the remainder of the Pledged Deposits being used to purchase
Preferred Stock. The Preferred Stock is non-voting and non-cumulative and is
subordinate to all indebtedness of the Company, including customer accounts.
In December 1997 the Company issued 32,613 shares of its Common Stock from
its Common Shares held as treasury shares. The additional shares were issued
in exchange for 35,874 shares of the Company's Series A Preferred Stock,
which was retired. During 1997 and 1996 the Company paid dividends to
Preferred Stockholders at the rate of $0.125 per share, per quarter. For the
twelve months ended December 31, 1997 and 1996 dividends paid totaled $41,000
and $46,000, respectively. The actual declaration and payment of future
dividends will be subject to determination by the Company's Board of
Directors, which will be based on, and subject to, the Board's assessment of
the Company's financial condition and results of operations, along with other
factors. There can be no assurance that dividends will in fact be paid on
Preferred Stock in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Broadway Financial Corporation was incorporated under Delaware law on
September 25, 1995 for the purpose of acquiring and holding all of the
outstanding capital stock of the Bank as part of the Bank's conversion from a
federally chartered mutual savings association to a federally chartered stock
savings bank. The Conversion was completed, and the Bank became a
wholly-owned subsidiary of the Company, on January 8, 1996. See "Description
of Business--Broadway Financial Corporation."
33
The Company's principal business is serving as the holding company for
Broadway Federal. Prior to the completion of the Conversion, the Company had
no assets or liabilities and did not conduct any business other than that of
an organizational nature.
The Company's and Broadway Federal's results of operations are dependent
primarily on its net interest income, which is the difference between the
interest income earned on its interest-earning assets, such as loans and
investments, and the interest expense on its interest-bearing liabilities,
such as deposits and borrowings. Broadway Federal also generates recurring
non-interest income such as transactional fees on its loan and deposit
portfolios. The Company's operating results are affected by the amount of the
Bank's general and administrative expenses, which consist principally of
employee compensation and benefits, occupancy expenses and federal deposit
insurance premiums and by its periodic provisions for loan losses. More
generally, the results of operations of thrift and banking institutions are
also affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of governmental agencies.
For the years ended December 31, 1997 and 1996, the Company recorded net
earnings of $559,000 and a net loss of $277,000, respectively. At December
31, 1997 and 1996, respectively, the Company had total consolidated assets of
$125.1 million and $117.1 million; total deposits of $109.9 million and
$102.0 million; and stockholders' equity of $13.4 million and $13.6
million, representing 10.74% and 11.60% of assets. Each of the Bank's
regulatory capital ratios exceeded regulatory requirements at December 31,
1997 and 1996, with tangible and core capital each at 8.63% and 9.06% and
risk-based capital at 14.79% and 15.48%, respectively.
INTEREST RATE SENSITIVITY
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on
them. Net interest income is also affected by the maturities and repricing
characteristics of interest-earning assets as compared with those of the
Company's interest-bearing liabilities. During a period of falling interest
rates, the net earnings of an institution whose interest rate sensitive
assets maturing or repricing during such period exceeds the amount of
interest rate sensitive liabilities maturing or repricing during such period
may, absent offsetting factors, be adversely affected due to its
interest-earning assets repricing to a greater extent than its
interest-bearing liabilities. Conversely, during a period of rising interest
rates, the net earnings of an institution may, also absent offsetting
factors, increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-bearing liabilities reprice.
For extended time periods, however, an institution with a large portfolio of
ARMs may not be protected from increases in interest rates since ARMs
generally have periodic and lifetime interest rate caps. Additionally,
Broadway Federal's ARMs are predominantly tied to the COFI, which is a
"lagging market" index, whereas deposit costs are not. Rapid increases in
interest rates could therefore have a negative impact on Broadway Federal's
earnings. Declining interest rates have, in general, benefited Broadway
Federal primarily due to the effect of the lagging market index which has
resulted in the interest income earned on loans declining at a slower rate
than interest expense paid on deposits. This effect of the lagging index,
however, has been partially offset by the increase in refinancings of
portfolio loans to lower yielding loans.
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates and to manage the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Company, through Broadway Federal,
achieves these objectives primarily by the marketing and funding of ARM's,
which are generally repriced at least semi-annually and indexed to the COFI.
The Company closely monitors its interest rate risk as such risk relates to
its operational strategies. The Company's Board of Directors has established
a Management level Asset/Liability Committee, which is responsible for
reviewing the Company's asset/liability policies and interest rate risk
position. The Committee generally meets weekly and reports to the Board of
Directors on interest rate risk and trends on a quarterly basis. There can be
no assurance that the
34
Company will be able to maintain its desired interest rate risk position or
to implement other strategies to manage interest rate risk in the future.
Accordingly, the Company's net interest income will remain subject to the
movements of interest rates, up or down, and such movements could have a
negative impact on the earnings of the Company.
Neither the Company nor the Bank engage in the use of trading activities,
derivatives, synthetic instruments or hedging activities in controlling its
interest rate risk. Although such strategies could be permitted in the
future if recommended by the Asset/Liability Committee and approved by the
Board of Directors, the Company does not intend to engage in such practices
in the immediate future.
NET PORTFOLIO VALUE
The OTS has adopted a rule incorporating an interest rate risk (IRR)
component into its risk-based capital rules. See
"Business--Regulation--Capital Requirements." Although this rule has been
adopted and published, it is not yet effective. Under the rule, an
institution with a greater than normal level of interest rate risk (as
determined by the OTS) will be subject to a deduction of its interest rate
component from total capital for purposes of calculating the institution's
risk-based capital requirement. An institution with a greater than normal
interest rate risk is defined as an institution that would suffer a loss of
net portfolio value ("NPV") exceeding 2% of the estimated market value of its
assets in the event of a 200 basis point parallel increase or decrease in
interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet
contracts. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct 50% of that excess
change from its capital. The rule provides that the OTS will calculate the
IRR component quarterly for each institution. At December 31, 1997 there was
no decrease in the Bank's NPV as a percentage of the present value of assets
at the 200 basis point level.
The following table presents Broadway Federal's NPV as of December 31, 1997
as calculated by the OTS for the foregoing purposes based on information
provided to the OTS by Broadway Federal. Such information is provided solely
to illustrate the current application of the above-described regulation to
Broadway Federal by the OTS. No representation is made as to the accuracy of
such information as an indication of interest rate risk or as to the
significance thereof in Broadway Federal's management of interest rate risk.
[Enlarge/Download Table]
NET PORTFOLIO VALUE
----------------------------------------------------------------------------------------------------
CHANGE IN INTEREST CHANGE IN NPV AS %
RATES IN BASIS POINTS OF THE PRESENT VALUE
(RATE SHOCK) AMOUNT $CHANGE % CHANGE (a) OF ASSETS
--------------------- -------- ------- ------------ ---------------------
(DOLLARS IN THOUSANDS)
400 $16,364 (1,610) (9) (.93)
300 17,270 (704) (4) (.35)
200 17,927 (47) - .05
100 18,174 200 1 .18
Zero 17,974 - - -
(100) 17,825 (149) (1) .14
(200) 18,128 154 1 .01
(300) 18,584 610 3 .26
(400) 19,360 1,386 8 .71
----------------
(a) Percentage changes less than 1% not shown.
The above table suggests that in the event of a 200 basis point change in
interest rates, Broadway Federal would experience minimal change in NPV in a
rising rate environment and a 1% increase in NPV in a declining rate
environment. In evaluating Broadway Federal's exposure to interest rate risk,
certain shortcomings inherent in the NPV method of analysis presented in the
foregoing table must be considered. These include the factors mentioned in
the discussion under "--Interest Rate Sensitivity" above, and the fact that
market interest rates are unlikely to adjust simultaneously.
35
MARKET RISKS
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December
31, 1997 based on the information and assumptions set forth in the notes to
the table. The Company had no derivative financial instruments or trading
portfolio, as of December 31, 1997. The expected maturity date values for
loans receivable, mortgage-backed securities, and investment securities were
calculated by adjusting the instrument's contractual maturity dates for
expectations of prepayments, as set forth in the notes. Similarly, expected
maturity date values for interest-bearing core deposits were calculated based
upon estimates of the period over which the deposits would be outstanding as
set forth in the notes to the table. With respect to the Company's
adjustable rate instruments, expected maturity date values were measured by
adjusting the instrument's contractual maturity date for expectations of
prepayments, as set forth in the notes. From a risk management perspective,
however, the Company believes that repricing dates, as opposed to expected
maturity dates, may be more relevant in analyzing the value of such
instruments. Similarly, substantially all of the Company's investment
securities portfolio is comprised of callable government agency securities.
36
[Enlarge/Download Table]
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
------- ------ ------ ------ ------ ---------- --------- ----------
INTEREST EARNING ASSETS:
Loans Receivable: (1)(2)(3)(4)
Fixed $ 6,366 $3,303 $2,531 $2,038 $1,655 $ 5,106 $ 20,999 $ 22,123
Average Interest Rate 8.81% 9.66% 9.64% 9.63% 9.62% 9.37% 9.32%
Adjustable $ 7,634 $5,746 $4,957 $4,333 $3,845 $56,255 $ 84,770 $ 86,589
Average Interest Rate 7.65% 7.67% 7.69% 7.72% 7.75% 7.88% 7.82%
Investment Securities (5) $ 5,999 $ 5,999 $ 5,983
Average Interest Rate 6.02% 6.02%
Mortgage Backed Securities (6)(7)
Fixed $ 568 $ 232 $ 171 $ 142 $ 122 $ 567 $ 1,802 $ 1,821
Average Interest Rate 6.78% 7.63% 7.83% 7.83% 7.83% 7.83% 7.47%
Adjustable $ 263 $ 215 $ 175 $ 143 $ 117 $ 493 $ 1,406 $ 1,416
Average Interest Rate 5.95% 5.95% 5.95% 5.95% 5.95% 5.95% 5.95%
FHLB Stock (8) $ 931 $ 931 $ 931
Average Interest Rate 6.26% 6.26%
Interest Bearing Deposits $ 1,662 $ 1,662 $ 1,662
Average Interest Rate 4.89% 4.89%
Total Interest Earning Assets $22,492 $9,496 $7,834 $6,656 $5,739 $65,352 $117,569 $120,525
Interest Bearing Liabilities:
Savings Accounts:
NOW Accounts (9) $ 1,255 $1,041 $ 864 $ 718 $3,500 $ 7,378 $ 7,378
Average Interest Rate 1.01% 1.01% 1.01% 1.01% 1.01% 1.01%
Passbook Accounts (10) $ 4,779 $3,922 $3,211 $2,621 $2,131 $11,454 $ 28,118 $ 29,648
Average Interest Rate 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02%
Certificate Accounts (11) $51,634 $5,472 $5,472 $ 663 $ 662 $ 730 $ 64,633 $ 64,884
Average Interest Rate 5.11% 5.75% 5.75% 6.18% 6.18% 6.18% 5.25%
Money Market Funds (12) $ 1,402 $ 939 $1,881 $ 4,222 $ 4,222
Average Interest Rate 2.25% 2.25% 2.25% 2.25%
Non Interest Bearing Checking (13) $ 1,963 $1,277 $ 830 $ 555 $ 336 $ 555 $ 5,516 $ 5,516
Average Interest Rate
Other Interest Bearing Liabilities $ 571 $ 571 $ 571
Average Interest Rate 0.63% 0.63%
Total Interest Bearing Liabilities $61,033 $12,651 $12,258 $5,128 $6,629 $12,739 $110,438 $159,843
-37-
Footnotes:
(1) Loans receivable are net of undisbursed loan proceeds and
exclude net deferred loan fees and the allowance for loan losses.
(2) For single family residential loans, assumes contractual annual
amortization and balloon maturities as appropriate. Assumes a
prepayment rate of 17.52% for adjustable rate loans, and 7% to
27% for fixed rate loans.
(3) Approximately 92% of the Company's adjustable rate loans reprice on an
average of six months or less. These loans change with the 11th District
Cost of Funds Index. The remaining adjustable rate loans primarily reprice
using a current market index such as the one year constant maturity
Treasury Index. All loans are subject to various market based annual and
lifetime rate caps and floors.
(4) Non-performing loans, totaling $921,000, are categorized as maturing in
1998.
(5) As of December 31, 1997, $4.0 million of the securities have maturities
ranging from 1999 through 2001. However, they are subject to call given
their current above market yields.
(6) Mortgage-backed securities with single family residential loan collateral
are based on contractual annual amortization and balloon maturity
assumptions adjustd for prepayment rates on fixed rate securities are
assumed to range from 7% to 16%.
(7) The Company's adjustable mortgage-backed securities reprice on
an annual basis based upon changes in the one year constant maturity
Treasury index. Various annual and lifetime market based caps and fllors
exist. The schedule uses an assumed prepayment rate of 17.52%.
(8) FHLB Stock does not have a market. Its fair value is therfore unknown.
However, historically the stock could be sold to the Federal Home Loan
Bank at par.
(9) For NOW accounts, it is assumed that the decay rate is 17% for five years,
with the remaining balance maturing at the end of that time.
(10) For regular passbook accounts, it is assumed that the decay rate is 17%
for seven years, with the remaining balance maturing at the end of that
time.
(11) Certificate accounts have been shown based upon stated maturities.
(12) For Money Market accounts, it is assumed that the decay rate is 33%, with
the balance maturing in the third year.
(13) Non-interest bearing checking accounts have been shown based upon a 33%
decay rate for seven years, with the remaining balance maturing at the
end of that time.
YEAR 2000 COMPLIANCE
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900
and the year 2000. This is frequently referred to as the "Year 2000
Problem." During 1997, the Company initiated an organization-wide Year 2000
Project to address this issue. Utilizing both internal and external
resources, the Company is in the process of defining, assessing and
converting, or replacing various programs, equipment and instrumentation
systems to make them Year 2000 compatible. The Company's Year 2000 project
is comprised of two components: business applications and equipment. The
business applications component consists of the Company's business computer
systems, as well as the computer systems of third-party suppliers or
customers whose Year 2000 problems could potentially impact the Company.
Equipment exposures consist of the micro-processors with the power of small
computers that are embedded within operating equipment such as pumps,
compressors, elevators and furnaces.
To initiate its Year 2000 program in 1997 the Company began to diligently
assess its systems needs for the Year 2000 and beyond. This assessment
included an analysis of the benefits and limitations of the existing systems.
Based upon this analysis and upon the fact that the Company's outside
service bureau has stated that they are not planning to make Year 2000
programming changes , the Company determined that it will convert its entire
deposit, loan and general ledger systems to a new service bureau as part of
its Year 2000 Action Plan. In addition, as part of the complete conversion
the Company will replace most of its internal personal computer equipment and
software. The new service bureau, software and equipment, which represents
approximately 98% of the Company's business computer programs and equipment,
will be Year 2000 compliant, and is anticipated to cost approximately
$170,000. The remaining 2% of business application programs and equipment
will be made compliant through the Year 2000 project, and all non compliant
programs and equipment will be retired. It is anticipated that this project
will be completed by December 1998. The Company is also identifying and
prioritizing critical suppliers and customers and will follow up with them
concerning their plans and progress in addressing the Year 2000 Problem.
This portion of the Year 2000 project is expected to cost approximately
$40,000 and is being expensed as incurred.
The Company is also currently evaluating the Year 2000 readiness of its other
equipment, such as security, heating and air-conditioning systems, with a
comprehensive inventory of all monitoring and control devices. Work plans
detailing the tasks and resources required to insure equipment Year 2000
readiness by the end of 1998 are expected to be in place by the end of the
second quarter of 1998. Costs associated with other equipment upgrades have
not yet been quantified but will be expensed as incurred.
The Company has ascertained that failure to alleviate the Year 2000 Problem
with its application systems and equipment could result in possible system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices,
or engage in similar normal business activities. These problems could be
substantially alleviated with manual processing. However, this would cause
delays, possible lost production days, reduced customer service and increased
expense.
The cost of the Year 2000 modifications and the date of completion will be
closely monitored and are based on management's best estimates. Actual
results, could differ from those estimates.
-38-
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheets for the years ended December 31, 1997 and 1996. The
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown except
where noted otherwise. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material
differences in the information presented. The yields and costs include fees
which are considered adjustments to yields.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 197 $ 9 4.57% $ 569 $ 13 2.28%
Federal Funds sold and other
short-term investments 2,938 164 5.58 3,965 215 5.42
Investment securities, (1) 7,827 396 5.06 7,471 438 5.86
Loans receivable(2)(3) 97,503 8,354 8.57 91,189 7,878 8.64
Mortgage-backed securities, (1) 2,218 140 6.31 2,627 153 5.82
FHLB Stock 904 57 6.31 852 50 5.87
-------- ------ -------- ------
TOTAL INTEREST-EARNING ASSETS 111,587 $9,120 8.17 106,673 $8,747 8.20
------ ------
------ ------
NONINTEREST-EARNING ASSETS 8,834 6,975
-------- --------
TOTAL ASSETS $120,421 $113,648
-------- --------
-------- --------
LIABILITIES AND RETAINED EARNINGS
INTEREST-BEARING LIABILITIES:
Money market deposits $ 4,394 $ 88 2.23% $ 4,239 $ 94 2.22%
Passbook deposits 28,515 567 1.99 30,485 615 2.02
NOW and other demand deposits 10,818 67 0.62 10,683 61 0.57
Certificate accounts 61,295 3,244 5.29 52,278 2,706 5.18
-------- ------ -------- ------
TOTAL SAVINGS DEPOSITS 105,022 3,966 3.78 97,685 3,476 3.56
FHLB advances 541 19 3.45 83 5 6.02
-------- ------ -------- ------
TOTAL INTEREST-BEARING LIABILITIES 105,563 $3,985 3.77 97,768 $3,481 3.56
-------- ------ -------- ------
------ ------
Noninterest-bearing liabilities 1,733 2,185
Retained earnings 13,125 13,695
TOTAL LIABILITIES AND
RETAINED EARNINGS $120,421 $113,648
-------- --------
-------- --------
NET INTEREST RATE SPREAD(4) $5,135 4.40% $5,266 4.64%
Net Interest Margin(5) 4.60% 4.94%
-39-
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- -----------
Ratio of interest-earning assets to
interest-bearing liabilities 105.71% 109.11%
Return on average assets 0.46% (0.24%)
Return on average equity 0.43% (0.20%)
Average equity to average assets ratio 10.90% 12.05%
-------------------
(1) All investment securities were categorized as held-to-maturity, and none
were categorized as available-for-sale.
(2) Amount is net of deferred loan fees, loan discounts, loans in process and
loan loss allowances, and includes loans held for sale.
(3) Amount excludes non-performing loans.
(4) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET
INTEREST INCOME INTEREST INCOME
---------------------------- ----------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 8 $ (13) $ (5) $ (1) $ - $ (1)
Federal funds sold and
other short term investments (57) 6 (51) 25 30 55
Investment securities, net 21 (60) (39) 102 (55) 47
Loans receivable, net 544 (66) 478 358 355 713
Mortgage backed securities,
net (28) 14 (14) 153 - 153
FHLB stock 3 - 3 2 8 10
----- ----- ----- ----- ---- ----
TOTAL INTEREST-EARNING
ASSETS 491 (119) 372 639 338 977
----- ----- ----- ----- ---- ----
INTEREST-BEARING LIABILITIES:
Money market deposits 3 (9) (6) (5) 6 1
Passbook deposits (39) (9) (48) (72) 53 (19)
NOW and other demand deposits - 5 5 9 3 12
Certificate accounts 467 58 525 215 101 316
FHLB advances 27 (2) 25 5 - 5
----- ----- ----- ----- ---- ----
TOTAL INTEREST-BEARING
LIABILITIES 458 43 501 152 163 315
----- ----- ----- ----- ---- ----
Change In Net Interest
Income $ 33 $(162) $(129) $ 487 $175 $662
----- ----- ----- ----- ---- ----
----- ----- ----- ----- ---- ----
-40-
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
GENERAL
The $559,000 in net earnings recorded by the Company for the year ended
December 31, 1997, compares to a $277,000 net loss recorded for the year
ended December 31, 1996. This $836,000 increase in net earnings for the year
was impacted by several factors occurring in both the current and prior
years, including a $272,000 gain on the sale of an office property sold
during the fourth quarter of 1997, and lower expenses and write-downs related
to the operation and sale of REO during 1997. The net loss for the year ended
December 31, 1996 was significantly impacted by the payment of a one-time
SAIF recapitalization assessment fee of $614,000 (see "Regulation"). The net
earnings increase for 1997 also resulted from a number of other offsetting
factors which included higher interest income, higher interest expense, a
lower provision for loan losses, higher noninterest income, lower noninterest
expense and higher income taxes.
INTEREST INCOME
Interest income increased by $373,000, or 4.26%, from $8.7 million in 1996 to
$9.1 million in 1997. This increase was primarily the result of an increase
in average interest-earning assets of $4.9 million, to $111.6 million for the
year ended December 31, 1997 from $106.7 million for the same period a year
ago. The increase in average interest-earning assets resulted from Broadway
Federal's focus on increasing its loan portfolio.
The effect of the increase in average interest-earning assets was partially
offset by a decrease in the average yield on such assets from 8.20% during
the year ended December 31, 1996 to 8.17% during the year ended December 31,
1997. Interest income from loans, which accounted for approximately 91.60% of
total interest income in 1997, increased by $476,000, or 6.04%, due to a $6.3
million, or 6.92%, increase in the average balance of loans, offset by an
7-basis point decrease in the average yield on loans from 8.64% for 1996 to
8.57% for 1997. This decrease in average yield resulted from a decreasing
interest rate environment during most of 1997. Interest income from
investment securities decreased $100,000, or 15.02%, from $666,000 in 1996 to
$566,000 in 1997, primarily due to a 80 basis point decrease in the average
yield on investment securities to 5.06% during 1997 from 5.86% during 1996,
offset by a $356,000, or 4.77% increase in the average balance of investment
securities to $7.8 million during 1997, from $7.4 million during 1996.
INTEREST EXPENSE
Interest expense includes interest on savings deposits and on borrowings.
Interest expense increased $504,000, or 14.48%, for the year ended December
31, 1997, to $4.0 million, from $3.5 million for the same period a year ago.
This increase was primarily the result of an increase in average
interest-bearing liabilities of $7.8 million, to $105.6 million for the year
ended December 31, 1997 from $97.7 million for the same period a year ago.
Interest on savings deposits, which accounted for approximately 99.52% of
interest expense in 1997, increased by $490,000 or 14.10%, due to a $7.3
million, or 7.51%, increase in the average balance of savings deposits and a
22 basis point increase in the average cost of deposits from 3.56% for 1996
to 3.78% for 1997. The increase in the average cost of savings deposits also
reflects the more competitive interest rate environment in which deposits
were gathered during 1997 and a shift in the Bank's deposit portfolo mix,
resulting in a decrease in core deposits from $30.0 million at December 31,
1996 to $28.1 million for 1997.
Net interest spread ("NIS"), which represents the difference between the
yield on average interest-earning assets and the cost of average interest
bearing liabilities, decreased from 4.64% at December 31, 1996 to 4.40% at
December 31, 1997. This 24 basis point or $131,000 decrease in NIS primarily
results from the increased cost of deposits between 1996 and 1997. The
effect of this decrease is a reduction in the Company's core earnings.
Management has taken several steps in an attempt to stabilize core earnings,
which include (i) increasing loan originations, specifically multi-family
originations, which have higher yields and larger margins over the stated
index; (ii) increasing the level of non-interest bearing checking deposits;
and (iii) attempting to hold deposit rates on jumbo and other certificate
accounts to levels which are less than or equal to related FHLB borrowing
rates. In addition , Management continues to take steps designed to reduce
non-interest expenses, including reducing the number of full-time employees.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $320,000, or 54.61%, from $586,000
for the year ended December 31, 1996 to $266,000 for the year ended December
31, 1997. The decrease in the provision for loan losses was due primarily to
improved asset quality and the improving Southern California real estate
market.
Total non-performing assets, consisting of non-accrual loans and REO,
decreased by $742,000, from $2.8 million at December 31, 1996 to $2.1 million
at December 31, 1997. Of the $742,000 decrease, $953,000 represented a
decrease in non-accrual loans, offset by a $211,000 increase in REO. As a
percentage of total assets, nonperforming assets were 1.65% at December 31,
1997, compared to 2.39% at December 31, 1996. The allowance for loan losses
was 114.44% of nonperforming loans at December 31, 1997, compared to 62.65%
at December 31, 1996. Non-accrual loans at December 31, 1997 included eight
loans totaling $606,000 secured by one- to four-unit properties, one loan
totaling $214,000 secured by a multi-family property, one loan totaling
$99,000 secured by nonresidential property and a $2,000 non-mortgage loan.
REO at December 31, 1997 included six one- to four-unit properties of
$627,000, two multi-family properties totaling $378,000 and one parcel of
land having a book value of $139,000. At December 31, 1997 three
41
of the one- to four-unit REO properties and one multi-family REO property
were in escrow. All sales closed escrow after year end. At February
28, 1998 total REO had been reduced to $682,000.
NONINTEREST INCOME
Noninterest income increased by $492,000, or 134.06%, to $859,000 for the
year ended December 31, 1997, from $367,000 for the same period a year ago.
The increase is due to a number of offsetting factors. Service charges
increased by $113,000, to $414,000 during 1997, as compared the same period a
year ago. The increase resulted primarily from an increase in fees relating to
lending operations, an increase in fees charged on various savings products
and a greater number of checking accounts at December 31, 1997 as compared to
December 31, 1996, resulting in more fees earned. Gain on sale of mortgage
loans increased $95,000, from $28,000 in 1996 to $123,000 in 1997 due to an
increase in loans sold during the year. Gain on sale of office properties
and equipment totaled $272,000 during 1997, as compared to zero during the
same period in 1996. This gain resulted from the sale of property previously
used as Broadway Federal's corporate office and main savings branch, which
was destroyed during the 1992 Los Angeles civil disturbance.
NONINTEREST EXPENSE
Noninterest expense decreased by $737,000, or 13.39%, to $4.8 million for the
year ended December 31, 1997, from $5.5 million for the same period a year
ago. The decrease in noninterest expense was primarily due to decreases in
federal insurance premiums, write-downs, expenses and write-offs related to
the operation and sale of REO, a decrease in loss on the sale of
mortgage-backed securities and a decrease in operational losses, offset by
increases in compensation and benefits and occupancy expense. Federal deposit
insurance premiums decreased by $788,000 due to an insurance rate reduction
and a one-time assessment fee imposed by the FDIC in 1996. Write-downs,
expenses and write-offs related to the operation and sale of REO decreased
$244,000, from $374,000 in 1996 to $130,000 for the same period in 1997. The
higher 1996 loss was the result of a direct write-off to reduce the carrying
amount of REO to the fair market value of the real estate. During 1996 the
Company incurred an $84,000 loss on the sale of mortgage-backed securities.
No Securities were sold in 1997.
Compensation and benefits increased by $325,000 for the year ended December
31, 1997, as compared to the same period a year ago. The increase results
from general salary increases during the year and an increase in the number
of staff. Occupancy expense, including depreciation and repair and
maintenance costs on fixed assets, increased by $52,000, to $955,000 for the
year ended December 31, 1997, as compared to the same period a year ago. The
increases were primarily due to increases in computer expenses, repair and
maintenance costs, equipment rental expenses and property taxes on office
buildings. Operational expense, which includes bad debt write-offs and the
portion of savings losses in excess of insurance proceeds, decreased $21,000,
to $100,000 for the year ended December 31, 1997, as compared to the same
period a year ago. The decrease primarily resulted from higher losses
incurred in 1996 from checking account overdrafts.
INCOME TAXES
Income taxes increased from an income tax benefit of $179,000 for the year
ended December 31, 1996, to an expense of $403,000 for 1997. The increase in
income taxes was the result of higher earnings before income taxes during
1997, as compared to a loss before income taxes in 1996.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 were $125.1 million compared to $117.1
million at December 31, 1996, an increase of $8.0 million, or 6.84%. Net
loans receivable increased $7.4 million to $103.7 million at the year ended
December 31, 1997, as compared to $96.3 million at December 31, 1996. The
increase in net loans resulted from $14.1 million in loan originations and
$7.9 million in loan purchases, offset primarily by $9.2 million in principal
repayments, $1.7 million in loans transferred to foreclosure and $3.8 million
in loans sold during the year. Loans held for sale at December 31, 1997
totaled $222,000, and no loans were classified as held for sale at December
31, 1996. Office properties and equipment increased from $2.0 million at
December 31, 1996 to $4.0 million at December 31, 1997, primarily as a result
of the purchase of a $1.6 million office building located at 4800 Wilshire
Boulevard, Los Angeles, and renovation costs incurred at the Bank's branch
and loan facility located in the City of Inglewood. The new Wilshire
Boulevard facility, which includes a new savings branch,
42
was acquired to replace the Bank's administrative office lost by fire in 1992
during the civil disturbance in Los Angeles. The Company began
to occupy the new facility in March 1998.
Total liabilities at December 31, 1997 were $111.7 million compared to $103.5
million at December 31, 1996. The $8.2 million increase is primarily
attributable to a $7.9 million increase in savings deposits which were used
to fund the increase in total assets.
Total capital at December 31, 1997 was $13.4 million as compared to $13.6
million at December 31, 1996, representing a decrease of $205,000. Capital
decreased due to a $318,000 increase in Treasury stock, the retirement of
$359,000 in Preferred stock and the payment of $212,000 in dividends during
the year. This decrease was offset by increases of $559,000 in net earnings
for the year and a $121,000 Employee Stock Ownership plan ("ESOP") repayment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are Bank deposits, principal and
interest payments on loans and, to a lesser extent, proceeds from the sale of
loans and advances from the FHLB. While maturities and scheduled amortization
of Bank loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. Broadway Federal's average liquidity ratios were
14.40% and 14.18% for the years ended December 31, 1997 and 1996,
respectively. The realitively high liquidity ratio results from the fact that
Conversion proceeds, which the Company has not yet invested into Bank loans,
are held as investments in treasury securities and federal agency
obligations, which are included in the liquidity ratio under OTS regulations.
Management is currently attempting to reduce the liquidity ratio to a range
of 10% to 12% as part of the Company's strategy to invest excess liquidity
in Bank loans or other higher yielding interest-earning assets.
The Company has other sources of liquidity in the event that a need for
additional funds arises, including FHLB advances to the Bank. At December
31, 1997 and 1996 there were no advances outstanding from the FHLB. During
the years ended December 31, 1997 and 1996 Broadway Federal had borrowed from
the FHLB to meet its short-term loan funding needs. These advances were
repaid prior to year end, since such borrowings were more costly to Broadway
Federal than its primary sources of liquidity. Other sources of liquidity
include investment securities maturing within one year.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $1.2 million and
$475,000 for the years ended December 31, 1997 and 1996, respectively. Loans
originated for sale, net of refinances, totaled $3.9 million and $2.7 million
for the years ended December 31, 1997 and 1996, respectively. Proceeds from
the sale of loans receivable held for sale totaled $3.8 million and $2.7
million for the years ended December 31, 1997 and 1996, respectively. Net
cash used in investing activities consists primarily of disbursements for
loan originations and purchases of loans and investments, offset by principal
collections on loans and proceeds from the sale, maturity or redemption of
investments. Disbursements on loans originated and purchased were $18.3
million and $16.6 million for the years ended December 31, 1997 and 1996,
respectively. Proceeds from the sale, maturity or redemption and principal
payments of mortgage-backed and investment securities were $6.0 million and
$7.3 million for the years ended December 31, 1997 and 1996, respectively.
Capital expenditures for office properties and equipment for the years ended
December 31, 1997 and 1996 totaled $2.3 million and $1.2 million, respectively.
Net cash provided by financing activities includes 1996 proceeds from the
sale of Common Stock and an increase or decrease in deposit accounts. The net
increase in savings deposits for the year totaled $7.9 million, or 7.72%.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and Notes thereto
presented herein have been prepared in accordance with generally accepted
accounting principles ("GAAP") which require the measurement of financial
43
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost
of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company and Broadway Federal are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as
the price of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"). SFAS No.
123 provides a choice of accounting methods and requires additional
disclosures for stock-based employee compensation plans. SFAS No. 123 defines
a fair value-based method of accounting for an employee stock option or
similar equity instrument. However, it also allows the continued use of the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees". Regardless of the method used to account for stock-based
compensation, SFAS No. 123 requires all financial statements to include the
fair value of such compensation and certain other disclosures. The fair
value disclosures required by SFAS No. 123 must be adopted for fiscal years
beginning after December 15, 1995. In connection with the Conversion of the
Company's principal subsidiary from mutual-to-stock form, the Board of
Directors of the Company has adopted certain stock-based compensation plans.
Stockholder approval of the plans was obtained at the Company's Annual
Meeting held on July 3, 1996. The Company will account for such plans under
APB Opinion 25 and make the appropriate disclosures required under SFAS No.
123. The Company does not believe that such adoption and accounting has any
adverse impact on its financial condition or results of operations.
On January 1, 1997, the Company adopted the Statement of Financial Accounting
Standards No. 125, "Accounting For Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities and establishes guidelines
to distinguish transfers of financial assets that are sales from transfers
that are secured borrowings.
SFAS No. 125 requires that servicing assets and liabilities be recorded at
fair value at the time loans are sold or securitized. The Statement also
requires that servicing assets be evaluated for impairment by risk
characteristics and be carried at the lower of capitalized cost or fair
value. Adoption of SFAS NO. 125 had no material effect on the Company's
financial position at December 31, 1997 or results of operations or cash
flows for the year then ended.
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in Accounting Principals Board Opinion
No. 15 and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
statement of earnings for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, earlier application is not permitted. The Company
adopted SFAS No. 128 effective December 31, 1997. Adoption had no impact on
the basic EPS computation. The EPS-assuming dilution computation was
impacted only by stock-based employee compensation. All EPS amounts for all
periods presented, where appropriate, restated, to conform to the SFAS No. 128
requirements.
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes new rules for reporting and displaying comprehensive
income and its components in a full set of general purpose financial
statements. SFAS No. 130 requires companies to (a) display items of other
comprehensive income either below the total for net income in the income
statement, or in a statement of changes in equity, and (b) disclose the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of the balance
sheet. Other comprehensive income includes unrealized gains and losses on
available-for-sale securities and foreign currency translation adjustments.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. Disclosure of total comprehensive income is required in interim
period financial statements. The Company does not believe that such adoption
has any adverse impact on its financial condition or results of operations.
ITEM 7. FINANCIAL STATEMENTS OF BROADWAY FINANCIAL CORPORATION
44
See Index to Financial Statements of Broadway Financial Corporation on Page
53 and the Consolidated Financial Statements of Broadway Financial
Corporation beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1998 Annual Meeting of
Shareholders (the "Company's 1998 Proxy Statement")
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1998 Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requied by this Item is incorporated herin by reference to
the Company's 1998 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Item 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) EXHIBITS
[Enlarge/Download Table]
EXHIBIT
NUMBER
-------
2.1 Plan of Conversion (including Certificate of Incorporation and
Bylaws of the Company and Federal Stock Charter and Bylaws of
Broadway Federal) (Exhibit 2.1 to Amendment No. 2 to Registration
Statement on Form S-1, No. 33-96814, filed by the Registrant on
November 13, 1995)
3.1 Form of Certificate of Incorporation of the Company (contained in Exhibit 2.1)
3.2 Form of Bylaws of the Company (contained in Exhibit 2.1)
3.3 Form of Federal Stock Charter of Broadway Federal (contained in Exhibit 2.1 hereto)
3.4 Form of Bylaws of Broadway Federal (contained in Exhibit 2.1 hereto)
4.1 Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-1, No. 33-96814, filed by the Registrant on
September 12, 1995)
4.2 Form of Series A Preferred Stock Certificate (Exhibit 4.2 to
Amendment No. 1 to Registration Statement on Form S-1, No.
33-96814, filed by the Registrant on November 6, 1995)
4.3 Form of Certificate of Designation for the Series A Preferred Stock
(contained in Exhibit C to the Plan of Conversion in Exhibit 2.1
hereto)
10.1 Form of Broadway Federal Bank Employee Stock Ownership Plan
(Exhibit 4.1 to Registration Statement on Form S-1, No. 33-96814,
filed by the Registrant on September 12, 1995)
10.2 Form of ESOP Loan Commitment Letter and ESOP Loan and Security
Agreement (Exhibit 4.1 to Registration Statement on Form S-1, No.
33-96814, filed by the Registrant on September 12, 1995)
10.3 Form of Severance Agreement among the Company, Broadway Federal and
certain executive officers (Exhibit 10.7 to Amendment No. 2 to
Registration Statement on Form S-1, No. 33-96814, filed by the
Registrant on November 13, 1995)
10.4 Broadway Financial Corporation Recognition and Retention Plan for
Outside Directors
10.5 Broadway Financial Corporation Performance Equity Program for
Officers and Directors
10.6 Broadway Financial Corporation Stock Option Plan for Outside
Directors
10.7 Broadway Financial Corporation Long Term Incentive Plan
21.1 Subsidiaries of the Company (Exhibit 21.1 to Amendment No. 1 to
Registration Statement on Form S-1, No. 33-96814, filed by the
Registrant on November 6, 1995)
23.0 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule
-------------------------------------
* Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described therein.
46
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed for the three months ended December
31, 1997. Form 8-K was filed on January 8, 1998 disclosing in Item 5, "Other
Events", that on December 30, 1997, the Registrant issued 32,613 of its
common shares in exchange for a portion of its Series A Preferred Stock.
47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BROADWAY FINANCIAL CORPORATION
By: /s/ Paul C. Hudson
-------------------------------------
Paul C. Hudson
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: March 29, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons in the capacities and on the date indicated.
/s/ Paul C. Hudson Date: March 29, 1998
----------------------------------
Paul C. Hudson
Chief Executive Officer, President
and Director
(Principal Executive Officer)
/s/ Bob Adkins Date: March 29, 1998
----------------------------------
Bob Adkins
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Elbert T. Hudson Date: March 29, 1998
----------------------------------
Elbert T. Hudson
Chairman of the Board
/s/ Kellogg Chan Date: March 29, 1998
----------------------------------
Kellogg Chan
Director
/s/ Dr. Willis K. Duffy Date: March 29, 1998
----------------------------------
Dr. Willis K. Duffy
Director
48
/s/ Rosa M. Hill Date: March 29, 1998
----------------------------------
Rosa M. Hill
Director
/s/ A. Odell Maddox Date: March 29, 1998
----------------------------------
A. Odell Maddox
Director
/s/ Lyle A. Marshall Date: March 29, 1998
----------------------------------
Lyle A. Marshall
Director
/s/ Larkin Teasley Date: March 29, 1998
----------------------------------
Larkin Teasley
Director
/s/ Daniel A. Medina Date: March 29, 1998
----------------------------------
Daniel A. Medina
Director
49
INDEX TO FINANCIAL STATEMENTS
OF BROADWAY FINANCIAL CORPORATION
[Enlarge/Download Table]
PAGE
----
Report of Independent Auditors ............................................................. F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996................................ F-2
Consolidated Statements of Operations for years ended December 31, 1997 and 1996............ F-3
Consolidated Statements of Stockholders' Equity for years ended December 31, 1997 and 1996.. F-4
Consolidated Statements of Cash Flows for years ended December 31, 1997 and 1996............ F-5
Notes to Consolidated Financial Statements.................................................. F-7
50
Consolidated Financial Statements
Broadway Financial Corporation
and Subsidiary
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
Report of Independent Auditors
The Shareholders and Board of Directors
Broadway Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Broadway
Financial Corporation and Subsidiary (the Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Broadway
Financial Corporation and Subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information included in Note 20 is presented for purposes of additional
analysis of the consolidated financial statements rather than to present the
financial position and results of operations of the individual companies. The
consolidating information has been subjected to the auditing procedures
applied in the audits of the consolidated financial statements and, in our
opinion, is fairly presented, in all material respects, in relation to the
consolidated financial statements taken as a whole.
March 11, 1998
Los Angeles, California
F-1
Broadway Financial Corporation and Subsidiary
Consolidated Balance Sheets
[Enlarge/Download Table]
DECEMBER 31
1997 1996
-------------------------------
ASSETS
Cash and cash equivalents $ 4,831,000 $ 5,180,000
Investment securities held to maturity 9,207,000 10,371,000
Loans receivable, net 103,689,000 96,260,000
Loans receivable held for sale, at lower of cost or
fair value 222,000 -
Accrued interest receivable 834,000 733,000
Real estate acquired through foreclosure, net 1,144,000 933,000
Investment in capital stock of Federal Home
Loan Bank, at cost 931,000 876,000
Office properties and equipment, net 3,995,000 2,052,000
Income tax receivable - 426,000
Other assets 263,000 265,000
-------------------------------
$ 125,116,000 $ 117,096,000
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 109,867,000 $ 101,994,000
Advance payments by borrowers for taxes and insurance 199,000 161,000
Deferred income taxes 463,000 452,000
Other liabilities 1,148,000 845,000
-------------------------------
Total liabilities 111,677,000 103,452,000
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred nonconvertible, noncumulative, and
nonvoting stock, $.01 par value, authorized
1,000,000 shares; issued and outstanding 55,199
and 91,073 shares at December 31, 1997 and 1996,
respectively 1,000 1,000
Common stock, $.01 par value, authorized 3,000,000
shares; issued and outstanding 863,447 and 892,688
shares at December 31, 1997 and 1996, respectively 9,000 9,000
Additional paid-in capital 8,820,000 9,117,000
Retained earnings - substantially restricted 5,427,000 5,080,000
Treasury stock - 29,241 shares, at cost (318,000) -
Unearned ESOP shares (500,000) (563,000)
-------------------------------
Total stockholders' equity 13,439,000 13,644,000
-------------------------------
Total liabilities and stockholders' equity $ 125,116,000 $ 117,096,000
-------------------------------
-------------------------------
SEE ACCOMPANYING NOTES.
F-2
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Operations
[Download Table]
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
Interest on loans receivable $ 8,354,000 $ 7,878,000
Interest on investment securities 566,000 666,000
Interest on mortgage-backed securities 141,000 153,000
Other interest income 59,000 50,000
-----------------------------
Total interest income 9,120,000 8,747,000
Interest on savings and interest bearing demand
deposits 3,966,000 3,476,000
Interest on borrowings 19,000 5,000
-----------------------------
Total interest expense 3,985,000 3,481,000
Net interest income 5,135,000 5,266,000
Provision for loan losses 266,000 586,000
-----------------------------
Net interest income after provision for loan losses 4,869,000 4,680,000
Noninterest income:
Service charges 414,000 301,000
Gain on sale of mortgage loans 123,000 28,000
Gain on sale of office properties and equipment 272,000 -
Other noninterest income 50,000 38,000
-----------------------------
859,000 367,000
-----------------------------
Noninterest expense:
Compensation and benefits 2,474,000 2,149,000
Occupancy expense, net 955,000 903,000
Advertising and promotional expense 163,000 185,000
Professional services 64,000 48,000
Federal insurance premiums 86,000 874,000
Insurance bond premiums 98,000 105,000
Real estate operations, net 130,000 374,000
Loss on sale of mortgage-backed securities
available for sale - 84,000
Contracted security services 128,000 94,000
Net operational losses 100,000 121,000
Other noninterest expense 568,000 566,000
-----------------------------
4,766,000 5,503,000
-----------------------------
Earnings (loss) before income taxes 962,000 (456,000)
Income taxes (benefit) 403,000 (179,000)
-----------------------------
Net earnings (loss) $ 559,000 $ (277,000)
-----------------------------
-----------------------------
Earnings (loss) per share $ 0.61 $ (0.36)
-----------------------------
-----------------------------
Earnings (loss) per share - assuming dilution $ 0.60 $ (0.36)
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-3
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
[Enlarge/Download Table]
Additional Total
Preferred Common Paid-in Retained Unearned Treasury Stockholders'
Stock Stock Capital Earnings ESOP Stock Equity
------------------------------------------------------------------------------
Balance at December 31, 1995 $ - $ - $ - $ 5,581,000 $ - $ $ 5,581,000
Preferred stock issuance 1,000 - 910,000 - - - 911,000
Common stock issuance - 9,000 8,157,000 - - - 8,166,000
Dividends paid - 5% preferred stock;
2% common stock - - - (224,000) - - (224,000)
Net loss for the year ended December 31,
1996 - - - (277,000) - - (277,000)
Unearned Employee Stock Ownership Plan - - - - (625,000) - (625,000)
Employee Stock Ownership Plan payments - - 50,000 - 62,000 - 112,000
------------------------------------------------------------------------------
Balance, at December 31, 1996 1,000 9,000 9,117,000 5,080,000 (563,000) - 13,644,000
Treasury stock acquired for Stock
programs and preferred stock exchange - - - - - (673,000) (673,000)
Preferred stock exchanged for common stock - - (355,000) - - 355,000 -
Dividends paid - 5% preferred stock;
2% common stock - - - (212,000) - - (212,000)
Net earnings for the year ended December 31,
1997 - - - 559,000 - - 559,000
Employee Stock Ownership Plan payments - - 58,000 - 63,000 - 121,000
------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,000 $ 9,000 $ 8,820,000 $ 5,427,000 $ (500,000) $ (318,000) $ 13,439,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
F-4
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 559,000 $ (277,000)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 164,000 226,000
Amortization of net deferred loan origination fees (42,000) 48,000
Amortization of discounts and premiums on securities 170,000 (7,000)
Federal Home Loan Bank stock dividends (55,000) (49,000)
Provision for loan losses 266,000 586,000
Provision for write-downs and losses on real estate 60,000 283,000
Gain on sale of office properties and equipment (272,000) -
Gain on sale of real estate owned (18,000) (40,000)
Gain on sale of loans receivable held for sale (123,000) (28,000)
Loans originated for sale, net of refinances (3,912,000) (2,726,000)
Proceeds from sale of loans receivable held for sale 3,813,000 2,698,000
Loss on sale of mortgage-backed securities - 84,000
Gain on sale of mortgage-backed securities - (7,000)
Changes in operating assets and liabilities:
Accrued interest receivable (101,000) (59,000)
Income tax receivable 426,000 (335,000)
Deferred income tax liability 11,000 (187,000)
Other assets 2,000 252,000
Other liabilities 235,000 14,000
Other - (1,000)
------------------------------
Total adjustments 624,000 752,000
------------------------------
Net cash provided by operating activities 1,183,000 475,000
INVESTING ACTIVITIES
Loans originated, net of refinances (10,372,000) (14,573,000)
Loans purchased (7,923,000) (2,001,000)
Principal repayment on loans 9,224,000 8,123,000
Principal repayment on mortgage-backed securities - 383,000
Proceeds from sale of mortgage-backed securities - 3,933,000
Purchases of investment securities held to maturity (5,004,000) (7,946,000)
Proceeds from sale of office properties and
equipment 456,000 -
Purchase of mortgage-backed securities available
for sale - (4,315,000)
Proceeds from maturities of investment securities
held to maturity 5,998,000 3,000,000
Capital expenditures for office properties and
equipment (2,291,000) (1,176,000)
Proceeds from sale of real estate acquired
through foreclosure 1,233,000 1,728,000
------------------------------
Net cash used in investing activities (8,679,000) (12,844,000)
F-5
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
[Download Table]
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 7,873,000 $ (8,510,000)
Preferred stock issued - 911,000
Common stock subscribed - 8,166,000
Dividends declared (212,000) (224,000)
Unearned Employee Stock Ownership Plan - (625,000)
Employee Stock Ownership Plan payments 121,000 112,000
Treasury stock acquired (673,000) -
Increase (decrease) in advances by borrowers
for taxes and insurance 38,000 (42,000)
------------------------------
Net cash provided by (used in) financing activities 7,147,000 (212,000)
------------------------------
Net decrease in cash and cash equivalents (349,000) (12,581,000)
Cash and cash equivalents at beginning of year 5,180,000 17,761,000
------------------------------
Cash and cash equivalents at end of year $ 4,831,000 $ 5,180,000
------------------------------
------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 4,000,000 $ 3,543,000
------------------------------
------------------------------
Cash paid for income taxes $ 2,500 $ 371,000
------------------------------
------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Additions to real estate acquired through
foreclosure $ 1,710,000 $ 1,163,000
Loans to facilitate the sale of real estate
acquired through foreclosure - 1,000,000
Common stock exchanged for preferred stock (359,000) -
SEE ACCOMPANYING NOTES.
F-6
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1997
1. CONVERSION
Broadway Financial Corporation (the Company) is a Delaware corporation
organized for the purpose of acquiring all the capital stock of Broadway
Federal Bank, f.s.b. (Broadway Federal or the Bank) in connection with a
mutual to stock charter conversion effective November 13, 1995. At the
completion of the plan of conversion and the capitalization of the Company,
Broadway Federal became a wholly owned subsidiary of the Company on January
8, 1996. Prior to the completion of the conversion, the Company had no assets
or liabilities and did not conduct any business other than that of an
organizational nature (see Note 16 - Conversion to Capital Stock Form of
Ownership).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Broadway Federal's business is that of a financial intermediary and consists
primarily of attracting deposits from the general public and using such
deposits, together with borrowings and other funds, to make mortgage loans
secured by residential real estate located in Southern California. At
December 31, 1997, Broadway Federal operated four retail banking offices,
including a loan center, in Southern California. Broadway Federal is subject
to significant competition from other financial institutions, and is also
subject to regulation by certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent a summary of the Company's
and Broadway Federal's significant accounting policies.
F-7
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Broadway Federal. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year
financial statements to conform to the 1997 presentation.
ASSETS HELD TO MATURITY
Investment securities and loans, excluding those held as available for sale,
are carried at amortized historical cost, adjusted for amortization of
premiums and discounts. The carrying value of these assets is not adjusted
for temporary declines in fair value since the Company intends, and has the
ability, to hold them to their maturities.
Premiums and discounts on investment securities and loans are amortized
utilizing the interest method over the contractual terms of the assets.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are recorded in the consolidated balance sheets at the
unpaid principal, adjusted for the allowance for loan losses, loans in
process and net deferred loan fees or costs. Interest on loans receivable is
accrued monthly as earned, except for loans delinquent for 90 days or more
which are placed on nonaccrual status. Whenever the accrual of interest is
stopped, previously accrued but uncollected interest income is reversed.
Loans are returned to accrual status when all contractual principal and
interest amounts are reasonably assured of repayment.
The allowance for loan losses is maintained at an amount management considers
adequate to cover estimable and probable losses on loans receivable. The
allowance is reviewed and adjusted based upon a number of factors, including
current economic trends, industry experience, historical loss experience, the
borrowers' ability to repay and repayment performance, probability of
foreclosure, estimated collateral values and management's assessment of
credit risk inherent in the portfolio. Loans which are deemed uncollectible
are charged off against the allowance for loan losses. The provision for loan
losses and
F-8
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
recoveries on loans previously charged off are added to the allowance. The
allowance for loan losses is subjective and may be adjusted in the future
depending on economic conditions.
A loan is considered impaired when, based on current circumstances and
events, it is probable that Broadway Federal will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. Loans are evaluated for impairment as part of
the Bank's normal internal asset review process. Measurement of impairment
may be based on (1) the present value of the expected future cash flows of
the impaired loan discounted at the loan's original effective interest rate,
(2) an observed market price of the impaired loan or (3) the fair value of
the collateral of a collateral-dependent loan. The amount by which the
recorded investment in the loan exceeds the measurement of the impaired loan is
recognized by recording a valuation allowance with a corresponding charge to
the provision for loan losses. While the measurement method may be selected
on a loan-by-loan basis, Broadway Federal measures impairment for all
collateral dependent loans at the fair value of the collateral.
LOANS HELD FOR SALE
Broadway Federal identifies those loans for which, at the time of origination
or acquisition, it does not have the positive intent or ability to hold to
maturity. Loans that are to be held for indefinite periods of time or not
intended to be held to maturity are classified as held for sale. Loans held
for sale are carried at the lower of aggregate amortized cost or fair value.
Fair value is based on prevailing market rates of similar loans. Loans held for
indefinite periods of time include assets that management intends to use as
part of its asset/liability management strategy and that may be sold in
response to changes in interest rates, resultant prepayment risk and other
factors.
LOAN SALES AND SERVICING
Broadway Federal from time to time sells mortgage loans and loan
participations from current originations or portfolios previously identified
as held for sale for cash proceeds equal to the principal amount of loans or
participations with yield rates to the investor based upon the current market
rate. Typically, Broadway Federal will retain the servicing rights associated
with loans sold. Gain or loss is recognized and premium or discount is
F-9
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN SALES AND SERVICING (CONTINUED)
recorded at the time of sale measured by the present value of the difference
between the effective loan interest rate to Broadway Federal and the net
yield to the investor, excluding a normal servicing fee to be earned over the
estimated remaining lives of the loans sold. The resulting premium or
discount is amortized or accreted to interest income using the interest
method, adjusted for prepayments.
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities and establishes guidelines to distinguish
transfers of financial assets that are sales from transfers that are secured
borrowings.
SFAS No. 125 requires that servicing assets and liabilities be recorded at
fair value at the time loans are sold or securitized. The Statement also
requires that servicing assets be evaluated for impairment by risk
characteristics and be carried at the lower of capitalized cost or fair
value. Adoption of SFAS No. 125 had no material impact on the Company's
financial position at December 31, 1997 or results of operations or cash
flows for the year then ended.
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized in income using the interest method over the
contractual life of the loans adjusted for prepayments. Accretion of
discounts and deferred loan fees is discontinued when loans are placed on
nonaccrual status.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure represents real estate received in
satisfaction of real estate and commercial loans and is recorded at the lower
of carrying value or estimated fair value of the real estate, less costs of
disposition. An allowance for loss is provided when any subsequent decline in
value occurs. Income recognition on the sale of
F-10
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
real estate acquired through foreclosure is dependent upon the terms of the
sale. Any subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are recorded in
current operations.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at historical cost, less
accumulated depreciation. Depreciation and amortization of property and
equipment is provided on a straight-line basis over the estimated useful
lives of the related assets. Leasehold improvements are amortized over the
lease term or the estimated useful life of the asset, whichever is shorter.
INCOME TAXES
Deferred income tax expense (benefit) is derived by establishing deferred tax
assets and liabilities as of the reporting date for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
CASH AND CASH EQUIVALENTS
For purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, due from banks, and federal
funds sold. Generally, federal funds are sold for one-day periods.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128), which establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. SFAS No.
128 simplifies the standards for computing earnings per share previously
found in Accounting Principles Board Opinion No. 15 and makes them comparable
to international EPS standards.
F-11
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS (or EPS -
assuming dilution) on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company adopted SFAS No. 128 effective December 31, 1997. Adoption had no
impact on the basic EPS computation. The EPS - assuming dilution computation
was impacted only by stock-based employee compensation. All EPS amounts for
all periods have been presented, and where appropriate, restated, to conform
to the SFAS No. 128 requirements.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with
Broadway Federal's financial instruments is concentrated in its loan
portfolio. Broadway Federal has established a system for monitoring the level
of credit risk in its loan portfolio.
The market risk of a financial instrument is the possibility that changes in
market prices may reduce the value of a financial instrument or increase the
contractual obligations of Broadway Federal. Broadway Federal's market risk
is concentrated in its portfolios of loans and real estate acquired through
foreclosure. When a borrower fails to meet the contractual requirements of
the loan agreement, Broadway Federal is subject to the market risk of the
collateral securing the loan. Likewise, Broadway Federal is subject to the
volatility of real estate prices with respect to real estate acquired through
foreclosure.
INTEREST RATE RISK
Broadway Federal is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. The majority of Broadway Federal's loans reprice
based on the Eleventh District Cost of Funds Index (COFI). The repricing of
COFI tends to lag market interest rates. Broadway Federal closely monitors
the pricing sensitivity of its financial instruments.
F-12
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk exist for groups of borrowers when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other conditions. The ability of Broadway Federal's borrowers to repay their
commitments is contingent on several factors, including the economic
conditions in the borrowers' geographic area and the individual financial
condition of the borrowers. Broadway Federal's lending activities are
concentrated in Southern California. Broadway Federal currently focuses on
the origination of residential mortgage loans and loans to community churches
secured by church properties.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, "Employers' Accounting to Employee Stock
Ownership Plans" (SOP 93-6). SOP 93-6 provides guidance for accounting for
these plans. SOP 93-6 requires that the issuance or sale of treasury shares
to the ESOP be reported when the issuance or sale occurs and that
compensation expense be recognized for shares committed to be released to
directly compensate employees equal to the fair value of the shares
committed. In addition, SOP 93-6 requires that a leveraged ESOP, funded with
an employer loan, be reflected as a reduction to equity and that the related
interest income and expense not be recorded. The application of SOP 93-6
results in fluctuations in compensation expense as a result of changes in the
fair value of the Company's common stock; however, any such compensation
expense fluctuations would result in an offsetting adjustment to paid-in
capital. During 1997 and 1996, the changes in the fair value of the Company's
common stock did not result in material fluctuations in compensation expense
and paid-in capital.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
establishes new rules for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. SFAS
No. 130 requires companies to (a) display items of other comprehensive income
either below the total for net income in the income statement, or in a
statement of changes in equity, and (b) disclose the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity
F-13
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (CONTINUED)
section of the balance sheet. Other comprehensive income includes unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Disclosure of total
comprehensive income is required in interim period financial statements. The
Company expects its adoption of SFAS No. 130 to have no material impact on
its financial statement presentation.
3. INVESTMENT SECURITIES
At December 31, 1997 and 1996, all of the Company's securities are classified
as held to maturity based on the Bank's intent and ability to hold the
securities to maturity. At December 31, 1997 and 1996, the Company held
investment securities with a carrying value of $9,207,000 and $10,371,000,
respectively.
The following table provides a summary of investment securities held to
maturity with a comparison of carrying and fair values:
[Enlarge/Download Table]
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAIN LOSS VALUE
---------------------------------------------------------
December 31, 1997:
Mortgage-backed securities $ 3,208,000 $ 29,000 $ - $ 3,237,000
FHLMC debenture 1,000,000 - - 1,000,000
FHLB debentures 4,000,000 - 16,000 3,984,000
U.S. Treasury notes 999,000 - - 999,000
---------------------------------------------------------
$ 9,207,000 $ 29,000 $ 16,000 $ 9,220,000
---------------------------------------------------------
---------------------------------------------------------
F-14
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
[Enlarge/Download Table]
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAIN LOSS VALUE
---------------------------------------------------------
December 31, 1996:
Mortgage-backed securities $ 425,000 $ - $ 8,000 $ 417,000
SLMA bonds 1,500,000 2,000 1,502,000
FNC/FNMA discount notes 2,442,000 - - 2,442,000
U.S. Treasury bills 10,000 - - 10,000
FHLB debentures 4,000,000 - 29,000 3,971,000
U.S. Treasury notes 1,994,000 5,000 - 1,999,000
---------------------------------------------------------
$ 10,371,000 $ 7,000 $ 37,000 $ 10,341,000
---------------------------------------------------------
---------------------------------------------------------
The remaining contractual principal maturities for investment securities at
December 31, 1997, are as follows:
[Enlarge/Download Table]
CONTRACTUAL MATURITY
-------------------------------------------------------
AFTER
WITHIN 1 THROUGH AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
-------------------------------------------------------
December 31, 1997:
Mortgage-backed securities $ - $ 347,000 $ 2,861,000 $ 3,208,000
FHLMC debenture - 1,000,000 - 1,000,000
FHLB debentures - 4,000,000 - 4,000,000
U.S. Treasury notes 999,000 - - 999,000
-------------------------------------------------------
$ 999,000 $ 5,347,000 $ 2,861,000 $ 9,207,000
-------------------------------------------------------
-------------------------------------------------------
At December 31, 1997 and 1996, the Company had accrued interest receivable on
investment securities of $139,000 and $117,000, respectively, which is
included in accrued interest receivable in the accompanying consolidated
balance sheets.
During the years ended December 31, 1997 and 1996, the Company sold no held
to maturity investment securities.
F-15
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net:
[Download Table]
DECEMBER 31
1997 1996
----------------------------
Held to maturity:
Real estate:
Residential:
One to four units $ 54,680,000 $ 50,671,000
Five or more units 31,588,000 29,573,000
Construction loans 446,000 226,000
Nonresidential 16,671,000 16,449,000
Loans secured by deposit accounts 1,862,000 1,428,000
Other 445,000 83,000
----------------------------
105,692,000 98,430,000
Plus:
Premium on loans purchased 71,000 -
Less:
Loans in process 143,000 130,000
Allowance for loan losses 1,054,000 1,174,000
Deferred loan fees, net 820,000 812,000
Unamortized discounts 57,000 54,000
----------------------------
Loans receivable held to maturity, net 103,689,000 96,260,000
Held for sale - residential real estate,
one to four units 222,000 -
----------------------------
$ 103,911,000 $ 96,260,000
----------------------------
----------------------------
Weighted average interest rate 8.13% 8.21%
----------------------------
----------------------------
F-16
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET (CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
[Download Table]
DECEMBER 31
1997 1996
----------------------------
Balance at beginning of year $ 1,174,000 $ 896,000
Provision for loan losses 266,000 586,000
Charge-offs (386,000) (308,000)
----------------------------
Balance at end of year $ 1,054,000 $ 1,174,000
----------------------------
----------------------------
Broadway Federal's loan portfolio yielded a weighted average interest rate of
8.13% and 8.21% at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Broadway Federal had accrued interest receivable
on loans of $695,000 and $616,000, respectively, which is included in accrued
interest receivable in the accompanying consolidated balance sheets.
Broadway Federal serviced loans for others totaling $8.2 million and
$7.5 million at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Broadway Federal had loans to senior officers
and directors amounting to $224,000 and $229,000, respectively.
The following is a summary of Broadway Federal's nonaccrual loans at
December 31, 1997 and 1996:
[Download Table]
1997 1996
----------------------------
Residential real estate $ 919,000 $ 1,848,000
Other 2,000 26,000
----------------------------
Total nonaccrual loans $ 921,000 $ 1,874,000
----------------------------
----------------------------
The Bank had no accruing loans which are contractually past due 90 days or more
or restructured loans at December 31, 1997 and 1996.
F-17
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET (CONTINUED)
The gross amount of interest income that would have been recorded during the
years ended December 31, 1997 and 1996, if nonaccrual loans had been current
in accordance with their original terms, was $71,000 and $147,000,
respectively. For the years ended December 31, 1997 and 1996, $28,000 and
$68,000, respectively, was actually received on nonaccrual loans and is
included in interest income on loans in the accompanying consolidated
statements of operations. Broadway Federal had no commitments to lend
additional funds to borrowers whose loans are on nonaccrual at December 31,
1997 and 1996.
At December 31, 1997 and 1996, the total recorded investment in impaired
loans was approximately $1.8 million and $2.0 million, respectively. Of these
amounts, $443,000 and $770,000 had a related impairment allowance totaling
$239,000 and $97,000 at December 31, 1997 and 1996, respectively. Provisions
for losses and any related recoveries related to impaired loans are recorded
as part of the allowance for loan losses. During the years ended December 31,
1997 and 1996, Broadway Federal's average investment in impaired loans was
$1.4 million and $2.1 million, respectively, and interest income recorded on
impaired loans during these periods totaled $150,000 and $176,000
respectively, none of which was recorded utilizing the accrual basis method
of accounting. At December 31, 1997, all impaired loans were measured using
the fair value of the loans' collateral.
The table below identifies Broadway Federal's impaired loans by loan type at
December 31, 1997 and 1996:
[Download Table]
1997 1996
----------------------------
One to four units $ 230,000 $ 474,000
Five or more units 1,531,000 1,519,000
----------------------------
$ 1,761,000 $ 1,993,000
----------------------------
----------------------------
CREDIT RISK AND CONCENTRATION
Substantially all of Broadway Federal's real estate loans are secured by
properties located in Southern California. At December 31, 1997 and 1996,
approximately 82% of the real estate portfolio consisted of loans secured by
residential real estate. In addition, approximately 16% of the loan portfolio
at December 31, 1997 and 1996, was secured by
F-18
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET (CONTINUED)
CREDIT RISK AND CONCENTRATION (CONTINUED)
nonresidential real estate. Loans secured by church real estate represented
70% and 71% of nonresidential real estate loans at December 31, 1997 and
1996, respectively.
5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE, NET
The following is a summary of real estate acquired through foreclosure, net:
[Download Table]
1997 1996
----------------------------
Real estate acquired through foreclosure $ 1,271,000 $ 1,114,000
Less: valuation allowance 127,000 181,000
----------------------------
Real estate acquired through foreclosure, net $ 1,144,000 $ 933,000
----------------------------
----------------------------
Activity in the allowance for losses on real estate acquired through
foreclosure during the years ended December 31, 1997 and 1996, is summarized as
follows:
[Download Table]
1997 1996
----------------------------
Balance at beginning of year $ 181,000 $ 218,000
Provision for losses 60,000 283,000
Charge-offs (114,000) (320,000)
----------------------------
Balance at end of year $ 127,000 $ 181,000
----------------------------
----------------------------
Real estate operations, net, are summarized as follows:
[Download Table]
1997 1996
----------------------------
Net loss from operations of foreclosed
real estate $ (99,000) $ (144,000)
Net gain on sales of foreclosed real estate 29,000 53,000
----------------------------
(70,000) (91,000)
Provision for losses (60,000) (283,000)
----------------------------
Real estate operations, net $ (130,000) $ (374,000)
----------------------------
----------------------------
F-19
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. INVESTMENT IN CAPITAL STOCK OF THE FHLB
As a member of the Federal Home Loan Bank (FHLB) System, Broadway Federal is
required to own capital stock in FHLB in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLB. Broadway
Federal was in compliance with this requirement with an investment in FHLB
stock at December 31, 1997 and 1996, of $931,000 and $876,000, respectively.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of the following:
[Download Table]
1997 1996
----------------------------
Land $ 1,918,000 $ 877,000
Office buildings and improvements 1,923,000 1,000,000
Furniture, fixtures and equipment 1,402,000 1,295,000
----------------------------
5,243,000 3,172,000
Less accumulated depreciation (1,248,000) (1,120,000)
----------------------------
Office properties and equipment, net $ 3,995,000 $ 2,052,000
----------------------------
----------------------------
F-20
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. SAVINGS DEPOSITS
A summary of deposits by type of account and interest rate at December 31 is as
follows:
[Enlarge/Download Table]
1997 1996
--------------------------------------------------------
RATE* AMOUNT RATE* AMOUNT
--------------------------------------------------------
Balance by account type:
NOW account and other demand deposits .58% $ 12,894,000 .62% $ 11,325,000
Passbook 2.00 28,118,000 2.00 30,024,000
Variable-rate time deposits:
3 months 3.79% 2,093,000 3.75 1,448,000
18 months 5.00 988,000 5.20 1,039,000
Fixed index 5.35 44,785,000 5.32 45,104,000
Negotiable time deposits ($100,000 or more) 5.12 16,767,000 4.66 9,599,000
Money market deposits 2.24 4,222,000 2.24 3,455,000
-------------- ---------------
$ 109,867,000 $ 101,994,000
-------------- ---------------
-------------- ---------------
*Weighted average interest rate.
The overall weighted average interest rate on deposits was 3.74% and 3.60% at
December 31, 1997 and 1996, respectively.
Savings deposit maturities at December 31, 1997, are summarized as follows:
[Download Table]
MATURITY AMOUNT
-------- --------------
No stated maturity $ 45,301,000
1998 49,947,000
1999 10,850,000
2000 1,782,000
2001 1,006,000
Thereafter 981,000
--------------
$ 109,867,000
--------------
--------------
F-21
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. SAVINGS DEPOSITS (CONTINUED)
A tabulation of interest expense on deposits at December 31, 1997 and 1996, is
as follows:
[Download Table]
1997 1996
----------------------------
NOW accounts and other demand deposits $ 634,000 $ 676,000
Money market deposits 88,000 94,000
Time deposits 3,273,000 2,748,000
Penalty for early withdrawals (29,000) (42,000)
----------------------------
$ 3,966,000 $ 3,476,000
----------------------------
----------------------------
At December 31, 1997 and 1996, the Company had accrued interest payable on
deposits of $69,000 and $53,000, respectively, which is included in deposits in
the accompanying consolidated balance sheets.
The Company had $1,215,000 in brokered deposits at December 31, 1997 and
$247,000 at December 31, 1996.
9. FHLB ADVANCES
Pursuant to collateral agreements with the FHLB, advances are secured by 290
loans and 134 loans, representing $18.8 million and $9.2 million as of
December 31, 1997 and 1996, respectively. The borrowing capacity with the FHLB
approximates $16.3 million and $7.3 million as of December 31, 1997 and 1996,
respectively. There were no borrowings outstanding with the FHLB as of
December 31, 1997 and 1996.
F-22
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The following is a summary of the provision for income tax expense (benefit):
[Download Table]
1997 1996
----------------------------
Current taxes:
Federal income $ 319,000 $ -
State franchise 3,000 3,000
----------------------------
322,000 3,000
----------------------------
Deferred taxes:
Federal income 37,000 (67,000)
State franchise 44,000 (115,000)
----------------------------
81,000 (182,000)
----------------------------
$ 403,000 $ (179,000)
----------------------------
----------------------------
A reconciliation of income taxes and the amounts computed by applying the
statutory federal income tax rates to earnings before income taxes follows:
[Download Table]
1997 1996
----------------------------
Computed expected federal taxes $ 327,000 $ (155,000)
Increases (reductions) to taxes resulting from:
California franchise tax (benefit), net of
federal income tax (benefit) 71,000 (34,000)
Other 5,000 10,000
----------------------------
$ 403,000 $ (179,000)
----------------------------
----------------------------
In prior years, Broadway Federal had qualified under the provision of the
Internal Revenue Code which allowed it to deduct, within limitations, a bad
debt deduction computed as a percentage of taxable income before such
deductions. Alternatively, Broadway Federal could deduct from taxable income
as allowance for bad debts based upon the experience method. Under provisions
of the Small Provision Job Protection Act of 1996, Broadway Federal lost the
use of the method of calculating a bad debt deduction based on a percentage
of taxable income. However, Broadway Federal may continue to maintain an
allowance for bad debts based on the experience method, and its tax allowance
for bad debts has been maintained under such method.
F-23
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Retained earnings at December 31, 1997 and 1996, is substantially restricted
for tax purposes and includes $3,013,000 in all periods, for which no
provision for federal income tax has been made. If, in the future, this tax
bad debt reserve is used for any purpose other than to absorb bad debt
losses, federal income taxes may be imposed at the then applicable rates.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996, are presented below:
[Download Table]
1997 1996
----------------------------
Deferred tax assets:
Loan valuation allowances deferred for tax $ 402,000 $ 504,000
Allowance for loss 151,000 120,000
State franchise tax liability - 41,000
REO 116,000 -
Other 91,000 71,000
----------------------------
Net deferred tax assets 760,000 736,000
----------------------------
Deferred tax liabilities:
Basis difference on fixed assets 454,000 456,000
Deferred loan fees 366,000 334,000
FHLB stock dividend 384,000 363,000
Other 19,000 35,000
----------------------------
Total gross deferred tax liabilities 1,223,000 1,188,000
----------------------------
Net deferred tax liability $ 463,000 $ 452,000
----------------------------
----------------------------
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible amounts and operating loss
and tax credit carryforwards. A valuation allowance is then established to
reduce that deferred tax asset to the level at which it is "more likely than
not" that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss or credit carryforwards
depends on having sufficient taxable income of an appropriate character
within the carryback and carryforward periods. Sources of taxable income that
may allow for the realization of tax
F-24
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
benefits include (i) taxable income in the current year or prior years that
is available through carrybacks, (ii) future taxable income that will result
from the reversal of existing taxable temporary differences, and (iii) future
taxable income generated by future operations. Based on an evaluation of its
realizability of its gross deferred tax assets, management believes that it
is more likely than not that Broadway Federal will realize the tax benefit
related to these assets.
11. EMPLOYEE BENEFIT PLANS
BROADWAY FEDERAL 401(k) PLAN
In 1995, Broadway Federal established a 401(k) Plan in which employees may
elect to enroll each January 1 or July 1 of every year provided that they are
at least 21-years of age and have been employed for a least one year prior to
the semiannual enrollment date. Employees may contribute up to 15 percent of
their pretax annual salary with the Company matching up to 100 percent of the
employee's contribution, not to exceed three percent of that employee's base
salary. In 1997 and 1996, Broadway Federal's contribution amounted to $50,600
and $14,000, respectively.
STOCK PROGRAMS
In 1996, the stockholders of the Company ratified two stock programs, the
Broadway Federal Bank, f.s.b. 1996 Performance Equity Program for Officers
and Employees (the PEP) of Broadway Federal and its subsidiary and the
Recognition and Retention Plan for Outside Directors (the RRP, and together
with the PEP, the Stock Programs). During 1997, the names of the Stock
Programs were amended to Broadway Financial Corporation Performance Equity
Program for Officers and Employees, and Broadway Financial Corporation
Recognition and Retention Plan for Outside Directors. The effective date of
the Stock Programs was changed from December 1, 1995 to August 1, 1997. The
Stock Programs are designed to encourage recipients of share awards to remain
with the Company and to promote the Company's growth and profitability.
F-25
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK PROGRAMS (CONTINUED)
The RRP is designed to recognize outside directors of experience and ability
by providing such persons with a proprietary interest in the Company as
compensation for their contributions to the Company and its affiliates and as
an incentive to make such contributions. Under the RRP each Outside Director
serving in such capacity as of the date of Conversion (February 9, 1996), is
granted a "Fixed Award" of shares and a "Fixed Service Award" of shares. The
shares awarded under the RRP will become vested at the rate of twenty percent
(20%) annually commencing one year from the date of grant. For the RRP, an
aggregate of 8,034 shares of common stock were acquired during 1997 for award
pursuant to the plan and on September 17, 1997, the grant date, a total of
4,872 shares were granted to Outside Directors for the first time. At
December 31, 1997, none of the shares granted are exercisable.
The PEP is designed to retain officers and employees of experience and
ability by providing such persons with a proprietary interest in the Company
as an additional incentive to perform in a superior manner. Under the PEP,
all employees of the Company and its affiliates are eligible to receive both
base and predetermined performance grants of shares. Performance grants are
based upon achievement of specified performance goals. Base and performance
grants awarded will become vested at the rate of twenty percent (20%)
annually commencing one year from the date of grant. For the PEP, an
aggregate of 18,747 shares of common stock were acquired during 1997 for
award pursuant to the plan and on September 17, 1997, the grant date, a total
of 15,998 shares were granted for the first time. As of December 31, 1997,
none of the shares granted are exercisable.
F-26
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK PROGRAMS (CONTINUED)
[Enlarge/Download Table]
STOCK PROGRAMS
----------------------------------------------------------------------------------
PEP RPP TOTAL
----------------------------------------------------------------------------------
SHARES PRICE* SHARES PRICE* SHARES PRICE
----------------------------------------------------------------------------------
Outstanding at January 1, 1997 - - - - - -
Granted 15,998 $ 11 4,872 $ 11 20,870 $ 11
Exercised - - - - - -
Expired or canceled - - - - - -
----------------------------------------------------------------------------------
Outstanding at December 31, 1997 15,998 $ 11 4,872 $ 11 20,870 $ 11
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
*At date of grant.
EMPLOYEE STOCK OWNERSHIP PLAN
As part of the conversion, an Employee Stock Ownership Plan (ESOP) was
established for all employees who attain a certain age and have completed one
year of service during which they served a minimum of 1,000 hours. The ESOP
is internally leveraged, with a $625,000 note from the Company. The ESOP
purchased 62,488 shares of the common stock of Broadway Financial Corporation
issued in the Conversion. The loan will be repaid principally from the
Broadway Federal's discretionary contributions to the ESOP, net of dividends
paid, over a period of 10 years. At December 31, 1997 and 1996, the
outstanding balance of the loan was $500,000 and $563,000, respectively,
which is shown as Unearned ESOP in the equity section of the balance sheets.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation, as described in the plan, in the
year of allocation. Benefits generally become 100% vested after seven years
of credited service, with 20% of the shares vesting each year commencing with
the participant's completion of the third year of credited service under the
ESOP. Prior to the completion of seven years of credited service, a
participant who terminates employment for reasons other than death,
retirement, disability, or a change in control of Broadway Federal or the
Company, will not receive any benefit if such termination is prior to the
participant's completion of three years of credited service. Forfeitures will
be reallocated among the remaining participating employees in the same
F-27
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
proportion as contributions. Participants will become fully vested in the
shares allocated to their accounts upon a change in control of Broadway
Federal or the Company. Benefits are payable upon retirement, death or
disability of the participant.
Since the quarterly contributions are discretionary, the benefits payable
under the ESOP cannot be estimated. Broadway Federal's contributions related
to the ESOP totaled $111,000 and $112,000 for the years ended December 31,
1997 and 1996, respectively, which is net of dividends of approximately
$15,600 and $9,400, respectively.
Of the 62,488 ESOP shares purchased during the years ended December 31, 1997
and 1996, 8,102 and 6,249 shares, respectively, were allocated, leaving an
unallocated balance of 48,137 and 56,239 shares at December 31, 1997 and
1996, respectively. The fair value of unallocated ESOP shares totaled
$721,000 and $520,000 at December 31, 1997 and 1996, respectively.
STOCK OPTION PLANS
In 1996, the stockholders of the Company ratified two stock option plans, the
Company's Long-Term Incentive Plan (the LTIP) and the 1996 Stock Option Plan
for Outside Directors (the Stock Option Plan, and together with the LTIP,
Stock Option Plans). During 1997, the effective date of the Stock Option Plan
was changed from December 1, 1995 to August 1, 1997.
The LTIP is a nonqualified stock option plan, designed to attract and retain
qualified personnel in key positions to provide officers and key employees
with a proprietary interest in the Company as an incentive to contribute to
the success of the Company and to reward key employees for outstanding
performance. Options granted under the LTIP will entitle the recipients to
purchase specified numbers of shares of the Company's common stock at a fixed
price and are exercisable for up to 10 years from the date of grant. Such
options will become vested and exercisable at the rate of twenty percent
(20%) annually commencing one year from the date of grant. No options were
granted under the LTIP during the year ended December 31, 1996. An aggregate
of 62,488 options are available for issuance under the plan. On September 17,
1997, options to purchase 43,909 shares were granted. As of December 31,
1997, none of these options are exercisable.
F-28
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The purpose of the Stock Option Plan is to promote the growth and
profitability of the Company and Broadway Federal by providing Outside
Directors with an incentive to achieve long-term objectives of the Company.
This plan is also intended to assist in retaining and attracting nonemployee
directors of outstanding competence by providing such outside directors with
an opportunity to acquire an equity interest in the Company. Options granted
under the Stock Option Plan become vested and exercisable at the rate of
twenty percent (20%) annually commencing one year from the date of grant and
are exercisable for up to 10 years from the date of grant . No options were
granted under the Stock Option Plan during the year ended December 31, 1996.
An aggregate of 26,781 options are available for issuance under the plan. On
September 17, 1997, options to purchase 17,264 shares were granted. As of
December 31, 1997, none of these options are exercisable.
[Enlarge/Download Table]
STOCK OPTION PLANS
----------------------------------------------------------------------------
LTIP STOCK OPTION PLAN TOTAL
----------------------------------------------------------------------------
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------------------------------------------------------------------------
Outstanding at January 1, 1997 - $ - - $ - - $ -
Granted 43,909 11 17,264 11 61,173 11
Exercised - - - - - -
Expired or canceled - - - - - -
----------------------------------------------------------------------------
Outstanding at December 31, 1997 43,909 $ 11 17,264 $ 11 61,173 $ 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective January 1, 1997 the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS No.123,) "Accounting for Stock-Based
Compensation." SFAS No. 123 provides for companies to recognize compensation
expense associated with stock-based compensation plans over the anticipated
service period on the fair value of the award on the date of grant. However,
SFAS No. 123 allows companies to continue to measure compensation costs
prescribed by APB opinion No. 25, "Accounting for Stock Issued to Employees."
Companies electing to continue accounting for stock-based compensation plans
under APB opinion No. 25 must make pro forma disclosure of net income and
earnings per share as if SFAS No. 123 has been adopted if the fair value of
the options has material impact on earnings. The Company has elected to
account for stock-based compensation plans under APB opinion No. 25.
F-29
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The Black-Scholes Option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The fair value of options granted by the Company in 1997 was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions:
[Download Table]
Risk free interest rate 6.50%
Expected volatility 30.10%
Expected dividend yield 2.00%
Expected option life 10 years
Approximate fair value of options granted $ 3.44
The impact of applying SFAS No. 123 in 1997 is immaterial to the financial
statements of the Company at December 31, 1997.
F-30
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, through Broadway Federal, leases certain premises and equipment
on a long-term basis. Some of these leases require that Broadway Federal pay
property taxes and insurance. Lease expense was approximately $82,000 in 1997
and $140,000 in 1996. Annual minimum lease commitments attributable to
long-term leases at December 31, 1997, are as follows:
[Download Table]
PREMISES EQUIPMENT TOTAL
--------------------------------------------
Year ending December 31:
1998 $ 41,000 $ 46,000 $ 87,000
1999 41,000 35,000 76,000
2000 41,000 16,000 57,000
2001 41,000 41,000
2002 41,000 41,000
Thereafter through 2013 401,000 401,000
--------------------------------------------
$ 606,000 $ 97,000 $ 703,000
--------------------------------------------
--------------------------------------------
Broadway Federal had commitments to originate loans of approximately $1.0
million and $1.7 million, respectively, at December 31, 1997 and 1996.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since certain commitments are
expected to expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements. Broadway Federal minimizes
its exposure to loss under these commitments by requiring that customers meet
certain conditions prior to disbursing funds. The amount of collateral
obtained, if any, is based on a credit evaluation of the borrower and
generally involves residential real estate.
Broadway Federal had commitments to sell $222,000 of loans and no commitments
to purchase loans at December 31, 1997. At December 31, 1996, there were no
commitments to sell or purchase loans.
In the ordinary course of business, the Company and Broadway Federal become
involved in litigation. In the opinion of management, and based in part upon
opinions of legal counsel, the disposition of any suits pending against the
Company and Broadway Federal would not have a material adverse effect on the
Company's financial position at December 31, 1997 or results of operations
for the year then ended.
F-31
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. YEAR 2000 (UNAUDITED)
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus, programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the "Year 2000 Problem."
During 1997, the Company initiated an organization-wide Year 2000 Project to
address this issue. Utilizing both internal and external resources, the
Company is in the process of defining, assessing and converting, or replacing
various programs, equipment and instrumentation systems to make them Year
2000 compatible. The Company's Year 2000 project is comprised of two
components-business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers whose Year 2000
problems could potentially impact the Company. Equipment exposures consist of
the micro-processors with the power of small computers that are embedded
within operating equipment such as pumps, compressors, elevators and furnaces.
BUSINESS APPLICATIONS AND EQUIPMENT
In 1997 the Company began to diligently assess its systems needs for the Year
2000 and beyond. This assessment included an analysis of the benefits and
limitations of the existing systems. Based upon this analysis and upon the
fact that the Company's outside service bureau has stated that they are not
planning to make Year 2000 programming changes, the Company determined that
it will convert its entire deposit, loan and general ledger systems to a new
service bureau as part of its Year 2000 Action Plan. In addition, as part of
the complete conversion, the Company will replace most of its internal
personal computer equipment and software. The new service bureau, software
and equipment which represents approximately 98% of the Company's business
computer programs and equipment, will be Year 2000 compliant, and is
anticipated to cost approximately $170,000. The remaining 2% of business
application programs and equipment will be made compliant through the Year
2000 project, and all noncompliant programs and equipment will be retired. It
is anticipated that this project will be completed by December 1998. The
Company is also identifying and prioritizing critical suppliers and customers
and will follow up with them concerning their plans and progress in
addressing the Year 2000 Problem. This portion of the Year 2000 project is
expected to cost approximately $40,000 and is being expensed as incurred.
F-32
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. YEAR 2000 (UNAUDITED, CONTINUED)
BUSINESS APPLICATIONS AND EQUIPMENT (CONTINUED)
The Company is also currently evaluating the Year 2000 readiness of its other
equipment, such as security, heating and air-conditioning systems, with a
comprehensive inventory of all monitoring and control devices. Work plans
detailing the tasks and resources required to insure equipment Year 2000
readiness by the end of 1998 are expected to be in place by the end of the
second quarter of 1998. Costs associated with other equipment upgrades have
not yet been quantified but will be expensed as incurred.
The Company has ascertained that failure to alleviate the Year 2000 Problem
with its application systems and equipment could result in possible system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices,
or engage in similar normal business activities. These problems could be
substantially alleviated with manual processing. However, this would cause
delays and possible lost production days.
The costs of the Year 2000 modifications and the date of completion will be
closely monitored and are based on management's best estimates. Actual
results, however, could differ from those estimates.
14. REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision
(OTS) promulgated thereunder (Capital Regulations) established three capital
requirements - a "leveraged limit," a "tangible capital requirement" and a
"risk-based capital requirement." These capital standards set forth in the
Capital Regulations must generally be no less stringent than the capital
standards applicable to national banks. The OTS may also establish, on a
case-by-case basis, individual minimum capital requirements for a savings
institution which vary from the requirements that would otherwise apply under
the Capital Regulations. The OTS has not established such individual minimum
capital requirements for Broadway Federal. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on Broadway Federal's financial statements. At
December 31, 1997 and 1996, Broadway Federal was in compliance with such
capital requirements.
F-33
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. REGULATORY CAPITAL (CONTINUED)
The leverage limit adopted by the OTS Director under the Capital Regulations
requires a savings institution to maintain "core capital" of not less than 3%
of adjusted total assets, which is the minimum amount required by FIRREA.
"Core capital" generally includes common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and any related
surplus and minority interests in the equity accounts of fully consolidated
subsidiaries.
The tangible capital requirement adopted by the OTS Director requires a
savings institution to maintain "tangible capital" in an amount not less than
1.5% of adjusted total assets, which is the minimum amount required by
FIRREA. "Tangible capital" means core capital less any intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights,
valued at the lower of the maximum percentage established by the FDIC or the
amount includable in core capital as defined under the Capital Regulations.
The risk-based capital requirements provide, among other things that the
capital ratio applicable to an asset will be adjusted to reflect the degree
of defined credit risk associated with such asset. In addition, the asset
base for computing a savings institution's risk-based capital requirement
includes off-balance sheet items, including loans and other assets sold with
subordination or recourse. Generally, the Capital Regulations require savings
institutions to maintain "total capital" equal to 8% of risk weighted assets.
"Total capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes among other things certain types of
preferred stock and subordinated debt and, subject to certain limitations,
general valuation allowances.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
contains "prompt corrective action" provisions pursuant to which banks and
savings institutions are to be classified into one of the five categories
based primarily upon capital adequacy. The OTS regulations implementing the
"prompt corrective action" provisions of FDICIA define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10.00% or greater, has a Tier 1 risk-based
capital ratio (Tier 1 capital to total risk-weighted assets) of 6.00% or
greater, has a core capital ratio of 5.00% or greater is not subject to any
written capital order or directive to meet and maintain a specific capital
level or any capital measure; (ii) an institution is "adequately
F-34
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. REGULATORY CAPITAL (CONTINUED)
capitalized" if it has a total risk-based capital ratio of 8.00% or greater,
has a Tier 1 risk-based capital ratio of 4.00% or greater and has a core
capital ratio of 4.00% or greater (3% for certain highly rated institutions);
(iii) an institution is "undercapitalized" if it has a total risk-based
capital ratio of less than 8.00% or has either a Tier 1 risk-based or a core
capital ratio that is less than 4.00%; (iv) an institution is "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 7.00%, or has either a Tier 1 risk-based or a core capital ratio that is
less than 3.00%; and (v) an institution is "critically undercapitalized" if
its "tangible equity" (defined in the prompt corrective action regulations to
mean core capital plus cumulative perpetual preferred stock) is equal to or
less than 2.00% of its total assets. The OTS also has authority, after an
opportunity for a hearing, to downgrade an institution from "well
capitalized" to "adequately capitalized," or to subject an "adequately
capitalized" or "undercapitalized" institution to the supervisory actions
applicable to the next lower category, for supervisory concerns. At December
31, 1997 and 1996, Broadway Federal's regulatory capital was in excess of the
amount necessary to be "well capitalized." Management believes there have
been no conditions or events since the last notification by the OTS that
would change the institution's category.
The table below presents Broadway Federal's capital ratios as compared to the
requirements under FIRREA and FDICIA at December 31, 1997 and 1996:
[Enlarge/Download Table]
FOR CAPITAL AMOUNT
ADEQUACY REQUIRED TO BE
ACTUAL PURPOSES WELL CAPITALIZED
-------------------------------------------------------------------------------
(Dollars in Thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------
December 31, 1997:
Leverage/Tangible Ratio $ 10,708 8.63% $ 4,963 4.0% $ 6,204 5.0%
Tier I Risk-based ratio 10,708 13.67 3,133 4.0 4,699 6.0
Total Risk-based ratio 11,587 14.79 6,266 8.0 7,832 10.0
December 31, 1996:
Leverage/Tangible Ratio $ 10,299 9.06% $ 4,587 4.0% $ 5,682 5.0%
Tier I Risk-based ratio 10,299 14.23 2,896 4.0 4,343 6.0
Total Risk-based ratio 11,204 15.48 5,790 8.0 7,239 10.0
F-35
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
Pursuant to the requirements of Statement of Financial Accounting Standards
No. 107 (SFAS No. 107,) "Disclosure about Fair Value of Financial
Instruments," as amended by Statement of Financial Accounting Standards No.
119 (SFAS No. 119,) "Disclosure about Derivative Financial Instruments," the
Company has included the following information about the fair values of its
financial instruments, whether or not such instruments are recognized in the
accompanying consolidated balance sheets. In cases where quoted market prices
are not available, fair values are estimated based upon discounted cash
flows. Those techniques are significantly affected by the assumptions
utilized, including the assumed discount rates and estimates of future cash
flows. In this regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in an immediate sale or other disposition of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. All components of accrued
interest receivable and payable are presumed to have approximately equal book
and fair values because the periods over which such amounts are realized are
relatively short. As a result of the assumptions utilized, the aggregate fair
value estimates presented herein do not necessarily represent the Company's
aggregate underlying fair value.
The fair values of investment securities are generally obtained from market
bids for similar or identical securities, or are obtained from quotes from
independent security brokers or dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one to four units,
multifamily, nonresidential real estate and other. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan.
The estimate of maturity is based on the contractual term of the loans to
maturity, adjusted for estimated prepayments.
The fair value of nonperforming loans is based on discounting cash flows.
Estimated cash flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates
F-36
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
are judgmentally determined using available market information and specific
borrower information.
The fair values of deposits are estimated based upon the type of deposit
product. Demand and money market deposits are presumed to have equal book and
fair values. The estimated fair values of time deposits are determined by
discounting the cash flows of segments of deposits having similar maturities
and rates, utilizing a yield curve that approximates the rates offered as of
the reporting date.
The fair values of commitments to extend credit are based on rates for
similar transactions as of the reporting date.
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997.
[Download Table]
CARRYING
OR NOTIONAL FAIR
VALUE VALUE
-----------------------------
Assets:
Cash and federal funds sold $ 4,831,000 $ 4,831,000
Investment securities 9,207,000 9,220,000
Loans receivable 103,911,000 108,713,000
Federal Home Loan Bank stock 931,000 931,000
Liabilities:
Savings deposits 109,867,000 110,186,000
Off-balance sheet:
Commitments to extend credit $ 1,004,000 $ 1,004,000
F-37
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
The Company was incorporated under Delaware law on September 25, 1995, for
the purpose of acquiring and holding all of the outstanding capital stock of
Broadway Federal as part of Broadway Federal's Conversion from a federally
chartered mutual savings association to a federally chartered stock savings
bank, effective November 13, 1995. The Conversion was completed and Broadway
Federal became a wholly owned subsidiary of the Company on January 8, 1996.
In connection with the Conversion, the Company issued and sold to the public
892,688 shares of its common stock (par value $.01 per share) at a price of
$10.00 per share. In addition, the Company issued 91,073 shares of its
noncumulative perpetual preferred stock (par value $.01 per share) also at
$10.00 per share. The proceeds, net of approximately $760,000 in conversion
costs received by the Company from the Conversion (before deduction of
$893,000 to fund employee stock plans), amounted to $9,077,000. The Company
retained 50% of the net common stock proceeds and used the remaining net
common stock proceeds and all of the preferred stock proceeds to purchase the
capital stock of Broadway Federal. Prior to the completion of the Conversion,
the Company had no assets or liabilities and did not conduct any business
other than of an organizational nature.
Prior to the Conversion, in the event of a complete liquidation of Broadway
Federal, each holder of a deposit account in Broadway Federal would receive a
pro rata share of any assets of Broadway Federal remaining after payment of
the valid claims of all creditors having greater priority, including the
claims of all depositors to the withdrawal value of their accounts, which
includes accrued interest. Such holder's pro rata share of such remaining
assets, if any, would be in the same proportion of such assets as the value
of such holder's deposit account was to the total value of all deposit
accounts in Broadway Federal at the time of liquidation. Pursuant to the
"depositor preference" rights of federal law, the claims of depositors of
federally insured institutions to the withdrawal value of their accounts is
given a priority over the claims of most other unsecured creditors.
The Plan of Conversion provided that, upon completion of the Conversion, a
"Liquidation Account" will be established on Broadway Federal's books for the
benefit of Eligible Account Holders and Supplemental Eligible Account
Holders. The amount of the Liquidation Account will be equal to the
regulatory capital (retained earnings) of Broadway Federal as of the date of
its latest statement of financial condition contained in the final prospectus
relating to the sale of shares of common stock in the Conversion.
F-38
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (CONTINUED)
At the time of the Conversion, Broadway Federal established a liquidation
account in the amount of $5.3 million which was equal to its total retained
earnings as of June 30, 1995. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at Broadway Federal after the Conversion. The liquidation account
will be reduced periodically to the extent that eligible account holders have
reduced their qualifying deposits. At December 31, 1997, the liquidation
account had been reduced to approximately $4.2 million. Subsequent increases
in deposit accounts will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each
eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
Broadway Federal may not declare or pay cash dividends on or repurchase any
of its shares of common stock, if the effect would cause stockholder's equity
to be reduced below applicable regulatory capital maintenance requirements or
if such declaration and payment would otherwise violate regulatory
requirements.
17. STOCK REPURCHASE PROGRAM
During 1997, the Company acquired 61,854 shares of common stock in the open
market to fund stock-based management recognition programs and redeem Series
A Preferred stock. The purchased shares represented approximately 6.929% of
the outstanding common stock before the purchase, of which 3.929% (35,073
shares) were for the redemption of Series A Preferred stock and 3.000%
(26,781 shares) were for the awards under the Company's stock programs. The
repurchase prices during the year ranged from $10.75 to $11.00 per share with
an average stock repurchase price of approximately $10.87 per share. During
the year ended December 31, 1997, 35,874 shares of preferred stock were
converted to 32,613 shares of common stock through exchange.
F-39
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
18. EARNINGS PER SHARE
Under its stock-based compensation plans (see Note 11 - Employee Benefit
Plans), no options were granted by the Company for the year ended December
31, 1996. Stock options and shares were granted on September 17, 1997, by
resolution of the board of directors. The grants had no impact on the basic
EPS computations as all the necessary conditions for the issuance of shares
under the Stock Programs and Stock Option Plans have not been satisfied at
December 31, 1997. For the year ended December 31, 1996, basic earnings per
share are computed on earnings for the period beginning January 8, 1996 , the
date of Conversion to stock form, to December 31, 1996, and are based on the
weighted average number of shares outstanding during that period. Similarly,
basic earnings per share for the year ended December 31, 1997, are computed
based on earnings for 1997 and the weighted average number of shares
outstanding during that year.
The Company's stock-based compensation awards were considered outstanding as
of the grant date for purposes of computing EPS - assuming dilution in
accordance with SFAS No. 128 at December 31, 1997. The dilutive effect of
stock awards and options is calculated under the treasury stock method using
the average market price during the period these shares and options were
outstanding. The following table sets forth the computation of earnings per
share and earnings per share - assuming dilution:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
1997 1996
------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------------------------------------------------------------
Net earnings (loss) $ 558,526 - - $ (277,129) - -
Less: Preferred stock dividends (41,052) - - (45,537) - -
------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Income available to common stockholders $ 517,474 852,007 $ 0.61 $ (322,666) 893,688 $ (0.36)
EFFECT OF DILUTIVE SECURITIES
Stock Programs - 7,203 - - - -
Stock Option Programs - 1,432 - - - -
------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Income available to common stockholders
plus assumed conversions $ 517,474 860,642 $ 0.60 $ (322,666) 893,688 $ (0.36)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
F-40
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-----------------------------------------------------------------------
1997
Interest income $ 2,216 $ 2,289 $ 2,281 $ 2,334 $ 9,120
Interest expense 935 981 1,009 1,060 3,985
Net interest income 1,281 1,308 1,272 1,274 5,135
Provision for loan losses 30 47 75 114 266
Net earnings 63 145 102 249 559
Earnings per share of common stock (1) .07 .16 .11 .29 .61
Earnings per share - assuming diluted (1) .07 .16 .11 .29 .60
Market range:
High bid 11.25 11.25 11.50 13.38 13.38
Low bid 10.25 10.75 10.75 13.00 10.25
1996
Interest income $ 2,148 $ 2,161 $ 2,225 $ 2,213 $ 8,747
Interest expense 864 865 864 888 3,481
Net interest income 1,284 1,296 1,361 1,325 5,266
Provision for loan losses 55 188 255 88 586
Net earnings 114 (54) (378) 41 (277)
Earnings (loss) per share of common stock (1) 0.12 (0.07) (0.44) 0.03 (0.36)
Earnings per share - assuming diluted (1) 0.12 (0.07) (0.44) 0.03 (0.36)
Market range:
High bid 10.75 10.00 10.00 9.75 10.75
Low bid 10.25 10.00 9.63 9.13 9.13
(1) The sum of the quarterly earnings per share amounts may not equal the
amount for the year because per share amounts are computed independently
for each quarter and the full year based upon respective weighted average
shares of common stock outstanding. For earnings per share-assuming
diluted, the weighted average shares of common stock are adjusted for the
contingently issuable shares under the Company's stock-based compensation
plans for the fourth quarter of 1997, and year-to-date 1997.
F-41
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
20. PARENT COMPANY FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to
consolidated financial statements. During the first quarter of 1996, the
Company issued $8.9 million of common stock and $911,000 of preferred stock.
The Company retained 50% of the net common stock proceeds and used the
remaining net common stock proceeds and all of the preferred stock proceeds
to purchase the capital stock of Broadway Federal (see Note 16 - Conversion
to Capital Stock Form of Ownership).
Statements of Financial Condition
[Download Table]
DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
ASSETS
Cash $ 1,530 $ 784
Investment securities held to maturity 1,000 2,488
Accrued interest 22 23
Investment in subsidiaries
10,901 10,300
Other assets 3 117
-------------------------
$ 13,456 $ 13,712
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 17 $ 68
Stockholders' equity (including $4.2 million
at December 31, 1997 and $5.3 million at
December 31, 1996 representing remaining restricted
retained earnings from conversion
balance retained earnings-See Note 16) 13,439 13,644
-------------------------
$ 13,456 $ 13,712
-------------------------
-------------------------
F-42
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Operations
[Download Table]
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
Interest income $ 98 $ 159
Interest expense - 6
Other income 12 -
Other expense 182 147
Income taxes (benefit) (29) 7
-------------------------
Earnings before equity in earnings (loss)
of subsidiaries (43) (1)
Equity in earnings (loss) of subsidiaries 602 (276)
-------------------------
Net earnings (loss) $ 559 $ (277)
-------------------------
-------------------------
Statements of Cash Flows
[Download Table]
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net earnings (loss) $ 559 $ (277)
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Equity in (earnings) loss of subsidiaries (602) 276
Decrease (increase) in interest receivable 1 (16)
Decrease (increase) in other assets 114 (117)
Decrease in other liabilities (51) (309)
Amortization and others 1 12
Loss on sale of investment securities - 50
-------------------------
Total adjustments (537) (104)
-------------------------
Net cash provided by (used in) operating activities 22 (381)
F-43
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Cash Flows (continued)
[Download Table]
1997 1996
-------------------------
(IN THOUSANDS)
INVESTING ACTIVITIES
Purchases of investment securities held to maturity - (2,488)
Proceeds from maturity of investment securities
held to maturity 1,488 170
Purchases of investment securities available for sale - (1,982)
Sale of investment securities available for sale - 1,762
Purchase of outstanding stock of subsidiaries - (7)
-------------------------
Net cash provided by (used in) investing activities 1,488 (2,545)
FINANCING ACTIVITIES
ESOP payments 121 112
Dividends declared (212) (224)
Decrease in accounts payable - stock issuance - (5,897)
Decrease in stock subscription receivable - 2,505
Treasury stock acquired (673) -
Unearned ESOP - (625)
-------------------------
Net cash used in financing activities (764) (4,129)
-------------------------
Net increase (decrease) in cash and cash equivalents 746 (7,055)
Cash and cash equivalents, beginning of year 784 7,839
-------------------------
Cash and cash equivalents, end of year $ 1,530 $ 784
-------------------------
-------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock exchanged for preferred stock $ (359) $ -
F-44
Dates Referenced Herein and Documents Incorporated by Reference
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