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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 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 0-27464
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Broadway Financial Corporation
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(Name of Small Business Issuer in Its Charter)
Delaware 95-4547287
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4835 West Venice Boulevard, Los Angeles, California 90019
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(Address of Principal Executive Offices) (Zip Code)
(213) 931-1886
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(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
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(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
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Check if 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. $8,747,000.
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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
12, 1997 as quoted on The Nasdaq Stock Market. $8,498,079.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
892,688 shares of Common Stock at March 12, 1997
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Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Item 16 of Part II of the Company's Registration Statement on
Form S-1 (File No. 33-96814), filed with the Securities and Exchange Commission
("SEC") on September 12, 1995, as amended by Amendment No. 1 thereto filed with
the SEC on November 6, 1995 and as amended by Amendment No. 2 thereto filed with
SEC on November 13, 1995, are incorporated by reference into Item 13 of Part III
hereof.
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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) totalled $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. 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. Historical information presented throughout this report
at and for periods ended prior to the Company's commencement of operations on
January 8, 1996 is that of Broadway Federal. The executive offices of the
Company are located at 4835 West Venice Boulevard, Los Angeles, California
90019, telephone number (213) 931-1886.
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 South Central
Los Angeles, California. Broadway Federal conducts its business from two
banking offices located in Los Angeles and from a newly renovated facility
located in nearby Inglewood, which also houses the Bank's loan origination and
service departments. Broadway Federal's appraisal operations are located in a
separate facility in Inglewood.
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 sells loans in
it's portfolio that are designated as held 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 and general and administrative expenses. Broadway
Federal's primary sources of funds are deposits and principal and interest
payments on loans.
The Company and the Bank are regulated by the Office of Thrift Supervision
("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."
Based upon its regulatory capital levels the Bank is currently classified as
"well-capitalized" for purposes of regulations promulgated by the OTS.
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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), as well as brokered
deposits, 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 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 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 South Central Los Angeles.
MARKET AREA AND COMPETITION
The Los Angeles metropolitan area is a highly competitive market and 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 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 that are able to accept lower
returns on loans in Broadway Federal's market desire to attract a sufficient
volume of such loans to respond to the 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 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 the advent of a rapidly growing Hispanic community, as well as
Asian and other ethnic communities. At the same time, the average age of
persons in South Central Los Angeles has increased as younger families move to
other areas of Los Angeles and adjacent counties.
Broadway Federal seeks to take into account both the opportunities and the
challenges presented by its market area in its business operations. South
Central Los Angeles has been relatively underserved in terms of most consumer
services, including deposit services. 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
transaction 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 than other financial institutions. Management
believes that this results in Broadway Federal realizing a substantially higher
interest rate spread and margin than most 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 underwriting information. 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 for housing without material default experience.
Broadway Federal will also, in cases it believes to be appropriate, accept a
greater incidence of late payments by 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.
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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, 1996, approximately 81% 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
Federal National Mortgage Corporation ("FNMA"), 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, 1996 Broadway Federal had
no loans held for sale.
The types of loans that Broadway Federal originates are subject to federal and
state law 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, 1996, Broadway Federal's loan portfolio totaled $98.4
million, of which approximately 51.48% was secured by one- to four-family
residential properties, 30.05% was secured by multi-family properties and 16.71%
was secured by nonresidential properties, with approximately 71% of such
nonresidential properties being secured by church properties. At that same
date, approximately 70.90% of Broadway Federal's one- to four-family mortgage
loans, 97.65% of its multi-family residential mortgage loans and 90.58% of its
nonresidential mortgage loans had adjustable rates.
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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.
December 31,
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1996 1995
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Amount Percentage Amount Percentage
-------- ------------ -------- ------------
(Dollars in thousands)
Real Estate:
Residential:
One-to Four-Units $ 50,671 51.48% $ 53,306 58.44%
Five or More Units 29,573 30.05 20,325 22.29
Nonresidential 16,449 16.71 15,578 17.08
Construction 226 0.23 158 0.17
Land - - 63 0.07
Loans Secured by
Savings Accounts 1,428 1.45 1,636 1.79
Other 83 0.08 144 0.16
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Total Loans $ 98,430 100.00% $ 91,213 100.00%
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Less:
Allowance for
Loan Losses 1,174 896
Loans in Process 130 43
Deferred Loan
Fees, net 812 764
Unamortized
Discounts 54 54
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96,260 89,456
Less:
Loans Held for
Sale - 1,556
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Total Loans Held for
Investment $ 96,260 $ 87,900
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LOAN MATURITY. The following table sets forth the contractual maturities of
Broadway Federal's total loans at December 31, 1996. The table does not reflect
the effect of scheduled principal repayments. Principal repayments on loans
totalled $8.3 million and $6.6 million for the years ended December 31, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
December 31, 1996
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One-to Five or More Total Loans
Four-Family Units Nonresidential Construction Other Receivable
------------- -------------- ---------------- -------------- ------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
One year or less $ 40 $ 3 $ 521 $ 226 $ 1,477 $ 2,267
------------- -------------- --------------- --------------- ------- -------------
After one year:
After one to three years 758 146 1,356 - 9 2,269
After three to five years 620 388 231 - - 1,239
After five to ten years 1,884 2,849 1,829 - 24 6,586
After ten to twenty years 10,064 22,166 12,381 - - 44,611
More than twenty years 37,305 4,021 132 - - 41,458
------------- -------------- --------------- --------------- ------- -------------
Total due after one year 50,631 29,570 15,929 - 33 96,163
------------- -------------- --------------- --------------- ------- -------------
Total Amounts Due $ 50,671 $ 29,573 $ 16,450 $ 226 $ 1,510 $ 98,430
------------- -------------- --------------- --------------- ------- -------------
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</TABLE>
5
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The following table sets forth at December 31, 1996 the dollar amount of
total loans receivable which are contractually due after December 31, 1997,
and whether such loans have fixed interest rates or adjustable interest rates.
December 31, 1996
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Adjustable Fixed Total
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(In thousands)
Real Estate Loans:
One-to four-units $ 35,936 $ 14,695 $ 50,631
Five or more units 28,879 691 29,570
Nonresidential real 14,899 1,030 15,929
estate
Construction and land - - -
Other - 33 33
-------- -------- --------
Total $ 79,714 $ 16,449 $ 96,163
======== ======== ========
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
or originated during the period and being 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. The decision whether loans
will be sold or retained in Broadway Federal's portfolio is made at the time
of loan origination. Broadway Federal recognizes, at the time of sale, the
cash gain or loss on the sale of the loans 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, 1996, there were no fixed-rate loans or
ARMs categorized as held for sale.
Broadway Federal retains the right to service virtually all loans sold, for
which it receives monthly loan servicing fees payable by the loan purchaser
out of loan collections 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, 1996,
Broadway Federal was servicing $7.5 million of loans held 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, 1996 and 1995, $2.0 million and
$1.2 million, respectively, in loans were purchased by Broadway Federal.
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The following table provides information concerning Broadway Federal's loan
origination, purchase, sale and principal repayment activity for the periods
indicated.
At or for the Year Ended
December 31,
-------------------------------
1996 1995
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(In thousands)
Gross Loans:
Beginning Balance: $ 91,213 $ 86,167
Loans Originated:
One-to Four-Units 5,005 9,453
Five or More Units 9,630 1,797
Nonresidential 1,751 605
Construction 205 -
Loans Secured by Savings 795 982
Accounts
Other - 96
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Total Loans Originated 17,386 12,933
Loans Purchased 2,001 1,236
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Total New Loans 19,387 14,169
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Less:
Transfer to REO 1,163 1,082
Principal Repayments 8,337 6,650
Sales of Loans 2,670 1,391
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Ending Balance $ 98,430 $ 91,213
======== ========
ONE-TO FOUR-FAMILY MORTGAGE LENDING. Broadway Federal offers both
fixed-rate loans and ARMS secured by one- to four-family residences, with
maturities up to thirty years. Substantially all of such loans are secured
by property located in Southern California, with most being in Broadway
Federal's primary market area of 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, 1996, 29.10% were fixed-rate loans and 70.90%
were ARMs.
The interest rates for substantially all of Broadway Federal's ARMs are
indexed to the 11th District Cost of Funds Index ("COFI"). Broadway Federal
currently offers loans with interest rates that adjust both monthly and every
six months. 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 $9.6 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 plus the applicable margin) provided by the terms of the
loan. However, the initial rate paid by the borrower is often discounted to a
rate determined by Broadway Federal in accordance with market and competitive
factors. As of December 31, 1996, the introductory discount rates offered by
Broadway Federal on ARMs that adjust semi-
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annually and those that adjust monthly were 1.71% and 3.46%, respectively,
below the fully-indexed rate based on the COFI, which was 4.84% at such date.
As of December 31, 1996, the fully-indexed rates on ARMs that adjust
semi-annually and those that adjust monthly were 2.75% and 2.50%,
respectively, above COFI. Broadway Federal's semi-annual ARMs adjust by a
maximum of 1.0% 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 semi-annual and monthly ARMs have a lifetime adjustment limit, which
limit is set at the time the loan is approved. At December 31, 1996,
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, 1996.
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 97% of the
appraised value or selling price 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 deem 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, 1996
multi-family lending represented 30.05% of the Company's gross loan
portfolio, compared to 22.29% of the Bank's portfolio at December 31, 1995.
This planned increase in multi-family lending is part of the Company's
strategic focus on less competitive, higher yielding loan products. The
risk associated with the increase in multi-family loans is 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 creditworthiness of the borrower,
Broadway Federal generally reviews the financial statements, employment and
credit history of the borrower, as well as other related documentation.
8
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Broadway Federal's largest multi-family loan at December 31, 1996 is a
participation loan, Broadway Federal's portion of which totalled $676,000 at
such date. 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 is secured by a
twenty-eight unit property located in Los Angeles. At December 31, 1996, this
loan had an outstanding balance of $664,000 and is currently performing
according to its terms.
Multi-family loans are generally viewed as exposing the lender to a greater
risk of credit loss than one- to four-family residential loans and typically
involve higher loan principal amounts. 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
area 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 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 and
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 during
the year ended December 31, 1996. Of the $16.1 million in Broadway Federal's
nonresidential real estate loan portfolio at December 31, 1996, $12.5 million
were originated prior to 1993.
Broadway Federal's nonresidential real estate loans are generally made
in amounts up to 70% 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
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, 1996 of $826,000. 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, 1996 of $701,000. 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 such loans and
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 such 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 nonresidential 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 totalled $11.8 million and $11.6 million at
December 31, 1996 and 1995, respectively.
9
<PAGE>
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 are often
dependent on the successful operation or management of the properties.
Repayment of such loans is typically dependent upon successful operation of
the nonresidential property subject, to a greater extent than single family
loans, to adverse conditions in the real estate market or the economy.
Additionally, the recent declines in real estate values 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, 1996, loans secured
by savings accounts represented $1.4 million or 1.45% 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 a 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 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
$214,600, the new loan may be approved by one Loan Committee member; if the
total of the borrower's existing loans and the loan under consideration is
from $214,600 to $500,000, the new loan must be approved by two Loan
Committee members; if the total of the borrower's existing loans and
the loan under consideration is from $500,000 up to $850,000, the new loan
must be approved by three Loan Committee members; and if the total of
existing loans and the loan under consideration is $850,000 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 Loan
Committee members are reviewed monthly 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
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 after the loan is first 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
10
<PAGE>
charges and any other delinquent fees owed, all income is recognized by
Broadway Federal and the loan is returned to accrual status.
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 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 reporting problem and potential
problem assets. Broadway Federal has incorporated asset classifications as
a part of its credit monitoring system and thus classifies problem 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 of 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 present 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 an 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 savings 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 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. As a result of the
decline in local and regional real estate market values and the
significant losses experienced by many financial institutions, a greater
level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions has been undertaken as part of the examination of
institutions by the OTS and the FDIC. 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, 1996, 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 them at that time, thereby negatively affecting
Broadway Federal's financial condition and earnings.
At December 31, 1996, Broadway Federal had $4.1 million of loans classified as
"Substandard," and the largest loan so classified had a principal balance of
$284,000 secured by a multi-family residential property. At December
11
<PAGE>
31, 1996 there were $66,000 in loans classified as "Doubtful" and
$131,000 of loans classified as "Loss". As of December 31, 1996, loans
designated as "Special Mention" included 28 loans totalling $4.4 million,
which were so designated due to delinquencies or other identifiable
weaknesses. At December 31, 1996, the largest loan designated as "Special
Mention" had a principal balance of $553,000 secured by a nonresidential
property.
Broadway Federal obtains appraisals on an annual basis on REO properties.
Broadway Federal generally conducts external inspections on 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:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------- ----------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------------- ---------------------- --------------------- ----------------------
Principal Principal Principal Mumber Principal
Number Balance of Number Balance of Number Balance of of Balance
of Loans Loans of Loans Loans of Loans Loans Loans of Loans
-------- ---------- -------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family 7 $ 10 9 $ 971 11 $ 480 8 $ 622
Multi-family - - 3 638 3 763 - -
Construction and land - - - - 1 58 1 5
Other loans - - 2 247 - - 1 24
-------- ---------- -------- ---------- -------- ---------- -------- ---------
Total 7 $ 10 14 $1,856 15 $1,301 10 $ 651
-------- ---------- -------- ---------- -------- ---------- -------- ---------
Delinquent loans to
total gross loans 0.01% 1.89% 1.43% 0.71%
========== ========== ========== =========
</TABLE>
NON-ACCRUAL LOANS AND REO. Nonperforming assets, consisting of non-accrual
loans and REO, increased from $2.5 million at December 31, 1995 to $2.8 million
a December 31, 1996. The $335,000 increase consisted of a $1.2 million increase
in non-accrual loans, offset by a $888,000 decrease in REO. As a percentage of
total assets, nonperforming assets were 2.39% at December 31, 1996, compared to
2.10% at December 31, 1995. The allowance for loan losses was 62.65% of
nonperforming loans at December 31, 1996, compared to 137.63% at December 31,
1995.
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,
1996 and 1995, respectively, 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 $147,000 and $104,000, respectively,
as compared with the respective amounts actually earned on non-accrual loans of
$68,000 and $58,000. Broadway Federal had no commitments to lend additional
funds to borrowers whose loans are non-accrual at December 31, 1996. There were
no accruing loans contractually past due 90 days or more at December 31, 1996.
12
<PAGE>
AT DECEMBER 31,
-----------------------
1996 1995
-------- -------
Non-accrual loans: (Dollars in thousands)
Residential real estate:
One- to four-family $ 987 $ 622
Construction and Land - 5
Other loans 887 24
------- -------
Total non-performing loans 1,874 651
REO 933 1,820
------- -------
Total non-performing assets $ 2,807 $ 2,471
------- -------
------- -------
Allowance for loan losses as a percentage of
total loans 1.19% 0.98%
Allowance for loan losses as a percentage of
total non-performing loans 62.65 137.63
Allowance for losses as a percentage of total
non-performing assets (1) 47.95 45.08
Non-performing loans as a percentage of total
loans 1.90 0.71
Non-performing assets as a percentage of total
assets 2.39 2.10
Net charge-offs to average loans 0.33 0.19
Impaired loans as a percentage of total loans 2.03 3.09
__________________
(1) Allowance for losses includes valuation allowances on loans and REO.
At December 31, 1996, 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
$2.0 million. Of this amount, $770,000 had a related impairment allowance
totalling $97,000 at December 31, 1996. 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, 1996, Broadway Federal's average investment in impaired
loans was $2.1 million, and interest income recorded on impaired loans during
this period totalled $176,000. 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 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
13
<PAGE>
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, 1996, Broadway Federal's allowance for loan losses was
1.19% of total loans, as compared to 0.98% of total loans as of December 31,
1995. Broadway Federal had non-accrual loans of $1.9 million and $651,000 at
December 31, 1996 and 1995, 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 will
continue to monitor and modify its allowances 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 such 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 at the time of the examination.
For loans transferred to REO, any excess of cost or recorded investment over
the 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 fair value of the related
assets at the date of foreclosure, less estimated costs to sell. Thereafter,
if there is a 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, 1996, Broadway
Federal had $933,000 of REO, net of valuation allowances.
14
<PAGE>
The following table sets forth Broadway Federal's allowances for loan and
real estate losses at the dates indicated:
DECEMBER 31,
------------------------
1996 1995
------- -------
Allowance for loan losses: (In thousands)
Balance at beginning of year $ 896 $ 670
Charge-offs, net:
One- to four-family 285 17
Multi-family 23 146
Construction and Land - -
Other - 10
------- -------
Total Charge-offs (1) 308 173
Provision charged to income 586 399
------- -------
Balance at end of year 1,174 896
------- -------
Allowance for REO
Balance at beginning of year 218 150
Provision for losses 283 68
Charge-offs (320) -
------- -------
Balance at end of year 181 218
------- -------
Total $ 1,355 $ 1,114
------- -------
------- -------
_______________
(1) There was one recovery during the year ended December 31, 1996 totalling
$5,000 and no recoveries for the year ended December 31, 1995.
15
<PAGE>
The following table sets forth the ratios of Broadway Federal's allowance for
loan losses to total loans, and the percentage of loans to total loans in each
of the categories listed.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLWANCE FOR LOAN LOSSES AT DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995
------------------------------------------- --------------------------------------------
PERCENTAGE OF PERCENTAGE OF
PERCENTAGE OF LOANS IN EACH PERCENTAGE OF LOANS IN EACH
ALLOWANCE TO CATEGOY TO ALLOWANCE TO CATEGORY TO
AMOUNT TOTAL ALLOWANCE TOTAL LOANS AMOUNT TOTAL ALLOWANCE TOTAL LOANS
-------- --------------- ----------- ------- --------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to Four-family $ 272 23.17% 51.48% $ 271 30.25% 58.44%
Multi-family 342 29.13 30.05 234 26.12 22.29
Nonresidential 199 16.95 16.71 172 19.20 17.08
Construction and Land 2 0.17 0.23 9 1.00 0.24
Other 24 2.04 1.53 29 3.24 1.95
Unallocated 335 28.54 - 181 20.20 -
--------- ------ ------ ------ ------ -------
Total valuation allowance $ 1,174 100.00% 100.00% $ 896 100.00% 100.00%
--------- ------ ------ ------ ------ -------
--------- ------ ------ ------ ------ -------
</TABLE>
16
<PAGE>
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 believed 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, 1996, the Company had
investment securities in the aggregate amount of $10.3 million with a fair
value of $10.3 million. All investment securities were categorized as
held-to-maturity and none were categorized as available-for-sale.
17
<PAGE>
The following table sets forth information regarding the carrying and fair
values of the Company's federal funds sold and other short-term investments and
investment securities at the dates indicated.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995
------------------------ ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- --------- --------- -------
(IN THOUSANDS)
Cash and Cash Equivalents:
Cash on hand and in banks
$ 1,530 $ 1,530 $ 1,962 $ 1,962
Restricted cash-stock
subscriptions(1) - - 14,454 14,454
Federal funds sold 3,650 3,650 1,345 1,345
-------- -------- ---------- ----------
Total cash and cash equivalents $ 5,180 $ 5,180 $ 17,761 $ 17,761
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Investment securities:
Held to maturity:
Mortgage-Backed Securities $ 425 $ 417 - -
U.S. Government and
Federal agency
obligations 9,946 9,924 $ 5,495 $ 5,519
-------- -------- ---------- ----------
Total investment securities $ 10,371 $ 10,341 $ 5,495 $ 5,519
-------- -------- ---------- ----------
-------- -------- ---------- ----------
________________________
(1) At December 31, 1995, $14.5 million in stock subscription proceeds were
included in restricted cash-stock subscriptions.
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, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
FIVE TO
LESS THAN ONE TO FIVE TEN
ONE YEAR YEARS YEARS TOTAL
----------------------- ---------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- -------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 3,650 5.97% - - - - $3,650 5.97%
Investment securities:
Held to maturity:
Mortgage-Backed Securities - - $ 425 5.45% - - 425 5.45
U.S. Government and Federal
Agency obligations 4,952 5.69 4,994 5.95 - - 9,946 5.82
------- ------ ------- ----- ------- ------ ------- ------
Total investment securities $ 8,602 5.81% $ 5,419 5.91% - - $14,021 5.85%
------- ------ ------- ----- ------- ------ ------- ------
------- ------ ------- ----- ------- ------ ------- ------
</TABLE>
18
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are a major 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 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 at a lower cost than other, higher yielding 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, 1996 out-of-state deposits totalled $5.0 million or 4.90%
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. Management continually monitors Broadway Federal's
certificate accounts.
Included in savings deposits at December 31, 1995 are corporate nonwithdrawable
pledged savings accounts (the "Accounts") totalling $1,000,000. The Accounts
were opened in September 1993 and had an annual fixed interest rate of 5%. In
connection with the conversion of Broadway Federal from a mutual to stock
institution on January 8, 1996, the holders of the Accounts used the funds in
the Accounts to purchase the maximum amount of the Company's Common Stock
permitted under the plan of conversion and purchased shares of the Company's
Preferred Stock with the remainder of the Account balances not used to purchase
shares of Common Stock. Also included in passbook savings deposits as of
December 31, 1995 is $14.5 million related to stock subscriptions for Broadway
Federal's then pending Conversion. See Note 9 to the Consolidated Financial
Statements attached hereto.
In the unlikely event of a complete liquidation of Broadway Federal, deposit
account holders would have claims for the amount of their deposit accounts,
including accrued interest, and would receive the protection of SAIF insurance
up to applicable limits. In addition, deposit account holders would be entitled
to full payment of their deposit accounts prior to payment of the stockholders
of the Company. See "--Regulation--Deposit Insurance."
The following table presents the deposit activity of Broadway Federal for the
periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995
---------- ---------
(IN THOUSANDS)
Deposits $171,545 $162,834
Withdrawals 182,074 146,830
-------- --------
Net Deposits (Withdrawals) (10,529) 16,004
Interest credited on deposits 2,803 2,461
-------- --------
Total (Decrease) Increase in deposits $ (7,726) $ 18,465
-------- --------
-------- --------
19
<PAGE>
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.
<TABLE>
<CAPTION> DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENTAGE AVERAGE AVERAGE PERCENTAGE AVERAGE
BALANCE OF TOTAL RATE BALANCE OF TOTAL RATE
--------- ---------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Money market deposits $ 4,264 4.27% 2.24% $ 4,478 4.67% 2.07%
Passbook deposits 32,258 32.31 2.00 34,384 35.87 1.84
NOW and other demand deposits 10,782 10.80 0.56 9,024 9.42 0.54
-------- --------- -------- --------
Total 47,307 47.38 47,886 49.96
-------- --------- -------- --------
Certificate Accounts:
Three months or less 1,817 1.82 3.75 1,895 1.98 3.57
Over three months through six
months 10,123 10.14 4.77 10,027 10.46 4.28
Over six through twelve months 14,019 14.04 5.24 11,214 11.70 5.12
Over one to three years 11,459 11.48 5.56 9,565 9.98 4.91
Over three to five years 3,147 3.15 5.76 2,520 2.63 5.67
Over five to ten years 1,473 1.48 6.58 1,289 1.34 7.29
Certificates over $100,000 10,507 10.52 5.10 11,456 11.95 5.31
-------- --------- -------- --------
Total certificates 52,545 52.62 47,966 50.04
-------- --------- -------- --------
Total deposits $ 99,852 100.00% $ 95,852 100.00%
======== ========= ======== ========
</TABLE>
20
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1996 and
1995.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT DECEMBER 31, 1996
------------------------------------------------------------------------- AT
LESS THAN ONE TO TWO TO DECEMBER
ONE YEAR TWO YEARS THREE YEARS THEREAFTER TOTAL 31, 1995
--------- -------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts: (DOLLARS IN THOUSANDS)
0 to 4.00% $ 3,759 $ 4 $ 2 $ 2 $ 3,767 $ 3,831
4.01 to 5.00% 14,314 1,027 215 124 15,680 15,025
5.01 to 6.00% 27,462 4,198 851 574 33,085 29,087
6.01 to 7.00% 1,472 211 447 2,007 4,137 3,392
7.01 to 8.00% 269 - - - 269 348
8.01 to 9.00% 252 - - - 252 607
Over 9.00% - - - - - -
-------- -------- ------- ------- -------- --------
Total $ 47,528 $ 5,440 $ 1,515 $ 2,707 $ 57,190 $ 52,290
======== ======== ======= ======= ======== ========
</TABLE>
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, 1996 and 1995,
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:
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding $ 83 -
Maximum amount outstanding at any 1,000 -
month-end period
Balance outstanding at end of period - -
Weighted average interest rate during 5.67% -
the period
21
<PAGE>
Weighted average interest rate at end - -
of period
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, 1996, and for the twelve months
then ended, BSC had total assets of $172,000 and net earnings of $9,000.
PERSONNEL
At December 31, 1996, Broadway Federal had 45 full-time employees and 5
part-time employees.
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, is a member of the FHLB System
and its 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 and 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 that 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.
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
22
<PAGE>
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 1996, Broadway Federal's assessment rate
was 0.26%.
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, estimated to
be $0.675 per $100 of 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.
Beginning on 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. At March 31, 1995, the Bank had $93.5
million in deposits and on November 27, 1996 the Bank paid a special
assessment of $614,247.
Although the 65.7 basis point one-time recapitalization fee has adversely
impacted the Bank's operating expenses and results of operations, the Bank
remains a "well-capitalized" institution. On a going forward basis, the Act
will result 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.
Also included in the budget reconciliation bill are provisions that eliminate
the deduction for additions to tax bad debt reserves available to qualifying
thrift institutions under existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The bill also generally requires "recapture"
(i.e., inclusion in taxable income) of the balance of such reserve accounts
to the extent they exceed a base year amount (generally the balance of
reserves as of December 31, 1987 reduced proportionately for any reduction in
an institution's loan portfolio) in ratable installments over a six-year
period. The legislation also requires recapture of reserves, including the
base year amounts, in the event of certain distributions to shareholders in
excess of current or accumulated earnings
23
<PAGE>
and profits, or redemptions, or in the event of liquidations or certain
mergers or other corporate transactions.
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 ratio 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, 1996 and 1995, Broadway Federal's general valuation allowance
included in supplementary capital was $905,000 and $805,000, 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, (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 institutions, the
general concentration by such institutions in real estate lending activities
24
<PAGE>
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, 1996 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, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31,1996
------------------------------------ ----------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- -------- ------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 10,299 $ 10,299 $ 10,299 $ 5,581 $ 5,581 $ 5,581
Pledged Deposits(1) - - 1,000 1,000 1,000
Additional
supplementary capital:
General valuation allowance - - 905 - - 805
-------- -------- -------- ------- ------- -------
Regulatory capital amounts 10,299 10,299 11,204 6,581 6,581 7,386
Minimum requirement 1,720 3,440 5,791 1,766 3,532 5,217
-------- -------- -------- ------- ------- -------
Excess over requirement $ 8,579 $ 6,859 $ 5,413 $ 4,815 $ 3,049 $ 2,169
======== ======== ======== ======= ======= =======
</TABLE>
- ----------
(1) Broadway Federal had $1,000,000 in nonwithdrawable pledged deposits as of
December 31, 1995, all of which pledged deposits were used to purchase
Common Stock and Preferred Stock in the Conversion. See "--Sources of
Funding--Deposits."
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
25
<PAGE>
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, 1996, Broadway Federal was a
well-capitalized institution.
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 Office of the
Comptroller of the Currency has recently amended its loan to one borrower
limitation (following similar amendment of the corresponding regulation for
national banks), to, among other things, define the term "unimpaired capital
and unimpaired surplus" by reference to an institution's regulatory capital,
and also to include in the basic 15% of capital lending limit that portion of
an institution's general valuation allowances that is not includable in the
institution's regulatory capital. At December 31, 1996, 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
$1,250,000. At December 31, 1996, the largest aggregate amount of loans
which Broadway Federal had outstanding to any one borrower was $826,000.
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).
Each FHLB is required to transfer a certain amount of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the
government entity established to raise funds to resolve troubled savings
institution cases, to fund the principal and a portion of the interest on the
REFCORP bonds and certain other obligations. In addition, each FHLB must
transfer a percentage of its annual net earnings to a federal affordable
housing program. That amount increased from 5% of the annual net earnings of
the FHLB in 1990 to at least 10% of its annual net earnings in 1995 and
subsequent years. As a result of these requirements, which began in 1989,
the earnings of the FHLB of San Francisco were reduced and the Bank received
reduced dividends on its FHLB of San Francisco
26
<PAGE>
stock as compared with prior periods. Broadway Federal recorded dividend
income on its FHLB of San Francisco stock in the amounts of $49,000 and
$40,000 for the years ended December 31, 1996 and 1995, respectively. If
dividends are further reduced, or interest on future FHLB advances increased,
Broadway Federal's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of recent legislation on
the FHLB would not cause a decrease in the value of the FHLB stock held by
Broadway Federal.
LIQUIDITY
Federal regulations currently require 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 5%
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. Federal
regulations also require each savings institution to maintain, for each
calendar month, an average daily balance of short-term liquid assets
(generally those having maturities of 12 months or less) equal to at least 1%
of the average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. Monetary penalties may be
imposed for failure to meet liquidity ratio requirements. For the
calculation period including December 31, 1996, the total liquidity and total
short-term liquidity ratios of Broadway Federal were 14.04% and 9.55%,
respectively, which exceeded the total requirements.
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 last 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
averaging 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, 1996, Broadway Federal was in compliance with its QTL test requirements.
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.
27
<PAGE>
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 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 has proposed an amendment to its capital distribution regulation to
conform to its PCA regulations by replacing the current "tiered" approach
summarized above with one that would allow institutions to make capital
distributions that would not result in the institution falling below the PCA
"adequately capitalized" capital category. Under this proposal, an institution
would be able to make a capital distribution (i) without notice or application,
if the institution is not held by a savings and loan holding company and
received a composite CAMEL rating of 1 or 2, (ii) by providing notice to the OTS
if, after the capital distribution, the institution would remain at lease
"adequately capitalized," or (iii) by submitting an application to the OTS.
28
<PAGE>
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
administrations 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 "1996 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 1996,
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 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.
29
<PAGE>
DIVIDENDS RECEIVED DEDUCTION. The Company may exclude from its income 100% of
dividends received from Broadway Federal as a member of the same affiliated
group of corporations.
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 the
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 will be 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.
DELAWARE TAX
As a Delaware holding company not earning income in Delaware, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax to the State of Delaware. For the
year ended December 31, 1996 the Company paid franchise taxes of $7,000.
ITEM 2. DESCRIPTION OF PROPERTY
Broadway Federal conducts business through a temporary administrative and
corporate office that also serves as a branch office and two other branch
offices. Until February 1997 Broadway Federal's loan origination and service
operations were conducted from a separate facility. Currently such services are
conducted from one of Broadway
30
<PAGE>
Federal's three branch offices. Broadway Federal's administrative and
corporate offices are currently located at its branch office at 4835 West
Venice Boulevard. Its former administrative and corporate offices, which
were destroyed during the 1992 Los Angeles civil disturbance, were located at
4501 S. Broadway Boulevard.
There are no mortgages, material liens or encumbrances against any of Broadway
Federal's owned properties and 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.
31
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net Book Value
OF PROPERTY OR
ORIGINAL DATE LEASEHOLD
LEASED OR LEASED OR DATE OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1996
-------- --------- ------------- ------------- -----------------
ADMINISTRATIVE/BRANCH OFFICE:
4835 West Venice Blvd.(1) Building 1965 2013 $ 137,000
Los Angeles, CA Owned on
Leased Land
BRANCH OFFICE:
4429 South Broadway Blvd.(1) Owned 1977 - 91,000
Los Angeles, CA
BRANCH OFFICE/LOAN ORIGINATION
AND SERVICE CENTER:
170 N. Market Street(1)(6) Owned 1996 - 672,000
Inglewood, CA
APPRAISAL DEPARTMENT:
8467 South Van Ness Ave.(2) Owned 1994 - 132,000
Inglewood, CA
OTHER PROPERTY:
4501 South Broadway Blvd.(3) Owned Approx. 1954 - 32,000
Los Angeles, CA
4429 West Adams Blvd.(4) Owned 1993 - 196,000
Los Angeles, CA
Lots 31, 32 and 33 on 45th Street Owned 1987 - 28,000
and Broadway Blvd.,
Los Angeles, CA (5)
4001 South Figueroa Street (7)
Los Angeles, CA Owned 1996 - 415,000
</TABLE>
______________________
(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. Broadway Federal has decided to relocate
its Administrative Office in the near future. When the new branch office,
located at 4001 South Figueroa Street, is completed it is anticipated that
this site will be sold.
(4) Broadway Federal acquired this property in 1993 in anticipation of
including it as part of a proposed new corporate facility. The acquisition
of the adjacent parcels, which were needed to begin construction on the
corporate facility, has not yet occurred. This property will
be sold at a future date.
(5) These lots were previously used as parking for the building destroyed in
1992. These lots will be sold at a future date when the branches new
facility is completed.
(6) 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 $400,000.
(7) In December 1996, Broadway Federal acquired this property. 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
32
<PAGE>
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
the new branch has not been determined. The source of funds for this
acquisition is the insurance proceeds received for property that was
destroyed during the 1992 Los Angeles civil disturbance.
Broadway Federal's property located at 4501 S. Broadway Boulevard, Los Angeles
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
have 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 has
determined that it would not be practical to rebuild the main office building on
the same site and will instead locate a new site.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, none of
which Management believes is 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 12, 1997, 892,688 shares of
Common Stock were outstanding and held by approximately 446 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 information per
share of the Common Stock of the Company as reported on NASDAQ-Small Cap.
1996
------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
High.......... 10 1/2 10 11 10 3/4
Low.......... 9 9 5/8 10 10
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
the twelve months ended December 31, 1996, the Company paid quarterly dividends
totalling $178,000 to Common Stock shareholders. 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
33
<PAGE>
financial condition and results of operations, along with other factors. There
can be no assurance that dividends will in fact be paid on the Common Stock in
the future.
The Company's principal source of income in 1996 was interest from investments.
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. During the twelve
months ended December 31, 1996, the Company paid quarterly dividends totalling
$46,000 to Preferred Stock shareholders. 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 the
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."
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. Historical information presented throughout this report
at and for the periods ended prior to the Company's commencement of operations,
on January 8, 1996, is that of Broadway Federal.
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
34
<PAGE>
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 also 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. Broadway Federal's
operating results are also affected by the amount of its 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 year ended December 31, 1996, the Company recorded a net loss of
$(277,000). This compares to Bank net earnings of $490,000 for the year ended
December 31, 1995. At December 31, 1996 the Company had total consolidated
assets of $117.1 million, total deposits of $102.0 million and stockholders'
equity of $13.6 million, representing 11.60% of assets. Each of the Bank's
regulatory capital ratios exceeded regulatory requirements at December 31, 1996,
with tangible and core capital at 8.98% each and risk-based capital at 15.48%.
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 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, benefitted 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 and the Bank'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 through 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 and Broadway Federal's Board of Directors
has established an Asset/Liability Committee which is responsible for reviewing
its 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
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
35
<PAGE>
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, 1996 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, 1996
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.
<TABLE>
<CAPTION> NET PORTFOLIO VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN INTEREST CHANGE IN NPV AS %
RATES IN BASIS POINTS OF THE PRESENT VALUE
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE (1) OF ASSETS
- ----------------------- ---------- ----------- ------------ --------------------
(DOLLARS IN THOUSANDS)
400 16,098 (1,448) (8) (.86)
300 16,894 (652) (4) (.33)
200 17,506 (40) - .07
100 17,759 213 1 .20
Zero 17,546 - - -
(100) 17,116 (430) (2) (.35)
(200) 16,956 (590) (3) (.52)
(300) 17,306 (240) (1) (.32)
(400) 17,850 303 2 .01
</TABLE>
____________________
(1) 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 3% decrease 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.
36
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheets for the years ended December 31, 1996 and 1995. 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.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 569 $ 13 2.28% $ 719 $ 14 1.95%
Federal Funds sold and other short-
term investments 3,9650 215 5.42 3,420 160 4.68
Investment securities, Net(1) 7,4715 438 5.86 5,925 391 6.60
Loans receivable(2)(3) 91,189 7,878 8.64 86,852 7,165 8.25
Mortgage-backed securities, Net(1) 2,627 153 5.82 - - -
FHLB Stock 852 50 5.87 810 40 4.94
--------- ------ -------- ------
TOTAL INTEREST-EARNING ASSETS 106,673 $8,747 8.20 97,726 $7,770 7.95
====== ======
NONINTEREST-EARNING ASSETS 6,975 5,420
--------- --------
TOTAL ASSETS $ 113,648 $103,146
========= ========
LIABILITIES AND RETAINED EARNINGS
INTEREST-BEARING LIABILITIES:
Money market deposits $ 4,239 $ 94 2.22% $ 4,478 $ 93 2.08%
Passbook deposits 30,485 615 2.02 34,384 634 1.84
NOW and other demand deposits 10,683 61 0.57 9,024 49 0.54
Certificate accounts 52,278 2,706 5.18 47,966 2,390 4.98
--------- ------ -------- ------
TOTAL SAVINGS DEPOSITS 97,685 3,476 3.56 95,852 3,166
FHLB advances 83 5 6.02 - 1 -
--------- ------ -------- ------
NON INTEREST-BEARING LIABILITIES $ 97,768 $3,481 3.56 95,852 $3,166 3.30
--------- ====== -------- ======
Noninterest-bearing liabilities 2,185 1,950
Retained earnings 13,695 5,344
TOTAL LIABILITIES AND RETAINED
EARNINGS $ 113,648 $103,146
========= ========
NET INTEREST RATE SPREAD (4) 5,266 6.44% 4,604 4.65%
NET INTEREST MARGIN(5) 4.94% 4.71%
RATIO OF INTEREST-EARNING ASSETS TO 109.11% 101.96%
INTEREST-BEARING LIABILITIES
STOCKHOLDERS' EQUITY TO ASSETS RATIO 12.05% 5.18%
</TABLE>
__________________
(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.
37
<PAGE>
(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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------ --------------------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME NET INTEREST INCOME
------------------------------------ --------------------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
------------------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
(DOLLARS IN THOUSANDS)
Interest-earning deposits $ (1) $ - $ (1) $ 1 $ 2 $ 3
Federal funds sold and other short
term investments 25 30 55 18 60 78
Investment securities, net 102 (55) 47 (87) 145 58
Loans receivable, net 358 355 713 659 155 814
Mortgage backed securities, net 153 - 153 (190) - (190)
FHLB stock 2 8 10 (16) (1) (17)
----- ------ ------- ------ ------ ------
TOTAL INTEREST-EARNING ASSETS 639 358 977 385 361 746
----- ------ ------- ------ ------ ------
INTEREST-BEARING LIABILITIES:
Money market deposits (5) 6 1 - (3) (3)
Passbook deposits (72) 53 (19) (12) (72) (84)
NOW and other demand deposits 9 3 12 8 (11) (3)
Certificate accounts 215 101 316 89 624 713
FHLB advances 5 - 5 (1) - (1)
----- ------ ------- ------ ------ ------
TOTAL INTEREST-BEARING
LIABILITIES 152 163 315 84 538 622
----- ------ ------- ------ ------ ------
CHANGE IN NET INTEREST INCOME $ 487 $ 175 $ 662 $ 301 $ (177) $ 124
===== ====== ======= ====== ====== ======
</TABLE>
38
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995
GENERAL
The $(277,000) net loss recorded by the Company for the year ended December
31, 1996, compares to $490,000 in net earnings for the year ended December
31, 1995. This $767,000 or 156.53% decrease in earnings for the year was
significantly impacted by the payment of a one-time SAIF recapitalization
assessment fee of $614,000 (see "Regulation"), net loan write-offs totaling
$308,000 and higher expenses and writedowns related to the operation and sale
of REO. The decrease also resulted from a number of other offsetting factors
which included higher interest income, higher interest on savings deposits, a
higher provision for loan losses, lower noninterest income, higher
noninterest expense and a higher effective income tax rate. The Company's
return on assets (net income divided by average total assets) was (0.24)% for
the year ended December 31, 1996, as compared to the Bank's return on assets
of 0.48% for the year ended December 31, 1995.
INTEREST INCOME
Interest income increased by $977,000, or 12.57%, from $7.8 million in 1995
to $8.7 million in 1996. This increase was primarily the result of an
increase in average interest-earning assets of $9.0 million, to $106.7
million for the year ended December 31, 1996 from $97.7 million for the same
period a year ago. The increase in average interest-earning assets resulted
from the Company's focus on increasing its investment portfolio and
increasing the Bank's loan portfolio. In addition, the average balance of the
Company's mortgage-backed securities portfolio increased from zero for the
year ended December 31, 1995 to $2.6 million for the year ended December 31,
1996.
The effect of the increase in average interest-earning assets was enhanced by
an increase in the average yield on such assets from 7.95% for the year ended
December 31, 1995, to 8.20% for the year ended December 31, 1996. Interest
income from loans, which accounted for approximately 90.07% of total interest
income in 1996, increased by $713,000, or 9.95%, due to a $4.3 million, or
4.99%, increase in the average balance of loans and a 0.39% increase in the
average yield on loans from 8.25% for 1995 to 8.64% for 1996. This increase
in average yield resulted from an increasing interest rate environment during
most of 1996. Interest income from investment securities increased $47,000,
or 12.02%, from $391,000 in 1995 to $438,000 in 1996, primarily due to a $1.5
million, or 26.09% increase in the average balance of investment securities
during 1996, offset by a 74 basis point decrease in the average yield on
investment securities to 5.86% during 1996 from 6.60% during 1995. Interest
income from mortgage-backed securities was $153,000 in 1996, as a result of
purchases of mortgage-backed securities during the year ended December 31,
1996.
INTEREST ON SAVINGS DEPOSITS
Interest on savings deposits in 1996 increased $310,000, or 9.79%, from $3.2
million in 1995 to $3.5 million in 1996. Interest on savings deposits
increased of $1.9 million, resulting from an increase in the average balance
of savings deposits from $95.8 million over the 1995 period to $97.7 million
for the comparable 1996 period. The increase in interest on savings deposits
also reflects the rising and more competitive interest rate environment as
the average cost of deposits increased by 0.26%, from 3.30% for the year
ended December 31, 1995 to 3.56% for the year ended December 31, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $187,000, or 46.87%, from $399,000
for the year ended December 31, 1995 to $586,000 for the year ended December
31, 1996. The higher provision is a result of Management's observance of
certain trends in the Company's loan portfolio, including higher levels of
multi-family lending and charge-offs of other loan types. At December 31,
1996 multi-family lending represented 30.05% of the Company's gross loan
portfolio, compared to 22.29% of the Bank's portfolio at December 31, 1995.
This planned increase in multi-family lending is part of the Company's
strategic focus on less competitive, higher yielding loan products. The risk
associated with the increase in multi-family loans is mitigated by more
stringent underwriting requirements, which include lower loan-to-value ratios
and increased debt service coverage ratios. The higher provision also stems
from current market conditions for sales of real estate and the Company's
more aggressive disposition of REO. Since December 31, 1995 the level of REO
has decreased from $1.8 million to $933,000 at December 31, 1996. However,
for the year ended December 31, 1996, additional REO writedowns totalled
$320,000, as compared to
39
<PAGE>
zero at December 31, 1995. The bulk of the writedowns (approximately
$260,000) related to two multi-family REO's which were both sold in June
1996, and had been acquired through foreclosure in 1991 and 1995.
Total non-performing assets, consisting of non-accrual loans and REO,
increased by $335,000, from $2.5 million at December 31, 1995 to $2.8 million
at December 31, 1996. Of the $335,000 increase, $1.2 million represented an
increase in non-accrual loans, offset by a $888,000 decrease in REO. As a
percentage of total assets, nonperforming assets were 2.39% at December 31,
1996, compared to 2.10% at December 31, 1995. The allowance for loan losses
was 62.65% of nonperforming loans at December 31, 1996, compared to 137.63%
at December 31, 1995. The deterioration in the quality of the loan portfolio
reflects the effects of the economic condition of the Southern California
economy. Non-accrual loans at December 31, 1996 totalled $1.2 million, and
included ten loans totalling $987,000 secured by one- to four-unit
properties, three loans totalling $638,000 secured by multi-family
properties, one loan totalling $223,000 secured by a nonresidential property,
and two fully reserved non-mortgage loans totalling $26,000.
NONINTEREST INCOME
Noninterest income decreased by $318,000, or 121.84%, from $261,000 in income
for the year ended December 31, 1995 to a $57,000 expense for the same period
during 1996. The decrease is due to a number of offsetting factors, which
include an increase in service fees on customer deposit accounts of $38,000
for the year ended December 31, 1996 as compared to the same period in 1995,
resulting from a greater number of checking accounts at December 31, 1996 as
compared to December 31, 1995; REO writedowns, expenses and write-offs
increased $168,000 for the year ended December 31, 1996, as compared to the
same period in 1995, due to increased activity in operating and preparing
these properties for sale, and adjusting the carrying value of an REO to the
fair market value; the Company also realized $84,000 in losses on the sale of
mortgage-backed securities that were classified as available for sale. As of
December 31, 1996 the Company had no securities classified as available for
sale. Other noninterest income decreased $104,000, from $204,000 for the
year ended December 31, 1995 to $100,000 for the same period in 1996, due to
higher non-recurring income recognized during 1995, which included bad debt
recoveries and the 1995 donation a modular facility which was used as a
branch office.
NONINTEREST EXPENSE
Noninterest expense increased $1.3 million, from $3.8 million for the year
ended December 31, 1995 to $5.1 million for the same period in 1996. The
increase in noninterest expense was due primarily to increases in
compensation and benefits, federal insurance premiums and other noninterest
expenses. Compensation and benefits increased by $272,000 for the year ended
December 31, 1996 as compared to the same period during 1995. The increases
result from general salary increases during the year and an increase in the
number of staff. Federal insurance premiums increased $631,000 for the year
ended December 31, 1996 as compared to the same period during 1995. As
described earlier, the increase is directly a result of the one-time SAIF
assessment fee of $614,000. Other noninterest expenses increased $272,000
for the year ended December 31, 1996 as compared to the same period a year
ago. The year-to-date increase resulted from several factors: 1) the
write-off of overdraft checking accounts totalling $61,000; 2) increases in
professional fees, advertising, stationary, telephone and postage expenses,
associated with various business activities, including becoming a public
company; and 3) the recognition of losses from two employee defalcations
totalling $148,000 during the first and second quarters of 1996.
During the last quarter of 1996, the Company recovered $49,000 from insurance
proceeds, from a claim filed in association with the defalcation. The
Company is working with local law enforcement in investigating the
defalcations, and has enhanced its internal audit function and established
additional internal controls in response to such defalcations.
INCOME TAXES
Income taxes decreased from $124,000 for the year ended December 31, 1995 to
a $179,000 income tax benefit for the same period in 1996. The decrease in
income taxes results from the Company's loss before income taxes for the
year ended December 31, 1996. See Note 11 to the Consolidated
Financial Statements attached hereto for additional information on the
Company's income taxes.
40
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets at December 31, 1996 were $117.1 million compared to $117.7
million at December 31, 1995, a decrease of $648,000, or 0.55%. The
decrease primarily resulted from various year-to-date losses incurred which
included the increase an additions to the allowance for loan losses of
$187,000 for the year. Total assets were also impacted by a $4.9 million
increase in investment securities held to maturity, consisting primarily
of treasury bonds and federal agency obligations. In addition, there was
an increase in net loans receivable of $8.4 million, from $87.9 million at
December 31, 1995 to $96.3 million at December 31, 1996. The increase in
loans receivable, net resulted from $17.4 million in new loan originations
and $2.0 in loans purchased during the year ended December 31, 1996. Of the
total loans originated during 1996, $5.0 million were secured by one- to
four-unit properties and $9.6 million were secured by multi-family
properties. The new loans were primarily funded by $8.3 million in
principal repayments on existing loans, $2.7 million in proceeds from loan
sales and from an increase in savings deposits during the period. REO
decreased from $1.8 million at December 31, 1995 to $933,000 at December
31, 1996. The $887,000 decrease resulted from the sale of 12 properties,
totaling $2.0 million, offset by the foreclosure of 7 properties, totaling
$1.1 million during the year ended December 31, 1996.
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. This requirement, which may
be varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The required ratio is currently 5%. Broadway Federal's
average liquidity ratios were 14.18% and 11.96% for the years ended December
31, 1996 and 1995, respectively. The higher 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. Additional sources of funds for the Bank
include FHLB advances. At December 31, 1996 and 1995 there were no advances
outstanding from the FHLB. During the year ended December 31, 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 the cost of
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 (used in) operating activities were
$2.1 million and $(677,000) for the years ended December 31, 1996 and
1995, respectively. Net cash used in investing activities consists
primarily of disbursements from loan originations and purchases of loans
and investments, offset by principal collections on loans and proceeds
from the sale, maturity or redemption of investment. Disbursements on
loans originated and purchased were $18.3 million and $12.0 million for the
years ended December 31, 1996 and 1995, respectively. Loans classified as
held for sale decreased by $1.6 million to zero for the year ended December
31, 1996 and increased $761,000 for the year ended December 31, 1995.
Proceeds from the sale, maturity or redemption and principal payments of
mortgage-backed and investment securities were $7.3 million and $4.0 million
for the years ended December 31, 1996 and 1995, respectively. Net cash
provided by financing activities consists primarily of proceeds from the
sale of Common Stock, offset by a net decrease in deposit accounts.
Included in deposits at December 31, 1995 was $14.5 million in stock
subscription proceeds, which during 1996, $9.0 million in stock proceeds were
transferred to capital stock and $5.5 million in excess stock proceeds that
were returned to Common Stock subscribers. The net decrease in savings
deposits for the year totaled $8.5 million, or 7.69%. The stock
subscription proceeds had been received as part of the mutual-to-stock
Conversion which was completed in January 1996.
41
<PAGE>
At December 31, 1996, the Company and Broadway Federal had outstanding
loan commitments of $1.7 million. The Company anticipates that it and the
Bank will have sufficient funds available to meet its current loan
origination commitments.
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 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 March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 121, "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS" ("SFAS No. 121"). This statement
is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing
the review for recoverability, the entity should estimate the future cash
flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be
based on the fair value of the asset. An impairment loss for such assets
and intangibles to be held and used is reported as a component of
income from continuing operations before income taxes. SFAS No. 121
requires the Company to disclose a description of such impaired assets and
intangibles and the facts and circumstances leading to the impairment, the
amount of the impairment loss and how fair value was determined, and an
appropriate caption or parenthetical in the income statement. The Company
implemented SFAS No. 121 during fiscal year ended December 31, 1996. The
effect of the adoption was not material to the Company's financial
condition or results of operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "ACCOUNTING FOR MORTGAGE SERVICING RIGHTS" ("SFAS No. 122"), which
amends SFAS No. 65 ("SFAS No. 65") entitled "ACCOUNTING FOR CERTAIN
MORTGAGE BANKING ACTIVITIES." This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1995 and
is required to be adopted prospectively. This statement amends certain
provisions of SFAS No. 65 to eliminate the accounting distinction between
rights to service mortgage loans for others that are acquired through
loan origination activities and those acquired through purchase
transactions. This statement requires that a mortgage banking enterprise
measure mortgage servicing rights at cost by allocating the cost of the
mortgage loans between the mortgage servicing rights and the mortgage
loans based on their relative fair values. SFAS No. 122 requires the
Company to disclose the fair value of the mortgage servicing rights and
the methods and significant assumptions used to estimate such fair
value. The Company implemented SFAS No. 122 during fiscal year ended
December 31, 1996. The effect of the adoption was not material to the
Company's financial condition or results of operations.
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. SFAS No. 123 must be adopted for financial
statements 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.
42
<PAGE>
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 N. 123. The Company does not believe that such adoption and
accounting has any adverse impact on its financial condition or results
of operations.
ITEM 7. FINANCIAL STATEMENTS OF BROADWAY FINANCIAL CORPORATION
See Index to Financial Statements of Broadway Financial Corporation on Page 52
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.
43
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS
The Board of Directors of the Company is divided into three classes, with
each class containing approximately one third of the Board and with only
one class being elected each year. The directors are elected by the
stockholders of the Company for staggered terms of three years each, or
until their respective successors are elected and qualified. One class of
directors, consisting of Messrs. P. Hudson, Chan and Teasley, has a term
of office expiring at the 1997 annual meeting of stockholders; a second
class, consisting of Messrs. E. Hudson, W. Duffy and Mrs. Hill, has a term of
office expiring at the 1998 annual meeting of stockholders; and a third
class, consisting of Messrs. Maddox and Marshall, has a term of office
expiring at the 1999 annual meeting of stockholders.
The following table sets forth certain information regarding the Board
of Directors of the Company and Broadway Federal:
<TABLE>
<CAPTION>
COMPANY AND
BROADWAY
DIRECTOR OF FEDERAL
BROADWAY DIRECTOR
FEDERAL TERM
NAME AGE (1) POSITIONS HELD WITH COMPANY AND BROADWAY FEDERAL SINCE(2) EXPIRES
- ---- ------- -------------------------------------------------- -------- -------
<S> <C> <C> <C> <C>
Elbert T. Hudson(3) 76 Director and Chairman of the Board of Company 1959 1998
and Broadway Federal
Paul C. Hudson(3) 48 Director, President and Chief Executive Officer 1985 1997
of Company and Broadway Federal
Kellogg Chan 57 Director of Company and Broadway Federal 1993 1997
Willis K. Duffy 69 Director of Company and Broadway Federal 1974 1998
Rosa M. Hill 67 Director of Company and Broadway Federal 1977 1998
A. Odell Maddox 50 Director of Company and Broadway Federal 1986 1999
Lyle A. Marshall 71 Director of Company and Broadway Federal 1976 1999
Larkin Teasley 60 Director of Company and Broadway Federal 1977 1997
</TABLE>
- -------------
(1) As of December 31, 1996.
(2) All of the persons listed became directors of the Company in 1995.
(3) Elbert T. Hudson and Paul C. Hudson are father and son.
INDIVIDUALS NOMINATED TO BECOME DIRECTORS
During 1996, the Board of Directors of the Company increased the number of
authorized directors of the Company from eight to nine and the Board of
Directors of Broadway Federal also amended the Bylaws of the Bank to increase
the number of directors from eight to nine. Both Boards of Directors elected
Mr. Daniel A. Medina to fill the newly created vacancy, subject to OTS
approval. Mr. Medina has served as an advisor to the Board of Directors of
the Company and Broadway Federal since 1993. Upon receipt of OTS approval,
Mr. Medina will become a director of the Company and Broadway Federal and
will be included in the third class of directors with Messrs. Maddox and
Marshall. Mr. Medina is 39 years of age and currently serves as Vice
President-Acquisitions for Avco Financial Services, Inc., a subsidiary of
Textron, Inc. Mr. Medina joined Avco in October 1996. Prior to joining Avco,
Mr. Medina was Managing Director-Corporate Advisory Department for Union Bank
of California, N.A., a subsidiary of The Bank of Tokyo Mitsubishi Bank.
44
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Company and Broadway Federal who are not also directors.
<TABLE>
<CAPTION>
Name Age (1) Positions Held With Company and Broadway Federal
- ---- ------ ---------------------------------------------------
<S> <C> <C>
Bob Adkins 46 Chief Financial Officer and Secretary of Company
and Sr. Vice President-Chief Financial Officer of
Broadway Federal
Bruce Solomon 49 Sr. Vice President-Chief Loan Officer of
Broadway Federal
</TABLE>
___________________________
(1) As of December 31, 1996.
Each of the executive officers of the Company and Broadway Federal will
retain his or her office until the respective annual meeting of the Board of
Directors of the Company and Broadway Federal held immediately after the
respective annual stockholders meeting in 1997, and until their successors
are elected and qualified or until they are removed or replaced. Officers of
the Company and Broadway Federal are re-elected annually by the Board of
Directors of the Company and Broadway Federal, respectively.
BIOGRAPHICAL INFORMATION
DIRECTORS
Elbert T. Hudson is Chairman of the Board of Broadway Federal and has engaged
in the practice of law since his retirement as Chief Executive Officer in
1992. He was elected as President/Chief Executive Officer in 1972, a
position he held until his retirement. Mr. Hudson is currently Chairman of
the Executive Committee of the Board, a committee he has served on
continuously since 1959, and served on the Loan Committee of the Board from
1959 through 1984. Mr. Hudson has been a member of the California Bar
Association since 1953 and was a practicing attorney prior to his election as
President/Chief Executive Officer of Broadway Federal. Mr. Hudson serves on
the Board of Directors of BSC, a wholly owned subsidiary of Broadway Federal
and as a member of the Board of Directors of Golden State Mutual Life
Insurance Company, as well as a member of its Executive Committee and as
Chairman of its Audit Committee. He is a member of the Board of the Angelus
Funeral Home, member of the Board of the Angelus-Rosedale Cemetery and member
of the Board of Trustees of the Pre-Need, Cemetery and Endowment Foundations
of both organizations. Mr. Hudson is also President of the Board of NAACP
"New Careers," and member of the Board of L.A. Trade Technical College
Foundation.
Paul C. Hudson is President and Chief Executive Officer of Broadway Federal.
Mr. Hudson joined Broadway Federal in 1981. Mr. Hudson was elected to the
Board in 1985, and served in various positions prior to becoming President
and Chief Executive Officer in 1992. Mr. Hudson is a member of the
California and District of Columbia Bar Associations. He is a member of the
Board of America's Community Bankers, the Western League of Financial
Institutions and the American League of Financial Institutions. He also
serves on the Board of the California Business Roundtable, Pitzer College,
American Red Cross, the Fulfillment Fund and the California Community
Foundation. Mr. Hudson is a member of the Private Industry Council and
chairs the Board of Community Build.
Kellogg Chan has been a member of the Board of Directors since 1993. Now
retired, he previously served as Chairman and Chief Executive Officer of
Universal Bank, f.s.b. and President and Chief Executive Officer of East-West
Bank, Mr. Chan is a past trustee of the Greater Los Angeles Zoo Association,
and past member of the Boards of the San Marino City Club, the Southern
California Chinese Lawyers Association and the San Gabriel Valley Council of
Boy Scouts. Mr. Chan is a member of the Chinese American Citizens Alliance,
Central City Optimists and a member of the Chinese Heart Council of the
American Heart Association.
45
<PAGE>
Willis K. Duffy, D.D.S. is a retired dentist. He previously was general
partner of Washington Medical Center. Dr. Duffy is the Chairman of the
Compensation/ Benefits Committee of the Board. Dr. Duffy also serves as a
member of the Board of the Watts/Willowbrook Boys and Girls Club, the L.A.
Police Department Historical Society and the Sigma Pi Phi Foundation.
Rosa M. Hill is the Corporate Secretary of S.J.H Investment Company.
Previously she was an elementary school teacher in the Los Angeles City
Schools and Fisk University Children's School. She also was a social worker
with the Los Angeles County Bureau of Public Assistance. Mrs. Hill is the
Chairperson of the Compliance/Community Reinvestment Act (CRA)/Public
Relations Committee of the Board. She served on the Board of Trustees of
Bennett College, Greensboro, North Carolina. Mrs. Hill has been an active
member of Holman United Methodist Church for over 40 years where she has held
many leading roles.
A. Odell Maddox is President and Manager of Maddox & Stabler Construction Co.
Inc. and a real estate broker of Maddox Company, a real estate property
management company. Mr. Maddox is Chairman of the Loan Committee of the
Board.
Lyle A. Marshall is a retired tax attorney. He previously served as
President of Lyle A. Marshall & Assoc., Ltd., a consulting firm, and was
co-owner of Drummond Distributing Co. Mr. Marshall was admitted to practice
before the U.S. Supreme Court, U. S. District Court, Eastern District, U. S.
Tax Court and the New York State Bar. Mr. Marshall is Chairman of the Audit
Committee of the Board. Mr. Marshall also chairs the Board of the
Watts/Willowbrook Boys & Girls Club.
Larkin Teasley is President and Chief Executive Officer of Golden State
Mutual Life Insurance Company and a member of its Board of Directors. Mr.
Teasley is a member of the Board of the Golden State Minority Foundation, the
Greater L.A. African American Chamber of Commerce, the California Chamber of
Commerce, the L.A. County Board of Investment for the County Employees
Retirement Association and President of the National Insurance Association.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Bob Adkins joined Broadway Federal in 1994 as the Chief Financial Officer.
In January 1995 Mr. Adkins became Senior Vice President/Chief Financial
Officer. Mr. Adkins also serves as Director and Secretary/Treasurer of BSC.
Immediately prior to joining Broadway Federal Mr. Adkins was Chief Financial
Officer of Westside Bank of Southern California for three years. Westside
Bank was placed into receivership by regulatory authorities in late 1993.
Mr. Adkins has over 20 years experience in the financial services industry,
including experience in public accounting. Mr. Adkins is a Certified Public
Accountant, holds an MBA degree and a Bachelors degree in Accounting. Mr.
Adkins is President of the Board of the California State University at Los
Angeles Foundation, serves as an Aide to the California Business Roundtable
and is a past member of the Board of the Community Housing Assistance
Program, Inc.
Bruce Solomon joined Broadway Federal in 1993 as the Chief Loan Officer and
currently serves as Senior Vice President/Chief Loan Officer and CRA Officer.
Prior to joining Broadway Federal Mr. Solomon had over 19 years of experience
in the banking industry, primarily in real estate lending with Hancock
Savings and Loan Association, National Home Equity Corporation and Valley
Federal Savings and Loan Association. Mr. Solomon serves on the Board of the
Home Loan Counselling Center, the Inglewood Neighborhood Housing Services and
the Los Angeles Local Development Corporation.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION. In 1996, each director of the Company, other than
the Chairman of the Board and the President, received a payment of $200 for a
special Board meeting held during the year. There was no other remuneration
paid to the Directors by the Company in 1996. Currently, the Chairman of the
Board of Broadway Federal receives a monthly retainer fee of $2,800 and all
other directors of Broadway Federal, other than the President, receive a
monthly retainer fee of $1,000 each. A fee of $200 is paid to each director
of Broadway Federal, other than the Chairman of the Board and the President,
for special Board meetings. Committee meeting fees of $150 per meeting are
also paid to directors of Broadway Federal, other than the Chairman of the
Board and the President.
46
<PAGE>
EXECUTIVE COMPENSATION. Since the formation of the Company none of the
executive officers or other personnel has received remuneration from the
Company. The following table sets forth the cash compensation paid by Broadway
Federal for services during the year ended December 31, 1996 to the Chief
Executive Officer of Broadway Federal, who was the only officer who received
compensation in excess of $100,000.
NAME AND PRINCIPAL POSITION YEAR ANNUAL SALARY BONUS
--------------------------- ---- ------------- -----
Paul C. Hudson, President and 1996 $120,252 $17,952
Chief Executive Officer
SEVERANCE AGREEMENTS
The Company and Broadway Federal have entered into severance agreements with
Mr. Paul Hudson, Mr. Adkins and two other officers of Broadway Federal having
terms ranging from 12 to 24 months. Commencing on the first anniversary date
of such agreements and continuing on each anniversary date thereafter, the
severance agreements may be extended by the respective Board of Directors of
the Company and Broadway Federal for additional twelve-month periods. Each
severance agreement will provide that at any time following a change in
control of the Company or Broadway Federal, as applicable, if the Company or
Broadway Federal, as the case may be, terminates the employee's employment
for any reason other than for cause, or if the employee terminates his or her
employment, the employee or, in the event of death, the employee's
beneficiary, would be entitled to receive a payment equal to up to three
years of the employee's then current annual salary, any bonuses and any other
compensation paid or to be paid to the employee in any such year, the amount
of benefits paid or accrued to the employee pursuant to any employee benefit
plan maintained by Broadway Federal or the Company in any such year and the
amount of any contributions made or to be made on behalf of the employee to
any benefit plan maintained by Broadway Federal or the Company in any such
year. The Company and Broadway Federal would also continue the employee's
life, medical, dental and disability coverage for the remaining unexpired
term of his or her agreement to the extent allowed by the plans or policies
maintained by the Company or Broadway Federal from time to time. Payments to
the employee under Broadway Federal's severance agreements will be guaranteed
by the Company in the event that payments or benefits are not paid by
Broadway Federal. In the event of a change in control of the Company and
Broadway Federal, as applicable, the total payments due under the severance
agreements in the aggregate, based solely on the cash compensation paid to
the four officers covered by the severance agreements for the last fiscal
year and excluding any benefits under any employee benefit plan that may be
payable, are estimated to be up to approximately $520,000.
47
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MANAGEMENT
The following table sets forth, as of March 12, 1997, certain information
concerning the shares of the Company's Common Stock owned by any person who
is known to the Company to be the beneficial owner of more than 5% of the
Company's Common Stock, each of the directors and executive officers of
Broadway Federal and for all directors and executive officers as a group
(including in each case all "associates" of such persons).
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------------- -------------- -----------
BENEFICIAL OWNERS:
Broadway Federal Bank Employee Stock 62,488 7.00%
Ownership Plan (1)
Wellington Management Company LLP 83,000 9.29
75 State Street
Boston, Massachusetts 02109
Deltec Asset Management Corporation 87,000 9.74
535 Madison Ave.
New York, NY 10022
DIRECTORS AND EXECUTIVE OFFICERS (1):
Elbert T. Hudson 2,927(2) 0.32
Paul C. Hudson 6,000 0.67
Kellogg Chan 8,927 1.00
Willis K. Duffy 2,500 0.28
Rosa M. Hill 8,927(2) 1.00
A. Odell Maddox 5,000 0.56
Lyle A. Marshall 2,500(2) 0.28
Larkin Teasley 2,500 0.28
Daniel A. Medina 200 0.02
Bob Adkins 200 0.02
---------- -----
All directors and executive officers as a
group (10 persons) 39,681 4.44%
- --------------------------
(1) The address for each of the directors and executive officers and the
Broadway Federal Bank Employee Stock Ownership Plan is 4835 West Venice
Boulevard, Los Angeles, California 90019.
(2) Held jointly with spouse as to which voting and investment power is
shared.
48
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
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)
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
27.1 Financial Data Schedule
- -------------------
* Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described therein.
No Current Reports on Form 8-K were filed for the three months ended
December 31, 1996.
49
<PAGE>
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, 1997
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, 1997
- -------------------------------------
Paul C. Hudson
Chief Executive Officer, President
and Director
(Principal Executive Officer)
/s/ Bob Adkins Date: March 29, 1997
- -------------------------------------
Bob Adkins
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Elbert T. Hudson Date: March 29, 1997
- -------------------------------------
Elbert T. Hudson
Chairman of the Board
/s/ Kellogg Chan Date: March 29, 1997
- -------------------------------------
Kellogg Chan
Director
/s/ Dr. Willis K. Duffy Date: March 29, 1997
- -------------------------------------
Dr. Willis K. Duffy
Director
50
<PAGE>
/s/ Rosa M. Hill Date: March 29, 1997
- -------------------------------------
Rosa M. Hill
Director
/s/ A. Odell Maddox Date: March 29, 1997
- -----------------------------------
A. Odell Maddox
Director
/s/ Lyle A. Marshall Date: March 29, 1997
- -----------------------------------
Lyle A. Marshall
Director
/s/ Larkin Teasley Date: March 29, 1997
- -----------------------------------
Larkin Teasley
Director
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF BROADWAY FINANCIAL CORPORATION
PAGE
----
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . F-2
Consolidated Statements of Operations for years ended December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity (substantially
Restricted) for years ended December 31, 1996 and 1995 . . . . . . . . . F-4
Consolidated Statements of Cash Flows for years ended December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-7
52
<PAGE>
Consolidated Financial Statements
Broadway Financial Corporation
and Subsidiary
YEARS ENDED DECEMBER 31, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . .F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . .F-4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . .F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .F-7
<PAGE>
[LETTERHEAD]
Report of Independent Auditors
The Board of Directors
Broadway Financial Corporation
We have audited the accompanying consolidated balance sheet of Broadway
Financial Corporation and subsidiary (Broadway) as of December 31, 1996, and the
related consolidated statement of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of Broadway's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
financial statements of Broadway Federal Bank for the year ended December 31,
1995, were audited by other auditors whose report dated March 11, 1996,
represented an unqualified opinion.
We conducted our audit 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 audit provide a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Broadway as
of December 31, 1996, and the results of their operations and their cash flows
for the year 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
Notes 19 and 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.
/s/ ERNST & YOUNG LLP
February 5, 1997
Los Angeles, California
F-1
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
ASSETS
Cash and federal funds sold $ 5,180,000 $ 3,307,000
Restricted cash - stock subscriptions - 14,454,000
Investment securities held to maturity 10,371,000 5,495,000
Loans receivable, net 96,260,000 87,900,000
Loans receivable held for sale, at lower of cost or
fair value - 1,556,000
Accrued interest receivable 733,000 675,000
Real estate acquired through foreclosure 933,000 1,820,000
Investments in capital stock
of Federal Home Loan Bank, at cost 876,000 827,000
Office properties and equipment, net 2,052,000 1,102,000
Income tax receivable 426,000 91,000
Other assets 265,000 517,000
------------ ------------
$117,096,000 $117,744,000
------------ ------------
------------ ------------
LIABILITIES AND RETAINED EARNINGS
Savings deposits $101,994,000 $110,504,000
Advance payments by borrowers for
taxes and insurance 161,000 203,000
Deferred income taxes 452,000 639,000
Other liabilities 845,000 817,000
------------ ------------
Total liabilities 103,452,000 112,163,000
Stockholders' equity:
Preferred nonconvertible, non-cumulative,
and non-voting stock, $.01 par value,
authorized 1,000,000 shares; issued and
outstanding 91,073 shares at December 31, 1996 1,000 -
Additional paid-in capital 910,000 -
Common stock, $.01 par value,
authorized 3,000,000 shares;
issued and outstanding 892,688
shares at December 31, 1996 9,000 -
Additional paid-in capital 8,207,000 -
Retained earnings - substantially restricted 5,080,000 5,581,000
Unearned ESOP shares (563,000) -
------------ ------------
Total stockholders' equity 13,644,000 5,581,000
Commitments and contingent liabilities
------------ ------------
Total liabilities and retained
earnings, and stockholders' equity $117,096,000 $117,744,000
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
Interest on loans receivable $ 7,878,000 $ 7,165,000
Interest on investment securities 666,000 565,000
Interest on mortgage-backed securities 153,000 -
Other interest income 50,000 40,000
---------------------------
Total interest income 8,747,000 7,770,000
Interest on savings deposits 3,476,000 3,166,000
Interest on borrowings 5,000 -
---------------------------
Total interest expense 3,481,000 3,166,000
Net interest income 5,266,000 4,604,000
Provision for loan losses 586,000 399,000
---------------------------
Net interest income after provision for loan losses 4,680,000 4,205,000
Noninterest income:
Service charges 301,000 263,000
Real estate operations, net (374,000) (206,000)
Loss on sale of mortgage-backed
securities available for sale (84,000) -
Other noninterest income 100,000 204,000
---------------------------
(57,000) 261,000
---------------------------
Noninterest expense:
Compensation and benefits 2,149,000 1,877,000
Occupancy expense, net 903,000 873,000
Advertising and promotional expense 185,000 148,000
Professional services 48,000 63,000
Federal insurance premiums 874,000 243,000
Insurance bond premiums 105,000 105,000
Other noninterest expense 815,000 543,000
---------------------------
5,079,000 3,852,000
---------------------------
Earnings before income taxes (456,000) 614,000
Income taxes (benefit) (179,000) 124,000
---------------------------
Net (loss) earnings $ (277,000) $ 490,000
---------------------------
---------------------------
Earnings (loss) per share $(0.31) N/A
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Preferred Common Paid-in Retained Unearned Stockholders'
Stock Stock Capital Earnings ESOP Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at December 31, 1994 $ - $ - $ - $ 5,091,000 $ - $ 5,091,000
Net earnings for the year
ended December 31, 1995 - - - 490,000 - 490,000
-----------------------------------------------------------------------------------
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 8,207,000 - - 8,216,000
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 ESOP - - - - (563,000) (563,000)
-----------------------------------------------------------------------------------
Balance, at December 31, 1996 $ 1,000 $ 9,000 $ 9,117,000 $ 5,080,000 $ (563,000) $ 13,644,000
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (277,000) $ 490,000
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation 226,000 176,000
Deferred income tax benefit - (286,000)
Amortization of net deferred loan origination fees 48,000 (154,000)
Amortization of discounts and premiums on securities (7,000) (115,000)
Federal Home Loan Bank stock dividends (49,000) (40,000)
Gain on sale of real estate owned (40,000) (9,000)
Gain on sale of loans receivable held for sale (28,000) (37,000)
Loss on sale of mortgage-backed securities 84,000 -
Gain on sale of securities (7,000) -
Changes in operating assets and liabilities:
Provision for loan losses 586,000 399,000
Provision for write-downs and losses on real estate 283,000 211,000
Loans originated for sale, net of refinances (1,114,000) (2,153,000)
Proceeds from sale of loans receivable held for sale 2,698,000 1,391,000
Accrued interest receivable (59,000) (143,000)
Income tax receivable (335,000) 203,000
Deferred income tax liability (187,000) -
Other assets 252,000 (368,000)
Other liabilities 14,000 (307,000)
Other (1,000) 65,000
---------------------------
Total adjustments 2,364,000 (1,167,000)
---------------------------
Net cash provided by (used in) operating activities 2,087,000 (677,000)
INVESTING ACTIVITIES
Loans originated, net of refinances (16,185,000) (10,777,000)
Loans purchased (2,001,000) (1,236,000)
Principal repayment on loans 8,123,000 6,650,000
Principal repayment on mortgage-backed securities 383,000 -
Proceeds from sale of securities 3,933,000 -
Purchases of investment securities held to maturity (7,946,000) (1,427,000)
Purchase of securities available for sale (4,315,000) -
Proceeds from maturities of
investment securities held to maturity 3,000,000 3,989,000
Capital expenditures for office properties and equipment (1,176,000) (300,000)
Proceeds from sale of real estate
acquired through foreclosure 1,728,000 828,000
---------------------------
Net cash used in investing activities (14,456,000) (2,273,000)
</TABLE>
F-5
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in savings deposits $ (8,510,000) $ 4,011,000
Stock subscription proceeds on deposit - 14,454,000
Preferred stock subscribed 911,000 -
Common stock subscribed 8,216,000 -
Dividends declared (224,000) -
Unearned Employee Stock Ownership Plan (563,000) -
Increase (decrease) in advances
by borrowers for taxes and insurance (42,000) (27,000)
---------------------------
Net cash (used in) provided by financing activities (212,000) 18,438,000
---------------------------
Net (decrease) increase in cash and cash equivalents (12,581,000) 15,488,000
Cash and cash equivalents at beginning of year 17,761,000 2,273,000
---------------------------
Cash and cash equivalents at end of year $ 5,180,000 $ 17,761,000
---------------------------
---------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest expense $ 3,543,000 $ 3,162,000
---------------------------
---------------------------
Cash paid for income taxes $ 371,000 $ 260,000
---------------------------
---------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Additions to real estate acquired through foreclosure $ 1,163,000 $ 1,082,000
Loans to facilitate the sale of real
estate acquired through foreclosure 1,000,000 660,000
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1996
1. CONVERSION
Broadway Federal Savings and Loan Association changed its name to Broadway
Federal Bank, f.s.b. (Broadway Federal) in connection with a mutual to stock
charter conversion effective November 13, 1995. Broadway Financial Corporation
(the Company) is a Delaware corporation organized for the purpose of acquiring
all the capital stock of Broadway Federal at the completion of the plan of
conversion and the capitalization of the Company. The conversion was completed
and 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 17 - 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, 1996, Broadway Federal operated three retail banking offices and
one 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
<PAGE>
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 1996 presentation.
These consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheets, and revenues and expenses for the period. Actual
results could differ from those estimates.
ASSETS HELD TO MATURITY
Investment securities and loans, excluding those held or 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 non-
accrual 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.
F-8
<PAGE>
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)
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,
industry loan concentrations, 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 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.
Broadway Federal adopted the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," which, during the fourth quarter of 1994,
was subsequently amended by SFAS No. 118 entitled "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," for the year ended
December 31, 1995. A loan is impaired when it is "probable" that a creditor will
be unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. SFAS No. 114 does not
apply to large groups of smaller balance homogenous loans that are collectively
evaluated for impairment. For Broadway Federal, loans collectively evaluated for
impairment generally include single-family residential loans, although certain
larger balance single-family residential loans are subjected to the requirements
of SFAS No. 114. The 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) the 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 of the loan exceeds the
measure of the impaired loan is recognized by recording a valuation allowance
with a corresponding charge to the provision for loan losses. Additionally, SFAS
No. 114 requires loans for which foreclosure is probable to continue to be
accounted for as loans until the creditor has taken possession of the
collateral. The effect of the adoption was not material to the company's and
Broadway Federal's financial condition or results of operations.
F-9
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and ability to hold to
maturity. Loans that are to be held for indefinite periods of time and not
intended to be held to maturity are classified as held for sale. Loans held for
sale are carried at the lower of cost or fair value. 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 the loans
sold. Gain or loss is recognized and premium or discounts is 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.
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. Accretion of discounts and deferred loan fees is
discontinued when loans are placed on a non-accrual status.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is recorded at estimated fair value,
less costs of disposition. An allowance for losses is provided when any
subsequent decline in value occurs. Income recognition on the sale of real
estate acquired through foreclosure is dependent upon the terms of the sale.
F-10
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash,
restricted cash - stock subscriptions and federal funds sold. Generally, federal
funds are sold for one-day periods.
EARNINGS PER SHARE
Earnings per share are computed on earnings for the period beginning January 8,
1996, the date of conversion to stock form, and are based on the weighted
average number of shares outstanding. Fully diluted earnings per share is not
computed since there were no common stock equivalents during the period.
Earnings per share are not presented for periods prior to conversion to stock
form, as the Company had no stock outstanding.
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
F-11
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (CONTINUED)
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
Financial instruments are subject to interest rate risk to the extent that they
report on a frequency, degree or basis that varies from market pricing. The
Company is subject to interest rate risk to the degree that interest-earning
assets reprice on a different frequency or schedule that its interest-bearing
liabilities. A 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.
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.
F-12
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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 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.
3. INVESTMENT SECURITIES
The following table provides a summary of investment securities held to maturity
with a comparison of carrying and fair values:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAIN LOSS VALUE
--------------------------------------------------------
<S> <C> <C> <C> <C>
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
--------------------------------------------------------
--------------------------------------------------------
December 31, 1995:
SLMA bonds $ 1,500,000 $ 8,000 $ - $ 1,508,000
U.S. Treasury bills 998,000 1,000 - 999,000
U.S. Treasury notes 2,997,000 15,000 - 3,012,000
--------------------------------------------------------
$ 5,495,000 $24,000 $ - $ 5,519,000
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
F-13
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
The remaining contractual principal maturities for the investment securities
included above are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
--------------------------------------------------------
AFTER
WITHIN 1 THROUGH AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996:
Mortgage-backed securities $ - $ 425,000 $ - $ 425,000
SLMA bonds 1,500,000 - - 1,500,000
FMC/FNMA discount notes 2,442,000 - - 2,442,000
U.S. Treasury bills 10,000 - - 10,000
FHLB debentures - 4,000,000 - 4,000,000
U.S. Treasury notes 1,000,000 994,000 - 1,994,000
-------------------------------------------------------
$4,952,000 $5,419,000 $ - $10,371,000
-------------------------------------------------------
-------------------------------------------------------
December 31, 1995:
SLMA bonds $ - $ 1,500,000 $ - $ 1,500,000
U.S. Treasury bills 998,000 - - 998,000
U.S. Treasury notes 1,995,000 1,002,000 - 2,997,000
-------------------------------------------------------
$2,993,000 $ 2,502,000 $ - $ 5,495,000
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, Broadway Federal had accrued interest receivable
on investment securities of $117,000 and $57,000, respectively, which is
included in accrued interest receivable in the accompanying consolidated balance
sheet.
Broadway Federal did not sell any investment securities, classified as held to
maturity in accordance with FASB115 during 1996. During the year ended
December 31, 1995, Broadway Federal sold $2.5 million of investment securities,
classified as held to maturity in accordance with FASB115 which were within
three months of their scheduled maturity, realizing a loss of $4,000.
F-14
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
Held to maturity:
Real estate:
Residential:
One to four units $50,671,000 $51,750,000
Five or more units 29,573,000 20,328,000
Construction loans 226,000 158,000
Nonresidential 16,449,000 15,578,000
Loans secured by savings accounts 1,428,000 1,636,000
Other 83,000 207,000
--------------------------
98,430,000 89,657,000
Less:
Loans in process 130,000 43,000
Allowance for loan losses 1,174,000 896,000
Deferred loan fees, net 812,000 764,000
Unamortized discounts 54,000 54,000
--------------------------
Loans receivable held to maturity, net 96,260,000 87,900,000
Held for sale - residential
real estate, one to four units - 1,556,000
--------------------------
$96,260,000 $89,456,000
--------------------------
--------------------------
Weighted average interest rate 8.21% 8.16%
--------------------------
--------------------------
</TABLE>
Loans held for sale were stated at the lower of cost or fair value.
F-15
<PAGE>
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:
DECEMBER 31
1996 1995
-------------------------
Balance at beginning of year $ 896,000 $ 670,000
Provision for loan losses 586,000 399,000
Charge-offs (308,000) (173,000)
-------------------------
Balance at end of year $1,174,000 $ 896,000
-------------------------
-------------------------
The Company's and Broadway Federal's loan portfolio yielded a weighted average
interest rate of 8.21% and 8.16% at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the Company and Broadway Federal had accrued
interest receivable on loans of $616,000 and $618,000, respectively, which is
included in accrued interest receivable in the accompanying consolidated balance
sheets.
Broadway Federal serviced loans for others totaling $7.5 million and $5.2
million at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, Broadway Federal had loans to senior officers and
directors amounting to $229,000 and $234,000, respectively.
The following is a summary of non-accrual loans at December 31, 1996 and 1995:
1996 1995
-----------------------
Residential real estate $1,848,000 $627,000
Other 26,000 24,000
-----------------------
Total non-accrual loans $1,874,000 $651,000
-----------------------
-----------------------
There were no accruing loans contractually past due 90 days or more or
restructured loans at December 31, 1996 and 1995.
F-16
<PAGE>
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, 1996 and 1995, if the non-accrual loans had been
current in accordance with their original terms was $147,000 and $104,000,
respectively. For the years ended December 31, 1996 and 1995, $68,000 and
$58,000, respectively, was actually earned on non-accrual 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 non-accrual at December 31, 1996 and 1995.
At December 31, 1996, the total recorded investment in impaired loans was
approximately $2.0 million. Of the amount, $770,000 had a related impairment
allowance totaling $97,000 at December 31, 1996. All such provisions for losses
and any related recoveries are recorded as part of the allowance for loan
losses. During the year ended December 31, 1996, Broadway Federal's average
investment in impaired loans was $2.1 million, and interest income recorded on
impaired loans during this period totaled $176,000, none of which was recorded
utilizing the accrual basis method of accounting. At December 31, 1996, 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, 1996:
One to four units $ 474,000
Five or more units 1,519,000
----------
$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, 1996 and 1995,
approximately 82% of the real estate portfolio consisted of loans secured by
residential real estate. In addition, approximately 17% of the loan portfolio at
December 31, 1996 and 1995, was secured by nonresidential real estate. Loans
secured by church real estate represented 71% and 75% of nonresidential real
estate loans at December 31, 1996 and 1995, respectively.
F-17
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The Company held no mortgage-backed securities available for sale at
December 31, 1996 and 1995.
Proceeds from sales of mortgage-backed securities amounted to $2.9 million for
1996. Losses of $84,000 were realized on such sales during 1996. There were no
sales for the year ended December 31, 1995.
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The following is a summary of real estate acquired through foreclosure:
1996 1995
-------------------------
Real estate acquired
through foreclosure $1,114,000 $2,038,000
Less: valuation allowance 181,000 218,000
-------------------------
$ 933,000 $1,820,000
-------------------------
-------------------------
Activity in the allowance for losses on real estate acquired through foreclosure
during the years ended December 31, 1996 and 1995, is summarized as follows:
1996 1995
-------------------------
Balance at beginning of year $ 218,000 $150,000
Provision for losses 283,000 68,000
Charge-offs (320,000) -
-------------------------
$ 181,000 $218,000
-------------------------
-------------------------
F-18
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE (CONTINUED)
Real estate operations, net, are summarized as follows:
1996 1995
------------------------
Net loss from operations of foreclosed
real estate $(144,000) $ (4,000)
Net gains on sales of foreclosed real estate 53,000 9,000
------------------------
(91,000) 5,000
Write-downs - (143,000)
Provision for losses (283,000) (68,000)
------------------------
Real estate operations, net $(374,000) $(206,000)
------------------------
------------------------
7. 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 the 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, 1996 and 1995, of $876,000 and $827,000, respectively.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of the following:
1996 1995
--------------------------
Land $ 877,000 $ 331,000
Office building and improvements 1,000,000 726,000
Furniture, fixtures and equipment 1,295,000 1,249,000
3,172,000 2,306,000
Less accumulated depreciation (1,120,000) (1,204,000)
--------------------------
$ 2,052,000 $ 1,102,000
--------------------------
--------------------------
F-19
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. SAVINGS DEPOSITS
A summary of deposits by type of account and interest rate at December 31
follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------
RATE* AMOUNT RATE* AMOUNT
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance by account type:
NOW account and other demand deposits .62% $ 11,325,000 .61% $ 7,997,000
Passbook 2.00 30,024,000 2.00 45,474,000
Variable-rate time deposits:
91 days 3.75 1,448,000 3.76 1,923,000
18 months 5.20 1,039,000 5.08 1,168,000
Fixed index 5.32 45,104,000 5.28 36,963,000
Negotiable time deposits ($100,000 or more) 4.66 9,599,000 5.34 12,235,000
Money market deposits 2.24 3,455,000 2.24 4,744,000
------------ ------------
$101,994,000 $110,504,000
------------ ------------
------------ ------------
</TABLE>
*Weighted average interest rate.
The overall weighted average interest rate on savings deposits was 3.60% and
3.44% at December 31, 1996 and 1995, respectively.
Savings deposit maturities at December 31, 1996, are summarized as follows:
MATURITY AMOUNT
-------- -------------
No stated maturity $ 44,878,000
1997 45,386,000
1998 5,436,000
1999 3,589,000
2000 1,252,000
2001 1,139,000
Thereafter 314,000
------------
$101,994,000
------------
------------
F-20
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. SAVINGS DEPOSITS (CONTINUED)
A tabulation of interest expense on savings deposits at December 31, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
NOW accounts and other demand deposits $ 676,000 $ 682,000
Money market deposits 94,000 93,000
Time deposits 2,748,000 2,415,000
Penalty for early withdrawals (42,000) (24,000)
-------------------------
$3,476,000 $3,166,000
-------------------------
-------------------------
</TABLE>
At December 31, 1996 and 1995, the Company had accrued interest payable on
savings deposits of $53,000 and $75,000, respectively, which is included in
savings deposits in the accompanying consolidated balance sheets.
The Company had $247,000 in brokered deposits as of December 31, 1996. There
were no brokered deposits as of December 31, 1995.
Included in savings deposits at December 31, 1995, is a corporate
nonwithdrawable pledged savings account (Account) totaling $1,000,000. The
Account was opened in September 1993 and bears interest at a fixed rate of 5%
annually. The Account has no fixed maturity date and interest accrued on the
Account shall not accumulate to any subsequent quarter. The Account is not
withdrawable at the option of the account holder unless (i) Broadway Federal is
converted from a mutual to a stock institution or (ii) Broadway Federal is
otherwise involved in a merger or other reorganization, whereby Broadway Federal
is not in-substance the surviving institution. The Account is includable in
regulatory capital subject to certain limitations. Upon the capitalization of
the Company and Broadway Federal's conversion to a capital stock form of
ownership in January 1996, the account holder used the balance of the account to
purchase the maximum amount of the Company's common stock permitted under the
plan of conversion and purchased shares of the Company's noncumulative perpetual
preferred stock with the remainder of the account balance not used to purchase
shares of common stock.
F-21
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. SAVINGS DEPOSITS (CONTINUED)
Also included in savings deposits at December 31, 1995, is $14,500,000 related
to stock subscriptions for Broadway Federal's then pending conversion to capital
stock form of ownership which occurred in January 1996. Following the
conversion, all excess cash subscriptions, which were deposited with Broadway
Federal not used to purchase shares of the Company's common stock were remitted
back to the respective subscribers.
10. FHLB ADVANCES
Pursuant to collateral agreements with the FHLB advances are secured by 134
loans and 94 loans, representing $9.2 million and 4.0 million as of December 31,
1996 and 1995, respectively. The borrowing capacity with the FHLB approximates
$7.3 million and $3.1 million. There is no borrowing outstanding with the FHLB
as of December 31, 1996 and 1995.
11. INCOME TAXES
The following is a summary of the provision for income tax expense (benefit):
1996 1995
------------------------
Current taxes:
Federal income $ - $ 322,000
State franchise 3,000 88,000
------------------------
3,000 410,000
------------------------
Deferred taxes:
Federal income (67,000) (167,000)
State franchise (115,000) (119,000)
------------------------
(182,000) (286,000)
------------------------
$(179,000) $ 124,000
------------------------
------------------------
F-22
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
A reconciliation of income taxes and the amounts computed by applying the
statutory Federal income tax rates to earnings before income taxes follows:
1996 1995
------------------------
Computed expected federal taxes $(155,000) $209,000
Increases (reductions) to taxes resulting from:
California franchise tax (benefit),
net of federal income tax (benefit) (34,000) (20,000)
Other 10,000 (65,000)
------------------------
$(179,000) $124,000
------------------------
------------------------
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 (8%
for 1995). 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, for 1996, its tax allowance for bad
debts has been maintained under such method.
Retained earnings at December 31, 1996 and 1995, 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.
F-23
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995, are presented below:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances deferred for tax $ 504,000 $ 376,000
Allowance for loss 120,000 132,000
State franchise tax liability 41,000 47,000
Other 71,000 -
-------------------------
Net deferred tax assets 736,000 555,000
-------------------------
Deferred tax liabilities:
Basis difference on fixed assets 456,000 279,000
Deferred loan fees 334,000 414,000
FHLB stock dividend 363,000 413,000
Other 35,000 88,000
-------------------------
Total gross deferred tax liabilities 1,188,000 1,194,000
-------------------------
Net deferred tax liability $ 452,000 $ 639,000
-------------------------
-------------------------
</TABLE>
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 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.
F-24
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS
RETIREMENT INCOME PLAN
Broadway Federal noncontributory retirement income plan was frozen as of
December 31, 1993, and distributions were made for the benefits of all
participants in December 31, 1995. The plan covered all employees over 21 years
of age with one year of service and employer contributions were computed using
the frozen-initial-liability-cost method, and benefits became fully vested after
five years of service. The total pension income for the year ended December 31,
1995, was approximately $16,000. There was no pension expense or income for the
year ended December 31, 1996, as a result of the Plan being eliminated in
December 1995. Broadway Federal made annual contributions to the plan which were
not necessarily equal to the amounts accrued for pension expense. A contribution
refund was made for $15,000 during the year ended December 31, 1995.
At December 31, 1995, excess assets in the plan totaled $59,000. This was
allocated to the participants and paid in January 1996.
The following table sets forth the plan's funded status and amounts recognized
in Broadway Federal's consolidated balance sheets at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Actuarial present value of
accumulated plan benefits:
Vested accumulated benefits $ - $1,208,000
Nonvested accumulated benefits - -
--------------------
Total accumulated benefits $ - 1,208,000
--------------------
--------------------
Plan assets, at fair value $ - 1,208,000
Projected benefit obligation for
service rendered to date - 1,208,000
--------------------
Funded status - projected benefit
obligation short of plan assets - -
Items not yet recognized in net pension cost:
Unrecognized net (gain) loss - 59,000
Unrecognized net asset at December 31, 1996
and 1995, being recognized over approximately
15 years - (40,000)
--------------------
Prepaid pension cost included in other assets
at December 31, 1996 and 1995 $ - $ 19,000
--------------------
--------------------
</TABLE>
F-25
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYMENT BENEFIT PLANS (CONTINUED)
Net pension cost for 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Service cost - benefits earned during the period $ - $ -
Interest cost on projected benefit obligation - 73,000
Actual return on plan assets - (74,000)
Net amortization and deferral - (15,000)
-------------------
Net periodic pension (benefit) cost $ - $(16,000)
-------------------
-------------------
</TABLE>
The discount rate used in determining the actuarial present value of accumulated
and projected benefit obligations was 6.60% for 1995.
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
annual salary with the Company matching up to 100 percent of the employee's
contribution, but no more than 3 percent of that employee's base salary. In 1996
Broadway Federal's contribution amounted to $14,000. No contributions were made
in 1995.
STOCK PROGRAMS
In 1996, the stockholders of the Company ratified two stock programs, the 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) of Broadway
Federal and its subsidiary. The RRP is designed to recognized 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. 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. The Stock Programs are also designed to encourage
recipients of share awards to remain with the Company and to
F-26
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYMENT BENEFIT PLANS (CONTINUED)
promote the Company's growth and profitability in the future. For the RRP, an
aggregate of up to 8,034 shares of Common Stock will be acquired for award
pursuant to the plan. Under the PEP, an aggregate of up to 18,747 shares of
Common Stock will be acquired for award pursuant to the plan. As of December 31,
1996, no shares has been acquired or awards made under the Stock Programs.
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
Options Plans. The LTIP is 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. 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 non-employee directors of outstanding competence by
providing such outside directors with an opportunity to acquire an equity
interest in the Company. Under the Stock Option Plan, an aggregate of 89,269
shares will be reserved for issuance. OTS regulations provide that no individual
officer or employee of the Bank may receive more than 25% of the options granted
under the Stock Option Plans and that non-employee directors may not receive
more than 5% individually or 30% in the aggregate of the options granted under
the Stock Option Plans. As of December 31, 1997, no options had been granted
under the Stock Option Plans.
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 Bank's
discretionary contributions to the ESOP, net of dividends paid, over a period of
10 years. At December 31, 1996, the outstanding balance of the loan was
$563,000, which is shown as Unearned ESOP in the equity section of the balance
sheet.
F-27
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYMENT BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
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 the Bank 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 proportion as contributions. Participants
will become fully vested in the shares allocated to their accounts upon a change
in control of the Bank 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. The expense related to the ESOP totaled $112,000
for the year ended December 31, 1996, which is net of dividends of approximately
$9,400.
Of the 62,488 ESOP shares purchased, at December 31, 1996, 6,249 shares had been
allocated, leaving an unallocated balance of 56,239 shares. The fair value of
unallocated ESOP shares totaled $520,000 at December 31, 1996.
13. OTHER LIABILITIES
Included in other liabilities at December 31, 1996 and 1995, is a specific
accrual of $290,000 for a potential assessment by the State of California
(State) for noncompliance in escheating unclaimed savings account funds and safe
deposit box property to the State as required under California law.
The amount of the allowance established reflects the Company's and Broadway
Federal's estimate of the maximum assessment under law likely to be assessed
under the aforementioned circumstances. No penalty has been assessed by the
State as of the date of this report.
F-28
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company through Broadway Federal leases certain premises and equipment on a
long-term basis. Some of these leases require Broadway Federal to pay property
taxes and insurance. Lease expense was approximately $140,000 in 1996 and
$141,000 in 1995. Annual minimum lease commitments attributable to long-term
leases at December 31, 1996, were as follows:
<TABLE>
<CAPTION>
PREMISES EQUIPMENT TOTAL
---------------------------------------
<S> <C> <C> <C>
Year ending December 31:
1997 $ 41,000 $ 54,000 $ 95,000
1998 41,000 33,000 74,000
1999 41,000 28,000 69,000
2000 41,000 11,000 52,000
2001 41,000 - 41,000
Thereafter through 2013 443,000 - 443,000
--------------------------------------
$648,000 $126,000 $774,000
--------------------------------------
--------------------------------------
</TABLE>
The Company and Broadway Federal had commitments to originate loans of
approximately $1.7 million and $608,000, respectively, at December 31, 1996 and
1995. 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 of the commitments are expected
to expire without being drawn upon, 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.
The Company and Broadway Federal had no commitments to sell or purchase loans at
December 31, 1996. At December 31, 1995, there were $221,000 in commitments to
sell loans and no commitments to purchase loans.
In the ordinary course of business, the Company and Broadway Federal becomes
involved in litigation. In the opinion of management, based upon opinions of
legal counsel, the disposition of any suits pending against the Company and
Broadway Federal would not have any material adverse effect on its financial
position.
F-29
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. 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, 1996, Broadway Federal
was in compliance with such capital requirements.
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
F-30
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. REGULATORY CAPITAL (CONTINUED)
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 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 application to the next lower category, for supervisory concerns. At
December 31, 1996 and 1995, 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.
F-31
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. REGULATORY CAPITAL (CONTINUED)
The table below presents Broadway Federal's capital ratios as compared to the
requirements under FIRREA and FDICIA at December 31, 1996:
<TABLE>
<CAPTION>
FOR CAPITAL AMOUNT
ADEQUACY REQUIRED TO BE
ACTUAL PURPOSES WELL CAPITALIZED
------------------------------------------------------------------------------------
(Dollars in Millions) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
December 31, 1995:
Leverage/Tangible Ratio $6,581 6.38% $4,709 4.0% $5,157 5.0%
Tier I Risk-based ratio 6,581 10.09 2,608 4.0 3,913 6.0
Total Risk-based ratio 7,386 11.33 5,217 8.0 6,521 10.0
</TABLE>
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
Pursuant to the requirements of SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments," as amended by SFAS No. 119, "Disclosure about Derivative
Financial Instruments," Broadway Federal has included in the following notes to
consolidated financial statements 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
F-32
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
value estimates presented herein do not necessarily represent Broadway Federal'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, commercial 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 of 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 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 approximated the rates offered as of the
reporting date. No value has been estimated for Broadway Federal's long-term
relationships with depositors (commonly known as the core deposit premium) since
such intangible asset is not a financial instrument pursuant to the definitions
contained in SFAS No. 107.
The fair values of commitments to extend credit are based on rates for similar
transactions as of the reporting date.
F-33
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents the carrying amounts and fair values of Broadway
Federal's financial instruments at the dates indicated. See Note 1 to the
consolidated financial statements for a discussion of the accounting policies
followed in determining fair value information.
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
---------------------------
<S> <C> <C>
Assets:
Cash and federal funds sold $ 5,180,000 $ 5,180,000
Investment securities 10,371,000 10,341,000
Loans receivable 96,260,000 101,839,000
Federal Home Loan Bank stock 876,000 876,000
Liabilities:
Savings deposits 110,994,000 110,969,000
Off-balance sheet:
Commitments to extend credit $ - $ 1,720,000
</TABLE>
17. 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
F-34
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
17. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (CONTINUED)
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 have 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 provides 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.
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. Subsequent increases 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.
F-35
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
17. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (CONTINUED)
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.
As discussed in Note 1, Broadway Federal's conversion from a mutual to a stock
association was completed on January 8, 1996. At December 31, 1995, Broadway
Federal had received approximately $14.5 million from investors as stock
subscriptions. This amount is included in restricted cash-stock subscriptions
and savings deposits in the accompanying balance sheets. Subsequent to
December 31, 1995, approximately $5.5 million of the stock subscriptions were
returned to investors, the remainder, net of conversion costs, was transferred
to capital stock of the Company.
18. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Board of Directors of the Broadway
Financial Corporation authorized management to repurchase 3.929% of the
outstanding shares of the common stock. In September 1996, the Board authorized
the repurchase of 3.0% of the outstanding shares of common stock. The shares
acquired would be used for the redemption of the Series A Preferred Stock for an
equivalent number of shares of common stock and share to fund the management
recognition programs, respectively. The repurchase was pending the approval of
the Office of Thrift Supervision (OTS), which was received in February 1997.
In February 1997, one of Broadway Federal's branch facilities was broken into.
The branch experienced moderate property damage, and approximately $135,000 of
cash was stolen. As of the date of the report, management was unable to estimate
the total loss exposure, from the incident, to Broadway Federal.
F-36
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Interest income $ 2,147 $ 2,161 $ 2,225 $ 2,213 $ 8,746
Interest expense 863 865 864 888 3,480
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)
Primary earnings (loss)
per share of common stock:
Net earnings (loss)(2) 0.13 (0.06) (0.42) 0.05 (0.31)
Market range:
High bid 10.75 10.00 10.00 9.75
Low bid 10.25 10.00 9.63 9.13
1995
Interest income 1,818 1,910 1,973 2,069 7,770
Interest expense 703 753 826 884 3,166
Net interest income 1,115 1,157 1,147 1,185 4,604
Provision for loan losses 96 139 43 121 399
Net earnings 163 74 121 132 490
Primary earnings (loss)
per share of common stock:
Net earnings (loss)(1) N/A N/A N/A N/A N/A
Market range:
High bid(1) N/A N/A N/A N/A N/A
Low bid(1) N/A N/A N/A N/A N/A
</TABLE>
(1) 1995 data not available since Company has not yet converted to a stock form
of ownership (see Note 17 - Conversion to Capital Stock Form of Ownership).
(2) 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. Another factor affecting fully diluted
earnings per share is that, for certain periods, the fully diluted computed
amounts would be antidilutive; primary earnings per share are shown above
in such cases.
F-37
<PAGE>
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 17 - Conversion to Capital Stock Form of
Ownership).
Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $ 784 $ 7,839
Investment securities held to maturity 2,488 -
Accrued interest 23 7
Stock subscription receivable - 2,505
Investment in subsidiaries 4,718 4,987
Other assets 117 -
------ -------
$8,130 $15,338
------ -------
------ -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ - $ 5,897
Other liabilities 68 377
---------------------
68 6,274
Stockholders' equity 8,062 9,064
---------------------
$8,130 $15,338
---------------------
---------------------
</TABLE>
F-38
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Operations
SEPTEMBER 25,
YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31,
1996 1995
----------------------------
(IN THOUSANDS)
Interest income $159 $10
Interest expense 6 10
Other income - -
Other expense 147 -
Income taxes 7 -
----------------------------
Earnings before equity in earnings
(loss) of subsidiaries (1) -
Equity in earnings (loss) of subsidiaries (276) -
----------------------------
Net earnings (loss) $(277) $ -
----------------------------
----------------------------
Statements of Cash Flows
<TABLE>
<CAPTION>
SEPTEMBER 25,
YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31,
1996 1995
----------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (277) $ -
Adjustments to reconcile
net earnings (loss) to cash
provided by operating activities:
Equity in (earnings) loss of subsidiaries 276 -
Increase in interest receivable (16) (7)
Increase (Decrease) in other assets (117) -
Decrease in other liabilities (309) 377
Amortization 2 -
--------------------------
Total adjustments (164) 370
--------------------------
Net cash (used in) provided
by operating activities (441) 370
</TABLE>
F-39
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
SEPTEMBER 25,
YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31,
1996 1995
---------------------------
(IN THOUSANDS)
<S> <C> <C>
INVESTING ACTIVITIES
Purchases of investment securities held to maturity $ (2,488) $ -
Proceeds from maturity of investment
securities available for sale 170 -
Purchases of investment securities
available for sale (1,982) -
Sale of investment securities
available for sale 1,762 -
Loss on sale of investment securities
available for sale 48 -
Purchase of outstanding stock of subsidiaries (7) (4,987)
---------------------------
Net cash used in investing activities (2,497) (4,987)
FINANCING ACTIVITIES
Net proceeds from the issuance of stock 62 9,064
Dividends declared (224) -
Increase (Decrease) in accounts payable (5,897) 5,897
Decrease (Increase) in stock subscription receivable 2,505 (2,505)
Unearned ESOP (563) -
---------------------------
Net cash provided by (used in) financing activities (4,117) 12,456
---------------------------
Net increase in cash and cash equivalents (7,055) -
Cash and cash equivalents, beginning of period 7,839 -
---------------------------
Cash and cash equivalents, end of period $ 784 $ 7,839
---------------------------
---------------------------
</TABLE>
F-40
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-17331) pertaining to the Broadway Financial Corporation
1996 Stock Option Plan for Outside Directors and the Broadway Financial
Corporation Long Term Incentive Plan of our report dated February 5, 1997,
with respect to the consolidated financial statements of Broadway Financial
Corporation in the Annual Report (Form 10K) for the year ended December 31,
1996.
ERNEST & YOUNG LLP
Los Angeles, California
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PRECEDING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,290
<INT-BEARING-DEPOSITS> 240
<FED-FUNDS-SOLD> 3,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10,371
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0
911
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</TABLE>
